On Monday March 3, the price of crude oil reached US$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. Before and after that moment, 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 US 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 surge 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 growth 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 US 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 19th century until the Arab oil
embargo of 1973.
These vast 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-Chavez 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 US 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 Chavez 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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