[Mb-civic] Tomgram: Michael Klare on our Oil-Crunch Planet

[Michael Butler]

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Tomgram: Michael Klare on our Oil-Crunch Planet

This post can be found at http://www.tomdispatch.com/index.mhtml?pid=2277

Back in August 2004, I took up the issue of the Bush administration, Dick
Cheney, oil, and Iraq. As an introduction to Michael Klare's latest oil
piece for Tomdispatch, over half a year later, with the price of a barrel of
oil nudging the $57 mark and gas at the pump Tomgram: up above $2.10 a
gallon and climbing, I don't think I'd change a word:

    With prices peaking (and peakingŠ and peakingŠ), the world looks a tad
more peaked than it did not so many months ago and "peak oil" -- the
possibility that the limits of fossil fuel resources on this globe of ours
might in our lifetime, even in the coming decade, run up against the soaring
desire for the stuff -- looks ever less like the stuff of fantasy. In that
light, I thought it might be interesting to revisit a few comments Dick
Cheney made back when he was the CEO of a giant energy company. Now, we all
know, courtesy of our media, that control of global energy resources had
nothing (or next to nothing) to do with the invasion of Iraq and that global
energy flows and resources were the last things on the minds of neocon and
Pentagon hawks, national security advisors, or even vice presidents while
they were hatching plans to dominate the world forever and a day.

    But you see, back before Dick Cheney became our Veep, a whole year-plus
earlier, before, that is, he forgot all about the importance of energy in
our world and cut all ties with Halliburton, the company most involved in
(and that seems to have sucked the most money out of) our Iraqi adventure,
he had a few choice words for a sympathetic audience gathered at the
Institute for Petroleum on a relevant subject or two. He was introduced by
Chris Moorhouse, who reviewed his career in and out of government and then
commented, "Not surprisingly, with such a wide ranging career in politics
and now at Halliburton, Dick Cheney [h]as a deep interest in the
geo-politics of the energy industry."

    Cheney then went on point out that oil remains basically "a government
business" and to lay out briefly some of the math behind peak-oil fears:

        "For the world as a whole, oil companies are expected to keep
finding and developing enough oil to offset our seventy one million plus
barrel a day of oil depletion, but also to meet new demand. By some
estimates there will be an average of two per cent annual growth in global
oil demand over the years ahead along with conservatively a three per cent
natural decline in production from existing reserves. That means by 2010 we
will need on the order of an additional fifty million barrels a day. So
where is the oil going to come from?"

    If you happened to be a vice president with the kind of power no vice
president has ever had, you might give a passing thought or two to securing
some of that oil -- if you were still worried a year-plus later about where
it was going to come from. He also offered the following assessment of oil
in our world back in the distant days of 1999:

        "Oil is unique in that it is so strategic in nature. We are not
talking about soap flakes or leisurewear here. Energy is truly fundamental
to the world's economy. The [1991] Gulf War was a reflection of that
reality. The degree of government involvement also makes oil a unique
commodity. This is true in both the overwhelming control of oil resources by
national oil companies and governments as well as in the consuming nations
where oil products are heavily taxed and regulatedŠ It is the basic,
fundamental building block of the world's economy. It is unlike any other
commodity."

    Actually, here's the strange thing about our media and the latest Iraq
war: If Iraq had indeed been the global capital of soapflakes or
leisurewear, I guarantee you fears and speculations about either product
would have garnered far more press during those months of war and occupation
than (until very recently) oil did.

Mike Klare, author of an indispensable book on the role of oil (and arms) in
our world, Blood and Oil: The Dangers and Consequences of America's Growing
Petroleum Dependency, recently revisited the question of oil, the invasion
of Iraq, and the Bush administration's desire to put in place a
post-Saddam-Hussein regime "disposed to satisfy U.S. energy objectives," at
the ZNET website. Below he explains the potential crisis that lies behind
the American urge to put, as they say at the Pentagon, our "footprint" (and
all those little prints from our military bases) down on the "arc of
instability," which is basically a term for the major oil lands of our
planet. When you read Klare on the potential oil crunch to come, you can
understand all too well why the rush to secure oil supplies by hook or crook
(or cruise missile) is only accelerating. Tom

    The Energy Crunch to Come
    Soaring Oil Profits, Declining Discoveries, and Danger Signs
    By Michael T. Klare

    Data released annually at this time by the major oil companies on their
prior-year performances rarely generates much interest outside the business
world. With oil prices at an all-time high and Big Oil reporting record
profits, however, this year has been exceptional. Many media outlets covered
the announcement of mammoth profits garnered by ExxonMobil, the nation's
wealthiest public corporation, and other large firms. Exxon's fourth-quarter
earnings, at $8.42 billion, represented the highest quarterly income ever
reported by an American firm.

    "This is the most profitable company in the world," declared Nick Raich,
research director of Zacks Investment Research in Chicago. But cheering as
the recent announcements may have been for many on Wall Street, they also
contained a less auspicious sign. Despite having spent billions of dollars
on exploration, the major energy firms are reporting few new discoveries and
so have been digging ever deeper into existing reserves. If this trend
continues -- and there is every reason to assume it will -- the world is
headed for a severe and prolonged energy crunch in the not-too-distant
future.

    To put this in perspective, bear in mind that the global oil industry
has, until now, largely been able to increase its combined output every year
in step with rising world demand. True, there have been a number of
occasions when demand has outpaced supply, producing temporary shortages and
high gasoline prices at the pump. But the industry has always been able been
able to catch up again and so quench the world's insatiable thirst for oil.
This has been possible because the big energy companies kept up a constant
and successful search for new sources of oil to supplement the supplies
drawn from their existing reserves. The world's known reserves still contain
a lot of oil -- approximately 1.1 trillion barrels, by the estimates of
experts at the oil major BP -- but they cannot satisfy rising world demand
indefinitely; and so, in the absence of major new discoveries, we face a
gradual contraction in the global supply of petroleum.

    Signs of an Energy Crunch

    It is in this context that the following disclosures, all reported in
recent months, take on such significance.

    * ConocoPhillips, the Houston-based amalgam of Continental Oil and
Phillips Petroleum, announced in January that new additions to its oil
reserves in 2004 amounted to only about 60-65% of all the oil it produced
that year, entailing a significant depletion of those existing reserves.

    * ChevronTexaco, the second largest U.S. energy firm after ExxonMobil,
also reported a significant imbalance between oil production and
replacement. Although not willing to disclose the precise nature of the
company's shortfall, chief executive Dave O'Reilly told analysts that he
expects "our 2004 reserves-replacement rate to be low."

    * Royal Dutch/Shell, already reeling from admissions last year that it
had over-stated its oil and natural gas reserves by 20%, recently lowered
its estimated holdings by another 10%, bringing its net loss to the
equivalent of 5.3 billion barrels of oil. Even more worrisome, Shell
announced in February that it had replaced only about 45-55% of the oil and
gas it produced in 2004, an unexpectedly disappointing figure.

    These and similar disclosures suggest that the major private oil
companies are failing to discover promising new sources of petroleum just as
demand for their products soars. According to a recent study released by PFC
Energy of Washington, D.C., over the past 20 years, the major oil firms have
been producing and consuming twice as much oil as they have been finding.
"In effect," says Mike Rodgers, author of the report, "the world's crude oil
supply is still largely dependent on legacy assets discovered during the
exploration heydays." True, vast reservoirs of untapped petroleum were
discovered in those "heydays," mostly the 1950s and 1960s, but these
reserves, being finite, will eventually run dry and, if not replaced soon,
will leave the world facing a devastating energy crunch.

    The notion that world oil supplies are likely to contract in the years
ahead is hotly contested by numerous analysts in government and industry,
who contend that many large fields await discovery. "Is the resource base
large enough [to satisfy rising world demand]? We believe it is," affirmed
ExxonMobil president Rex W. Tillerson in December. But other experts cast
doubt on such claims by pointing to those disappointing reserve-replacement
rates. "We've run out of good projects," said Matt Simmons, head of the
oil-investment bank Simmons & Co. International. "This is not a money
issue.... If these companies had fantastic projects, they'd be out there
[developing new fields]."

    That the major oil firms see few promising new fields to invest in right
now is further suggested by reports that these companies are sinking their
colossal profits in mega-mergers and stock buy-back programs rather than in
exploration and field development. ExxonMobil, for example, spent $9.95
billion to buy back its own stock in 2004, while ChevronTexaco put out $2.5
billion to do the same. Meanwhile several big companies, including
ChevronTexaco, are said to be eyeing California-based Unocal Corp. as a
possible acquisition, and ConocoPhillips recently announced a $2 billion
investment in Lukoil, the Russian energy giant. These moves are consuming
funds that might have gone into new-field exploration -- yet another
indicator of diminished expectations for major new discoveries. "If they had
attractive things to invest in, they'd be investing their little heads off,"
explained PFC Energy managing director Gerald Kepes. But the great
exploration opportunities of yesteryear "have largely dried up."

    It is true, of course, that the private energy firms are largely barred
from investment in Mexico, Venezuela, and the Persian Gulf countries, where
oilfield development is the exclusive prerogative of state-owned companies.
Hence, a major goal of the Bush administration's energy policy is to
persuade or compel these countries to open up their territories to
exploration by U.S. firms -- which, it is claimed, possess the advanced
technological know-how that would make possible the discovery of previously
unknown fields. But the energy professionals who run the state-owned
companies insist that they do not need outside help to search for oil and
that they have already mapped their countries' major prospects. Here, too,
there has been a marked slowdown in new discoveries over the past decade or
so.

    The worldwide decline in new discoveries has profound implications for
the global supply of energy and, by extension, the world economy. Given a
recent surge in energy demand from China and other rapidly-developing
countries, the U.S. Department of Energy (DoE) predicts that, for all future
energy needs to be satisfied, total world oil output will have to climb by
50% between now and 2025; from, that is, approximately 80 million to 120
million barrels per day. A staggering increase in global production, that
extra 40 million barrels per day would be the equivalent of total world
daily consumption in 1969. Absent major new discoveries, however, the global
oil industry will likely prove incapable of providing all of this additional
energy. Without massive new oil discoveries, prices will rise, supplies will
dwindle, and the world economy will plunge into recession -- or worse.

    Where Is Oil's Peak?

    Just how soon such an energy crunch will arrive and just how severe it
is likely to be are matters of considerable debate. To a great extent, this
debate hinges on the concept of "peak oil," or maximum sustainable daily
output. In the 1950s, a petroleum geologist named M. King Hubbert published
a series of equations showing that the output of any given oil well or
reservoir will follow a parabolic curve over time. Production rises quickly
after initial drilling and then loses momentum as output reaches its maximum
or "peak" -- usually when half of the total amount of oil has been extracted
-- after which production falls at an increasingly sharp rate. In 1956,
using these equations, Hubbert predicted that conventional (that is, liquid)
U.S. oil output would peak in the early 1970s. His prediction provoked much
derision at the time, but earned him considerable renown when U.S. output
did indeed achieve its peak level in 1972. Because of insufficient data at
the time, Hubbert was unable to apply his equations to non-U.S. production.
He did, however, predict that global output -- just like U.S. output --
would eventually reach a peak level and then begin an irreversible decline.

    Today, the concept of global peak oil is widely accepted in the energy
field, though debate rages over when this moment will actually occur. Those
who believe that oil supplies are abundant tend to put this date far in the
future, well beyond our immediate concern. The DoE, for example, noted in
its International Energy Outlook for 2004 that it expects "conventional oil
to peak closer to the middle than to the beginning of the 21st century." But
other analysts are not so sanguine. "It is my opinion that the peak will
occur in late 2005 or in the first few months of 2006," says Princeton
geologist Kenneth S. Deffeyes in a new book, Beyond Oil. A more conservative
estimate by Mike Rodgers of PFC Energy locates the peak somewhere in the
vicinity of 2010-2015. If either of these predictions proves accurate,
global oil supply can never climb high enough to satisfy the elevated
consumption levels projected by the DoE for 2025 and beyond.

    Where one stands on this critical issue depends on one's estimate of how
much petroleum the Earth originally possessed. Those like Deffeyes, who
contend that peak oil will arrive soon, believe that our petroleum
inheritance amounted to roughly 2,000 billion barrels when commercial oil
drilling first commenced in 1859. Since we have already consumed
approximately 950 billion barrels and are now burning some 30 billion
barrels each year, in this scenario the halfway point of total world
extraction -- and so the moment of peak production -- should be just a year
or two away. By contrast, those who hold that peak oil is safely in the
distance claim that the world's total inheritance is closer to 3,000 billion
barrels. This more optimistic figure would include the 950 billion barrels
already consumed, "proven" reserves of approximately 1,150 billion barrels,
and as-yet-undiscovered fields believed to hold another 900 billion barrels.
This latter amount, it should be noted, represents the equivalent of all the
known oil in the Middle East, Asia, and Africa combined.

    Where might these mammoth still-undiscovered reservoirs lie? This is no
idle question, given that the major oil companies have scoured the world for
over a century in the search of new sources of supply -- and, in recent
years, have come up virtually empty-handed. True, a handful of impressive
finds -- in the 1 billion barrel range -- have been uncovered off the west
coast of Africa, and one very large field (the 10-billion barrel Kashagan
field) was discovered in Kazakhstan's portion of the Caspian Sea.

    Most other recent discoveries have been relatively small, and often
located in deep offshore waters or other remote locations where the costs of
production are high. "The reason [investment] is not increasing," Mike
Rodgers has observed, "is that, in so many regions of the world, the fields
have gotten so small that even though you might be able to drill a well and
get a positive rate of return, the incremental value doesn't mean a lot." It
is conceivable, of course, that Iraq and Saudi Arabia could harbor large
fields that have simply escaped discovery in earlier sweeps. Perhaps these
could indeed be located through the use of advanced seismic technology, as
advocated by the Bush administration.

    Put all of this together, however, and none of it comes remotely close
to the scale of discovery needed to generate that additional 900 billion
barrels of oil, which is why the recent oil-company reports are so
significant. If the more optimistic estimates of global oil are on the mark,
it stands to reason that the major firms should be finding more new oil
every year than they are producing; yet the very opposite has been the case
for the last 20 years. If this continues to be the case, it is hard to
imagine that the approach of global peak oil can be that far in the future.

    Whether peak oil arrives in 2005, 2010, or 2015, and whether the maximum
level of daily oil output turns out to be 90 or 100 million barrels will not
matter much in the long run. In any of these scenarios, global oil
production will level off and begin to decline at a level far below the
anticipated world demand of 120 million barrels per day in 2025. True, some
of this shortfall may be absorbed by the accelerated development of
"unconventional" petroleum fuels -- liquid condensate from the production of
natural gas, fuels derived from tar sands and oil shale, liquids extracted
from coal, and the like -- but these materials are exceedingly costly to
produce and their manufacture entails too many environmental risks to make
them practical substitutes for conventional oil.

    Even with increased production of such substitutes, the inevitable
contraction in global petroleum supplies would only be postponed for a few
years. Eventually, scientists and engineers may develop entirely new sources
of energy -- for example, geothermal, biomass, or hydrogen-based systems --
but at current rates of development, none of these alternatives will be
available on a large enough scale when petroleum products become scarce.

    So while the major stockholders of Exxon, Chevron, and the other oil
giants may be exulting at the moment, the rest of us should be deeply
disturbed by their recent reports. Despite all the optimistic talk from
Washington, we are facing a substantial and inescapable threat of global
energy scarcity, which can only have dire consequences for our economy and
the world's. Indeed, we are beginning to see hints of that today, with
rising prices at the neighborhood gas pump and a perceptible decline in
consumer spending.

    This coming scarcity cannot be wished away, nor can it be erased through
drilling in the Arctic National Wildlife Refuge, which contains far too
little petroleum to make a significant difference even in U.S. oil supplies.
Only an ambitious program of energy conservation -- entailing the imposition
of much higher fuel-efficiency standards for American automobiles and SUVs
-- and the massive funding of R&D in, and then the full-scale development of
alternative, environmentally-friendly fuels can offer hope of averting the
disaster otherwise awaiting us.

    Michael T. Klare is a professor of peace and world security studies at
Hampshire College and the author, most recently, of Blood and Oil: The
Dangers and Consequences of America's Growing Petroleum Dependency
(Metropolitan Books).

Copyright 2005 Michael Klare
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posted March 22, 2005 at 1:16 pm
     
             
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