Saturday, May 28, 2005

Whats oil got to do with it? 

This blog, as the title implies, has an awful lot to do with oil, in spite of the fact that it has been ages since I wrote anything about it. Today however I ran across this informative article on the subject of when world wide oil production is likely to peak. A couple excerpts:

Could the petroleum joyride — cheap, abundant oil that has sent the global economy whizzing along with the pedal to the metal and the AC blasting for decades — be coming to an end? Some observers of the oil industry think so. They predict that this year, maybe next — almost certainly by the end of the decade — the world's oil production, having grown exuberantly for more than a century, will peak and begin to decline.

And then it really will be all downhill. The price of oil will increase drastically. Major oil-consuming countries will experience crippling inflation, unemployment and economic instability. Princeton University geologist Kenneth S. Deffeyes predicts "a permanent state of oil shortage."

According to these experts, it will take a decade or more before conservation measures and new technologies can bridge the gap between supply and demand, and even then the situation will be touch and go.


The pessimism stems from a legendary episode in the history of petroleum geology. Back in 1956, a geologist named M. King Hubbert predicted that U.S. oil production would peak in 1970.

His superiors at Shell Oil were aghast. They even tried to persuade Hubbert not to speak publicly about his work. His peers, accustomed to decades of making impressive oil discoveries, were skeptical.

But Hubbert was right. U.S. oil production did peak in 1970, and it has declined steadily ever since. Even impressive discoveries such as Alaska's Prudhoe Bay, with 13 billion barrels in recoverable reserves, haven't been able to reverse that trend.

There is a whole debate raging on this question of peak oil - that is when the world will start running short of oil. No one, including this bog, really knows. But this much does seem to be clear - oil is likely to be ever more scarce as worldwide demand increases and the easily found and exploited reserves are depleted. And even more importantly, the oil that does exist will be concentrated more and more in the hands of countries that are members of OPEC. For example check out this quote from a “peak oil” doubter in that article:

But many experts see no reason global oil production has to peak at all. It could plateau and then gradually fall as the economy converts to other forms of energy.

"Even in 30 to 40 years there's still going to be huge amounts of oil in the Middle East," said Daniel Sperling, director of the Institute of Transportation Studies at the University of California, Davis.

This person is mentioning a fact that is much overlooked by most people. Even though OPEC’s share of world oil output has declined in recent years its share of proven reserves has not. The majority of the worlds proven reserves are in the Middle East and Venezuela. And other countries that are currently producing a large amount of oil such as Russia, Norway, England in the North Sea, and the U.S. are pumping oil at a rate that will deplete their reserves in the not too distant future. To get a sense of this take a look at the following display of proven oil reserves by region:

There are a great many people who downplay the significance of oil in current events. Taking a good look at this graph gives a strong indication of why they are wrong.

First things first, the Middle East is clearly sitting on top of the vast majority of the worlds oil. Its not even close. It is obvious that if the industrialized world, and the U.S. in particular, were to lose access to the oil reserves of the Middle East, the gig would be up. Modern day life in the United States, Japan and Western Europe, which is dependent on fossil fuels and the internal combustion engine, would simply not be sustainable.

Seeing this it is all of the sudden clear why the U.S. is very happy to cavort with the Medieval regimes of Saudi Arabia and Kuwait. Even Qaddaffi is ok as long as he stops blowing up airplanes and doesn’t develop nuclear weapons. More importantly this explains why the U.S is willing to spend hundreds of billions of dollars and much blood to control Iraq. From their point of view they simply can’t be denied access to the country with the second greatest amount of oil on the planet. And they especially can’t be denied access when the future of world oil production is in doubt.

Moreover, if the U.S. could subdue Iraq, have it pull out of OPEC, and flat out produce as much oil as possible it could effectively destroyed OPEC's ability to keep prices high and would have undermined some governments that the U.S. doesn’t care for – namely Venezuela’s Hugo Chavez.

This brings me to one final point. In reading the press on Venezuela most of the commentators and pundits who argue that Chavez presents a problem for the U.S. (which is in a way true) also argue that the U.S. has neglected Venezuela, hasn’t been aware of the “threat” that he poses and hasn’t had a plan for dealing with him.

In reality that is not true at all. Fine, so what was the plan for dealing with Chavez? Simple, invade Iraq. Invade Iraq!?!? – how could that possibly be a plan for dealing with Venezuela? Again the answer is simple. The Venezuelan economy, and hence its government, is highly dependent on oil. When the price of oil is high Venezuela’s economy booms and when it is low the economy tanks. Because of this the fate of Venezuelan governments is closely tied to oil. So much so that it is often said in Venezuela that the only thing that brings down governments is the price of oil (BTW, its not a topic for this blog but Russia is in the same position and Putin is also someone the U.S. would like to cut down to size).

So if you want to bring down Chavez what better way to try to do it than bring down the price of oil. And there is no doubt that this was one factor is the calculations that led the U.S. to invade Iraq. If Iraq was now exporting 4 or 5 million barrels of oil a day the price would be much, much lower than it is today (the price of oil turns on about 1 million barrels) and they may well have rid themselves of Chavez. Unfortunately for them Iraqis haven’t been co-operating with their plan.

Obviously, this is an involved topic and there is much more to be said on it. But this should give some idea why a blog on Venezuela and Iraq would have “oil” in its name. And why "peak oil" means Venezuela and Iraq will be front and center in world events.


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