Bad News at the Pump
Commentary: The $100-plus barrel of oil and what it means.
March 11, 2008
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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 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. 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 U.S. 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 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 U.S. 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 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-Chávez 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 U.S. 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 Chávez 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.
Vote for me! Let's get crafty on this stuff.
Bert08
national debt combined with the birth of OPEC had the consequence of crippling the nation. (OPEC immediately made its mark on the world through a series of doubling and tripling of the price of oil) It was then and there that had real national security been a concern of the so-called “conservative” forces in the US that the Oil Industry ought to have been nationalized, because it was from that point in time onwards that we no longer controlled the oil business. Control was now completely in the hands of foreign states while the oil itself was crucial to the functioning of the nation—we were now slaves to these nations and we have apparently become suicidal slaves at that. The Iraq War is the failure of those who claim they defend the interests of the nation because it is a war that only serves the interests of oil producing nations while it weakens the US, our key trading partners and our allies. The decision to go to war is a direct reflection of the ignorance that leads the nation.
A key consequence from our war debt in Vietnam was the collapse of the Breton Woods exchange
system (built on the Gold Standard) that gave rise to a more or less fixed rate currency exchange regime. A subtle but unfortunately not discussed economic-political policy is the peculiar difference between the use of fixed and floating currency exchange regimes, since these systems of economical value are as much political in nature as they are economical—this is so because the elusive system of exchange rates is in fact what defines what is really possible in terms of economic policy.
In a world of fixed exchange rates a central bank attempts to maintain fixed rates of exchange between the "homeland" and its trading partners because this allows the use of an effective fiscal policy and thereby offering policy makers the ability to rule their country by means of Keynesian styled economics. Here the government uses taxes and government spending to achieve desired goals, while if the currency regime is floating then these instruments are not effective. The key incentive of the fixed exchange system was to enable a country to use fiscal policy to maintain the national economy but also to encourage economic perspicacity because the freedom opened to policy makers via Keynesian economics was contingent upon a nation actually maintaining control over their finance policy in such a way that the policy decisions could be defended against open market operators who would continuously test each nation’s exchange rate (buying and selling currencies)—if a country failed to successfully defend their currency position against the fixed rate, the country’s currency would then be forced to float and they in turn would be forced to manage the affairs of state by a different form of political philosophy—because once their credibility is destroyed the currency floats and fiscal policy becomes ineffective. This was the global impact of Reaganomics—forcing the world to adopt a floating exchange so as to adapt to the collapse of the American dollar during the 80's, combined with double digit interest rates which culminated in a total economic crash at the end of the 80's and a global recession. (back then interests rate achieved double digit figures for much of the world's economy--meaning the likelihood of investment projects failing increases dramatically (if you could get 10% interest by simply putting your money in the bank are you willing to borrow at say 13% and put your savings at risk in a project that might give a return of say 11% a year?)
By 1988 the consequences of Reaganomics had kicked in. The world economic system basically
collapsed thanks to the black hole deficit of Reaganomics and in place of the more or less fixed
exchange rate system that had ruled the majority of nations since the end of Vietnam (actually since the end of WWII) we got the so called floating or flexible exchange rate system came into play. Here the central bank’s role is changed. Taxes and government spending become basically ineffective and what are used to manipulate domestic policy are the interest rates and the supply of money. The politics of a nation are forced to avoid the use of government spending (it is necessary to have complete balance in the budget because budget imbalance is reflected immediately through the exchange rate (because it floats) hence a budget deficit results immediately in the weakening of the country’s currency—Keynesian styled economics is dropped and it is the market that rules the nation. With the Bush administration the effect of deficit spending is most clearly seen through the devaluation of dollar that went from a position of 90 cents to a Euro in 2001 and today we are at 1.54$ dollars to a Euro—our purchasing power in relation to the Euro has been halved, but for countries that receive a major source of their revenues in the form of the dollar, in particular oil producing nations, then a decline in the value of the dollar means they must raise the price of oil to maintain a constant level of purchasing power, hence a devaluation in the dollar means an increase in the price of oil. The major consequence of the floating system is that it forces nations towards classical notions of money supply—for the average jack this simply means you won't be paid enough to survive and a look a household savings in the US confirms this, since they have literally evaporated to zero savings, which means household investments are zero too. With Reagan it required around 8 years before his black hole style of economics failed and like the collapse of Breton Woods, it took the world with it. Today with George W. Bush we have again achieved systemic collapse because of no restraints. In terms of our history we have obviously learned nothing. Not in terms of starting wars on fictive grounds,Vietnam like the Iraq War was also started on fictions and we have learned nothing from black hole economics.
The problem is that we have now used up all known economical systems—each one destroyed by a
Republican president. Even when we go back in time to Calvin Coolidge’s laissez faire we meet that same sweet Republican disaster in the financial realm while they seem to always discover some “evil” to be conquered—with Coolidge it was “King Alcohol” and prohibition, with McCarthyism it was “get the commie” and today we are strangled by the Bush war on terrorism. With Coolidge it also required around 8 years before he destroyed the country.
Maybe this is nothing more than crazy eights or perhaps there is a direct correlation between
Republican economic policy and economic mayhem (It requires a Republican exactly 8 years to
destroy an economic system). Personally I don’t think the economy gives a hoot about ideology unless you attempt to steer the economy by dogma—sometimes the economy needs liberalism a la Keynes and other times it needs classical solutions via wage-labor or expanding the supply of money, sometimes you must increase taxes, sometimes you must cut them, sometimes you must raise the interest rate and sometimes the government must bail people out of hard times and sometimes you need combinations of theses all according to what’s happening here and in the global economy. The inflexible dogma of republicans is perhaps a disaster when it comes to economic decision making because it might not be in line with the party dogma of what constitutes being “conservative”—thus they probably should never be allowed to be in the White House more than 4 years or else you can bet with 100% certainty on an economical disaster. This trend for economic disaster has been the case since 1922. During Ike’s presidency we avoided economic mayhem but suffered from the republican ideological delirium of McCarthyism—that delirium still controls the “conservative” base. Republicans are basically nothing more than an elite party of greedy dogmatists—much like Red Communist who served their party propaganda via the Pravda; with the Red Republicans you get FOX News—meaning it ain’t news its propaganda. Basically the party message is those outside of the party elite are expendable dogs—in particular your rights and especially those rights that concern the pursuit of happiness. For them happiness is watching you suffer. It is the chuckling sense of power they feel from blaming you, the American people, for desiring to bring the Iraq War to a halt because it serves no purpose and weakens the nation. Because you desire accountability they call you cowards. Because you’re tired of your kids getting killed to please the board of trustees at Standard Oil—they say you lack staying power when the truth is the average American can’t make ends meet and this is reflected via the national accounting statistics for household savings, which presently stand in minus—today there are no household savings in the US—hence the reason the country can’t consume its way out of the economic crunch is not for lack of will or desire but because “they ain’t got no bread, man."
The motto of the Republican Party reminds me of the story surrounding the statement made by Marie Antoinette when it was brought to her attention that the people of France had no bread to eat and she retorted, “Then let them eat cake”!