9. The coming world oil crisis
When comparing these two viewpoints, I will give my comments on a number
of issues concerning the future availability of oil and whether there are
enough alternative energy resources.
Oil is where you find it.
We, geologists, are now very well informed of the areas on earth were we
can expect to find oil. More than 90% of original recoverable oil and gas
reserves in the world have been generated from source rocks of six geological
time intervals. Large areas on earth are devoid of oil. In the last 20 years,
it has become clear that the uneven concentration of oil and gas reserves on
any scale is not a result of our incomplete knowledge, but a fundamental fact
of the petroleum geology.
(Link 9. For more details on the
origin of oil click here)
At which moment an oil
field peak in production
Oil companies shun phrases like extraction and depletion. They prefer
the word production. "Chevron produces oil" (life insurance rather
than death insurance). In 1956 Dr M.King Hubbert described three basic laws
according to which an oil field will produce:
1. Production starts at
zero
2. Production then rises
to a peak, which never can be surpassed
3. Once the peak has been
passed, production declines until the resources are depleted
The peak is known as the Hubbert Peak.
With these rules in hand Hubbert predicted in 1956 that the oil
production of the 48 lower states of the US would peak in 1969. Since then the
production declined. The point of maximum production coincides with the
midpoint of depletion of the resource.
 |
Figure 15: Geologist Marion King Hubbert born in 1903. Predicted
correctly that oil from the lower 48 American states would peak around 1969
(Campbell, 1998).
 |
Figure 16: The Hubbert curve for the oil production in the lower 48
states of the United States (Menard, 1971)
 |
Figure 17: Annual oil discoveries in the lower 48 states in the United
States. The upper curve: the total oil production, the lower curve: the
production from giant fields (more than 1900 millions of barrels) (After
Menard, 1971).
Dr Colin J.Campbell and others used the Hubbert curve for the world oil
production. They predict that the peak will be during the first decade of the
next century. It is of the greatest importance to know the depletion rate
thereafter. We have to realize that oil cannot be pumped up quickly as from an
underground cavern. The oil is held in minute pore spaces of the reservoir
rocks. Wells start to decline, as they have to draw oil farther and farther
from the wellbore.
We have to make a great distinction between the quantity of new oil that
is in the ground and how much we can extract from it. Laherrère gives some
interesting figures concerning the ultimate recoverable oil from a well. Only
10% of all the oil fields oil can be recovered up to 45%. In the biggest fields with more than 500
million barrels the percentage of recovery is 57%. He opposed strongly to C. Alegre who said:" Today we reach a
middle mean of 20 to 30 %, but in the future it may be up to 80 to 90%".
Laherrère considers this as ridiculous as saying that tomorrow all Frenchmen
will measure 2 meters, because certain Frenchmen have attained that height!
From the big field of Ghawar (Saudi Arabia), they believed the recovery
percentage would come to 60%. Until now it is only 24% and already in the year
2000 the field will decline.
C.W. Masters: "Technology has its role and I don't mean to diminish
it- but the world is changed by dreamers". W. Pratt: " Oil is first
found in the minds of men"
Campbell and others have divided the world's producing countries in
three categories:
1. Post-midpoint countries:
production is declining exponentially in these countries (US)
2. Pre-midpoint countries:
production will be declining in a couple of years (UK)
3. Swing producers: they
can perform for about 15 years until they reach the midpoint. These
countries are capable to increase or decrease their production.
(Abu Dhabi, Iran, Iraq, Saudi
Arabia, Kuwait, Venezuela, Nigeria and Libya)
 |
Figure 18: Depletion midpoint in years to the past and the future of oil
production in areas in the world (After Laherrère, 1997)
World oil production is 98.4 % in 41 countries, whereas production in
the remaining countries 149 only 1.6%. In
the year 1997, world production was 25 billion barrels. Estimates are that in
2005 29 billion will be produced worldwide. From then on we will see a
declining production, in 2040 not more than 11 billion barrels!
 |
Figure 19: World hydrocarbons production till the present. Prediction
for production for hydrocarbons till 2150 (conventional and non-conventional
oil) in relation to the world population
(After Laherrère, 1997)
Not a single major oil field has been found because of 3D seismic or
horizontal drilling. Technology is necessary to fight against diminishing
returns of Nature. What is left to discover are the complex small, difficult to
reach and uneconomic fields. Technology
like new tools, improves development, save money, but accelerates depletion
rather than adding significant reserves.
(Link 10. More on the
history of the oil industry since 1970 click here)
We consume more oil than
we find.
If we apply the Hubbert curve for the discovery rate, we see the Hubbert
peak of the World annual oil discoveries peaked in 1962 and dropped since then.
We consumed in 1997 26 billion barrels of oil, we were finding less than
6 billion barrels in that year. Therefore, it is unbelievable that oil
executives do not accept this fact. Kenneth T. Derr (Chairman of Chevron):
"But now it's fairly well known that we're finding more than we're
using". Morris Adelman (Professor of economics):"The industry will
never run out of oil, not in 10.000 years"
Angola and Algeria are one of the few places on earth were big oil
fields were discovered recently. When viewed by decade however, the greatest
volumes of oil were discovered in the decade of 1958 to 1967 and gas in the decade
1968 to 1977.
Even with the improvements of technology, the average size of
discoveries has decreased. In total we have found 41000 oilfields, 641.000
drills were necessary to find them. 90% of the present oil production comes
from fields who are more than 20 year old and 70% from fields that were found
30 years ago. (Petroconsultants, 1998)
 |
Figure 20: World oil discoveries are
declining rapidly, whereas production rises.
The exponential factor of
consumption.
Every year we have an exponential growth of consumption. This fact is
completely ignored by the oil executives of British Petroleum and Chevron:
" at the current rate of consumption we have enough oil for 45
years". According to Walter Youngquist (1998): " This is very
misleading that the "current rate of consumption" does not represent
the future. The rate of consumption of
almost all resource, particularly energy is increasing every year".
Percentage of world oil consumption in the rich countries:
US 25%, Japan 8%, China 5%, Russia 4%, Germany 4%, S. Korea 3%, Italy 3%
France 3% England 3%
The demand for oil will increase considerable in de developing nations.
Since 1985 the consumption increased in Latin America with 30%, in Africa with
40 % and in Asia with 50%. The time is not far away when the demand of oil can
not be met, because the production is going to decline.
 |
Figure 21: In the next century. there will be a moment where the demand
is more than the supply of oil (After Meier et al, 1998)
If current trends persist, in about 10 years the developing countries
will consume as much energy as the industrialized countries do now.
 |
Figure 22: Exponential growth of
energy use in the world from 1890 to 1990 in terawatts ( 1 terawatt is equal
five billions barrels of oil per year) (After Holdren, 1990)
A factor that shall not be forgotten, that we consume quite a
substantial part of oil by spilling it all over the place. 6600 ships carry 525
billion gallons of oil every year. Between 1973 and 1993 there were over
200.000 oil spills in US water, dumping 230 million gallons of oil. In 1989,
the Exxon Valdez tanker dumped 11 million gallons of oil in the waters and onto
shores of Alaska. In 1994, a ruptured Russian pipeline spewed 85 million
gallons on the Arctic tundra. The Iraqi has burned at the end of the Gulf war 2
billion barrels of oil. The estimates are that a billion gallons of oil are
spilled into the world's oceans and waterways each year. Expressed in barrels
of oil: 280 million barrels every year or 767.000 barrels per day or 121.953.00
liters. (The oil production of Australia is 800.000 barrels per day). We could
drive with a car, which consumes 1 liter for every 10 kilometers, the enormous
distance of 1.2 million kilometers, that is 30 x around the world, with the oil
will spill every day!
The tankers spill amount only 13 percent of the total oil lost. The
biggest percentage accounts for the waste and the lost by municipal, industrial
waste, urban, leaking pipelines, storage tanks, standard tanker operations. We
do not have figures of the amount of gas that evaporates as we fill the tank of
our car and the oil drips form the cars.
There are also natural spills. Oil is leaking from fissures in the
seabed. In the Gulf of Mexico oil spills of 25.000 barrels of oil have been
registered. (McDonald, 1998)
Reserves dates are highly
unreliable
King Hubbert:
" Economists can find
twice as much oil on paper as geologist can find in the ground! In 1969, the
estimates of the world oil reserves were 3550 billion barrels. The new
discoveries after 1969 were far below expectation. Also disappointing were the
offshore discoveries".
In the exploration, the reserves are exaggerated to get more
investments. Is the well a success the reserves are underrated.
Governments in the main producing countries, especially in the OPEC
countries own most of world's reserves. In some cases, the estimated reserves
do not distinguish between conventional oil and non-conventional oil. The cost
to produce oil from these non-conventional reserves is astronomical high with
today's standards. Its is therefore misleading to include these reserves with
the conventional oil reserves.
The estimates of reserves given by oil producing countries are highly
distorted. OPEC countries raised their reserves with unsubstantiated increases.
They were motivated by quota considerations. The more oil you say you have, the
more you are allowed to sell. Nothing particularly happened in 1988 in terms of
technology or recovery.
Political reserves - non-existent oil that is reported by government's
agencies for political purposes. OPEC oil production quotas are based upon the
oil reserve figures provided by each member country. After this quota system
was implemented in 1985 a sudden leap in world oil reserves occurred 'Kuwait
reserves jumped 51%, Saudi Arabia shot up 50%, a 100% jump in Iraq, and
Venezuela and a 200 % in Abu Dhabi and Dubai.
Total amount of "political" reserves: 371,81 billion
barrels
 |
Figure 23: Sudden rise of reserves in 1988 and 1990. Political reserves?
Mexico included in their reserves the barely producible Chicontepek
field. This was done to get a 50 billion-dollar loan from the US, in order to
save the collapsing economy. The peso fell in 1994 35%!
In 1988, Venezuela doubled its reserves by including 20 billion barrels
of heavy oil.
The Soviet Union exaggerated its reserves, because it did not take into
account economic and technical constraints. (Reserves with 5-10 probability of
finding oil).
Russian oil expert Khalimov admitted in 1993 that the resources appeared
to be strongly exaggerated due to inclusion of reserves and resources that are
neither reliable nor technologically and economically viable.
Also very strange is the fact that forty-three countries reported
reserves that did not change for one or more years. Production however
diminishes the reserves. The reserves should be reduced by the cumulative
production of the unchanged period.
Different opinions of oil
experts in the reliability of reserves (Laherrère,1996):
DeScorcy (1993): "There
are currently almost as many definitions for reserves as there are evaluators,
oil and gas companies, securities commissions and government departments. Each
one uses its own version of the definition for its own purposes".
Capen (1996): "An
industry that prides itself on its use of science, technology and frontier risk
assessment, finds itself in the 1990's with a reserves definition more
reminiscent of the 1890's".
Cadwell (1996): " Why our reserves definitions don't work anymore".
Tobin (1996): "
Virtual reserves - and other measures designed to confuse the investing public".
Ultimate reserves of oil
Estimates are converging because the world petroleum exploration is now
mature. We know where oil is and where it is not. Demands are rising and
discoveries falling. The estimates of Estimated ultimate recoverable (EUR) oil
have varied little over the past half century:
1800 to 2400 billion barrels. 70% in the range of 2000. Campbell and
Laherrère (Petroconsultants) estimated the EUR: 2000 and Masters (1997) (USGS):
2300 billion barrels of oil.
 |
Figure 24: Percentage of Estimates of Ultimate Recoverable oil (EUR)
Strangely enough, there is not much disagreement in the ultimate
reserves on oil. They all accept more or less that we still have 1 trillion
barrels of oil left. The difference of opinion is in the time we need to get
the oil out of the ground. An oil well can not be depleted at a constant rate.
When half of the well is depleted, the extraction begins falling gradually back
to zero. Therefore, the time to extract the oil from the well takes more time.
This fact is completely overseen by the optimistic viewpoints.
Campbell and Laherrère (1997) combined several techniques to conclude
that there are left 1 trillion barrels of conventional oil to produce:
a. Extrapolating published production figures
for older oil fields that have begun to decline.
b. The amount of oil
discoveries so far in some regions plotted against the cumulative number of
exploratory wells drilled there; because larger field are
found first, the curve rises rapidly and
then flattens.
c. An analysis of the distribution of oil-field
size in the Gulf of Mexico and other provinces.
Ranked according to size, then graphed on a logarithmic scale.
The fields tend to go all along
an parabola that grows predictably over time.
d. The estimates were
checked by matching the projections for oil in large areas such as the
world outside the Persian Gulf region, to the rise and fall of
oil discovery in those places
decades earlier.
Even if we take the most optimistic reserves of ultimate recoverable oil
as high as 2600 billion barrels, the year of peaking would move back only 11
years to 2019.
The Petroconsultants have a lower figure, because they do not include
the political (spurious) reserves of some OPEC countries.
Costs of exploration for
oil going up
The optimist's claim that the average cost per barrel of finding has
dropped considerably. The facts indicate that the amount of oil discovered per
foot well drilled has declined exponentially from 1925 to 1988 without
interruption.
"Technology always overwhelms depletion": according MIT energy
researcher Michael C. Lynch. The new technology, such as horizontal drilling,
3-D seismic and improved secondary recovery methods, has not helped much to
stop the dropping of the discovery ratio. The costs associated with horizontal
drilling are as much as 40% to 200% (Oberle Oil Corporation, 1998).
The finding of a new giant as the oil field offshore Angola with one
billion barrels can not help much. The world oil consumption is today 73
million barrels per day. It means that this giant field can move the peak of
world production back just 13.6 days.
The energy costs of locating, extracting and refining fuel and other
resources from the environment have increased and will continue to increase
despite technical improvements in the extractive sector (Cleveland, 1984). We
have declining amount inputs used per unit output in the extractive sector
during this century. The extraction of lower quality requires the use of
more-energy intensive capita and labor inputs. The energy return on investment
for petroleum, natural gas and coal has fallen in the US.
 |
Figure 25: Relation between oil (low and high effort) per foot drilled (After
Gever et al. 1991)
OPEC versus non-OPEC
production of oil
OPEC countries are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. They
produce only 40% of the world production, but they have 76,5% of world reserves
Non-OPEC producing countries are concentrated in seven countries. Of
these, the United States and Russia are the largest producers and Russia and
Mexico have the largest reserves. While Russia, Mexico, Norway, the United
Kingdom and Canada are net exporters to the world oil market, United States and
China must import oil.
World production peaks at 285 billion barrels in 2005 and the falls top
10.9 billion barrels in 2040, a decline of 62% in 35 years. The inexorable
dynamics of World oil production will have human consequences in the extreme.
The question is - not whether, but - when will OPEC dominate world
petroleum production? This looming event is crucial because it is sure to have
social, economic, political, military, and religious consequences. OPEC
overtakes Non-OPEC in 2006. Thenceforth OPEC dominates World production.
 |
Figure 26: The OPEC (mainly Muslim) countries dominance in oil
production in the beginning of next century (Duncan, 1997)
Richard C. Duncan (Director of the Institute on Energy and Man, Seattle,
WA) wrote a letter to President Clinton may 13, 1997 in which he warns him for
the dominance of oil producing Muslim countries:
"The percentage of World
petroleum exports from Muslim countries will, willy-nilly continue to increase until
(perhaps by 2010) the Muslim countries will control nearly 100% of the World
petroleum exports. The World 19 Muslim countries will exceed the production of
all the 181 non-Muslim countries. What if tomorrow Palestine Yasir Arafat met
with representatives from each of the 19 Muslim countries and proposed an
entirely new organization called the " Alliance of Muslim Petroleum
Exporting Nations - "AMPEC" for short?
This proposal also could
cause World stock markets to fall 50% in one day and a World holy war".
(Link 11. More on Oil and the
Islam countries click here)
Duncan (1999) wrote a highly interesting paper, in which he related the
primary energy resources with the growth of world population. His conclusions
are well illustrated with a number of graphs:
"The world oilproduction per
capita peak (ca.1979), the falling oil production per capita trends (i.e 1979
to 1997), and the Muslim nations'control of world production (or the
"military option") will cause widespread and economic dislocations".
 |
Figure 27: Non-OPEC countries are producing far more oil at the moment
than the OPEC countries at a bottom price while having far lesser reserves than
the OPEC countries (After Global 2000 revisited)
A number of writers are over-optimistic about the production of non-OPEC
countries. "Non-OPEC oil production may continue to rise for another
decade or even more" (Herman T.Franssen, 1995). The facts are otherwise.
Although the Non-OPEC countries produce at the present 60% of the world
production, they have less than 25% of the world reserves. If the world would
depend only on the non-OPEC countries their reserves would all be gone (with
the assumption that the rise of world consumption is 2% annually) in 3670 days
(10 years) time! In a couple of years, we will depend fully on the OPEC
countries, especially those countries of the Middle East. The great paradox is
that the non-OPEC countries produce their costly oil at close capacity, whereas
the cheaper oil in the Middle East has an excess production capacity. Production
costs in the Middle East are averaged $2/barrel compared with about
$4.50/barrel in the US and Western Europe and $5.75/barrel in Canada.
Individual OPEC countries have significantly lower costs (e.g. less than
one dollar/barrel in Venezuela). The basic economics of mineral extraction and
production for the world market should result in the utilization of the lower
cost resources first. Today three-quarters of total world- wide oil and gas
investment is being spent in OECD countries. They have only 6% of the proven
reserves, but are now producing up to 25%. Their reserves will be quickly
depleted and the Middle East countries with 63 % of the world reserves will be
in a strong position in the time to come.
If restriction on the oil trade of some Middle Eastern countries is not
lifted in the near future, the Non-OPEC will need by 2005 an additional 10
million barrels per day. The price will also go up to maybe 40$ per barrel.
In this context, it is interesting to know that some of the OPEC
countries are trying to create a more effective group of oil. The July 6, 1998
issue of EIG's Petroleum Intelligence Weekly reports that, in theory, the new
organization should augment not supplant OPEC. The aim of the new group is to
keep the oil prices in a range of $17-$22 a barrel. It will try to intervene
swiftly without warning whenever prices will move outside this range. The club
has no fixed home-base or secretariat. The members can map out their strategy
by telephone and meet informally as they did already in Riyadh and
Amsterdam. Eventually the club will try
to gather 10 oil-exporting countries (Saudi Arabia, Iran, Kuwait, Mexico, the
United Arab Emirates, Venezuela, Iraq, Norway, Qatar, and Nigeria). These 10
countries have a potential output of 40% of world oil output, 70% of global
reserves and a spare capacity of 3 million barrels per day! (Barton, 1998).
The prospects from the Economist Intelligence are forecasting a further
decline of the oil price to under $10 dollar for 1999. What will the response
of this new group be, to this new challenge of still lower oil prices? Are they
afraid to lose a share in world oil market?
The President-Director of Royal Shell/Group Mark Moody- Stuart (Dutch
newspaper NRC Handelsblad, Tuesday 27 October 1998, p.17) answered this
question recently. He predicts a
drastic change in global oil production because we should reckon to deal for a
long time with extreme low oil prices. He thinks that the solidarity between
the big OPEC countries in The Gulf region will disappear. They can produce
against extreme low costs, whereas the other OPEC countries with lower volumes
and have much higher costs. He mentions Saudi-Arabia and Kuwait as candidates
for a bigger share of the market. The big oil companies have taken draconian
measures to face the low oil price (under 10$ per barrel).
The fusion of Shell and Texaco in refining and sales and the take-over
of Amoco by British Petroleum. An alliance of the Russian Gazprom and the
Nigerian energy company. The French oil company Total bought the Belgian oil
company Petrofina. In December 1998 was the biggest deal in oil history: the
fusion of Exxon and Mobil. What will be next, Shell with Chevron?
Riyadh, 28 October: The crown prince of Saudi Arabia, Abdullah, blamed
other OPEC countries for the low oil prices. They should keep their promises to
lower their oil production. In fact, Venezuela promised in the beginning of
this year to cut 200.000 barrels per day, but instead produced 780.000 barrel
per day more than their quota of 2.580.000 barrels per day.
The OPEC countries discussed the problem of the low oil price. They
decided end November 1998 not to take steps to reduce their oil production.
OPEC will however lower oil production in March next year. They suspect that
Iran and Venezuela have exported 600.000 barrels per day more than their quota
permits.
The OPEC members agreed 23 March 1999 to cut crude oil production by
2.104 million barrels a day and to maintain the lower levels of output for a
full year beginning April 1.
The group of 11 oil-producing nations detailed the plan in a communiqué
released after a meeting of OPEC members. It includes reductions by non-OPEC
producers as well as those in the group in an effort to end a global oil glut
and strengthen prices that had languished at a 12-year low as recently as
December. If the participating nations fully comply with the agreement, the
supply of oil on world markets would be reduced by about 2.6 percent. The
agreement was unanimous.
Saudi Arabia, OPEC's largest producer, will slash output by 585,000
barrels of crude a day. OPEC's No. 2 producer Iran will curtail daily output by
264,000 barrels, while Venezuela will pump 125,000 fewer barrels of oil a day.
OPEC will evaluate its output levels at the group's next meeting in
September and reserves the right to adjust production levels before the full
12-month period ends. (Associated Press)
As a result of this cut in production we have seen that the price of oil
went up form 10 to 14 dollar per barrel. It is quite possible that the price
will rise soon to 17-18 dollars per barrel.
Two
big countries will need big oil imports in the next century: China and the
Unites States.
China became a net importer in 1993. They produce 3 million barrels
crude oil per day but they consume more. The off balance in 2000 will be over 2
million barrels a day. In the year 2000 China will import 45 % of its oil need.
Thirsty for oil and gas, China spends billions to set up a supply network
abroad (Hajari, 1997).
Where will all this oil
come from? Mainly from the Middle East.
In the next century, we will see a tough fight between these two
superpowers China and the US to secure their oil imports.
China has a spectacular economic growth of 7-8% in1998. It will have a
growing thirst for oil. This will have a great impact on de the geopolitics in
the Asia-Pacific region. It will become the third biggest oil importer after US
and Japan. It will trade arms for oil
with the Middle East. It could use arms to secure oil supplies from South East
Asia. They have reserves of 24 billion barrels. Maybe they have 44 billion of
potential reserves. Especially the Tarim basin has huge potential reserves. In
the South China Sea China have large offshore potential reserves.
It has a GNP of 25-45 billion dollar. In 2005, it will overtake Japan.
The oil wealth of beneath the South China Sea is fueling an explosive arms race
in South East Asia. China claims the sovereignty of the Spratly islands in the
middle of the South East China Sea. Taiwan, Brunei, Vietnam, Malaysia and
Philippines also claim these islands. It has a great strategic value: the
shipping routes lie near; it contains huge reserves of oil and gas.
The US will in the future compete with China for every barrel of oil.
Maybe Persian oil exporters prefer Chinese rockets to US dollars?
Unites States growing
dependence of oil and energy policy:
In the period 1985 - 1995, we see that the oil production in the US
declines, whereas imports and consumption are rising.
These data are given in
millions of barrels per day:
Production 10.58 to 8.11
Consumption 15.15 to
18.16
Imports 4.59 to 10.05
In the year 2000 the United States will import 66 % of its oil needs
(Link 12. More on the history of the oil industry of the United States 1961-1999
click here)
What are the prospects for
the future oil industry in the next century?
It depends on the political situation in the Middle East. In addition,
another factor will be of great importance, that is the foreign policy of the US.
If the US embargo has imposed on Iraq, Iran and Libya remains, the oil price
will go up. This implies an extra cost of trillions of dollars, because the
Non-OPEC oil is far more expensive to produce.
The interests of the oil exporters and importers are diametrically
opposed as far as the price of oil is concerned. The low price is good for the
western world, but bad for the exporting countries. They do not have enough
capital for maintaining and expanding their oil production. As contrasted with
former times, when the Gulf Countries have high profits, nowadays they have
external debts. Their debts increased from 6.2 billion dollars in 1980 to 168
billion dollars in 1994! They need an extra 180 billion dollars in the next ten
years for capacity expansion. In the whole world, there will be a need between
800 and 1400 billion dollars for investment in the oil industry. (Bakshi, 1996)
The price is so low because we found all this oil already 25 year before
the first oil shock. When the price of oil will go up, we will see that we must
burn more energy to make more goods and services to buy more energy. This
feedback loop will end in disaster.
Weinberger: "One of the reasons we were selling all those arms to
the Saudi's was for a lower oil price."
The current GATT agreements promote poorer countries to sell their
resources at very low prices. This leads to an accelerating destruction of
their resources. Decisions concerning
the global energy economy would be very different if they were based on the
costs and the benefits to the seventh generation on a different system of
national accounts. The future costs of present resource consumption, waste,
production and pollution would then not be ignored. (Global 2000 revisited)
G7 countries have 70% more income from oil by taxes than the 11 OPEC
countries. Tax revenues are spent on other things than investment in the oil
industry. OPEC needs in 20 years 100 billion dollars for investment.
The alarming decline of stable oil prices is a major assurance of the
global market health. However, when those prices soar or plunge big trouble
soon follows. Greenspan warned for a deflation, which can lead to severe
recession or even depression.
At the end of this chapter, we will point to the fact that the future
oil shock is of a complete different nature than all the shocks we have seen.
They all had an economical and/or political character. There has never been a
moment when the supply of oil could on the long term not fulfil the demand.
Although there were, shortages like in 1973, but not in a geological sense. The
oil supply shocks of 1973-74 and 1979-80 were followed by considerable turmoil
in various markets. Worldwide recessions and the earlier shock followed both
shocks by a several-year period of inflation as well. The shock of 1986 was
different in nature.
Disagreements between OPEC members hastened a collapse of the oil
prices. The shock of the Gulf war in 1991 caused certain unrest on the oil
markets. However Saudi Arabia and other OPEC producers increased their production
and destabilized the oil market within six months. This price shock was also,
as in the shocks in the seventies, followed by a recession. (Jones and Leiby,
1996) (Taylor, 1993)
There will be a moment in the next century when the demand of oil could
not be fulfilled. The curve of production and demand will cross over and
forever. Natural gas and coal may for the time being filled the gap, but they
also are finite resources! As we will see in a later chapter it looks as if we
don't have enough alternative energy resources to fill all the tanks of the
billion cars on earth or to produce enough food for the still growing world
population.
Oil is a reality and money
is an abstraction
When the last tree is cut
When the last river is
poisoned
When the last fish is
caught
Then you will see that you
can't eat money
(Wisdom of the Cree
Indians)
In our economic models, we lack the representation of the natural
resources. Already as 1971 Earl Cook realized that enormous consumption of
energy is primarily at the expense of "capital" rather than of
"income"; that is at the expense of solar energy stored in coal, oil
and natural gas rather than of solar radiation, water, wind and muscle power.
The subtitle of his article was "The US with 6 percent of world's population,
uses 35 %percent world's energy". In the end, the limiting factor of high
levels of energy consumption will be the disposal of waste heat. A better
definition of the second law of thermodynamics could not be given!
In our economy these natural resources remain unpriced and therefore not
subject to market signals. Our economic models of production do not include the
natural resources, they only consider production as a function of labor and
capital.
Neither capital nor labor
can create energy. We cannot print oil
Economists are thinking in money. It is their ultimate resource. They
forget to take in account the value of the natural resources. They count as
costs only labor and investment to extract them. There is no thought given to
the cost of replacement of maintenance for the resources they use.
Peet (1992) gave a good example of the myth of environment as commodity:
" The first is that
the "prices" of widespread child abuse, or of losing Amazon forests,
for example, are not available; there are no markets in which they may be
"valued". Economists then have to invent a" shadow price"
to consider them. But these showed prices are only estimates of transactions
associated with the events- for example, hospital and/ or psychiatric
counseling costs (in dollars) of treatment of a physically of psychologically
abused child. They in no sense evaluate the misery and hurt experienced by the
child. Nor do the shadow prices evaluate the long-term loss of social income or
ecosystem services from the absent forest, let alone the cost of restoring
something whose loss may be intolerable and /or irreversible".
The models the economists built on assets with no economic value to
natural resources. Failing to recognize the asset value of natural resources
will lead to wrong choices in the policy of a country. An article of Robert
Repetto (1992) is in this context very illustrative:
"A country can cut
down its forests, erode its soils, pollute its aquifers and hunt its wildlife
and fisheries to extinction, but its measured income is not affected as these
assets disappear. Impoverishment is taken for progress".
Economists not only forget to take into account the value of natural
resources, they also ignore the hidden costs to the environment. The cost of
energy is frequently subsidized, by government through investment tax credits,
federally subsidized research and military expenditures that ensure access to
petroleum. The environmental costs of fossil - fuel burning also do not factor
into the price of gasoline. Therefore, the real costs are ignored. They should
internalize the real costs in the prize of their product. The economists call
it free trade. Daly (1993): "Free trade could be accused of reverse
environmental imperialism". He gives an example of the so-called free
trade:
"It is likely that
the North American Free Trade Agreement (NAFTA) will ruin Mexican peasants when
"inexpensive" US corn (subsidized by depleting topsoil, aquifers, oil
wells and the federal treasure) can be freely imported. Displaced peasants will
bid down wages. Their land will be bought cheaply by agribusiness to produce
fancy vegetables and cut flowers for the US market. Ironically, Mexico helps to
keep US corn "inexpensive" by exporting its own vanishing reserves of
oil and genetic crop variants, which the US needs to sustain its corn
monoculture".
When there is no trade between countries, each country is limited to
produce goods by its own capital and resources.
The assumption of Ricardo (1817) was that free trade worked well, when
products can cross the borders, but not the capital.
"It would be much
wiser to acknowledge the errors which a mistaken policy has induced us to
adopt, and immediately to commence a gradual recurrence to the sound principles
of an universally free trade".
The capital of a Country can now be invested in making one product. The
absolute cost differences between the countries do not matter (comparative
advantage).
When the capital can cross the borders, one country may end up producing
all the goods if it has lower absolute costs (absolute advantage).
Daly (1993) has further some quite interesting remarks on the free trade
theory developed by the early 19th-century British economist David
Ricardo. He observes those countries
with different technologies, customs and resources will incur different costs
when they make the same products. They have a comparative advantage to trade
freely to obtain others products. Ricardo's assumption was however, that
factors of production (especially capital) were immobile. This is completely
different with the situation of today. Capital is transferred from one country
to another with the speed of light. This fact invalidates the assumption that
free trade will benefit all its partners. If capital is mobile, capital can
follow absolute advantage rather than comparative advantage. One country may
end up producing everything if it has lower absolute costs.
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Figure 28: Free mobility of capital ends fair competition (After Daly,
1993)
Dr M. King Hubbert in 1970 noted the fundamental difference between the
properties of money and those of matter and energy. Money is an abstraction and
follows other rules than those in which material and energy systems must
operate. Money, whatever its quantity, has no intrinsic worth. A sum of money
is nothing more than the expression of an abstract relation between supply and
demand. Money grows exponentially by the rule of compound interest. The amount
the matter-energy system can grow is limited. The crisis of 1929-1930 was
completely different from the future crisis.
The crisis was due to monetary reasons.
At that moment, we had enough manpower and abundant raw materials.
Hubbert had 40 years ago a remarkable sharp view on the future.
He was not a pessimist, as you would gather from these words. He believed in a non-catastrophic solution.
We should abandon two axioms of our culture:
" ….the work ethic
and the idea that growth is the normal state of affairs. Solar energy is the
solution for the future energy. I'm convinced we have the technology to handle
right now. We could make the transition in a matter of decades if we begin
now".
Unfortunately, not much has been done in these decades. Solar power is
not capable to substitute oil in the coming decades. L. Hickerson commented in
1995 on Hubbert's proposal to abolish the money system. An interest rate of
zero (as Hubbert explains) means the end of the money system. We are being
forced to completely rethink our cultural ideas about how to organize our
economy and distribute purchasing power. Those who think we can continue to
have business as usual will use increasingly desperate means. The proposals of
Negative Population Growth should be implemented immediately.
We are afraid that none of these proposals will be effectuated in the
near present. Jay Hanson (1998b) has some good comparisons on the non-linear
relationship between the prices and natural resources.
" The market is like
the float in a carburetor: as the engine demands more gas, the float falls and
allows more gas to flow in from the tank. The float has no information
concerning the amount of gas left in the tank until the fuel line is unable to
keep up with demand. So it is with the market. As the demand for oil increases
the increase in price signals oil companies to pump more oil out of the ground,
which lower prices again. The oil market has no information about the amount of
oil in the ground until production is unable to keep up with demand. The
worldwide fall of the stock markets to-day can be explained by the fact that
the quality of the natural resources is declining. We need more and more
investments for mining our natural resources. The minerals of good quality are
gone".
Alternative energy
resources to replace oil
There are a number of people telling you that we have many alternative
energy resources if the oil reserves
are depleted. This may be true, if we start now to develop these resources. There are however no real signs
that the industry or the governments are taking drastic actions to develop
alternative energy resources at a big scale. Too expensive they say, especially
with a low oil price.
Christopher Flavin (Vice-President for research of the Worldwatch
Institute) however is very optimistic about our energy future:
"Using technologies
such as fuel cells and mass-produce solar generators, it should be possible in
the long run to replace virtually all fossil fuels with hydrogen-based energy
system, something that {French} author Jules Verne dreamed of more than a
century ago. The hydrogen would be produced using sunlight harnessed on
rooftops as well as in remote dessert collectors, and would be conveyed to
homes and industries via pipeline. Although this vision may sound futuristic
most of the inventions needed to make it real have already been made".
(Link 13. More on
alternative energy resources to replace oil).
The
car bomb
Since 1950 the world
population has doubled 1950 doubled from 3 to 6 billion, the number of cars has
increased ten times from 50 to 500 million! More than half of world's oil is
consumed by these road vehicles.
With the annual growth rate we will have in 2025 nearly 1 billion road
vehicles! World traffic volume measured
in passenger-kilometers will continue to rise. The effect on the environment
will be disastrous. A tank of gasoline produces up to 400 pounds of carbon
dioxide. Bleviss and Walzer wrote in 1990 that the OECD countries must rethink
transportation systems and should concentrate on light vehicles.
Motor vehicles make up 53 % of US oil consumption, Jet aviation 8% and
the Industry 26%.
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Figure 29: World traffic volume will grow exponentially. Measures in
passenger-kilometres. (After Schafer and Victor, 1997)
An oil industry executive (Pitts) says:
"You can't tell a person in India who has just saved enough
money to buy a car, to go back to riding bicycle".
James Howard Kunstler has a chapter on the car craziness of the
Americans in his book Home from Nowhere.
"We have the
knowledge to do the right timing; we lack only the will to do the right
thing".
Jim Minter (1996) commented on this book:
" We Americans are
not going to abandon our cars. We won't abandon them even when they cause
global warming and melt the polar caps putting New York and Florida under
water. A personal automobile is the right of every American. It says so in the
Constitution.
Ah, would Kunstler's
prophecy of a gradual taming of the automobile be possible. Nothing so gentle
as that seems likely to me. The Auto Age is going to hit a rapid deceleration.
However, it will not be graceful, gradual or planned".
Large amounts of carbon dioxide presently are blown into the atmosphere
by burning fossil fuels and deforestation.
Bolin 1971, p.123:
"The earth atmosphere
is so thoroughly mixed and so rapidly recycled through the biosphere that the
next breath you inhale will contain atoms exhaled by Jesus at Gethsemane and
Hitler at Munich. It will contain strontium 90 and iodine 130 from atomic
explosions and gases from chimneys and exhaust pipes of the world
The greatest disturbances
of which we are aware are those now being introduced by man himself. Since his tampering with the biological and
geochemical balances may ultimately prove injurious - even fatal- to himself,
he must understand them much better than he does today. The story of the
circulation of carbon in nature teaches us that we cannot control global
balances. Therefore, we had better leave them close to be to the natural state
that existed until the Industrial Revolution. Out of a simple realization may
come a new industrial revolution".
Carbon dioxide is transported to the deep ocean by downdwelling currents
for centuries. It the ocean is not anymore capable to absorb great quantities
of carbon dioxide the downward currents will stop. It will be the sink for the
6 billion tons of carbon that is thrown in earth atmosphere.
Increased temperatures have slowed growth of tropical trees over the
past decade.
Trees take up carbon dioxide, but also release carbon dioxide by
respiration. When growing fast the balance is positive, but when it slows down
the balance will be negative. Higher night temperatures force trees of the
tropical forests to transpire more. (Beardsley, 1998)
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Figure 30: Global temperature of the atmosphere since 1850 has risen
half a degree Celsius, mainly due to the burning of fossil fuels.
Computer
models predict a rising of 1.5 - 2.5 degrees Celsius in 2025 ( After Jones,
1990).
Methane is the most rapidly increasing greenhouse gas. Estimates of
atmospheric methane from a thousand years ago suggest values around 700 part
per billion (ppb), which were constant until about the late 1700s. Since that
time, concentrations have more than doubled. Cores of Antarctic ice going back
160.000 years shows that methane have fluctuated between 300 ppb and 700 ppb
until the industrial revolution when it begun top climb near 1700 ppb (Takle,
1996)
An average American drives 12.000 miles a year. He consumes his weight
in oil every seven days.
Cars account for half the oil consumed in the US, about half the urban
pollution and one fourth of the greenhouse gases. New technology has made it
possible to put electrical cars within reach but politics may slow the transition
for internal combustion engines. (Sperling, 1996)
Even when a "miracle " car will be on the road tomorrow, it
takes 10-20 years to replace the global fleet of 500 million cars vehicles.
(Swenson, 1997)
The uneven distribution of the world's fossil fuels necessitates a
flourishing worldwide trade in energy.
Some people believe that the upgrading of our two-lane highways to giant
multi-lane freeways can reduce air pollution. The presence of these giant
freeways generates enormous new volumes of traffic. These freeways will also be
congested. Also, there is the thought that it would be good to build bigger and
heavier trucks, it will be more efficient and reduce costs. However, this will
damage the freeways. The repairs will be paid by the taxpayer and not by the
truckowners!
In 1981, there were hopes that in 1995 the US will have light vehicles
that will drive 6o miles per gallon! Gray and von Hippel (1981):
"it would be possible
with currently available technology to raise the average fuel economy of the
entire US automobile fleet to more than 60 miles per gallon".
In 1989, there was hope for the use of methanol (wood alcohol) or
ethanol (grain alcohol) as fuel to reduce pollution. Unfortunately, most car
buyers do not base their purchase on the need for reducing fossil-fuel
consumption and the need to reduce air pollution. They look mainly for cost,
safety and performance.
The US has in 1995 exhausted 194.4 billion barrels, that is 75% of her
initial reserves. A nation with only 268 million people has produced 10% of the
world oil reserves.
The US gasoline is very cheap in comparison with Europe. The US should
raise the tax on gasoline consumption but there are two groups of voters that
would resist strongly; those who buy and those who sell it.
Transport costs are energy intensive. Governments subsidize cost of
energy through tax investment credits. Federal subsidies for research and
military expenditure ensure access to petroleum. The environmental costs of
fossil fuel burning are also not a factor into the price of gasoline. The
average American owned and consumed twice as much as in 1990 than in 1948.
In Science Journal of October 1967 Bouladon predicted from a literature
survey that by the end of the century:
" Belt transporters
for short distance, 800 km/h tubes for medium distances and Mach 10 aircraft
for long distances. Also that their should be a government legislation forcing
transport systems into harmony with their environment".
We have seen none of these transport systems yet.