The true debate about energy:When Oil Runs Out...

Posted in Other | 29-Dec-05 | Author: Hichem Karoui

Hichem Karoui is WSN Editor France.

(Exclusive for WSN)

The OPEC Website holds an interesting FAQS (Frequently Asked Questions) about oil industry. The questions are very simple. Anybody could ask them. And the answers are still as simple as could be. You do not need to be an economist to understand these quite complicated issues – as we used to think – in plain words, without figures, or statistics’ tables, or any such stuff that makes ordinary folks run away.

So, Bravo for the editor who, shrewdly let us fathom from a single sentence that “at the end of 2004, world proven crude oil reserves stood at 1,144,013 million barrels, of which 896,659 million barrels, or 78.4 per cent, was in OPEC Member Countries», which was the answer to the anxious question: How much oil is there in the world?

Another no less anxious question says: Will we ever see a repeat of the 1970s oil crisis? And guess what! The answer is as simple as that: No. The editor is sure that nothing would happen that would disturb the “tranquility” of the market. We wish he were right, but we do not think the matter may be so easily settled.

Do we need to remind anybody that oil prices have bypassed $60/b in 2005? Was it the normal course, given the fact that the Gulf region undergoes tremendous changes with the Iraq war, the post-Saddam chaos, the election of an “enlightened” in Iran, heading straightforward towards the succession of Saddam Hussein (in both countries), not to speak of the “black series” unleashed in Lebanon, etc?

Ok. The world will perhaps not see another 1973’s oil crisis in the same terms; yet anxiety is still sticking up to the market and to all the actors concerned by the energy issues in the years to come. As many of us can imagine - and as the OPEC site editor emphasizes in his answer to the question “is the world running out of oil?» - this energy source is indeed a limited one; and as this truth is also known to the producers and to the consumers as well, it is just normal that both parties get anguished about the issue.

Just 90 years, then what?

“At the rate of production in 2003”, says the FAQS answer, “OPEC's oil reserves are sufficient to last more than 90 years, while non-OPEC oil producers' reserves might last less than 20 years. The worldwide demand for oil is rising and OPEC is expected to be an increasingly important source of that oil”.

90 years is not that much in the long humankind history, is it? It is nothing. A little drop in the ocean. And for that drop, the world might well be fighting several wars in the years to come, unless other energy resources matching oil are meanwhile discovered and/or developed.

This said, the picture might not look much like what the optimistic editor of the OPEC Website was saying. Yet, we’d better face harsh realities than be overwhelmed by them. Anyway, this is not the concern of the only consumers but that of the producers as well.

How Arab (producers) and Western (consumers) nations have prepared themselves to meet the coming crises is the great question?

Let us begin with the producers. There is an "expert wisdom" (1) which is based on the recommendations of the International Monetary Fund (IMF). It can be summarized this way:

- Governments should balance their budgets: therefore to maintain steady government expenditure in the face of fluctuating revenue, a stabilization fund should be established out of “windfall” revenues, and a fund for the future to provide income when oil is depleted. The two funds are not the same: stabilization funds absorb surplus revenue when prices are high (preferably in investment outside the country, to avoid domestic inflation) but contributions may be halted or reversed when prices are low. Long-term funds (such as the Kuwait Fund for Future Generations, and similar funds in Alaska and Abu Dhabi) cannot be used within the normal budget process. They are to provide revenue when oil runs out;

- Subsidized oil prices should be phased out, as part of establishing a sustainable fiscal balance for the government;

- The non-petroleum economy should be reformed by reducing State participation and intervention, liberalizing markets, reducing protection, and opening to foreign investment so as to develop exports and tax revenue for the longer term. For most countries, the expansion of the non-oil economy (which the IMF reforms support) has an immediate priority because only such expansion can provide employment for a rapidly increasing national labor force.

Are the Arab governments - (those dependent on oil exports)- preparing plans for the “day after”? We put them the question.

Oil anxiety

Let us notice by the way that anxiety has been the unrecognized twin of oil since its discovery. It is the former OPEC Secretary-General, M. Francisco Parra, who recently observed “the long march from energy self-sufficiency that began in 1948, when the US first became a net importer of oil, has been accompanied by sporadic cries of anguish during the intervening years”(2). Not without reason indeed, because as demand rises concerns increase. This said, let us now look to the consumers.

In the United States, the demand rise “ has been a serious concern to all Administrations because it has impinged on national security, focused on a potential disruption of supplies and, occasionally, on the economic damage from inordinately high price increases”(3).

In May 2001, a report of the National Energy Policy Development Group, led by Vice President Cheney, acknowledged that U.S. oil production would fall 12% over the next 20 years. As a result, U.S. dependence on imported oil which has risen from one-third in 1985 to more than half in 2003 is set to climb to two-thirds by 2020 (4). For some observers of U.S. foreign policy, that was the real motive behind the war against Saddam Hussein(5). Otherwise, it was the first war for oil. If such a hypothesis is right, it will not be the end of wars in the Middle East. This is also another source of anxiety. Yet, it is not just an American problem, but also a world problem.

On August 16, 2005, French Prime Minister Dominique de Villepin delivered an important speech in which he explained to his fellow-citizens why the oil crisis is destined to last and why it is important to have a new energy policy. The Prime Minister said that Oil reserves appear fragile in front of growing demands from old and new great powers such as China and India, and the political tensions in the Middle East will continue for the foreseeable future. The core of the strategy he proposed was based on National energy independence and technological innovation, aimed at diversifying energy sources. De Villepin announced three pillars upon which the project will be carried on.

Different solutions for the same problem

The first of these pillars is massive investment in energy policy, beginning with the oil sector. In this context, the Prime Minister called for French Oil Company Total, and other companies, to invest in more refining capacity.

The second pillar, continued de Villepin, will be that of renewable energy, a field in which Paris ranks among the most advanced countries. Hydroelectricity and bio-fuels in particular were evoked as the right assets to develop together with nuclear power.

The third pillar will be energy savings. Again, the government will actively take part in this game with taxation, reinforcing tax credits that already exist and promoting renewable energy assets, low-consumption cars, solar energy heaters (6)…

Thus it is seems obvious that every nation would have to tackle the matter according to its resources and strategic choices.

In the USA, it is expected that even with improved energy efficiency the country will need more energy supply. The National Energy Policy document released in May 2001, says that “U.S. energy demand is projected to rise to 127 quadrillion Btus by 2020” (...) However, domestic production is expected to rise to only 86 quadrillion Btus by 2020. The shortfall between projected energy supply and demand in 2020 is nearly 50 percent. That shortfall can be made up in only three ways: import more energy; improve energy efficiency even more than expected; and increase domestic energy supply”(7).

We have three remarks about these suggestions:

- The first proposition (importation) can be achieved without more problems than those all the nations meet on the free market. However, in order to get the better produces for the best prices, the oil and gas consumers should improve the relations with the producers as to reassure them about their own future, which is not always the easiest task. The good news for the Americans is that next door to them, Canada is rising as a possible great oil supplier. The Oil and Gas Journal (8) now reports Canada as having the second highest estimated proven reserves in the world, with only Saudi Arabia higher. This revision increased the estimated reserves for Canada from five billion barrels to 180 bn b. Technological developments have continued to reduce costs, approximately halving operating costs in mining plants since 1990, with future costs estimated in the range of US $6–11 a barrel. With some luck, Oil from the Caspian and from Canada – and possibly other unknown places yet – may very well open new opportunities to the industrial world.

- The second suggestion is probably the most interesting, because it does not depend on an external element, but on self-development and internal creativity. This is indeed the focus point concerning next evolution in alternative energies and new technologies. Scientific research in this field should be allowed the budgets it deserves, since there is no other choice but to find new energy resources to replace oil. We have just a hundred years to do it.

- As to the third proposition, it is wise to accomplish it, when it can be afforded. As we saw in 2005, unexpected natural tragedies (such as Katrina and Rita hurricanes) may disturb domestic energy supplies a lot. Besides, it is true, the Gulf of Mexico has become the region of most intense exploration and production activity in water depths of over 500 meters. Before 2005 hurricanes, it was expected that the Gulf of Mexico deepwater production would peak some time before 2010. It is hard to say now whether these expectations are still update. Another major unknown for this region is the rate at which US deepwater production can increase, given the difficulties of developing reserves at depths below 3,000 meters.

Moreover, when we know that by 2020, the Energy Information Administration expects the United States will need about 50 percent more natural gas and one-third more oil to meet demand, it becomes obvious that with all its capacities, the U.S. production cannot fulfill the task.

Anyway, the whole World demand is also increasing as it is shown in the following table:

Source: Organization of the Petroleum Exporting Countries (9).

According to the OPEC report (10), Global oil demand rises in the reference case by 12 mb/d to 89 mb/d from2002 to 2010, an average annual rate of 1.5 mb/d, or 1.8 per cent p.a., over that period. In the following decade, demand grows by a further 17 mb/d to 106 mb/d by 2020, and then by another 9 mb/d to 115 mb/d by 2025 (averaging 1.7 per cent p.a. over the years 2010–25). Almost three-quarters of the increase in demand of 38 mb/d over the period 2002–25 comes from developing countries, whose demand doubles over that time. By 2025, the share of developing countries in world oil demand has risen to 46 per cent, up from 32 per cent in 2002. Nevertheless, the OECD remains the largest consumer of oil throughout the projection period.

Starting the debate now

Anyway, there is no global solution for a global problem, but as we have previously hinted, specific answers to these issues.

However, there is no reason either to believe that the future of the world energy resources lies necessarily in the Middle East. For on the one hand, new perspectives of production in the Caspian and Canada are expected to exert: first, a disturbing influence on the market, then in a second time would probably stabilize the prices, while shifting the gravity center from a region to another. The first stage has perhaps already begun.

On the other hand, with the current extraction rates, the Middle East will grow impoverished if it does not find a way to replace its main source of wealth. The West will find other resources and it will develop, under the stress of the penury haunting the minds, new technologies and alternative sources of energy. What about the Middle East? Without authentic technology and know-how, what would those peoples do?

This is why it is imperative that producers and consumers of oil start a debate with a different objective than the one discussed so far. We mean that they should go beyond the current negotiations about pricing, offer and demand, and market conditions. Upon such a debate, the world peace depends.

In next April (2006), there will be a meeting in Doha. Energy Ministers from the world’s main oil and gas exporting and importing countries will meet. Although the Forum has no decision-making authority, it is an opportunity to open a deep debate about these issues. The agenda for the 10th Forum has not been settled yet, but it is likely to build on the conclusions of the 9th Forum meeting in Amsterdam. If there are ostensibly some shared interests to talk about, such as stabilizing oil prices, unhindered access to capital, energy technology and markets, bilateral investment agreements and multilateral frameworks, Better information, etc… it is also advisable to start the real debate that all the parties seem to avoid so far, because of the controversial trends it may release. We think that the time is ripe to talk of the post-oil era, of alternative energies, of making the new technologies in the field profitable to those whose economy is deeply dependent on oil exports among the developing countries.

Hichem Karoui

Notes and references:

1 Producer-Consumer Dialogue, What Can Energy Ministers Say To One Another? John Mitchell, November 2005, Chatham House. London.

2 Francisco Parra: The US And The Security Of Oil And Gas Supplies. Middle East Economic Survey. VOL. XLVIII; No 46; 14-November-2005.

3 Idem.

4 National Energy Policy Development Group, Reliable, Affordable, and Environmentally Sound Energy for America’s Future (Washington: U.S. Government Printing Office, May 2001), pp. x and 1-13.

5 See for example: Michael Renner, Post-Saddam Iraq, Linchpin of a new oil order; FPIF Policy Report, January 2003.

6 See: Federico Bordonaro; French Energy Policy. Intelligence Brief. PINR. 25 August 2005.

7 See the report on this link:

8 Cited in: Oil Outlook to 2025. OPEC: Review paper, 2004

9 Op.Cit.

10 Idem.