2006 is almost over, and it’s been a blessedly quiet year from a peak-oil perspective. The price of gasoline and natural gas has stayed stable for most of the year, and nothing else has really sprung up that would wrack the world economy. Compared to 2005, this has been a good year, and we should feel thankful for that, for I don’t believe that 2007 will treat us so kindly.
I’m not qualified to offer full-blown predictions for the coming year, but there are several noticeable trends that I feel we need to keep track of. Here’s my list of things to watch in 2007.
OPEC decided to close out the year by both acknowledging that peak oil is a real threat to the world economy, and by agreeing to production cuts in the interest of keeping oil prices above $60 per barrel. There is speculation, of course, that some of the production cuts are a move to hide member countries’ (read: Saudi Arabia) ability to keep producing at recent levels. Declining production from the Cantarell field will also keep oil prices from dropping, as Mexico struggles to keep its daily production rates up.
The timely arrival of El Nino short-circuited the 2006 hurricane season and prevented another summer spike in gasoline prices. Forecasters are already predicting a 2007 hurricane season that is more active than normal, but whether a major storm makes it into the Gulf of Mexico’s oil patch or not remains to be seen. If it does, a return to $4/gallon gasoline will be imminent.
Finally, there are the wildcards of the geopolitical scene. The threat of civil war or worse looms in the Middle East and West Africa, and the stability of those regions will play a major role in determining the price of oil. If everything stays fairly quiet, all is well, but more and more insurgent groups around the world are figuring out that it is both easier and more profitable to strike at the infrastructure of a country versus symbolic targets. A major strike at oil facilities in Saudi Arabia, Iraq or Nigeria (among other places) will have an immediate affect on the price of oil.
As I alluded to above, the arrival of El Nino stayed the hand of the 2006 hurricane season, much to the relief of the rebuilding Gulf Coast as well as the oil industry in the region. This winter is also promising to be mild in some regions of the USA, which will keep natural gas prices from rising too fast as well.
Several major grain-producing regions of the world are suffering from drought, including parts of Australia and the USA. This is already having an effect on the price of staple grains around the world, and a continuing or worsening drought will only make things worse. The combined effects of drought, increased ethanol production (from corn in the USA), and a growing population are already being predicted to cause meat prices to rise, and depending on how bad the situation gets, countries like China could cause a more general bidding war for the world’s dwindling grain reserves.
Finally, I expect the climate change debate to intensify next year. As I write this Minnesota is experiencing of one on the warmest Decembers I can remember, while other parts of the country like the Pacific Northwest are getting socked with bad weather. As time goes on, it is becoming harder and harder to deny that we are having an effect on the world’s weather. Hopefully we will see some more positive signs on this front in 2007. The USA, of course, will dither as always, which seems odd to me since we seem to be doing everything we can to get rid of all of our manufacturing base as fast as we can. I wasn’t aware that bundling financial derivatives needed to pay a carbon tax…
It’s an open secret that the US economy is in trouble. At the end of this year, a delegation of senior US officials, including the Secretary of the Treasury and the Chairman of the Federal Reserve, went to China, hat in hand, to alternatively badger and bluster the Chinese into doing something to help the trade imbalance between our two countries. Demands to lower trade barriers, float the yuan, and pleas to not dump the $1 trillion in US treasury bonds and cash reserves fell on more or less deaf ears. The Chinese are naturally in no hurry to alter what they see as a successful policy of growth that keeps the cash coming in, and keeps growing segments of the Chinese population employed. They would like to reduce their exposure to the dollar, but seem to be having trouble doing so. Apparently the EU has told Beijing that they either cannot or will not sell the Chinese enough Euros to significantly reduce the amount of US dollars the Chinese Central Bank is holding onto, and various Middle Eastern nations (also major holders of dollars) have told the Chinese that if they dump dollars on the open market in large amounts, they can expect to receive less oil imports from the region. It’s a tricky dance for all involved, since the US needs to continue printing more and more money to pay its obligations, while the rest of the world is trying to both keep the value of the dollar up while trying to find ways to subtly reduce their holdings without inducing a general panic. Good luck to all of us with that.
Another issue to watch is the slowing US economy. Mortgage refi’s have enabled US consumers to continue spending with abandon, but that trend is ending as mortgage rates rise, the housing market continues to slow, and more and more ARM’s reset after their initial, very low rates expire. The number of foreclosures is continuing to increase, and housing prices on both coasts appear to be in danger of correcting to one degree or another. If the housing market implodes, the odds of if being contained to only one segment of the economy is low.
Inflation fears, growing recognition of the horrible fundamentals of the US economy (can anyone say ‘insolvent?’) and the growing shadow the derivatives market is casting on Wall Street are other issues that bear watching as well in the coming year.
If you believe the leaks coming out of Washington D.C., it appears the US will be increasing the number of combat troops in Iraq in an attempt to make one final push to secure Baghdad and achieve ‘victory.’ Will these troops be used to combat the Sunni insurgents, or is there a plan to strike the forces of Moktada Al-Sadr, whose militia is believed to be behind a lot of the anti-Sunni violence taking place in the area. If we do go after both the Shiites and the Sunnis, then what? Likewise, if we decide to pull out of the area, all hell will break loose. Vice President Cheney has already been summoned to Riyadh to be told that Saudi Arabia will not stand by and let the Shiites butcher Iraqi Sunnis, and they also fear growing Iranian power in the region. Incursions by both Saudi and Iranian forces into an Iraqi civil war (not to mention a possible Turkish intervention if the Kurds declare independence) and you have the makings for both regional bloodshed and skyrocketing oil prices, which will rock the world economy. We have truly opened a Pandora’s Box in Iraq, and finding a way to shut it will prove to be interesting to watch.
There is also the unfinished business Israel has with both Palestine and Hezbollah. These issues will continue to fester until a permanent solution can be achieved. Unfortunately, it appears that the current administration in Israel has no intention of negotiating with either group, and that probably means status quo at best unless tensions flare up again.
These are just some of the issues that will bear watching in the coming year. It is not a complete list, and I sincerely hope that we have another bland, boring year. I don’t think that’s in the cards, though.
My main worry is for the US economy, since there are so many variables in play, and we are far too reliant on the goodwill of other nations to keep the current game going. We may very well get through to the 2008 elections before we see a major correction in the markets, but I’m not too hopeful of that. It’s not just that other nations keep from dumping their dollars on the open market; we also need them to keep buying more dollars. If they don’t, it will become harder and harder to keep the illusion of a healthy economy viable. And if the US economy corrects, the contagion will spread to other markets as well, thanks to globalization and the US Dollar’s status as the world’s reserve currency.
I don’t think of myself as being too much of a doomsayer. However, I also cannot ignore the situation at hand, and while it’s possible that 2007 will turn out to be another relatively placid year from a peak oil/financial crisis standpoint, there are enough potential flashpoints out there that we all need to pay attention to them, and be prepared for as many of the possible outcomes as we can.