[R-G] [BillTottenWeblog] The Permanent Energy Crisis Hits Home

[Bill Totten]

by Michael Klare

prefaced by Tom Engelhardt

Tom Dispatch (March 11 2008)


Back in January, on his trip to the Middle East, the President all but
begged the Saudi royals  -  the New York Times referred to his requests
as "entreaties"  -  to put more oil on the global market and so lower
prices at the pump in the US, essentially saving his "legacy". In April
2005, in his previous meeting with then-Crown Prince, now Saudi King
Abdullah, Bush was also fretting about oil prices. A barrel of crude was
then pegged at $54. This time, the President who, in his seven years in
office, has told the leaders of more nations more times what they "must"
do, approached the Saudi king with the sort of diffidence (by his own
description) that a needy vassal might employ with his liege lord.

No surprise there. By this Tuesday, the price of oil had crested above
$109 a barrel, more than doubling since 2005, and a gallon of regular
was already averaging $3.22 at US gas pumps with the latest price leaps
yet to register. Estimates for oil at $130 a barrel this year and $150
in 2009 are now common. Something else had changed as well  -  the mood
of the Saudis and the leaders of many other petro-powers. Last week,
OPEC officially rejected the President's entreaty to immediately
increase the oil supply without even a polite nod, instead suggesting
that the Bush administration was mishandling the American economy. Ali
al-Naimi, the Saudi oil minister, couldn't have been blunter. There was
no need, he insisted, to increase global supplies by "even one barrel of
oil".

In fact, the global resource landscape is changing fast and the "sole
superpower" on the planet is looking ever more forlorn. Over the years,
no one has caught this changing landscape better than Michael Klare.
Once again just ahead of the curve, he has produced a new book (to be
published in mid-April), Rising Powers, Shrinking Planet: The New
Geopolitics of Energy, that lays out the resource and power map of the
planet, which is morphing in startling ways. Over the coming months,
Klare will be producing a series of articles for Tomdispatch.com based
on the findings in his book. This is the first of them. His are words
worth heeding. Tom

The Bad News at the Pump

The $100-plus Barrel of Oil and What It Means

by Michael T Klare


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
thirty 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 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 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 twenty million barrels per day in just fifteen 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
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 forty
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 forty percent 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.

Copyright 2008 Michael T Klare

http://www.tomdispatch.com/post/174904

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