Image: The New York Times

Low oil prices have been a welcome relief for heating oil and gasoline users around the country–fuel prices that were at or near record highs as recently as six months ago are now 25 to 50 percent lower.  Even better, it appears as though low oil and energy prices will remain low for at least the next year or so.  Amidst all the good news, however, there is a downside.

When the global economy does recover from the current recession (which could be in six months or five years–but it will definitely happen), the oil industry will be hard-pressed to meet surging demand.  The seeds of that supply crunch are being sown right now, as the fastest-ever decline of crude prices is forcing oil companies around the world to shut down and delay expansion of oil production.  Exploration and production costs are as high as ever, so when crude prices fell hard, oil companies were suddenly faced with operating at a loss, and, being for-profit businesses, the companies balanced their operations by shutting down production.    Even Saudi Arabia, the world’s largest oil producer and the nation who can produce oil most cheaply (in a recent 60 Minutes interview, King Abdullah of Saudi Arabia said it costs the kingdom less than $2 to produce one barrel of oil–click the link to see the video and fast forward to the 8:30 mark in Part 1), has postponed the construction of new refineries.  Peter Jackson, an analyst at Cambridge Energy Research, has said that if the current trend continues, world fuel supplies could fall by five percent over the next five years.  North American extraction facilities and refineries are also putting on the brakes;  a front-page article in the New York Times reported today that brokerage firm Raymond James has found that domestic drilling in the U.S. could decline by 41 percent next year as oil companies scale back.  Obviously, such a development could put a major dent in plans to reduce U.S. dependence on foreign oil.  An analyst at Bernstein Research went even farther, predicting that a 17 percent reduction in North American oil production through 2010 “will be the catalyst needed for oil prices to rebound,” according to the Times article.  In that scenario, reduced production by the world’s largest oil consumer and its neighbors will tip the balance and drive production levels below demand levels and spark a sharp price increase.

If current production cuts continue through next year, a price spike appears to be almost inevitable, however it starts.  Oil extraction and refinement are complex and expensive processes, and it takes weeks for a dormant oil well or refinery to return to full capacity.  When the global economy recovers, oil demand will surge well beyond production capacity, and the price of oil will spike, perhaps closer to the $200 per barrel mark than the $150 mark seen this summer.

So remember, enjoy low heating oil and gasoline prices while they last and plan for an uncertain future–low prices may not be around for too much longer.

Last night, Leslie Stahl anchored the leading story on CBS’s 60 Minutes that profiled “The Oil Kingdom”–the world’s biggest oil producer (by far)–Saudi Arabia. The segment included interviews with Saudi Arabia’s Oil Minister Ali Al-Naimi and the national Saudi oil company’s (known as Saudi Aramco) CEO, Abdallah Jum’ah. Stahl also toured a massive new facility in the Saudi desert that will increase the nation’s production capacity from 10 million to 12 million barrels per day when it comes online next year.

Although the story did not offer much insight into the future of oil prices or even future moves by OPEC, it did offer an interesting glimpse inside the enormous and highly sophisticated Saudi Oil operation. Perhaps most impressive was the giant office space in the Saudi Aramco corporate headquarters that serves as the “nerve center” for every single drop of oil that is extracted and exported from Saudi Arabia.

Watch the two-part segment below, or at cbsnews.com, where you can also read a written version of the story.

Image: Mirko Ilic/The Wall Street Journal

For weeks now, The HEAT Zone has been applauding falling oil prices, as they mean immediate savings for heating oil consumers.  Everyone enjoys paying less for their heating oil and gasoline, especially during tough financial times like Americans are facing today.

But there is a downside to falling oil prices.  As the price of oil drops, people and companies become less and less interested in reducing our dependence on foreign oil and increasing energy efficiency.  Without high fuel prices cutting into profit margins and pocketbooks, driving less and using less electricity become decreasingly urgent goals.  And the worst part is, while oil is cheap now, it will certainly go back up in the next year or two and will eventually reach new record-high prices.  Unless we change our consumption habits and find cleaner, domestically-available energy sources before then, the same economic, environmental, and national security problems associated with oil dependence will return with greater intensity.

President-Elect Obama spoke about this issue in his 60 Minutes interview last night (fast forward to the 9:40 mark to hear the question and answer):

Watch CBS Videos Online

So how exactly can we as a nation re-ignite the urgency of increasing energy efficiency and reducing our dependence on foreign oil?  The Wall Street Journal posted a story today that asks precisely that question and collects responses from six high-profile thinkers in the energy sector.  Highlights are below.  Read the full story here.

Representative Roscoe G. Bartlett (R) of Maryland: Cut back the work week.  Employers should cut back to a four-day work week, and expand telecommuting.  This will reduce traffic and auto pollution, decrease employer overhead, and increase employee fuel and time savings.

James Woolsey, former CIA director: Mandate the manufacture of alternative-fuel vehicles.  The federal government should use the leverage provided by the possible bailout of the U.S. auto industry to demand the manufacture of more vehicles that are capable or running on electricity, biodiesel, or ethanol.  More “flex-fuel” cars on the road soon means U.S. oil consumption could drop off quickly.

Amy Myers, Educator and Director of Rice University’s Energy Program: Increase federal taxes on gasoline.  If the federal government raises gasoline taxes to create a “price floor” for gas, the economic pressures to curb energy consumption re-appear, and the private sector has a strong incentive to increase efficiency and develop new non-petroleum-based energy technologies.

Amory Lovins, Chairman and Chief Scientist at Rocky Mountain Institute: Force increased vehicle efficiency with a “feebate” system.  Charge additional fees on cars and trucks that are the least fuel-efficient in their size class, and use the collected fees to provide rebates for the most fuel-efficient vehicles in their size class.  This will give consumers extra financial incentive to purchase fuel-efficient vehicles, increasing demand for those vehicles with auto manufacturers.

Phil Sharp, President, Resources of the Future: Institute a cap-and-trade system.  The government should assign negative monetary values to carbon emissions, allowing companies to trade or sell their emissions credits or debits and giving the biggest polluters unprecedented economic incentive to clean up their acts.