Past Its Peak

Michael Klare

Unlike the oil ‘shocks’ of the 1970s, the current energy crisis is almost certain to be long-lasting. None of the quick fixes proposed by pundits and politicians – drilling in protected wilderness and maritime areas, curbs on commodity speculators, pressure on members of Opec to increase output – is likely to have much impact. In 1973-74 and again in 1979-80, events in the Middle East led to a sharp reduction in the flow of oil from the Persian Gulf, causing a contraction in global supplies and a rise in energy prices, and thus sparking a global recession. But when equilibrium of a sort was restored to the region, the oil began to flow again and the crisis passed. Now, however, the imbalance between supply and demand is largely due to factors inherent in oil commerce itself – and so is less easily solved.

The oil crisis is the product of three developments: an unexpected surge in demand, much of it from Asian countries; a slowing in the growth of world supply; and a shift in the centre of gravity of production from the global North to the global South. But the situation has been made far worse by the 1994 decision by Jiang Zemin’s government to make car production and ownership a ‘pillar’ of the Chinese economy; and by the Bush administration’s National Energy Policy of 2001, which backed the continued production and consumption of oil rather than the development of alternative sources of energy. Both policies ensured that the global demand for oil would rise just at the moment when the industry’s capacity to boost supply was beginning to falter.

According to the Statistical Review of World Energy, published every June by BP, oil consumption jumped from 69.5 million barrels a day at the end of 1995 to 85.2 million barrels at the end of 2007. Some of this huge rise was generated by increased fuel consumption in the United States (where giant SUVs had become all the rage), but most was the result of increased demand from the rapidly industrialising nations of the developing world. Of those 15.7 million extra barrels, 4.6 million were added by China, and 2.7 million by other Asian states, including India.

These trends are likely to continue. In its 2008 Medium-Term Oil Market Report, the International Energy Agency (IEA) predicts that global consumption will rise from 86.9 million barrels a day in 2008 to 94.1 million in 2013. Almost all of this growth is expected to come from non-OECD countries, with Asia generating the largest share. According to the report, China alone will account for nearly a third of the increase in global consumption over the next five years. Although some progress has been made in Europe and Japan towards reining in demand, this has been more than offset by rising consumption elsewhere. And the growing signs that the industry is no longer capable of keeping pace with the surge in demand are helping to drive prices even higher.

The essential cause of the slowdown in the growth of output is that many large and easy to exploit fields have already been substantially depleted, while those yet to be developed are, in general, smaller, more remote and harder to bring into operation (whether for political, environmental or technical reasons). Various methods, such as the use of ‘enhanced oil recovery’ techniques, have been developed by the industry to prolong production at fields that are beginning to show signs of decline. Offshore drilling, meanwhile, has moved into ever deeper waters in the search for promising deposits. But these efforts can’t compensate for the exhaustion of the major fields that have sustained global consumption for the past half-century.

Although there are tens of thousands of producing oilfields in the world, nearly half of our daily intake comes from just 116 enormous fields. Of these, all but four were discovered more than a quarter of a century ago, and many are showing signs of exhaustion. In May, for example, the Mexican state oil company, Pemex, announced that output at Cantarell – the country’s biggest field – had declined by nearly 40 per cent since 2006. Similar problems are affecting some of Russia and Norway’s major fields.

In the 2008 report IEA analysts increased their estimate of decline rates in mature fields to 5.2 per cent a year, up from 4 per cent in 2007. This means that 3.5 million more barrels a day would have to be generated elsewhere every year just to hold production levels steady. By 2013, the industry will have to generate 24.7 million barrels a day in additional capacity in order to reach the predicted target of 94.1 million barrels: a nearly impossible task.

As the IEA report points out, although the major oil companies are eager to bring new projects online (and thereby increase their take from the current surge in prices), the only options that remain are those that cost more, take longer to complete or require complex technology, and the major companies are reluctant to invest the many billions of dollars required. Although a number of major projects undertaken in the late 1990s and early 2000s will come on stream in 2009 and 2010, there are very few waiting in line behind them, and the IEA predicts a sharp fall-off in new capacity in 2011 and after – just when demand from China, India and other developing countries will take off in earnest. Mainstream energy analysts and industry officials are now coming to agree that conventional oil production will soon peak and then begin an irreversible decline – a view that was until recently held only by a group of unorthodox oil geologists, many associated with the Association for the Study of Peak Oil and Gas.

When the Petroleum Age began in the late 19th century, production was concentrated in the United States, Mexico, Romania and the Russian empire. This remained the case until well after the Second World War, with the US still providing half of the world’s oil in 1955. But the centre of production has moved ever southwards, to the Middle East, Africa, Central Asia and South America. Today, the US accounts for only 9.6 per cent of output; the Middle East for 30.1 per cent; Africa for 12.5 per cent and Latin America for 12.4 per cent. All told, the non-OECD countries now supply approximately three-quarters of the world’s oil.

This shift is important because most of the major developing-world producers were at one time or another ruled by the imperial powers and continue to bear the scars. Some, like Iraq, have borders that were devised by the imperial powers to meet their own needs and bear little relation to ethnic, religious or linguistic realities. Such regions are susceptible to involvement in violent struggles for regional autonomy or secession. The spoils of oil production often exacerbate these problems, by enhancing the attractions of separatism (especially if the oil fields are located in the ethnic territory involved, as in Angola’s Cabinda province or Iraqi Kurdistan) or of seizing national power (and thus taking control of the allocation of oil revenues).

All this means that the major oil-consuming nations are more dependent than ever on supplies from countries that are prone to rebellion, ethnic strife, separatism, sabotage and coups d’état – often instigated by the lure of oil wealth. Attacks on oil rigs, pipelines, refineries, loading platforms, tankers and other exposed elements of infrastructure cause temporary reductions in global supplies and lead to price spikes: recently, refinery explosions in Iraq, insurgent attacks in Nigeria and pipeline sabotage in Mexico have all had this effect. This would be bad enough if the industry possessed substantial spare capacity, which would allow it to compensate for a temporary drop in output, but major producers no longer have significant reserves such as Saudi Arabia deployed in 1990 to avert an energy crisis after Iraq invaded Kuwait. While price spikes don’t tend to last long, their frequency seems to be increasing, tempting speculators to buy oil futures at ever higher prices in expectation of higher returns.

Until 1994, China manufactured very few cars (in 1990, it was producing only 42,000 a year) and discouraged imports of foreign-made vehicles. But after Jiang Zemin’s State Planning Commission announced that car production was to become a ‘pillar’ of national economic development, with foreign companies invited to provide capital and knowhow, China soon became the developing world’s leading recipient of foreign direct investment. By 1998, it was making 500,000 cars a year; in 2002, it was making a million; a year later it was making two million.

There have been tangible economic benefits. As Kelly Sims Gallagher reported in China Shifts Gears (2006), by 2003 China’s automobile industry – including cars, motorcycles, engines and parts – employed 1.6 million workers and accounted for 6 per cent of the total added value of manufacturing. The growing availability of relatively affordable cars to China’s burgeoning middle class has also satisfied a long-suppressed desire. According to a recent US government estimate, the number of privately owned cars in China is expected to rise from 27 million in 2004 to 400 million in 2030.

This huge growth is the main cause of the rise in China’s oil consumption. Until 1993, it consumed less oil than any other major power and satisfied its needs from domestic production. In that year, according to BP, China produced and consumed 2.9 million barrels a day, compared to 17.2 million barrels in the United States and 5.5 million in Japan. By the end of 2003 it had overtaken Japan to become the world’s second biggest consumer and now consumes 9.2 per cent of the world’s oil. But it has failed to boost domestic production much above its 1990s level. In spite of efforts to develop new fields in offshore areas and the far western Xinjiang region, China is producing only 3.7 million barrels a day, an increase of a mere 800,000 barrels over its 1993 output. This means that imports have had to rise from zero to their current level of about 3.7 million barrels a day; and it is this rise, the largest in any country over the past ten years, that has made such a contribution to the growth in global demand.

It’s difficult not to feel that the Chinese leaders made a strategic error in choosing to push car manufacture. Why not develop subway systems, suburban and high-speed intercity railways? With its crowded cities and continental expanse, China would be far better served by an integrated rail network. Beijing is now finally taking steps to improve the country’s rail system, but it is also committed to a huge road-building programme, and continues to hold gasoline and diesel prices at below market rates, further spurring sales of both oil and cars. With domestic output unable to satisfy rising demand, China’s devotion to the automobile will make it a sinkhole for imported oil, depleting its economy and distorting international markets.

One of George W. Bush’s first major acts as president was to set up a National Energy Policy Development Group (NEPDG), headed by Dick Cheney. Many observers assumed that the NEPDG would take account of the evidence then beginning to accumulate that oil production was about to peak: one of the first key studies, Kenneth Deffeyes’s Hubbert’s Peak: The Impending World Oil Shortage, was published in 2001 and widely circulated. (M. King Hubbert was the oil geologist who first developed the equations that predicted a peak.) Many environmentalists also argued that a new energy policy should stress the importance of developing alternatives to fossil fuels, given the mounting signs of global warming. But Cheney, a former executive at Halliburton and a close ally of many oil company executives, had other plans; though he met senior executives of major US energy firms, he failed to consult with representatives of any environmental organisations.

The Cheney panel’s final report, National Energy Policy, published on 16 May 2001, contained 105 recommendations, but almost all US news coverage was devoted to just one of them: the call for drilling in the Arctic National Wildlife Refuge. Environmentalists raised a howl of protest, and Congress has yet to give its consent. But this focus on Arctic drilling has had the unfortunate effect of distracting attention from the more profound implication of the report: its commitment to the perpetuation of the Petroleum Age by any means and at any cost.

Cheney came close to revealing his objective when he told reporters on 30 April 2001, two weeks before the NEP’s release: ‘Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy.’ Oil and other fossil fuels, he said, would remain America’s principal sources of energy for ‘years down the road’. To ensure this, the NEP called for increased drilling not only in the Arctic but in other protected wilderness areas, on public land in the American West, and in the outer continental shelf. Even more significant, the report openly assumed that the United States would become more rather than less dependent on imported oil, and urged the president to take a more active role in securing American access to foreign energy reserves. Of the report’s recommendations, around a third are aimed at bolstering US participation in global oil markets.

Bush claims that the NEP provides strong backing for the development of wind power, solar power and other energy alternatives. And it is true that the administration has approved modest research grants into such technologies. But these are insignificant compared with the support given to increased domestic drilling and the pursuit of foreign oil, a pursuit that can be measured by the repeated visits by Bush, Cheney, Condoleezza Rice and other senior figures to the capitals of major oil-producing states, including Angola, Azerbaijan, Kazakhstan, Nigeria and Saudi Arabia.

There is also the question of how far the administration’s decision to go to war in Iraq was prompted by a desire to control Iraqi oil (or indeed to ensure US dominance of the Persian Gulf). Until recently, the view that Iraq was a war for oil was held largely by critics of the war, but last year Alan Greenspan broke ranks with other members of the Washington establishment when he declared: ‘I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.’ Whatever its original aim, the conspicuous presence of US forces in the Arab world and the continuing instability in Iraq have significantly contributed towards the proliferation of terrorist groups in the region, many of which have mounted attacks on pipelines, refineries and loading platforms – causing yet more disruptions to oil supplies.

Throughout their administration Bush and Cheney have worked to impede the adoption of conservation measures (such as tough fuel-efficiency standards for domestic vehicles), to hold back the development of alternative sources of energy and transport, and to sustain high levels of oil consumption. As a result, according to BP, US consumption rose by one million barrels a day over the course of Bush’s presidency while the output of domestic fields declined by roughly the same amount, pushing net imports up by two million barrels. Although not as large a rise as that recorded by China, it still contributed to the pressure on oil exporters and helped to push prices up. Until American and Chinese consumers of oil are put on a diet, and alternatives to petroleum are developed, the world’s energy crisis will only get worse.