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Charles Hugh Smith

Charles Hugh Smith

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global…

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Cheap Oil: The Engine of America

The foundation of the American lifestyle and economy is cheap oil. Remove that prop and every aspect of that lifestyle becomes questionable.

Not to sound too cinematic, but everywhere I look, I see cheap oil. The results, of cheap oil, actually; or more precisely, a complete and total dependence on cheap, abundant oil.

- When I see expansive, well-manicured lawns, I see cheap oil.
- When I see busy airports and taxiing aircraft, I see cheap oil.
- When I see news about the latest "surge" in Afghanistan, I see cheap oil. 
- When I see goods from China on sale for less than a dollar, I see cheap oil.
- When I see branded water in plastic bottles, I see cheap oil.
- When I see inexpensive meat in supermarket coolers, I see cheap oil.
- When I walk through aisles of frozen food, I see cheap oil.
- When I see vast swaths of America dotted with rural mini-estates, I see cheap oil.
- When I see the "free" Internet, I see cheap oil.
- When I see retirees walking their dogs, I see cheap oil. (Ultimately, all pensions are based on cheap oil.)
- When I see bakeries which sell only dog treats, I see cheap oil.
- When I see jammed freeways, I see cheap oil.
- When I feel air conditioning in desert cities, I see cheap oil.
- When I see new fiberglas boats with large inboard engines, I see cheap oil.
- When I see boxes of "free clothing" set on the curb, I see cheap oil.
- When I read about vast bureaucracies dedicated to regulating complex industries, I see cheap oil.
- When I see a new iPad, I see cheap oil.
- When I meet an enthusaistic young person who is jetting to a distant land to work for an NGO (non-governmental organization), I see cheap oil.
- When I see electric bicycles, I see cheap oil.
- When I see well-dressed people filing into a corporate meeting, I see cheap oil.
- When I see imported furniture, I see cheap oil (and clear-cut native forests).
- When I see adverts for cosmetic surgery, I see cheap oil.
- When I see a stadium full of sports fans, I see cheap oil.

Virtually all of the things which characterize the "American way of life" are utterly and completely dependent on cheap oil, cheap coal, cheap natural gas and cheap uranium (as long as the waste products of which can be "cheaply" stored).

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Once liquid petroleum is no longer abundant and cheap, the "American way of life" will change in ways that few seem to anticipate.

It is in the political interests of all nations to overstate their "proven reserves"--oil and gas still underground. As a result, these estimates are often wildly inflated.

Not all gas and oil deposits are equal. A single supergiant field of 10 billion barrels of oil under pressure yields its treasure at low cost. Hundreds of thin, deep, viscous threads of oil may also total 10 billion barrels, but the practicalities of extracting deep, sticky, unpressurized oil in small quantities is quite different.

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There are endless "happy story" headlines about "limitless" reserves of shale oil or other "unconventional" deposits in the U.S. and elsewhere, just as there are "happy story" headlines about new technologies (all horrendously expensive, of course) which can be deployed to extract more oil from old "depleted" wells.

If you read the entire story, buried deep in the hoopla and hype is the factoid that the old well cranks out 8,000 barrels a month. That is certainly a welcome source of income to the well owner, but a thousand such wells (or even 10,000 such wells) barely register against the stupendous 19 million barrel-a-day consumption of the U.S. (That's roughly 600 million barrels per month or 7 billion barrels a year.)

If all this unconventional oil and gas is so cheap and easy to extract, then why is oil near $80/barrel? (Speculation? Perhaps.) Why is the U.S. producing 4 million barrels of oil a day instead of 10 million barrels a day (BPD)? A conspiracy?

That is doubtful. The real reason is that it is horrendously difficult and costly to extract, process and ship unconventional oil. The much-touted shale oil fields of Canada produce about 2 million BPD--approximately 10% of U.S. consumption and 2.5% of global production.

Let's say oil remains abundant but it is no longer cheap. Let's say that oil has to double to $150/barrel just to be worth the gamble of extracting it. Let's also reckon that the cheap oil pumped from supergiant fields continues its depletion curve, and oil rises to $300/barrel due to supply-demand constraints.

What impact will $150/barrel or $300/barrel oil have on the energy-profligate American lifestyle? It's a question worth pondering.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.


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