A combination of circumstances led to a dramatic fall in the price of oil in 1998. These included unseasonably warm weather; an Asian recession that reduced the demand for swing Middle East production; the collapse of the ruble; encouraging exports; overestimation of supply by the International Energy Agency (IEA), which misled OPEC; and further turns in Iraq. Furthermore, there were motives to talk down the long-term price of oil as oil companies and their financial advisers planned acquisitions. Major companies, plainly seeing that exploration could no longer underpin their future, took the opportunity of the price crisis to merge, successfully concealing their real predicament from the stock market. Budgets were slashed and staffs purged in a climate of uncertainty leading to an improvident draw on stocks.
The OPEC countries themselves did everything possible to foster the notion that they could flood the world with cheap oil at the flick of a switch. It was a strategy aimed to inhibit investments in natural gas, non-conventional oil, renewable energy or energy saving that they feared might undermine the market for their oil, on which they utterly depend.
But it was a short-lived price collapse. Before long, the underlying resource and depletion pressures manifested themselves again with prices rebounding in a staggering 300 percent increase in 12 months, when another anomalous fall occurred at the end of 2000. It was partly triggered by profit taking for year-end financial reporting and partly by the hope of a brief reprieve as spring demand traditionally falls.
The underlying trend is due to reassert itself, leading to the resumption of soaring oil prices. The Middle East is working flat out to try to offset the decline of its old fields. In large measure, new production in Venezuela can come only from in-fill drilling in old heavy oil fields, which is dependent on the amount of effort and investment. It does not sound as if it has many shut-in wells either. Its oilmen speak of reduced capacity.
The market may hope that some important recent discoveries tell a different story with a happier ending. The long-known Azadegan prospect on the Iraq-Iran border was at last tested, delivering some 5 Gb of reserves to Iran. Kashagan East in the north Caspian found about 7 Gb of high sulfur oil at great depth, demonstrating that the prospect was not one huge structure as hoped, but several independent reefs. The disappointment caused two major companies to withdraw from the venture.
Promising deepwater finds continue to be made off West Africa, but it is becoming clear from the experience of the Gulf of Mexico that deepwater operations do test technology and management to the absolute limit. Small accidents or setbacks can have devastating consequences in this extreme environment. Petroconsultants recently announced the total oil discovery for 2000 at 11.2 Gb, less than half consumption, and of that much was in the former Soviet Union and in deep water off West Africa.
The reality is that there is no real reprieve. Gradually the market – and not just the oil market – will come to realize that OPEC can no longer single-handedly manage depletion. It will be a dreadful realization because it means that there is no ceiling to oil price other than from falling demand. That in turn spells economic recession and a crumbling stock market, the first signs of which are already being felt.
The United States is perhaps the most vulnerable to the coming crisis having farther to fall after the boom years, which themselves were largely driven by foreign debt and inward investment. The growing shortfall in oil supply since its own peak of production was made good by soaring oil imports, now contributing more than half its needs, and a move to natural gas. The rate of import cannot, however, be maintained as other countries pass their own production peaks, putting ever more pressure on the Middle East. The North Sea is now at peak, with the United Kingdom being off 7 percent in 2000 and 16 percent off from October to October, meaning that production is set to fall by one-half in ten years. For every barrel imported into the United States, there will be one less left for anyone else, a situation inevitably leading to international tensions.
The move to natural gas proved to be only a short-lived palliative. Gas depletes differently from oil. An uncontrolled gas well would blow it all away in one big puff. Production is, accordingly, capped by infrastructure and market, leaving a large, unseen balloon of readily available spare capacity. In a privatized market, trading on a daily basis, production becomes cheaper and cheaper as the original costs are written off and as this almost free spare capacity is drawn down. There were no market signals of the approach of the cliff at the end of the plateau. It accordingly came without warning, causing prices to surge through the roof, and bringing power blackouts to California. Canada is trying to make good the shortfall, but its stocks are failing fast too.
The U.S. has to somehow find a way to cut its demand by at least 5 percent a year. It won’t be easy, but as the octogenarian said of old age, “the alternative is even worse.” Europe faces the same predicament as North Sea production plummets. Although it may draw on gas from Russia, North Africa and the Middle East to see it over the transition, assuming that new pipelines can be built in time, that creates a new and unwelcome geopolitical dependency.
All of this is so incredibly obvious, being clearly revealed by even the simplest analysis of discovery and production trends. The inexplicable part is our great reluctance to look reality in the face and at least make some plans for what promises to be one of the greatest economic and political discontinuities of all time. Time is of the essence. It is later than you think.
About the Author: Colin Campbell is a geologist, formerly with Petroconsultants.
From M. King Hubbert Center, Petroleum Engineering Department, Colorado School of Mines, Golden, CO 80401.
This article originally appeared in the Spring 2005 edition of The Social Contract.
It is redistributed as part of the Internet Forum Series of Negative Population Growth, Inc., a national membership organization founded in 1972.
World population, now over 7.3 billion, is predicted to rise to 9 billion by 2050, an increase of almost two billion, or 23%, in the short space of only 34 years from now.In the highly unlikely event that per capita greenhouse gas emissions could possibly be decreased by an equal percentage in such a short space of time (a blink of an eye) the total amount of worldwide emission would remain the same!
From this simple illustration it would appear that without drastically reducing the size of world population, there is no solution to the problem.None at all.So then why do our world leaders pretend that there is one?What is to be gained by pretending rather than by proposing a solution that would solve the problem – a reduction in the size of world population to not more than 1- 2 billion?
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