Friday, January 20, 2006

Oil, Our Lifeblood and Our Worst Nightmare

Not only do the world’s 600 million automobiles depend on oil, but also do almost every other critical aspect of industrial civilization: airlines, chemicals, plastics, medicines, agriculture, heating, etc. Almost all of the increase in world food productivity over the past 50 years is attributable to increases in the use of oil-derived additives: pesticides; herbicides; fungicides; fertilizers; and machinery. Oil is the one commodity without which civilization cannot exist.
“When oil is gone, civilization will be stupendously different. The onset of rapid depletion will trigger convulsions on a global scale, including, likely, global pandemics and die-offs of significant portions of the world’s human population. The “have” countries will face the necessity of kicking the “have-nots” out of the global lifeboat in order to assure their own survival. Even before such conditions are reached, inelastic supply interacting with inelastic demand will drive the price of oil and oil-derived commodities through the stratosphere, effecting by market forces alone massive shifts in the current distribution of global wealth.”

In the late 1970’s President Jimmy Carter was ridiculed for insisting that a permanent oil shortage was upon us, and that everyone had to turn their thermostats way down and cut back sharply on their driving. President Carter, who famously was wearing a sweater as he made this announcement, was wrong, but almost all knowledgable people now agree that his message is coming true. He was just ahead of his time. We are now in or soon facing what is called the “Peak” of oil supplies. From the moment of the “Peak”, with demand from China and India increasing by a huge factor, we cannot get the oil we need.
“The world is quickly running out of oil. In the year 2000, global production stood at 76 Million Barrels per Day (MBD). By 2020, demand is forecast to reach 112 MBD, an increase of 47%. But additions to proven reserves have virtually stopped and it is clear that pumping at present rates is unsustainable. Estimates of the date of “peak global production” vary with some experts saying it already may have occurred as early as the year 2000. New Scientist magazine recently placed the year of peak production in 2004. Virtually all experts believe it will almost certainly occur before the end of this decade.

And the rate of depletion is accelerating. Imagine a production curve that rises slowly over 145 years—the time since oil was discovered in Pennsylvania in 1859. Over this time, the entire world shifted to oil as the foundation of industrial civilization. It invested over one hundred trillion dollars in a physical infrastructure and an economic system run entirely on oil. But oil production is now at its peak and the right hand side of the curve is a virtual drop off. Known reserves are being drawn down at 4 times the rate of new discoveries.

The reason for the drop off is that not only have all the “big” discoveries already been made, the rate of consumption is increasing dramatically. Annual world energy use is up five times since 1945. Increases are now driven by massive developing countries—China, India, Brazil—growing and emulating first or at least second world consumption standards. Fixed supply. Stalled discoveries. Sharply increased consumption. This is the formula for global oil depletion within the next few decades.

The situation is especially critical in the US. With barely 4% of the world’s population, the US consumes 26% of the world’s energy. But the US produced only 9 MBD in 2000 while consuming 19 MBD. It made up the difference by importing 10 MBD, or 53% of its needs. By 2020, the US Department of Energy forecasts domestic demand will grow to 25 MBD but production will be down to 7 MBD. The daily shortfall of 18 MBD or 72% of needs, will all need to be imported.

The reason is that a very major portion of the world’s oil is, by accident of geology, in the hands of states hostile to the US. Fully 60% percent of the world’s proven reserves of oil are in the Persian Gulf. They lie beneath Muslim countries undergoing a religious revolution that wants to return the industrial world to a pre-modern order governed by a fundamentalist Islamic theocracy. Saudi Arabia alone controls 25% of all the world’s oil, more than that of North America, South America, Europe and Africa combined. Kuwait, Iran and Iraq, each control approximately 10% of the world’s oil.

Another 15% of the world’s oil lies in the Caspian Sea region, also a dominantly Muslim region. It includes a group of post-Soviet, satellite and buffer states that lack any semblance of legal or market systems.”
“The United States currently obtains only about 18 percent of its imported petroleum from the Persian Gulf area. But Washington perceives a strategic interest in the stability of energy production there because its major allies, including Japan and Western Europe, rely on imports from the region. Also, the gulf's high export volume has helped to keep world oil prices relatively low, benefiting the US economy. With domestic production in decline, the National Energy Policy observes, the Persian Gulf "will remain vital to US interests"….

US policy with regard to the protection of Persian Gulf energy supplies is unambiguous: When a threat arises, the US will use whatever means are necessary to ensure the continued flow of oil. This principle, known as the Carter Doctrine, was first articulated by president Jimmy Carter in January 1980, following the Soviet invasion of Afghanistan and the fall of the shah of Iran. It has remained part of US policy ever since. In accordance with the principle, the US used force in 1987 and 1988 to protect Kuwaiti oil tankers from Iranian missile and gunboat attacks, and then in 1990 and 1991 to drive Iraqi forces out of Kuwait”

Weekly Standard
“UKRAINE is the West writ small. Its confrontation with Russia over energy supplies, during the course of which Vladimir Putin gave "cold war" a new definition, is a warning to major energy-consuming countries that their long-term prosperity is in the hands of very dangerous people.

It's no news that the OPEC oil cartel is not the most reliable supplier of the oil that advanced economies need to keep their trucks and cars moving, their planes flying, and some of their homes heated. These oil-producing countries have combined to keep prices above competitive levels and have not hesitated to "unsheathe the oil weapon"--read, boycott consuming countries--when dissatisfied with American foreign policy, as they were in 1973 and 1974. That includes, most notably, Saudi Arabia which nevertheless attempts to pass itself off as a reliable supplier of energy.

As does Vladimir Putin, who kept a straight face when announcing that his willingness to end his cutoff of gas supplies to Europe--a supply shutdown that included refusing to allow gas from Turkmenistan and Kazakhstan to flow through Russian pipes--proves that Russia is a reliable supplier. Never mind that it was on his orders that Gazprom cut off supplies to Ukraine, and by extension to Germany, France, and other countries--despite existing contracts that run until 2009.

Remember: This dispute was not only about prices. Belarus, the former Soviet republic that has elected to stay in Russia's sphere of influence, has not been faced with the massive price increases Gazprom has imposed on more Western-oriented Ukraine, Georgia, and Moldova.

There's worse. Venezuela, one of America's top crude oil suppliers, has always been a reliable business partner, even honoring its supply contracts when the Arab members of OPEC instituted their boycott. Now, however, that country is run by the rabidly anti-American, pro-Castro, Hugo Chávez. He has raised taxes, sued for massive back taxes (shades of Putin's assault on Yukos), forced the major international oil companies to give state-owned PDVSA majority ownership of their oil concessions, and forged an anti-Yankee alliance with other Latin American oil producers such as Bolivia's Evo Morales.

Putin keeps prices to favored allies below market levels; Chavez makes cheap oil available to Cuba; Middle Eastern countries, with the possible exception of Kuwait, refuse to allow Western oil companies to invest capital and expertise to develop new reserves although the host countries would benefit from such development; China pumps $1.2 billion into Sinopec, a listed company, to cover its losses. These are the acts of power-maximizers, not profit-maximizers.”

Our civilization, and that of the rest of the industrial world, is entirely dependent on a disappearing resource. We can conserve it, we can fight for it and we can substitute for it, but it has become clear that these are stop-gap measures that will fall far short of our needs. Fortunately, there is an answer to our dilemma. Nuclear energy can more than fill this void. In my next post I will discuss this in detail, but, basically, we can turn to nuclear energy to replace the oil that we are consuming in the production of needed electricity, and the new generating plants we build can be the type that also produce cheap hydrogen as a byproduct. We must also build a hydrogen distribution and storage network that can supply the hydrogen-powered fuel cell automobiles now on the drawing boards. If we go forward with this program right away, the precipitous decline of oil supplies can have tremendously beneficial effects to America, because such a switch will result in 1. cheap, safe electrical power with no greenhouse gases, 2. low cost, clean running automobiles, 3. complete domestic control of our energy needs (and reduced need for military interventions), and 4. the application of available oil supplies to the production of petrochemical products such as fertilizer, plastics and medicine.

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