Since 2005 the average price for a barrel of oil has doubled ($55 per barrel 2005 vs. $111 per barrel 2011). Historically a doubling in price has lead to substantial increased production. Not this time.

Since 2005 production of the conventional crude oil has been stuck at 75 million barrels per day. The world demands about 89 million barrels a day. The gap is being filled by unconventional "oil" - tar sands, ethanol, ultra-deep water, tight oil requiring enhanced oil recovery technologies and natural gas liquids.

None of these unconventional sources are viable without high prices. Taken together they will not offset the annual depletion from existing oil fields, the unrelenting demand increases from the developing world and the decline in net oil exports as exporting countries face both depletion and increasing internal consumption.

Assuming a 3% depletion rate, 1.25% demand growth and a declining net export rate of 1.25%, the world must continually find and produce about 5 million barrels a day just to stay even. Industry analysts estimate that developing fields will add 3.5 million barrels a day per year over each of the next five years.

 Simple math can be annoying, but it is hard to argue - production needed 5 million barrels a day minus anticipated production 3.5 million barrels a day equals 1.5 million barrel a day shortfall.

With the developed world stockpiles of about 2.6 billion barrels, plus the new reserves being accumulated in China, this 1.5 million barrel a day shortfall is not a problem yet. But there is no slack and we are one geopolitical event or natural disaster away from an oil shock.

Yet 2011 was a year that saw articles, statements and government actions that point to a naiveté and deep denial about the reality of the world oil situation.

The written barrage started in September with Daniel Yergin's, "There Will Be Oil" in The Wall Street Journal. October was Ed Crooks with, "Pendulum swings on American oil independence" in Financial Times. November saw Edward Luce's, "Look away, Greens: America is entering a new age of plenty" in Financial Times and Mort Zuckerman's, "How America Can Escape the Energy Trap" in The Wall Street Journal.   

Read the articles, but do so with the numbers shown above as context.  There is nothing in any of these that changes the conclusion that the world is close to another oil shock. Yergin posits that technology and higher prices will bring vast amounts of oil on line quickly. Crooks ignores depletion. Luce takes a cheap shot at clean energy. Zuckerman assets that that shale gas has dramatically reduced oil consumption. They all tout the US energy independence meme.

Art Berman, a geologist and contributor to The Oil Drum, uses our old friend math again to clearly show that crude oil imports - relative to total consumption of crude oil and products - were only 2% lower in 2010 than in 2005.

He also shows that Zuckerman's claim that "...natural gas is already putting downward pressure on oil prices" is untrue. Since early 2009, there has been no relationship whatsoever between natural gas and crude oil prices. In fact, the opposite is true, shale-gas producers have been shifting their drilling to more oil-prone prospects because of the rising price of oil and the falling price and economics of gas.

The publication of clueless articles by The Wall Street Journal and Financial Times is frustrating, but more frustrating and even dangerous is the utterances and actions of our political elites.

On the Republican side, Rep. Michele Bachmann, when she was still a candidate, promised a return to $2/gallon gasoline if she was elected president.

 In the November 23 CNN Republican presidential debate, Newt Gingrich stated that the United States could discover and produce enough oil in 2012 to cause a worldwide oil price collapse.

The US imports a net of about 9 million barrels of crude per day. We would need 5 new Gulf of Mexico's in one year to become oil independent and bringing about a collapse in world oil prices would mean increasing production by substantially more.

These statements by supposedly reputable candidates for President of the United States show either total ignorance of our energy reality or dangerous dishonesty and demagoguery.

On the Democrat side, the Obama administration's knee jerk release of 30 million barrels (about 8 hours of world consumption) from Strategic Reserves and putting the Keystone XL pipeline on hold shows again either total ignorance of energy reality or dangerous dishonesty and political expediency.

While there are legitimate environmental concerns with oil sands development, the Canadian tar sands will be developed and current production will grow from 1.5 million barrels per day today to over 5 million in 2030. None of this growth is contingent upon the US approving this pipeline. If we don't build the pipeline, the oil will go to Asia and the US will continue to rely on countries like Saudi Arabia, Venezuela, Nigeria and Iraq and the Straits of Hormuz.

While we play political games, China is laughing and we miss out on securing a secure oil supply and the jobs related to building and maintaining the pipeline. It would be a far better strategy to build the pipeline and use some of the revenues to support demand reduction and renewable alternatives.

So we enter 2012 with tightening supply, increasing demand, no leadership and no vision.

For supply chain professionals, 2012 will be another volatile year. During 2011, in spite of the supposed global slowdown, worldwide demand for diesel surged. The US average price was $3.85 per gallon up from $3.00 in 2010.

This demand will continue and accelerate in 2012 as the US Federal Reserve, China, the European Central Bank and other emerging markets and will do everything possible to spur growth. These government actions set the stage for sustained and perhaps higher demand for oil in 2012. As an example, US manufacturing grew in December at its fastest pace in six months showing growth for the 29th consecutive month according to the Institute for Supply Management.

Coupling this demand growth with the continuing low-level short fall in supply mentioned earlier suggest an average oil price of $125 - $130 a barrel in 2012. Diesel is not only a transportation fuel but is increasingly used to generate electricity. Also, natural gas liquids and ethanol two of the unconventional sources used to replace decreasing conventional crude are not commonly used to produce diesel, reducing the quantity of feedstock for diesel production and impacting supply. So expect diesel prices to average $4.65 per gallon.

This forecast assumes no hot wars erupt in the Middle East, the Straits of Hormuz stay open and Iraq, Venezuela and/or Nigeria don't collapse in civil turmoil. It also ignores natural disasters e.g. Katrina and the many other possible Black Swans lurking. If any of these happens, the $125 - $130 will be a minimum price.

In closing, supply chain professionals should understand that Business As Usual will not continue indefinitely. We are reaching a point where a forced transition off oil is not far away. Every supply chain strategy should recognize this and begin planning for much higher oil prices and a moving away from oil.

Conservation, efficiency and natural gas for transportation appear to be the only viable alternatives at this time. It is time to begin all three.

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Who is Chuck Taylor?:

Supply chain consultant Chuck Taylor enjoys being in demand as a supply chain and operations consultant to some of the world's largest companies. However, even though he is winning raving fans, he often leaves his audiences feeling uncertain about their future and queasy.

Chuck's focus has gain him one of the highest achievement honors by a supply chain professional: the Council of Supply Chain Management Professionals' (CSCMP) 45^th annual Distriguished Service Award.

Taylor's now famous presentation, The End of Cheap Oil: Is Your Supply Chain Obsolete?, not only aims to inform his audience about the factors leading to rising oil prices, but to encourage supply chain professionals to seriously investigate alternatives to current practices and to aggressively explore new supply chain and fuel management strategies.

Awake! Consulting was founded in 2005 in order to provide senior supply chain and transportation professionals with unvarnished information about rising oil prices and strategies for overcoming the growing energy challenges facing the transportation industry. Led by CSCMP Distinguished Service Award winner Chuck Taylor, Awake! Consulting works with senior managers that are committed to preparing their organizations for a sustainable future. For more information on Awake!, visit Chuck's blog at http://blogs.dcvelocity.com/energy/ or send him an email: chutay at msn.com.

Taylor's upcoming speaking engagements include:

• Retail Industry Leaders Association, Retail's Supply Chain Conference - Logistics, February 19-22, 2012
• Food Shippers of America's annual Food Industry Transportation and Logistics Conference, February 27-28, 2012
• CSCMP Central Texas (Austin) Roundtable, March 2012

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