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December 18th, 2011

Energy Prices

There is a continuting concern over the price of energy. Will high prices for crude oil make it difficult to climb out of the recession?

First, the good news: Natural gas prices have come down to $3.03 per million BTU. (A million BTU is close to a thousand cubic feet.) On the same scale, crude oil is costing $16 per million BTU. In terms of energy content, natural gas is a huge bargain.

In terms of energy content, natural gas is a huge bargain.

And now for the bad news: Crude oil currently priced near $100 per barrel. The 2008 peak price was $147 per barrel and the world economic house of cards collapsed. On page 40 of When Oil Peaked, I showed the US expenditures for crude oil as a percentage of the US gross domestic product. When the percentage went above 5 percent (1981 and 2008) we had serious economic problems. After the book was published, crude oil prices have increased. My estimate of the current US oil expenditure is 3.5 percent of our GDP. It's worth watching; let's hope that it doesn't go above 5 percent again.

When the percentage went above 5 percent of our GDP (1981 and 2008) we had serious economic problems.

So what's next? Oil from Libya is coming back on-line. Iraq is slowly getting its act together. The Saudis, bless their hearts, have raised their daily production to almost 10 million barrels per day. Iran is the biggest uncertainty. By itself, Iran is a major oil producer; 2.5 million barrels per day. The Europeans have embargoed oil shipments from Iran. Nice symbolic move, but Iran can sell their oil to China, India, and Japan while Europe imports politically-correct oil from Saudi Arabia.

The biggest, baddest news would be for the Iranians to interrupt ship traffic through the Strait of Hormuz at the mouth of the Persian Gulf. Twenty five percent of the world's oil passes through the Strait. Closing the Strait would be TEOTWAWKI. (Pronounced tea-oh-TWAW-key, rhymes with "Milwaukee," acronym for The-End-Of-The-World-As-We-Know-It.) Closing the Strait could bring on an even bigger naval struggle than the 1944 Battle of the Philippine Sea.

Warning: I'm an amateur when it comes to military strategy. Both Adolph Hitler and I rose to the rank of corporal; he wasn't any good either. But continuing bravely on:

The US already has air bases at Al Udeid in Qatar and at Thumrait in Oman with runways longer than 12,000 feet. Thumrait is at the south end of Oman; Qatar is actually closer to the Strait of Hormuz. Here's the nervousness. Wikipedia lists the operational range of the American F-22 at 410 nautical miles. Qatar is 300 miles from the Strait. Bomb something, come home.

At the northern end of Oman, the Khasab airport is only 20 miles south of the Strait of Hormuz, with an 8000 foot runway. Great forward air strip. The obvious Iranian opening move would be to splatter the Khasab runway with bomb craters. The simultaneous American move would be to protect Khasab.

The American aircraft carriers would be better off out in the Indian Ocean instead of being bottled up in the Persian Gulf: mobile, defensible, air bases, Top Gun pilots. After all, this is a naval battle. Presumably, for many moons, US officers on their map tables, sandboxes, and laptops have been gaming The Battle of Hormuz. We corporals play with


Today's oil prices depend on both short- and long-term signals. Everything from Iran to the stock tanks at Cushing, Oklahoma influence the daily price. Even if $100 per barrel is not disastrous, it may be a serious barrier to economic recovery. Is $100 oil a dead albatross hanging around Ben Bernanke's neck? President Obama's neck? I'm still waiting for a presidential candidate to make a major push for natural gas automobiles. When I moved to San Diego four years ago, the county had four natural gas filling stations, but only one was open to the public. A search on last week turned up a dozen, most of them selling to the public. One of the exits from Interstate 5 had a small sign directing customers to a natural gas filling station.

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