Entering
The Tough Oil Era
By Michael T. Klare
19 August, 2007
TomDispatch
When
"peak oil" theory
was first widely publicized in such path breaking books as Kenneth Deffeyes'
Hubbert's Peak (2001), Richard Heinberg's The Party's Over (2002), David
Goodstein's Out of Gas (2004), and Paul Robert's The End of Oil (2004),
energy industry officials and their government associates largely ridiculed
the notion. An imminent peak -- and subsequent decline -- in global
petroleum output was derided as crackpot science with little geological
foundation. "Based on [our] analysis," the U.S. Department
of Energy confidently asserted in 2004, "[we] would expect conventional
oil to peak closer to the middle than to the beginning of the 21st century."
Recently, however, a spate
of high-level government and industry reports have begun to suggest
that the original peak-oil theorists were far closer to the grim reality
of global-oil availability than industry analysts were willing to admit.
Industry optimism regarding long-term energy-supply prospects, these
official reports indicate, has now given way to a deep-seated pessimism,
even in the biggest of Big Oil corporate headquarters.
The change in outlook is
perhaps best suggested by a July 27 article in the Wall
Street Journal headlined, "Oil Profits Show Sign of
Aging." Although reporting staggering second-quarter profits for
oil giants Exxon Mobil and Royal Dutch Shell -- $10.3 billion for the
former, $8.7 billion for the latter -- the Journal sadly noted that
investors are bracing for disappointing results in future quarters as
the cost of new production rises and output at older fields declines.
"All the oil companies are struggling to grow production,"
explained Peter Hitchens, an analyst at the Teather and Greenwood brokerage
house. "[Yet] it's becoming more and more difficult to bring projects
in on time and on budget."
To appreciate the nature
of Big Oil's dilemma, peak-oil theory must be briefly revisited. As
originally formulated by petroleum geologist M.
King Hubbert in the 1950s, the concept holds that worldwide
oil production will rise until approximately half of the world's original
petroleum inheritance has been exhausted; once this point is reached,
daily output will hit a peak and begin an irreversible decline. Hubbert's
successors, including professor emeritus Kenneth
Deffeyes of Princeton, contend that we have now consumed
just about half the original supply and so are at, or very near, the
peak-production moment predicted by Hubbert.
Since the concept burst into
public consciousness several years ago, its proponents and critics have
largely argued over whether or not we have reached maximum worldwide
petroleum output. In a way, this is a moot argument, because the numbers
involved in conventional oil output have increasingly been obscured
by oil derived from "unconventional" sources -- deep-offshore
fields, tar sands, and natural-gas liquids, for example -- that are
being blended into petroleum feedstocks used to make gasoline and other
fuels. In recent years, this has made the calculation of petroleum supplies
ever more complicated. As a result, it may be years more before we can
be certain of the exact timing of the global peak-oil moment.
On Tap: The Tough-Oil
Era
There is, however, a second
aspect to peak-oil theory, which is no less relevant when it comes to
the global-supply picture -- one that is far easier to detect and assess
today. Peak-oil theorists have long contended that the first half of
the world's oil to be extracted and consumed will be the easy half.
They are referring, of course, to the oil that's found on shore or near
to shore; oil close to the surface and concentrated in large reservoirs;
oil produced in friendly, safe, and welcoming places.
The other half -- what (if
they are right) is left of the world's petroleum supply -- is the tough
oil. They mean oil that's buried far offshore or deep underground; oil
scattered in small, hard-to-find reservoirs; oil that must be obtained
from unfriendly, politically dangerous, or hazardous places. An oil
investor's eye-view of our energy planet today quickly reveals that
we already seem to be entering the tough-oil era. This explains the
growing pessimism among industry analysts as well as certain changes
in behavior in the energy marketplace.
In but one sign of the new
reality, the price of benchmark U.S. light, sweet crude oil for next-month
delivery soared to new highs on July 31, topping the previous record
for intraday trading of $77.03 per barrel set in July 2006. Some observers
are predicting that a price of $80 per barrel is just around the corner;
while John Kildruff, a perfectly sober analyst at futures broker Man
Financial, told Bloomberg.com,
"We're only a headline of significance away from $100 oil."
New disruptions in Nigerian or Iraqi supplies, or a U.S. military strike
against Iran, he explained, could trigger such a price increase in the
energy equivalent of a nano-second.
A signal of another sort
was provided by the government of Kazakhstan in oil-rich Central Asia
on August 7. It warned the private operators of the giant offshore Kashagan
oil project -- in the Kazakh sector of the Caspian Sea -- to cut costs
and speed the onset of production or face a possible government takeover.
In an
interview, Prime Minister Karim Masimov said threateningly:
"We are very disappointed with the execution of this project. If
the operator can't resolve these problems, then we don't exclude their
possible replacement."
Kashagan,
it must be borne in mind, is not just any oil project: it is the largest
field to be developed anywhere in the world since the discovery of Alaska's
Prudhoe Bay some 40 years ago. With estimated oil reserves of 9-13 billion
barrels, it is crucial to the hopes of its principal developers -- Exxon,
ConocoPhillips, Shell, Total (of France), and Eni (of Italy) -- to increase
their output in the years ahead. Consistent with the "tough oil"
aspect of peak-oil theory, Kashagan is, however, proving dauntingly
difficult to turn into a successful font of petroleum. The oil reservoir
itself is buried beneath high-pressure strata of gas, making its extraction
exceedingly tricky, and it contains abnormally high levels of deadly
hydrogen sulfide; moreover, the entire field is located in a shallow
area of the Caspian Sea that freezes over for five months of the year
and is the breeding ground for rare seals and beluga sturgeon.
As a result of these and
other problems, the Kashagan operating consortium has seen the price-tag
for launching the project nearly double -- from $10 billion to $19 billion
-- and has postponed the onset of initial production from 2005 to 2010,
infuriating the Kazakh government, which had hoped to be earning billions
of dollars in taxes and royalties by now.
A Demanding World
And then there are those
reports from high-level agencies and organizations on the global energy
picture, all coming to the same basic conclusion: Whether or not the
peak in world oil output is at hand, the future of the global oil supply
in a world of endlessly growing demand appears grim.
The first of these recent
warnings, entitled the "Medium-Term
Oil Market Report," was released on July 8 by the
International Energy Agency (IEA),
an arm of the Organization for Economic Cooperation and Development
(OECD), the club of major industrial powers. Although filled with statistics
and technical analyses, the report, assessing the global oil supply-and-demand
equation through 2012, seemed to leak anxiety and came to a distinctly
worrisome conclusion: Because world oil demand is likely to keep rising
at a rapid tempo and the development of new oil fields is not expected
to keep pace, significant shortfalls are likely to emerge within the
next five years.
The IEA report predicts that
world economic activity will grow by an average of 4.5% per year during
this period -- driven largely by unbridled growth in China, India, and
other Asian dynamos. Global oil demand will rise, it predicts, by about
2.2% per year, pushing world oil consumption from an estimated 86.1
million barrels per day in 2007 to 95.8 million barrels by 2012. With
luck and substantial new investment, the global oil industry may be
able to increase output sufficiently to satisfy this higher level of
demand -- but, if so, just barely. Beyond 2012, the production outlook
appears far grimmer. And keep in mind, this is the best-case scenario.
Underlying the report's conclusions
are a number of specific fears. Despite rising fuel prices, neither
the mature consumers of the OECD countries, nor newly affluent consumers
in the developing world are likely to significantly curb their appetite
for petroleum. "Demand is growing, and as people become accustomed
to higher prices, they are starting to return to their previous trends
of high consumption," was the way Lawrence Eagles, an oil expert
at the IEA, summed
the situation up. This is clearly evident in the United
States, where record-high gasoline prices have not stopped drivers from
filling up their tanks and driving record distances.
In addition, oil output in
the United States and most other non-members of the Organization
of Petroleum-Exporting Countries (OPEC) has peaked, or
is about to do so, which means that the net contribution of non-OPEC
suppliers will only diminish between now and 2012. That, in turn, means
that the burden of providing the required additional oil will have to
fall on the OPEC countries, most of which are located in unstable areas
of the Middle East and Africa.
The numbers are actually
staggering. Just to satisfy a demand for an extra 10 million or so barrels
per day between now and 2012, two million barrels per day in new oil
would have to be added to global stocks yearly. But even this calculation
is misleading, as Eagles of the IEA made clear. In fact, the world would
initially need "more than 3 million barrels per day of new oil
each year [just] to offset the falling production in the mature fields
outside of OPEC" -- and that's before you even get near that additional
two million barrels.
In other words, what's actually
needed is five million barrels of new oil each year, a truly daunting
challenge since almost all of this oil will have to be found in Iran,
Iraq, Kuwait, Saudi Arabia, Algeria, Angola, Libya, Nigeria, Venezuela,
and one or two other countries. These are not places that exactly inspire
investor confidence of a sort that could attract the many billions of
dollars needed to ramp up production enough to satisfy global requirements.
Read between the lines and
one quickly perceives a worst-case scenario in which the necessary investment
is not forthcoming; OPEC production does not grow by five million barrels
per day year after year; ethanol and other substitute-fuel production,
along with alternate fuels of various sorts, do not grow fast enough
to fill the gap; and, in the not-too-distant future, a substantial shortage
of oil leads to a global economic meltdown.
The Missing Trillions
A very similar prognosis
emerges from a careful reading of "Facing the Hard Truths About
Energy," the second major report to be released in July. Submitted
to the U.S. Department of Energy by the National
Petroleum Council (NPC), an oil-industrial association,
this report encapsulated the view of both industry officials and academic
analysts. It was widely praised for providing a "balanced"
approach to the energy dilemma. It called for both increased fuel-efficiency
standards for vehicles and increased oil and gas drilling on federal
lands. Contributing to the buzz around its release was the identity
of the report's principal sponsor, former Exxon CEO Lee Raymond. Having
previously expressed skepticism about global warming, he now embraced
the report's call for the taking of significant steps to curb carbon-dioxide
emissions.
Like the IEA report, the
NPC study does claim that -- with the perfect mix of policies and an
adequate level of investment -- the energy industry would be capable
of satisfying oil and gas demand for some years to come. "Fortunately,
the world is not running out of energy resources," the report bravely
asserts. Read deep into the report, though, and these optimistic words
begin to dissolve as its emphasis switches to the growing difficulties
(and costs) of extracting oil and gas from less-than-favorable locations
and the geopolitical risks associated with a growing global reliance
on potentially hostile, unstable suppliers.
Again, the numbers involved
are staggering. According to the NPC, an estimated $20 trillion in new
investment (that's trillion, not billion) will be needed between now
and 2030 to ensure sufficient energy for anticipated demand. This works
out to "$3,000 per person alive today" in a world in which
a good half of humanity earns substantially less than that each year.
These funds, which can only
come from those of us in the wealthier countries, will be needed, the
council notes, in "building new, multi-billion-dollar oil platforms
in water thousands of feet deep, laying pipelines in difficult terrain
and across country borders, expanding refineries, constructing vessels
and terminals to ship and store liquefied natural gas, building railroads
to transport coal and biomass, and stringing new high-voltage transmission
lines from remote wind farms." Adding to the magnitude of this
challenge, "future projects are likely to be more complex and remote,
resulting in higher costs per unit of energy produced." Again,
think tough oil.
The report then notes the
obvious: "A stable and attractive investment climate will be necessary
to attract adequate capital for evolution and expansion of the energy
infrastructure." And this is where any astute observer should begin
to get truly alarmed; for, as the study itself notes, no such climate
can be expected. As the center of gravity of world oil production shifts
decisively to OPEC suppliers and to state-centric energy producers like
Russia, geopolitical rather than market factors will come to dominate
the energy industry and a whole new set of instabilities will characterize
the oil trade.
"These shifts pose profound
implications for U.S. interests, strategies, and policy-making,"
the report states. "Many of the expected changes could heighten
risks to U.S. energy security in a world where U.S. influence is likely
to decline as economic power shifts to other nations. In years to come,
security threats to the world's main sources of oil and natural gas
may worsen."
Read from this perspective,
the recent reports from pillars of the Big- Oil/wealthy-nation establishment
suggest that the basic logic of peak-oil theory is on the mark and hard
times are ahead when it comes to global oil-and-gas sufficiency. Both
reports claim that with just the right menu of corrective policies and
an unrealistic streak of pure luck -- as in no set of major Katrina-like
hurricanes barreling into oil fields or refineries, no new wars in Middle
Eastern oil producing areas, no political collapse in Nigeria -- we
can somehow stagger through to 2012 and maybe just beyond without a
global economic meltdown. But in an era of tough oil, the odds tip toward
tough luck as well. Buckle your seatbelt. Fill up that gas tank soon.
The future is likely to be a bumpy ride toward cliff's edge.
Michael T. Klare
is a professor of peace and world security studies at Hampshire College
in Amherst, Mass., and the author of Blood
and Oil: The Dangers and Consequences of America's Growing Dependence
on Imported Petroleum. His newest book, Rising Powers,
Shrinking Planet: The New Geopolitics of Energy, will be published in
the spring of 2008 by Metropolitan Books.
[This article first appeared
on Tomdispatch.com,
a weblog of the Nation Institute, which offers a steady flow of alternate
sources, news, and opinion from Tom Engelhardt, long time editor in
publishing, co-founder of the American
Empire Project and author of Mission
Unaccomplished (Nation Books), the first collection
of Tomdispatch interviews.]
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