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The Truth about Oil, Part 1

Written by Brian Hicks
Posted January 9, 2007

JACKSON, WY-Over 1.5 TRILLION barrels of oil equivalent have been produced since Edwin Drake drilled the world's first oil well in 1859. The world will need that same amount to meet demand in the next 25 years alone. And if you're thinking that it's all for your gas tank, you're only half right.

You see, petroleum isn't just at your local Gas n' Go station. It's found in virtually every product that you buy, own and use. Be it your shoes, your Starbucks coffee cup, or the computer on which you are reading these very words.

And I'm not just talking about transportation from the factory to the stores where goods like these are purchased and consumed. I'm talking about the petroleum used in making the product itself and, more importantly, the petroleum needed for the technological breakthroughs that made these products a possibility.

Chew on these facts:

  • To construct the average car, approximately 27 to 42 barrels of oil, or 1,100 to 1,700 gallons, will be consumed.
  • Making average desktop computer requires more than 10 times its weight in fossil fuels.
  • Every calorie of food eaten in the U.S. requires roughly 10 calories of fossil fuels.

You see, we simply can't have computers, silicone, wire coverings, outlets, artificial limbs and electron microscopes without oil. Fact is, whether you want to believe it or not, oil makes the world go ‘round.

Now, if you're curious and want to see how advanced a civilization can be without the use of petroleum, all you have to do is head to what gawking Long Island tourists call "Amish Country." To the locals, it's Lancaster, Pennsylvania.

These people, whose everyday lives have sadly become a tourist attraction, are living in suspended animation at the peak of their own society, before petroleum came into the mix.

No electricity, no flashlights, no plastic, no cars, no telephones, no Starbucks, no sneakers, no health clubs, no computers, no supermarkets (except to sell the wooden products they've made), no cell phones, and no Tasty Kakes. To which the modern world as a whole says: no thanks!

Today, murmurs of "peak oil" are being dismissed by big oil companies as purely hocus pocus - a rumor perpetuated by those who would take us back to the Dark Ages. But things couldn't be further from the truth.

Far from being a rumor, this problem has even the King Kong of oil companies in a thinly disguised frenzy to find its next couple of million barrels. As you'll see, this problem has been piling up, ignored, for more than 30 years. Now the dominoes are all lined up and the first one is about to tip.

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The Crippling Power of Oil

People who think that the oil crisis of 1973 was strictly an embargo have another think coming. It was an omen. And the first sign of our vulnerability to the ever-dwindling supply of oil in the world.

You see, in October of 1973, Middle Eastern OPEC states stopped exports to the U.S. and other western nations. They meant to punish all the infidels that supported Israel, their foe, in the Yom Kippur War. It was then that these oil-rich desert countries realized the extent of the world-halting power they possessed.

The results nearly drove the U.S. to the brink of anarchy . . .

Blocking just 5% of our imported oil supply was enough to nearly quadruple the price overnight.

It was a lesson we should never have forgotten. But it wasn't the first time-or the last-that oil, not weapons, proved to be the true "war machine."

In World Wars I and II, sabotaging the German supply lines was quite possibly the most crucial element to truly thwart the German military. Several years later, oil once again proved so important to the strength of a nation's economy that it was the United States' final plan of attack to crush the Soviets.

During the late summer of 1985, the Reagan administration had a sudden stroke of genius. Tired of the stalemate, the American government knew that the only alternative to physical destruction of the Soviet Union was to nuke their economy. And knowing that much of its economy was based on two exports-oil to Europe and military weapons and training to anti-Western countries-we found an in.

Mindful of the saying "the enemy of my enemy is my friend," we decided to make a little pact with Saudi Arabia-an offer the Saudis couldn't refuse.

You see, high oil prices from OPEC kept Soviet exports to Europe and other countries profitable. It also allowed Iraq, Iran and Syria to purchase advanced Soviet weapons and training. And those countries had been threatening Saudi Arabia for years.

The high oil price also allowed the Soviet Union to keep a military presence in South Yemen, Syria, Ethiopia and Afghanistan.

The idea was to bankrupt the Soviet Union by having Saudi Arabia drop its oil prices far below what the Soviets could afford to sell for. Once non-Soviet prices were lowered, former Soviet oil clients would cease buying from the USSR, killing the communist giant's income. It would also harm the Soviet economy because Iraq, Iran and Syria would no longer be able to sell their oil at prices high enough to be able to afford Soviet weapons and training.

It was a sucker punch to end the Cold War, a numbers-crunching accountant's wet dream . . . and it was just crazy enough to work. But that's also where the problems begin.

In short, we taught the Saudis how to cook the books and how to make their supplies appear larger than they really were to keep the oil prices low.

In December 1985, the price of oil was $26.46. And then, suddenly, on March 31, 1986, it plummeted to $10.25. The Soviets couldn't keep up, and their economy began to collapse.

Our part of the bargain for Saudi Arabia's aid in bankrupting the Soviets, would become known as Operation Desert Storm.

But the book-cooking lessons learned by the Saudis would soon become widespread among OPEC nations-and even among Big Oil companies. And after decades of inflating their actual reserve numbers without finding any more significant oil resources, the future of the world's oil is falling apart faster than a canvas shoe on a rainy day.

The Truth about Oil will continue on Friday.

Until then,

Mike Schaefer

Energy and Capital
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