Lethal Trajectories - Michael Conley [208]
With respect to demand, the demand growth rates projected—on a nominal or business-as-usual basis—suggest a per annum growth rate of 1 percent per year. OECD nations are projected to have a flat rate of growth with real growth in demand coming from emerging and developing nations. One need only look at the economic growth rates of China and India—with a third of the world’s population—to see what will happen as their standards of living rise and per capita consumption of oil increases. While the precise price point needed to curtail demand and act as a drag on the economy is unclear, pump prices of $4 or more per gallon have made at least marginal differences in American driving behaviors in the past. An aggregated oil expenditure exceeding 4 percent of GDP has also been correlated with downturns in the economy.
The CIA report suggests that all excess capacity was taken out of the system by year-end 2012 as a supply/demand equilibrium level of 87 to 88 MB/D was reached. Subsequent shortfalls were then shown to reach levels of -7.7 MB/D by 2015 and -11.7 MB/D by 2017. (Interestingly, the JOE-10 Report prepared by the military for military planners suggested the supply/demand equilibrium could even be reached by 2012 with a shortfall of as much as -10 MB/D by 2015.)
Access and affordability of oil: The global oil markets will ultimately determine the price of oil. As supply shrinks, demand increases, and the cost of production rises, the price point will ultimately reach a level at which less-well-off consumers and nations can no longer buy or use oil in the quantities they would like. They will, in effect, be denied access to oil by virtue of its unaffordability. Access to oil will also be constrained by the whims of OPEC and whatever amount of oil they choose to produce. With control of over 80 percent of the world’s proven oil reserves, OPEC nations will hold all the cards. Because energy equals economic growth, a deficiency of oil, for whatever the reason, will impose a serious economic hardship on individuals and nations.
Strategic petroleum reserves (SPR): Oil reserves are held by countries in many forms including inventories and private and public stocks. The SPR refers to the strategic reserve available to a nation for dire emergencies—such as a sudden cutoff of oil imports. The United States has a current SPR of about 725 million barrels. With daily imports of about 12 MB/D, the SPR would provide America with about a sixty-day reserve. China has embarked on a program to build an SPR aimed at a ninety-day reserve by 2020.
For purposes of the CIA report, I assumed the SPR reserves for China and the United States in 2017 would be 525 and 422 million barrels respectively. The United States had a huge head start on China, but I attribute the disparity to an assumption that China would stay the course in building their reserve while America would draw down its SPR to stabilize prices or to satisfy some political purpose. The call to use the SPR for nonstrategic purposes has been made several times in the past, but most presidents have resisted such cries. The importance of not using the SPR to meet a short-term expedient is evident throughout the book.
The price of a gallon of gas: It is impossible to predict the pump price of gasoline without knowledge of the price per barrel of oil. The crude price per barrel will vary for a host of reasons, including the transactional value of the petrodollar. For purposes of this book, I assumed a baseline price of $3.89 per gallon in 2012—though it could be far higher based on 2011 prices—with increases of 7 percent thereafter in the per barrel price of crude oil for every million barrels of incremental shortages. I then established the per-gallon price for crude oil by dividing the cost