Approaching Empty?

Hurricane Katrina's assault on the Gulf Coast has jacked up gasoline prices throughout the country.

But, reports CBS News Correspondent John Blackstone on CBS News Sunday Morning, rising prices all summer can be traced to something deeper: the first rule of economics: supply and demand.

Is the world in danger of running out of oil?

Katrina's hit on oil platforms and refineries in the Gulf of Mexico will hit Americans in the wallet for a long time to come. The Department of Energy says $3-a-gallon gasoline is likely to be the rule until close to the end of the year.

And as winter approaches, Blackstone says, the news gets worse. Those heating their homes with natural gas can expect an increase of more than 70 percent over last year; heating oil will be up 30 percent.

With supplies of oil and gas already tight, Blackstone observes, Katrina made a bad situation downright awful.

"If you lose a refinery, or if you lose a couple of days of oil production, it can't be replaced. It's like it's gone forever," observes Phil Flynn, an oil analyst and trader for Alaron Options and Futures, in Chicago.

He's one of those who helps determine whether the price of oil goes up or goes down, Blackstone points out.

"So when (crude) prices go up … then they end up going up at the pump?" Blackstone asks.

"They sure do!" Flynn confirms.

Flynn and other oil traders help set the price we pay at the pump by bidding to buy barrels of oil at a date in the future.

Flynn may consult with others, Blackstone notes, but his constant partner is fear: The fear of losing any oil, whatever the reason, can send the price of oil skyrocketing.

As Flynn puts it, "If I see a storm barreling down on 'Refinery Row "in the Gulf of Mexico, I'd be foolish not to be worried about that."

But, Blackstone says, as bad as it is, Katrina is a short-to-medium-term worry. Long before the hurricane hit, prices were rising, partly because of concern the demand for oil around the world is getting desperately close to outstripping supply.

"We're talking about competition between the major consuming countries of today and the consuming countries of tomorrow," Flynn says. "When you think it was just a few years ago that China was exporting oil and, when nobody was paying any attention, all of a sudden they're now the No. 2 importer in the world."

In 2000, China used less than 5 million barrels a day, Blackstone says. Now that figure is 6.6 million barrels. China's flourishing economy is built on oil.

"And what's scary about this," Flynn adds, "is that we may have only scratched the surface of their potential demand growth in the future."

But, Blackstone points out, the United States remains by far the world's largest user of oil, consuming more than 20 million barrels a day. That's nearly a quarter of all the oil produced on earth. And while the U.S. is using more oil than ever, American oil wells are producing less, only 5 million barrels a day, approaching 50-year lows.

We import more than 13-million barrels a day and, with that growing competition from other countries there is barely enough oil to go around.

"It's very difficult to bring new sources of production into the market on a very quick basis," says Ed Murphy, a director of the American Petroleum Institute in Washington.

He says soaring gasoline prices are simply a result of the law of supply and demand: "There is some extra capacity. There's a very small amount. It's almost entirely in Saudi Arabia. The other countries are producing to the fullest extent possible. So there is no extra capacity, really, outside of Saudi Arabia at this point."

That squeeze on supplies, Blackstone observes, has driven up gasoline prices with shocking speed. In some places, Katrina briefly pushed a gallon of gas into uncharted territory.Still, the national average of about $3.07 a gallon remains below the inflation-adjusted record set in 1981, Blackstone notes. A gallon back then cost $3.11.

And, in spite of complaining about current prices, Americans have done little to cut consumption. In fact, over the next few months, we're expected to use 300,000 barrels a day more than we did last year.

Paul Roberts sees many reasons to be pessimistic about our oil future.

He is a journalist and author of The End of Oil, one of several recent books examining a frightening possibility: that the world is running short of oil.

"We're gonna have an economic shock. …$70 oil may seem like a happy memory by the time one barrel reaches $150," he warns. "We're definitely approaching a point where it's gonna be harder and harder to pump oil at the rates we consume it. We've had a century of essentially easy oil, oil that was relatively straightforward to find, to tap, to bring to market. …So the easy oil is all gone. You know, we can all agree on that."

Roberts tells Blackstone that, on a recent visit to Saudi Arabia, officials admitted to him that their biggest, richest field was no longer pumping as much oil as it once did.

"It doesn't mean it's running out tomorrow," Roberts explains. "But it means that it's less, much less of a flow than it was when it was discovered. And the fact that the world's biggest oil field, the mother of all oil fields, was now in a depletion curve, it really made the hairs on the back of my neck stand up."

That depletion curve, says Roberts, is a big part of the current supply and demand equation.

"Traditionally, when demand goes up, producers can match it. …And what we're seeing now is that … they are really struggling to find new oil, discover new oil, and just to bring it online, bring it to market."

But for Robert Esser, who's with Cambridge Energy Research Associates (CERA), predictions of the end of oil are greatly exaggerated.

Says Esser, "Oil has been expected to peak now since the First World War. We've had various instances of oil as projected to peak. Obviously, it hasn't peaked yet."

Esser is co-author of the dauntingly titled CERA report, Worldwide Liquids Capacity Outlook to 2010, and he says help is on the way: "We see a surge, or an acceleration in accrued supplies, starting at the end of last year and increasing, especially the second half of 2005, and onto 2010."

Esser says new oil fields have been found off the coast of West Africa and Brazil, and elsewhere.

"We also see a surge in oil from the Caspian region," he continues, "from larger fields that were discovered in the 1990s that are now being developed and will be producing at full capacity by 2010 and thereafter. We also see a large amount of oil sands production from Canada. It's known as 'unconventional oil.' "

That unconventional oil, just across the border, is difficult to recover, Blackstone says: The oil and sand have to be separated. But improved technology and high oil prices have made production from the oil sands profitable, and some believe the reserves there could rival those in Saudi Arabia.

"With all the supplies that we see coming on," Esser reassures, "it's obvious that those projecting a peak haven't done their homework."

But even Esser admits that, after 2010, in just five years, discoveries of new oil reserves will be rare: "It becomes harder and harder to see oil capacity growing to a large extent."

And, Blackstone says, most of the known reserves are in places of political uncertainty, such as the Middle East, the former Soviet Union, and South America.

"It's like the energy system is on a three legged stool," Roberts says, "and each of these legs is unsustainable. We've got the politics of oil, which are unstable; we have the environmental impact of oil, which is growing worse; and we have the whole question of depletion of supply, and that stool is ready to collapse."

So, concludes Blackstone, Hurricane Katrina has demonstrated just how vulnerable the oil industry can be, now that it's stretched nearly to capacity. Oil optimists say price increases will bring their own cure by encouraging new supplies. Oil pessimists say this is just the beginning of the end of oil.