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The Bad News at the Pump: The $100-plus Barrel of Oil and What It
Means
By Michael T. Klare
TomDispatch.com
Tuesday 11 March 2008
On Monday March 3, the price of crude oil reached $103.95 per barrel on the
New York Mercantile Exchange, surpassing the record set nearly 30 years ago
during another moment of chaos in the Middle East. Will that new mark prove
distinctive in the annals of world history or will it be forgotten as energy
prices drop, just as they did following their April 1980 peak?
When oil costs are plotted over time, the 1980 oil crisis
- prompted by Ayatollah Khomeini's Iranian revolution - stands out as a sharp
spike on that price curve. Both before and after that moment, however, oil supplies
proved largely sufficient to meet rising global demand, in part because the
Saudis and other major producers were capable of compensating for declining
Iranian production. They simply increased their output substantially, dumping
a surplus of oil onto the global market. Aided by the development of new fields
in Alaska and the North Sea, prices dropped precipitously and stayed low through
the 1990s (except for a brief spike following the Iraqi invasion of Kuwait in
August 1990).
Nothing similar is likely to happen now. For the present surge in prices -
crude oil costs have risen by 74% over the past year - no such easy
solution is in sight. To begin with, we face not a sudden spike, but the results
of a steady, relentless climb that began in 2002 and shows no signs of abating;
nor can this rise be attributed to a single, chaos-causing factor in the energy
business or in global politics. It is instead the product of multiple factors
endemic to energy production and characteristic of the current era. There is
no prospect of their vanishing any time soon.
Three factors, in particular, are responsible for the current surge: intensifying
competition for oil between the older industrial powers and rising economic
dynamos like China and India; the inability of the global energy industry to
expand supplies to keep pace with growing demand; and intensifying instability
in the major oil-producing areas.
A Tsunami of Energy Needs
The crucial role of the developing economic dynamos in Asia on the global energy
market was already evident as this century dawned. With their phenomenal rates
of growth, these countries must have more oil (and other
forms of energy) to power their expanding industries, fuel their new cars and
trucks, and satisfy the aspirations of their burgeoning middle classes. According
to the U.S.
Department of Energy (DoE), combined oil demand from China and India,
already at 8.9 million barrels per day in 2004, is expected to hit 12.1 million
barrels by 2010 and 15.5 million barrels by 2020. These are staggering rises.
If you include anticipated consumption by Brazil, Mexico, South Korea, and other
rapidly industrializing nations, demand from the developing world is truly expected
to soar.
To this tsunami of new energy needs must be added an already high level of
consumption by the mature industrial powers led by the United States, the European
Union, and Japan. This shows little sign of lessening, which means we face an
unprecedented surge in the total demand for oil. According
to the DoE, combined world oil consumption, which reached 83.7 million barrels
per day in 2006, is projected to hit 90.7 million barrels in 2010 and 103.7
million in 2020. We're talking about an increase of 20 million barrels per day
in just 15 years. To achieve this would require a mammoth, unbelievably costly
effort on the part of the world's giant oil companies (and their lenders and
government backers), and even then it might not be possible.
American consumers, facing gas-pump hell, are, at the moment, being
further punished by the fact that most global oil transactions are denominated
in dollars. Given the declining value of the dollar relative to other currencies,
we wind up paying more per barrel than competitors who can convert their euros,
yen, or other strong currencies into dollars before bidding against us on the
international energy market. Global investors, sensing the trend, are dumping
the dollar for these other currencies or buying oil futures, only adding to
the slide of the U.S. currency and the rising price of crude.
A Tough Oil World
Lurking behind soaring demand is another crisis entirely - a crisis of production.
The energy industry is now in the difficult process of transitioning from a
world of easily tapped oil supplies to one in which mainly tough-oil options
prevail. Those "easy-oil" supplies are the ones we've long been familiar
with: the giant petroleum reservoirs in friendly, stable countries that provided
most of the world's oil during the formative years of the Petroleum Age, stretching
from the late nineteenth century until the Arab oil embargo of 1973.
These mammoth reservoirs include Ghawar in Saudi Arabia, Burgan in Kuwait,
and Cantarell in Mexico - monster fields that produce hundreds of thousands
or even millions of barrels of crude per day. In the last quarter-century, however,
discoveries of "elephant" fields like these have been almost nonexistent.
The world is, as a result, becoming increasingly dependent on smaller fields,
often in remote, unwelcoming locations that require far more expense to develop
and bring online. This, too, is adding to the price of oil.
As an illustration of this trend, take Kashagan, a giant oil field discovered
in 2000 in Kazakhstan's sector of the Caspian Sea. It represents the single
largest discovery worldwide in the past 40 years. Although
it does harbor significant reserves of oil and gas, the field poses staggering
challenges to the international consortium of energy companies attempting to
develop it. It contains, for example, high concentrations of poisonous hydrogen
sulfide gas, which makes its development using conventional (and so cheaper)
production technology impossible. Development costs to bring the field online
have already soared from an estimated $57 billion to $135 billion with no end
in sight. In the meantime, the projected date for the start-up of production
at Kashagan has been continually pushed back. Once expected to come online in
2005, it's now slated for 2011 - at the earliest. This, in turn, has led a
frustrated Kazakh government to demand that the
state-owned KazMunaiGaz energy company be given a larger stake in the field's
operating consortium.
Most of the other big discoveries of recent years - the "Jack" field
in the deep waters of the Gulf of Mexico, the Doba field in Chad, fields off
Russia's Sakhalin Island, and the Tupi field in the deep Atlantic off Brazil
- exhibit similar characteristics. They are either far offshore and difficult
to develop or entail problematic relationships with unreliable governments -
or, worse yet, some combination of the two. You can essentially do the math
yourself when it comes to the future cost of oil produced at such sites.
So here's the bad news at the pump: The inability of the global energy industry
to keep pace with rising demand is only likely to become more pronounced as,
in the years ahead, the world reaches maximum sustainable daily petroleum output
and commences what just about all energy experts now agree will be an irreversible
decline. No one can be sure when exactly this will occur, but a growing chorus
of specialists believes that we are moving ever closer to that moment of "peak"
oil output - with some specialists placing it as soon as 2010-12.
Oil as a Conflict-producer
Finally, let's not forget that the equivalent of the Iranian Revolution of
1980 remains with us. The oil heartlands of the planet are increasingly in crisis
and the price of oil is regularly driven up by that as well. Iraq, with the
world's second largest reserves of petroleum, is convulsed by war. Nigeria, a major supplier to the United
States and Europe, has experienced a significant reduction in output recently
due to ethnic violence in the oil-rich Niger Delta region. Venezuela's production has fallen because
many anti-Chávez oil technocrats have been purged from the state-owned
oil monopoly PdVSA. Iran's output has suffered as a result
of the economic sanctions imposed by the United States. Political violence,
corruption, and state interference in the energy sector have also led to depressed
output in Chad, Mexico, Russia, and Sudan.
At one time, the world's major oil producers could compensate for a downturn
in output in any area by ramping up production from the "spare" (or
reserve) capacity at their disposal. This was critical in 1990, following the
Iraq invasion of Kuwait, and again in 2001, following the attacks of 9/11. Both
times, Saudi Arabia simply upped production, adding hundreds of thousands of
barrels per day in spare capacity, thereby averting a catastrophic energy crisis
in the United States. But the Saudis and the other members of OPEC
no longer possess significant spare capacity. They're pumping oil for all they're
worth in order to benefit from the current surge in prices. Hence, any sudden
loss of production in conflict-torn areas translates quickly into rising prices.
Can we expect the levels of conflict in oil-producing regions to subside sooner
or later, bringing prices down? Unfortunately, this is a wholly unrealistic
prospect because oil production itself increasingly acts as a goad
to conflict. While extracting petroleum generates enormous wealth for privileged
elites, it leaves others in many countries, usually of a different ethnic or
religious identity, with few benefits from the resource in their midst. Take
the Niger Delta area, where ethnic minorities
continue to fight to obtain a larger share of oil revenues that historically
have been monopolized by elites in the distant national capital, Abuja. The
Kurds in Iraq have similarly been struggling to take control over the oil revenues
generated by the giant fields in portions of that war-ravaged country they claim.
This threatens to turn the oil-producing city of Kirkuk, in particular, into
a future battleground.
While no one can predict just where the next conflicts will break out over
the allocation of oil revenues or the control of valuable oil fields, it is
safe to predict that such conflicts will remain an abiding, price-hiking feature
of the global political landscape. Instability is now not only the norm, but
spreading in these areas, and high oil prices are an inevitable corollary.
An Energy "Black Monday"
The bottom line: Oil prices are high today not, as in 1980, due to a temporary
disruption in the global flow of petroleum but for systemic reasons that are,
if anything, becoming more pronounced. This means news headlines with the phrase
"record oil price" are likely to be commonplace for a long time to
come. The only good news may lie in just how bad the news
really is. Sooner or later, ever rising energy costs are likely to push the
United States and other oil-consuming nations into deep recession, thus depressing
demand and possibly beginning to bring energy prices down. But this is hardly
a recipe for lower prices that anyone would voluntarily choose.
What, then, will be the lasting consequences of higher energy costs? For the
ordinary American consumer the answer is simple, if grim: A diminished quality
of life, as discretionary expenses disappear in the face of higher costs for
transportation, home heating, and electricity, not to speak of basics like food
(for which, from fertilizers to packaging, oil is a necessity). For the poor
and elderly, the implications are dire: In some cases, it will undoubtedly mean
choosing among heat in winter, adequate nutrition, and medicine.
Finally, there are the implications for the United States as a whole. Because
the U.S. relies on petroleum for approximately
40% of its total energy supply, and because nearly two-thirds of its crude oil
must be imported, this country will be forced to devote an ever-increasing share
of its national wealth to energy imports. If oil remains at or above the $100
per barrel mark in 2008, and, as expected, the United States imports some 4.75
billion barrels of the stuff, the net outflow of dollars is likely to be in
the range of $475 billion. This will constitute the largest single contribution
to America's balance-of-payments deficit and will surely prove a major factor
in the continuing erosion of the dollar.
The principal recipients of petro-dollars - the major oil-producing states
of the Persian Gulf, the former Soviet Union, and Latin America - will undoubtedly
use their accumulating wealth to purchase big chunks of prime American assets
or, as in the case of Hugo Chávez of Venezuela or the Saudi princes,
pursue political aims inconsistent with American foreign policy objectives.
America's vaunted status as the world's "sole superpower" will prove
increasingly ephemeral as new "petro-superpowers" - a term coined
by Senator Richard Lugar of Indiana - come
to dominate the geopolitical landscape.
So, while March 3 may have only briefly made the headlines here, it may well
be remembered as the true "black Monday" of our new century, the moment
when energy costs became the decisive factor in the balance
of global economic power.
--------
Michael T. Klare, the author of Resource Wars (2001)
and Blood and Oil (2004), is a professor of Peace and World
Security Studies at Hampshire College in Amherst, Mass. His latest book, Rising Powers, Shrinking Planet: The New Geopolitics
of Energy, will be published on April 15th by Metropolitan Books.
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