It worked: In 2004, the well was providing 2.5 million barrels per day. It’s now in irreversible decline at a rate of 15% per year. By 2012, it will only be producing 500,000 barrels per day.

No serious exploration has been done in the Gulf of Mexico for over 30 years. Discovering a deep-water well takes 10 years and billions of dollars to bring on line. There’s no doubt that Mexico’s oil output will collapse in the next 5 years; with the rest of the world having no spare capacity and demand having risen, prices for gasoline in the US. will soar. In the meantime, we will ponder higher gas mileage requirements, forbid offshore drilling, and make no effort to convert our transportation fleet to natural gas. Congressmen will be outraged at the oil companies - but the writing was on the wall for a decade.

The financial crisis and the energy crisis were intertwined and will continue to feed upon each other: The combination of plunging home values and doubling gas prices led to the worst recession since the 1930s. The hibernation of the American consumer reduced oil demand enough to make the speculators go running for the hills. Oil prices plummeted 76%, to $35 a barrel, in just a few months.

It may sound like sacrilege, but prices below $50 a barrel are dangerously low. The crash in gasoline prices to below $2 a gallon has led to US demand rising 6% above September 2008 levels. Everything that’s happened since the price collapse will contribute to part 2 of the crisis:
 

• OPEC will cut supply by 4.2 million barrels per day from levels in September 2008.
  
  
• Projects that were viable at $80 a barrel have been scrapped. Ethanol and Tar sands are only profitable above this level. Natural gas wells are being capped as prices plunged from $13 to $4.
  
  
• Worldwide rig counts have plunged from 3,500 to 2,700 in a matter of months.
  
  
• Existing wells throughout the world continue to decline at ever increasing rates.
  
  
• The Obama administration will restrict the expansion of coal-powered plants, construction of new refineries and new drilling in the US.
  
  
• The enormous stimulus being rolled out throughout the world will generate increased energy demand as supply remains restricted.
  
  
• The banking crisis has resulted in no financing for energy projects that could relieve the long-term supply issues.
  
  
• Energy companies have been laying off skilled workers as their businesses have plummeted. When demand rises, these workers won’t be there.

Prices are set at the margin. Of 75 million houses in America, only 4 to 5 million homes are sold per year. Therefore, 5% to 6% of the homes in the US set the price for the other 70 million homes. This concept also applies to the last barrel of oil. When worldwide demand exceeded worldwide supply in late 2007 and early 2008, those last barrels of oil set the price - above $100 a barrel. It wasn’t the fault of greedy speculators or evil oil companies.