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The electric car age just got a little closer

For the last year, Deutsche Bank’s Paul Sankey, one of the best long-range energy minds on Wall Street, has been distributing a series of provocative, deeply researched, and forward-looking notes to clients under titles like “The Peak Oil Market” and “The End of the Oil Age.” Last week, Sankey produced a sixth note called “2011 and Beyond — A Reality Check.” Among the takeaways: As of 2010, the new electric car age is coming upon us faster than expected — far beyond this year’s conspicuous arrival of the General Motors Volt and Nissan Leaf, and the race among the world’s industrial nations to dominate this technology. Converging even more rapidly, says Sankey, are far higher oil and gasoline prices, starting in 2012. Such shifts could have enormous geopolitical ramifications — as a consequence, some countries will become poorer, and some richer, with corresponding impacts on their global influence.

Starting with the second forecast from this 59-page report, 2010 has seen a comparatively gentle respite in an otherwise unprecedented, decade-long period of turbulence in oil markets. According to Sankey, this calm is about to break. Sankey’s forecast is based on the salient factor of “spare capacity.” (If you are already familiar with the term, skip to the next paragraph. If you aren’t, read on.) This refers to how much oil the world’s petrostates can produce above and beyond current demand. So for instance, Saudi Arabia pumps about 8 million barrels of oil a day, but has dug enough wells in enough new fields to produce 50 percent more than that — or 12 million barrels a day — if it needs to. That excess Saudi productive capacity of 4 million barrels a day, plus about 1 million barrels a day of extra productive capability elsewhere, adds up to a global surplus of about 5 million barrels a day of spare oil production capacity — the available volume above and beyond the 87 million barrels of oil a day consumed around the world.

Price-setters — meaning oil traders — see a lot of spare capacity as a cause for calm. They remain serene in the face of bad weather, pirate attacks, or pipeline explosions — the sort of events that, in the 2006-2008 period (when there was much smaller spare capacity) sent them into paroxysms of panic, and accordingly sent oil and gasoline prices through the ceiling. This was because no one could say whence oil would come to fulfill demand. Since the world now has a cushion, we have the relative tranquility of 2010.

But Sankey effectively says that it’s been a false calm. Reality is about to strike, he says, based on the following math: Global spare capacity is actually not 5 million barrels a day, but 4 million barrels a day when one takes into account what countries really produce, versus what they report. From there, Sankey projects that global demand will rise by 2.5 million barrels a day next year, and an equal volume in 2012. Looking at the future through this lens, you can see how we will rapidly work through our spare capacity buffer, and arrive right back on the knife’s edge.

Interestingly, however, Sankey sees a ray of light in this coming crisis. He classifies the consequent years-long oil price spike (peaking at $125 a barrel in 2015) as the very reason that we are at the end of the oil age. He says that heavy petroleum consumers will finally absorb the message that they must at last wean themselves off of oil, and predicts that they will begin dieting — permanently. Because of this new consciousness, in Sankey’s model global demand will peak at about 96 million barrels a day in 2020, before commencing a long, slow decline.

John Hofmeister, the former president of Shell USA, agrees that a price spike is coming in 2012 that will drive gasoline to $5 a gallon at the pump:
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