Minnesota's Energy Future?©

Dell Erickson

Minneapolis, MN
October 20, 2003

Part II-A:  Energy &  Resources

Table of Contents
 

Part II:  Energy &  Resources

 47

 

 

      The Olduvai Theory & Resources

47

               Figure 3: Energy Sources & Use in the United States: 1635 – 2000, %

48

      Petroleum

49

            World Oil

53

               Figure 4: Oil Discovery vs. Consumption 1960 – 2002

55

               Figure 5: World Oil Production & Reserves

56

               Figure 6: Four Oil Depletion Scenarios

57

               Figure 7: Per Capita Conventional + Non-Conventional Oil 1970 – 2050

58

               Table  8: Per Capita Conventional & Non-Conventional Oil 1979 – 2050

58

 

 

            United States Oil

61

               Figure  8: U.S. Oil Production & Reserves

61

               Figure  9: U.S. Oil Supply Vulnerability

63

               Figure 10: U.S. Oil Production – Consumption Gap

64

 

 

            Conventional Oil Reserve Sources

64

               ANWR

65

                  Figure 11: Alaska Oil Production 1955 – 2020

66

               Mexico

67

               China & Japan

67

               North Sea

68

               Mideast

69

                  Figure 12: OPEC Revenues 1972 – 2003

71

                  Figure 13: World Oil Reserves by Region

72

                  Consequences For Major Producers

72

               New Production & Construction?

73

 

 

            The Olduvai Process and Peaking

75

 

 

            Oil, the U.S. Dollar & Economics

79

            US-Dollar vs. the Euro & U.S. Economic Security

80

            Food & Oil

82

            Securing Oil Resources

83

            Afghanistan & Iraq Region

84

 

The Olduvai Theory and Resources

Similar to travel through a time portal, a new and different energy future is rapidly drawing near.

The awakening public in the 1960s and 1970s affirmed that our living environment was harmed by natural resource based human activity.  The solutions offered at the time were centered on population and pollution.  In the intervening years great strides were made to limit or reduce pollution; however, the growth side of the energy equation, despite important studies and public enthusiasm, was restricted to conservation.  It is understandable why the earlier period regarded growth a central concern: 93% of the increases in U.S. energy use since 1970 is attributable to population growth.  Despite numerous programs and technological advances directed at energy conservation over the years, U.S. energy consumption grows daily.  Although researchers cautioned at the time that energy was a primary concern of growth, the consequences seemed too distant for comprehensive public programs to be implemented.  Our future is now becoming visible and it is a potentially tumultuous period of change.

The earlier studies foretold and researchers and today’s industry specialists conclude that the U.S. and world have either reached or exceeded the limits to energy and biological carrying capacity.  The primary reason is industrial civilization has already exhausted a substantial portion of Earth's initially available fossil energy inheritance and biological capacities.  The root of energy problems is that demand for fundamental natural resources is rapidly outgrowing supply. The challenge for the future will be how to live sustainably on the daily energy income from the sun either directly in the form of solar arrays or in the form of water, wind, and biomass energies.  It is an idea the public appeared to have come to terms with in the 1960s and 1970s.

As the World-3 scenario mentioned in the introduction predicted, there are multitudes of serious resource and population matters rapidly converging at a single point in time.  The World-3 models suggests that now is an appropriate time to quickly revise prior policies and implement innovative population and energy programs.  The U.S. is in serious energy trouble on all three primary energy fronts.  Matthew Simmons states that shortages are occurring almost simultaneously in oil and natural gas (and electricity), that Europe will suffer, and that in North America the turning point will arrive earlier and with harsh consequences.

Punctuating those sentiments, he recently said “for the first time in our nation’s history, we are out of the capacity to grow our use of petroleum products, out of capacity to increase natural gas supply, and out of electricity generating capacity during hot summer days or cold winter days in too many regions of the country.”  Simmons concludes with an analogy of the terrible storm (and related movie) that swept the east U.S. coast two years ago that was labeled “the perfect storm” by meteorologists because of its severity and because it was the coming together of three storms into one, we have a “Perfect Energy Storm.”1

Richard Duncan at a recent Geological Society of America conference made another more urgent, yet clarifying statement describing the world's looming energy dilemmas in discussing the “Olduvai Theory.”2  The theory measures the relationship between energy and population.  Dr. Duncan summarizes the gravity of the energy situation as follows:

The life expectancy of Industrial Civilization is less than or equal to 100 years: 1930 – 2030 and that energy production per capita will fall to its 1930 value by 2030, thus giving Industrial Civilization a lifetime of less than or equal to 100 years.3


The following graph illustrates the historical patterns of energy consumption in the U.S. since 1635.

Figure 3:  Energy Sources & Use in the United States: 1635 – 2000, %


Annual Energy Review: 2001”. Introduction. Energy Information Agency. See at < http://www.eia.doe.gov/emeu/aer/eh/frame.html >.


Figure 3 demonstrates that long-term energy trends parallel industrialization and population growth.  Except for the recessionary period of the early 1970s, the trendlines are rising at a steep slope.  The chart suggests the relative importance and therefore potential relative consequences for each diminishing energy resource.  The chart illustrates the early use of wood (biomass) —in Europe until the forests were logged— replaced by coal during industrialization.  The rate of industrialization from 1875 initially using coal (in Europe and U.S.) was soon replaced with an easier to manage and concentrated energy source, oil, and then natural gas up to the present time.  As the graph illustrates, nuclear energy is a relative newcomer.  Of interest is that had coal not been replaced, its reserves would have been exhausted in the 1960s or 1970s.  As will be evident in other figures, beginning at the approximate endpoint of these trendlines, oil and natural gas production begins to flatten and commences rolling over ―a reversal of their previous trends.

On an international, national, and local level, historical patterns of energy use will undergo changes conforming to supply.  Suggesting the changes, in the year 2000, oil accounted for 34.8%, coal 23.5%, natural gas 21.1%, nuclear 6.8%, and renewables 13.8% (including hydro) of energy.4

The graph can also be used to examine the reasonableness of claims heard that there are sufficient quantities of baseline energy resources to last well into the century, or next century.  When these claims are made it always under the assumption that use is “at current rates”.  Stating at “current rates” implies at some future point the same volume of an energy will be provided to the same number of consumers or conversely, reducing volumes to match the higher level of consumers.  Examining the chart, for example of Figure 3, if the claim was made for oil in 1950, it would imply restricting the rate of U.S. consumption at approximately 10% for the duration.  The trendline in this instance would turn to the right and parallel the bottom of the chart at the point where oil goes above the coal trendline.  There is an approximately quadruple increase in petroleum use evident in the trendline today.  The implication is that under the “current use” pattern oil would have to be replaced by one or more of the other energies or energy relationships to economic or population growth significantly modified.

Using the Olduvai Theory as a framework, the paper now turns to a discussion of U.S. and world oil reserves and the differences between the optimists and the realists, the government and non-government viewpoints.
 

Petroleum

The problem in forecasting is GIGO "... garbage in, gospel out.
Jean LaHerrere. 2001.
5


The story of natural resource extraction such as oil, follows a pattern.  First, a use is discovered, sometimes by accident (it burns!), then consumption and production grow hand-in-hand.  In the early years the easily available and inexpensive resources are extracted and larger populations in combination with low and declining cost energies meant increasing economies of scale which in turn encouraged further consumption.  Economies of scale also meant lower unit prices and an expanding middle class.  Additional uses of the resource are subsequently discovered or created and resource use is magnified.  Following this pattern, petroleum with more than 500,000 products derived from it has become institutionalized and the energy foundation of Western Society.

As demand builds the inexpensive and easily extracted stockpiles become depleted and more costly reserves are brought into production.  Because consumer demand is institutionalized (with expectations based on inexpensive supply from earlier periods), consumption rises faster than the resource base, the stage being set for a reduced supply availability.  In the final and the current stage, the energy cost of extracting the resource is greater than the energy potential extracted.  In this period prices accelerate until, to use an economist's term, the price clears the market; that is, until rising prices balance demand and available inventory.  Market pricing contrary to what some believe, does not “create” supply nor energy.  Furthermore, there is nothing intrinsic in using the competitive market to balance supply and demand that prevents the exhaustion of the resource, only that it becomes more expensive overtime.

Unless substitutes are readily available, rising energy prices imply corresponding declines in average standard of living.  Today and in the foreseeable future, substitutes are not readily available and those promoted or considered are small in scale or prohibitively expensive.  The consequence is that the price level necessary to balance market demand and resource availability will increasingly be determined by society's success at arresting population growth, conservation, and implementing the most efficient least costly alternative energy, if any.

This portion of the paper discusses the consumption, reserve and depletion situations for world and U.S. petroleum.  Because of its overarching importance to society and dearth of general public or media awareness, this section discusses world and U.S. food and energy relationships, major sources of oil and natural gas including the role of Alaska’s ANWR, the process and meaning of “peaking”, relationship to international instabilities and a brief examination of the oil and US-dollar relationship and its potentially serious effects on the U.S. economy.

Recent Energy Information Agency (EIA) data indicates the world in early 2001 very likely reached the peak in production of conventional oil.  “Peak production” has another side: peak depletion.  Because the industry and the general public think in terms of production it is not difficult to understand the decline in production.  Consider also however, the oil pool has diminished to the point where the ability to increase the rates of depletion or extraction has passed.  Petroleum geologist and Princeton University Professor Kenneth S. Deffeyes succinctly describes the petroleum situation stating that oil production will soon peak and that world oil production “will fall, never to rise again.”6

Saudi Arabia is an excellent example of Professor Deffeye's research.  Saudi Arabia's Ghawar petroleum field is the largest oil reservoir discovered and after being pumped for decades estimates are that it still contains 70 billion barrels of petroleum.  However, clearly demonstrating the coming petroleum situation, Chip Haynes writes in a prophetically titled article, “Ghawar is Dying”, that's “only an 875 day supply of oil for the world at the current rates of use.”7

Although recent data indicate oil production has peaked, industry estimates that in the 2004 to 2007 time frame, at the latest, all known and estimated oil reserves will fail to pace demand, falling in absolute and percentage terms.  Adding non-conventional sources of oil buys less than a handful of additional years.  Figure 7 and Table 8 (p58) indicates the actual volume level of the peak is likely to be reduced because of the worldwide reduction in economic activity in the previous two years reduced oil consumption.  If a recession had not reduced economic activity the production peak would have been higher because of higher use of energy and arrive earlier because of greater economic activity.8

The fact that petroleum resources are waning underscores the automobile industry’s harried rush to design and mass produce a substitute to existing internal combustion engines.  Oil fired generating plants are no longer constructed, and many existing plants are often retrofitted to burn natural gas.

There are practical and logistical impediments to a speedy solution.  Although no Super Giant fields have been discovered for decades, if several were discovered it would not be in time to prevent peaking and reversing the subsequent resource decline.  The fundamental reasons are that the peak has been achieved or is rapidly approaching, no sufficiently large field has been discovered, and about eight years are required to construct the necessary infrastructure in order to make the additional oil or gas available in quantity.9  Consumption is another reason.  Would it make a significant difference?  The world’s rate of extraction and growth combined with declines in petroleum inventory imply that finding a second colossal oil field such as “Ghawar” would result in approximately six or seven additional years of oil consumption. (Assume 140 billion barrel field and 50 million barrels daily production.)

On the other hand, some industry representatives and government allies declare there isn't a looming petroleum shortage and that reserves are more than adequate for the foreseeable future.  This viewpoint is evident in the “Taylor's Curve” showing the typical rise and subsequent fall.  However, the Taylor Curve is different: after a few years of decline, the trendline levels off.  It assumes substantially larger oil reserves —many “Ghawars”— will be discovered and immediately made available, more than petroleum scientists estimate.  The economic reason underlying the windfall of reserves is the assumption that price elasticity will “create” reserves as needed.  This is further discussed elsewhere; however, it is correct in that increased prices discourage demand, thus tending to balance supply with demand.  Although eternal optimists, even the U.S. Geological Survey (USGS) does not support this position.10

For example, in the September 2000 issue of “Scientific American” magazine, the U.S. Geological Survey (USGS) raised its previous estimate of the world's crude oil reserves by 20%, to a total of 649 billion barrels.  Although it was an attempt to downplay the arrival of the non-oil era, the USGS data confirms that even under the most optimistic assumptions, there remains less than 30 years of the petroleum era.  The Olduvai theory confirmed!  Although the intention was to suggest there is ample time for the transition, the report also stated that in less than 15 years, by year 2015, virtually all oil consumed in the U.S. will be imported.

Mirroring the statement opening this section from Jean Laherrere and the quote from the DOE/EIA in the section that follows on world oil, the same article included a quote from Dr. Cóilín J. Campbell.  This preeminent private oil industry analyst found the USGS estimates overly optimistic: “it's only the low end of this scale that has any practical meaning; the other end of the scale is a very bad estimate.”11

Consistent with the government's position is the view promoted by the industry flag bearer, the American Petroleum Institute (API),

•  “.... it's unlikely that our demand will ever exceed or use up our supply. As supplies grow scarce, oil prices will begin to rise, and people will turn to a more abundant, less expensive alternative. In the near term, with oil products both economical and practical, alternatives will find it hard to compete.”

•  “The shift, when it comes, won't happen overnight, because oil supplies both conventional and unconventional are substantial. Moreover, the change is likely to be as painless a transition as when people switched from wood to coal to heat their homes or substituted computers for typewriters to prepare letters and documents.”

•  “World reserves are greater now than ever before. Even if we never discover another drop of oil, current reserves will be able to sustain the current rate of consumption for another half-century.”

•  “Taking into account probable future oil discoveries ... this amount of oil would sustain the current rate of consumption between 63 to 95 years.”


One must wonder if a reader could misinterpret what may be attempts at humor in the statements of industry advocates?  After all, replacing the approximately 60% of petroleum used in transportation requires considerable thought, money, and time.  And tossing a lump of coal into a pre-existing cast-iron wood stove has no comparison to replacing the worldwide use of gasoline!

Four brief points will be mentioned before addressing the substance and evident inconsistencies of the API and government positions.  First, although numerous and expensive attempts have been engineered to develop alternatives, there is simply no resource or technology on the horizon that could substitute for oil.

Second, any transition to a petroleum alternative will require the consumption of additional petroleum (even as reserves decline), and the nearly total and simultaneous overhaul of the energy infrastructure of this and all other petroleum based societies.  The social and economic price of this transition will be greater than the sum of the infrastructure costs producing the societies seen today.  Third, there can be no doubt, as Dr. Cóilín Campbell said and Jean LaHerrere agrees the “probable future discoveries” are generous to a fault.  Facts, including the USGS's own survey, confirm the opposite stance.  And lastly, the fact that the API suggests that oil consumption is static, “at current levels”, incredulously overlooks the fact that oil consumption is increasing and in some nations rapidly increasing, exceeding 7% in Asia.  A rate of 7% demand growth doubles oil consumption every 10 years.

Further aggravating the situation is that as developing nations continue to climb the consumption ladder from third to first world consumption levels, their oil use will rise in sync with development.  In fact, oil consumption in the developing world has already reached 40% of the world's total consumption.  The mind-boggling consequence of the rapidly approaching oil capacity constraint is that there are inadequate resources to match the oil requirements of an expanding U.S. population, the world's swelling populations, nor the hoped-for increases in living standards.

Although government and industry energy planners do not publicly admit the limited future of petroleum or natural gas, the oil transition has begun.  Realizing the post-petroleum era is rapidly approaching, industry (and government to a lesser extent) is taking steps to be players in the coming new era and to define its terms.  Evidently Big Oil and automobile companies understand the closing situation, yet vary their statements with the audience —while actively searching for alternatives.  For example, note the vigorous car industry efforts to have oil equivalent, efficient gas or electric powered vehicles.  Many oil fired electric generating plants are being retrofitted and new generating facilities are frequently designed and constructed to use natural gas.  As discussed earlier, natural gas, in smaller volumes than the original oil, is the final energy product extracted from a petroleum field.

Reasons for underplaying the situation are briefly noted in several areas of this paper —the discussion of Mexico's looming energy dilemmas is a case in point.  The fundamental blueprint appears to be one of limiting the public's understanding and to shield financial and other economic interests from the consequences.  For example, following the lead of California (and suggested by recent Minnesota developments), if the actual magnitude of energy problems were widely known would the current systems of private energy production and delivery be nationalized?

Consumers could become unduly apprehensive and world economies impacted if world leaders, including President Bush or OPEC President Rodriguiz, were to publicly express concern about future reserves or declining production.  One likely consequence is that it would encourage unnecessary resource competition and potentially inappropriate and uneconomic allocations between nations.  On a more subtle level, because manipulating reserve estimates also manipulates prices and profits, it can be used as an instrument to influence selling prices and possibly reduce probabilities of Islamic nations from using the oil weapon.  Simultaneously, it would tend to discourage money from flowing into alternative energies and technologies.  Or perhaps our good Canadian neighbors would be less likely to transport their declining resources southward, and Mexico, its energy resources northward, if prices were not, at least in some measure, artificially set and public awareness dampened.

Once the public becomes aware of the futility of maintaining the status quo, further inroads to support will be a formidable obstacle to new programs.  Conservation programs in developed nations may be difficult to mandate and if implemented successfully have little if any impact on reserves.  With the Western nations in denial (including the State of Minnesota), how developing nations react, first to genuine world resource limits and soon after, to actually diminishing supply is a question not sufficiently addressed today.

In a similar conundrum, the West's options for dealing with oil dependencies are limited.  Further, there are few internal options Western nations can accomplish economically in the required time horizon to effect changes.  Any changes will be difficult to implement, and come at great political cost.  In the meanwhile, the West can continue to blame OPEC and demonize the oil producers and companies in an effort to shift responsibility, from taking a science-based rational approach to domestic U.S. actions.
 

World Oil

Get Ready For Another Oil Shock!
  L.F. (Buzz) Ivanhoe. Petroscientist. 1997
12


Today, daily world petroleum consumption is approximately 80 million barrels.  Of that 80 million, the U.S. produces about 10 million.  It is evident from the gargantuan volumes of oil consumed that society is dependent on what is known as Super-Giant fields for oil and natural gas.  “Super-Giant” fields are measured in billions of recoverable barrels of oil.  These large reservoirs explain how supply has been maintained with substantial increases in use.  Analogous to a large swimming pool or lake, reserves available in the “pool” greatly exceeded the oil volume demanded —producers only needed to crank open the spigot.  However, this analogy does not, cannot, suggest an impending peak.  Many of the important oil fields were discovered in the 1930s, drilled in the 1950s to 1970s and have now reached or exceeded maximum production.

The Super Giant petroleum fields are primarily responsible for the development of the world’s economies seen today.  Not considering other factors, the Middle East and U.S. oil fields were largely responsible for more than half a century of Western and worldwide economic development.  There can be little doubt that the success of industrial democracies —especially the U.S.— was the consequence of abundant and cheap oil and the equalities and the freedoms it permits.  It is ironic that in order for Western democracies to continue in their present forms, oil from Muslim and non-Western nations is required.

The plentiful and cheap energy era will not be repeated.  It is not that oil will be exhausted soon; only that its affordability will soon begin a relentless decline.  According to petroleum industry specialists, the world's petroleum reserves —even assuming locating considerably more— will peak sometime between the years 2000 and 2010, shown in Figure 5 (p56).  Research by oil conglomerates such as Agip (large Italian oil company) and Atlantic Richfield (Arco) and many experts also offer a less optimistic view than the government or API, anticipating a world oil peak around the year 2005, perhaps as early as 2003.

There are other forms of petroleum and petroleum-like structures that could provide additional supply.  Oil sands and shales or methane hydrates for example.  The sum of these alternative or unconventional oils are estimated to total more than three or four times the conventional.  However, as will be discussed, they are difficult to extract, place the environment at risk, are unaffordable, and often use more energy to obtain than contained in the resource.

The International Energy Agency (IEA) also offers a different, overly optimistic, scenario than the government or API view seen in the previous section, forecasting oil production peaks in the year 2000 for the world excluding the OPEC Middle East, 2015 for OPEC Middle East, and 2012 for world oil supply.  The IEA projects a peak in conventional oil in 2012 with 78.9 Mb/d and then, as has occurred in the U.S., then the beginning of a steep decline, a decrease to 72.2 Mb/d by 2020.13

On the other hand, preeminent oil geologist Dr. Cóilín Campbell states “it now appears that the world capacity limits were breached at the end of 2000, and oil prices began to soar when it became clear that the historic trend of growth at about 2% could not be maintained…”  In other words, Dr. Campbell concludes that the peak of conventional oil was reached two years ago, in the year 2000.14  Actual EIA production data supports Dr. Campbell.  Non-OPEC production for August 2002 was 922,000 barrels greater than the previous year and September 2002 non-OPEC production declined to 417,000 million barrels above September 2001.  Demonstrating the continuous declining trend, September 2002 was 505,000 below April of the same year.15

Regarding the projected peak, there is now better information available.  A peak in oil production was initially found to be in the year 2000, as Dr. Campbell suggests, however, revised EIA production data released January 2003, indicate the actual world’s production peak was achieved in early 2001.  The Iraq situation combined with Russian increases implies that the 2001 peak should be marginally exceeded: extending the peaking time period through 2003 – 2004.  Because of minor revisions the actual “peak year” will be known only several years after the fact.

Of greater immediate consequence is that the major petroleum exporting nations have little additional reserve production capacity.16  Figure 4 shows the difference in the year of maximum discovery and annual discovery compared with production.  The world’s peak year of discovery was 1964 and 1980 the final year discovery paced consumption.  The subsequent discovery falloff was, at least in part, from the resulting oil surplus.  The trendline marked with dark diamonds shows the number of new drilling rigs each year.  The trendline demonstrates that the spirited attempts to locate new oil fields peaked in 1980 and subsequently succumbed to geologic realties.  The chart also illustrates that despite periods with price spikes over decades, little or no lessening of the consumption gap is evident.  In the year 2002 total world discoveries was only approximately 15% of consumption, 3 6 Gbl.17  The failure to close the gap in recent years using sophisticated discovery and drilling technologies is clear as well.

Announcements of “new discoveries” often are of expansions of existing, unknown but calculated to exist fields or, more likely, revisions in existing reservoir estimates ―total volumes are fixed.  Thus, the heralded “new discoveries” are known.  Because they are not “new”, the correct approach is to backdate the field estimates as recommended by Jean LaHerrere and Cóilín Campbell.  This approach correctly identifies the resource and better informs decision makers and public of actual inventories.  The trendlines vividly demonstrate that at some point in production (see Figures 19, p123, and 21, p128) the physical hold on the resource exceed the economic costs of extraction —the Mideast reservoirs being the case in point.  The consequence of the geologic reality is that further production results in negative energy and net loss of energy capital for society.

Figure 4 illustrates the trend of world discovery and consumption over the previous four decades.  The chart demonstrates that despite desperate searching, no new Super-Giant field has been discovered since the late 1960s.

Figure 4:  Oil Discovery vs. Consumption 1960 – 2002 (April)


    Surplus/Discovery: Vertical bars (red/dark gray). Wells/Consumption: Trendline
Chart courtesy of Jean LaHerrere. See original at < http://www.hubbertpeak.com/ >.


As the graph illustrate, reserve growth from drilling and discovery has not kept pace with consumption for more than two decades.  Experts’ state there is approximately a 20-year span between discovery and consumption.  This is clear from the above figure where the world’s peak oil surplus (discovery) is about 20-years before the peak in drilling/consumption.  Similarly, the steady decline after peaking and the generally increasing discovery-consumption gap.

If the opening quote from the DOE/EIA and the preceding discussion failed to heighten doubt regarding the future of oil, then a September 2000 quote from the president of OPEC should: “we are approaching a crisis of great proportions because oil production capacity is reaching a limit.” Ali Rodriguiz, President of OPEC, reminding oil consumers of a period of long lines and rapidly escalating prices in the same presentation went on to say that “the world could soon face an energy crisis similar to the one that hit Western economies in the 1970s”.18  The high porosity of many OPEC oil fields implies that high levels of production are possible even as field capacities decline.  It suggests what has been stated by OPEC authorities is accurate: the fall-off in Mideast production is likely to be unnoticed and rapid after it occurs.

As noted, almost all major oil producing nations are now in decline or will soon reach maximum production.  Moneyed interests will likely consult resource geologists about these matters and conclude that investing in additional oil production facilities in declining fields could be hazardous to their financial interest.  Thus, it is evident there are prudent reasons underlying the substantial programs funded by Big Oil to develop natural gas production in, for example, Saudi Arabia and Kuwait.  The politics of this matter will be left to another author to discuss.

The transition to natural gas is clear evidence that the major oil exporting nations are nearing or have reached peaks in oil production and that despite increasing demand, oil reserves are beginning the final stages of depletion.

The graph of world oil production and reserves depicted in Figure 5 is generally known as the “Hubbert Curve”.  The Hubbert Curve was developed in the 1950s and 1960s by Shell Oil Company’s geoscientist, M. King Hubbert.  The curve combines the production and reserve profiles of individual wells in a reservoir or in countries.  Dr. Hubbert linked rates of discovery with production finding a lag period of two or three decades between discovery, maximum production and decline (note Figure 4).  The rising curve represents inexpensive and efficient production; the descending curve portrays the investment of additional energy to produce declining production.  The dotted line indicates actual production and the solid line is actual smoothed forecasted production.  The chart illustrates that following actual peak production, the ensuing decline appears similar to a roller-coaster ―gaining speed as the decline gains momentum, averaging 2% to 3% percent per year.  The declining line assumes that societies will moderate consumption consistent with the decline in reserves or/and substitutes are readily available.19  If not, the trendline’s slope will steepen as population and consumption increase.  Further, it indicates the rate of change in resource reallocations within and between industries and nations.  The wealthy and the mighty will likely control the queue changes.
 

Figure 5:  World Oil Production & Reserves


Chart courtesy of Dr. Albert Bartlett. Dots are actual; line is calculated production.


The chart clearly illustrates that the world is in the midst of the time horizon for maximum oil production and either has or soon will begin its inexorable decline to the volumes consumed in a less industrialized period of history.  It is important to understand the projected production trendline reflects “proven” reserves, future reserve projections from known fields, and “reserves” thought to exist mathematically but not actually discovered.  The graphical consistency with the 1930 – 2030 period of the Olduvai Theory is remarkable.  Of substantial interest is the extent of the production decline which the chart illustrates: from 23.0^10 to 2.5^9 barrels per year, about an 80% decline within less than 30 years.  The ascent of the left side is propelled by population growth.  The oil decline on the other side will be accomplished with the same population level as at the peak plus growth subsequent to peak production.  In brief, absent societal changes, the descent begins slowly then gains momentum to rates which are multiples of the ascent.

Let’s place this difficult to comprehend resource development in a readily understandable context: the petroleum accumulated over millions of years will be virtually exhausted in the lifetime of a person born in the 1930s or early 1940s.  Absent immediate population and growth reductions and patterns of consumption, the trendlines suggest that a Western-society child born in the year 2000 is unlikely to own a vehicle or fly in an airplane after graduating from elementary school.

Trends demonstrate that the time to prepare for significant production declines is now ―that within less than a handful of years decline momentum accelerates.  Oil production will remain at high levels for several years before commencing a decline that will never be reversed.  The repercussions will be across the social and economic spectrum.

Figure 6 illustrates nature of the peak and ski-jump appearance of the ensuing decline.  The explanation for the slope of the decline is that the population on the left side of the trendlines are one or more billion fewer than the slide-side.  Due to growth, the rates of decline relative to the differences between the four resource depletion scenarios are minor.  The graph illustrates three year old data.  It appears the peak has been achieved, as indicated —2000 or early 2001, and the ensuing decline is set to get underway.

Figure 6:  Four Oil Depletion Scenarios



Chart courtesy of Dr. Cóilín Campbell. See original at < http://www.hubbertpeak.com/midpoint.htm >.20

 
Another method of examining oil production illustrated in the preceding charts is seen in Figure 7.  Figure 7  illustrates the world’s total conventional and non-conventional oil production relative to world population.  The chart uses actual world population and oil production through 2002, then considers Census Bureau projected population to 2050.  Projected conventional and non-conventional oil production is from Table 8 Column D (p58).  The graph indicates that total daily oil production per capita peaked in 1979 at 0.0153 barrels.  In gallon terms the per person maximum was 0.64 gallons per day or 234 gallons per year.  During year 2003 per capita production will have fallen from the peak by more than 23%.  By 2010 per capita oil production will have fallen approximately 33%, 15 years later, 2025, approximately 67%.  Consistent with Figure 5, including increasing non-conventional oils, before 2050 per capita oil will have fallen more than 87%.
 

Figure 7:  Per Capita Conventional + Non-Conventional Oil 1970 – 2050

 

Table 8 contains the numerical data on which Figure 7 is based.

Table 8:  Per Capita Conventional & Non-Conventional Oil 1979 – 2050

Year

Population1

Daily World3

Oil

Production

Daily World2

Oil

Supply

Daily World

Oil

Supply Per Capita

Barrels Daily to

Maintain

1979 Level
(0.0153)

Required Daily Quantity

from

Non-Conventional Oil

Percent

from

Non-Conventional Oil at

0.0153

Population

to Maintain 1979 Level (0.0153)

 

(Billions)

(000)

(000)

(Barrels)

(000)

(000)

 

(Billions)

A

B

C

D

E

F

G

H

I

1979

4.38

62,674

66,973

0.0153

67,026

4,352

6.5%

4.38

1980

4.46

59,600

64,139

0.0144

68,188

8,588

12.6%

4.19

1985

4.85

53,982

59,249

0.0122

74,275

20,293

27.3%

3.87

1990

5.28

60,566

66,743

0.0126

80,841

20,275

25.1%

4.36

1995

5.69

62,335

69,876

0.0123

87,070

24,735

28.4%

4.57

2000

6.08

68,342

77,002

0.0127

93,026

24,684

26.5%

5.03

2005

6.46

65,917

75,392

0.0117

98,846

32,929

33.3%

4.93

2010

6.82

61,120

70,594

0.0103

104,402

43,282

41.5%

4.61

2015

7.18

51,147

60,621

0.0084

109,788

58,641

53.4%

3.96

2020

7.52

39,576

49,051

0.0065

115,026

75,449

65.6%

3.21

2025

7.84

30,623

40,098

0.0051

119,962

89,339

74.5%

2.62

2030

8.14

23,696

33,170

0.0041

124,547

100,851

81.0%

2.17

2035

8.42

18,335

27,810

0.0033

128,776

110,441

85.8%

1.82

2040

8.67

14,188

23,662

0.0027

132,626

118,439

89.3%

1.55

2045

8.90

10,978

20,453

0.0023

136,125

125,147

91.9%

1.34

2050

9.10

8,495

17,969

0.0020

139,294

130,800

93.9%

1.17

Sum 2003 – 2050:

1,599,154

 

Sum 2003 – 2050:

4,662,866

 

 

Table lists approximately 5 year increments. Actual schedule is annual 1970–2050. The latest data is available at the source for Figure 6 and at “International Petroleum Monthly”. EIA/DOE. January 2003. See at < http://www.eia.doe.gov/emeu/ipsr/supply.html >.
Data sources:
1. Population: U.S. Census Bureau: International Data Base. See at < http://www.mnforsustain.org/pop_world_population_1950-2050_and_graph.htm >.
2. Oil: Calculated from “Annual Energy Review: 2001”. Introduction. Energy Information Agency. See at < http://www.eia.doe.gov/emeu/aer/eh/frame.html >. 3. “Table 4.4 World Oil Supply, 1970-2002” (Thousand Barrels per Day), Energy Information Agency, DOE. November 15, 2002. See at < http://www.eia.doe.gov/emeu/ipsr/t44.xls >. Includes actual and non-conventional to 2000 (from Col. G). Related schedules are at < http://www.eia.doe.gov/ipm/supply.html >. “Table 4.1c World Crude Oil Production (Including Lease Condensate), 1970-2002” (Thousand Barrels per Day), Energy Information Agency, DOE. November 15, 2002. See at < http://www.eia.doe.gov/emeu/ipsr/t41b.xls >.
 
 

Column B is historical actual and Census Bureau projected world population.  Column C is actual world oil production through the year 2002.  Column C is critically important in that it documents that actual world oil production is now post-peak —peaking in 2000 (note: minor data revision in January 2003 indicated peak evidently occurred early in 2001).  Column C uses actual data to 2002 then projects oil production, assuming one-half a percent annual decline for the three following years, an approximately eight year plateauing period —to the 2005 – 2008 period, 1½% from 2006 – 2010, 3½% from 2011 – 2015, and finally 5% annually to 2050.  These figures are consistent with actual and projected production and reserves evident in previous graphs.21

The chasm between experienced petroleum geologists, the above table and government forecasts needs restating at this point.  The International Energy Agency projects world oil demand will increase 1.6% per year through 2030.  This implies an increase amounting to 120 million barrels of oil a day (Mbl/d) from the current 75 – 80 Mbl/d.  Table 8 indicates conventional oil production of approximately 23.7 Mbl/d for the same year —a difference of almost 100 Mbl/d or more than 75%.22

The assumption underlying potential extraction in Column D is that those volumes can be economically extracted.  Discussed later in this paper is that due to geology as resource basins peak and begin production declines, the cost of extraction rises (see Figure 19, p123).  The implication is that perhaps as much as half the production demands given in Column C are unlikely to be extracted because of high costs.  Although rising costs would become evident once the decline is set in motion, arithmetically the extraction point approximately half-way down the trendline represents the period overall costs of extraction exceeds the utility of the oil.  Arithmetically, the point production costs exceed benefits of extraction will be reached in the summer of 2015.  Because each reservoir is geologically different, the non-Super Giant fields —the majority of fields— become uneconomic prior to the world average.  Because actual inventory balances are declining, rising prices cannot create additional resources.  This is not to imply that oil will cease to be extracted, only that the vast majority of reservoirs will be too costly to produce.

Column D adds non-conventional to conventional oil sources in order to arrive at total world supply.  The actual non-conventional production is added to the world conventional total to the year 2002.  The difference between Columns C and D approximates the contribution from non-conventional sources.  The projections are prepared assuming actual non-conventional sources from the year 2003 are grown 4% annually to the year 2050.  This growth rate is based on the 32 year actual non-conventional oil average annual growth of 3.57% and increased to 4% to accommodate increases.  A surprising result of Column D is that despite significant increases in non-conventional oil production, the total volume of oil declines after peaking in 2000 (early 2001).  The substantial increases in non-conventional production are unable to overcome the decline in conventional oil production.  Consistent with the steepening decline in conventional oil production, the rate of decline of the world’s total production accelerates at mid-decade 2000.  Non-conventional oils, such as the tar sands, and their additional costs are discussed later under “alternative energies”.

Column E reflects per capita total oil as illustrated in Figure 7.  The numbers are found by dividing total supply (D) by population (B) to obtain per capita figures.  The year of 1979 is the initial period ―the year of maximum world oil production per person.  Column F assumes the 1979 per person oil production level is society’s objective and projects from 1979 to 2050 the production of oil necessary to maintain the 1979 per capita level of oil considering the world’s population forecasts.  Volume is found by dividing population by the 0.0153 barrels per person (or 0.64 gallons per day or 234 gallons per year).  (The minor difference from actual 1979 Column D is due to rounding error in calculations using large numbers.)  The daily quantity of oil production required for the growing population is mind boggling.  The quantity of oil that would be required in the year 2050 is almost double the actual volume in the year 2000.  In response to the question of where will the additional oil come from, Column G is the volume of non-conventional oils embedded in Column F, the difference between total barrels required (F) and conventional sources (C).  Column H is Column G expressed as a percentage.  The percent of oil required from non-conventional sources appears to mirror the difficulties in obtaining the enormous volumes.

Although not clearly evident in the above table or graph, there is an ongoing economic struggle to maintain living standards.  The reason the world’s current economic averages do not fully reflect the energy and population outcomes in the table is that income-energy consumption disparities have been widening.  The disadvantaged are becoming increasingly energy disadvantaged while the energy advantaged have maintained or increased consumption of energy as their populations increased.  This applies particularly to the U.S., Canada, Australia, and New Zealand ―growing, high energy nations.

The 1.6 Tbl (trillion barrels) figure summed in the final row under Column C is very close to remaining reserves projected by scientists.  The nearly 4.7 Tbl of Column G is the summation of daily non-conventional production seen in the column; it does not represent the yearly production in any single year or production over the period ending in the year 2050.  Nevertheless, the 4.7 Tbl of oil required merely to compensate for declining conventional daily production would require 150% more than the total of world oil produced or remaining in reserves.  Suggesting the magnitude of non-conventional production’s environmental impacts and infrastructure mining and construction needs is that this quantity is three times the amount from conventional oil sources.  When increasing monies are pouring into increasingly difficult to produce conventional oil, funding sources for non-conventional oil sources will be extraordinarily difficult.

Column I examines the oil situation from a different approach: population rather than an oil perspective.  It demonstrates the world’s population level required to maintain the same oil production and population ratio as in the year 1979.  The data reflects the peak and irregularly sideways trend of oil production of the previous decade.  It is illustrated by the graph of world oil production presented earlier.  Similarly, it demonstrates the population induced accelerating decline beginning within the decade.  Although there is a minor increase in potential population-oil ratio from 1979 to the year 2000― if the world’s population was to have a 1979 per person oil supply in the year 2000, the 2000 population must be more than a billion fewer.

The UN, many non-government population organizations (NGO’s), and businesses frequently downplay population growth in discussing world events.  They frequently state the rate of growth is slowing.  The primary purpose of Column I is to connect world population with total oil resources required to support growth.  Unlike the UN, NGO’s, and major environmental organizations’ statements apparently made in a vacuum, Column I demonstrates the alarming nature of growth: assuming enormous increases in non-conventional oils, by 2050 nonetheless there will be nearly 1/8th the equivalent oil resources of today to support 3 billion more than the 6 billion people today.  The alarming nature of the population to oil imbalance is that in the year 2000 the population to oil ratio required 1.05 billion fewer people (6.08 – 5.03 = 1.05) while in 2050 the number is 7.93 billion fewer people (9.1 – 1.17 = 7.93).  Because a significant percentage of oil consumption is in Western nations, a suggestion of this data is that Western nations with growing populations will be required to disproportionately reduce growth prior to 2050.
 

United States Oil

The adjustments to the USGS and MMS estimates are based on non-technical considerations that support domestic supply growth to the levels necessary to meet projected demand levels.
    DOE/EIA 1997.23


If the world's oil reserve situation is fraught with insecurity, the U.S. situation is fraught with peril.  The above DOE/EIA admission that the government uses approaches other than science in preparing energy reports is not reassuring.

In 1956 something ominous occurred: drilling for petroleum in the U.S. peaked.  Subsequently, oil production has fallen steadily.  Today the U.S. has approximately one-fourth of its enormous original oil endowment, originally second in reserves only to Saudi Arabia.  Obviously, the U.S. is vulnerable to substantial price increases and supply dislocations.  Minnesota is exceedingly vulnerable, lacking petroleum or natural gas fields, lying at the end of most natural gas pipelines, and distant from petroleum fields.  Growth from any source is a serious Minnesota energy matter requiring serious discussion.  With nearly 400,000 boreholes, the U.S. has few oil or natural gas reserves remaining to discover.

A few years later, in 1970 not only was important environmental legislation passed such as the Environmental Protection Agency, the Endangered Species Act, and the first “Earth Day” with its emphasis on stopping population growth celebrated, but it was the termination of a 100 year period of stable to slightly declining oil prices (in 1999 US-dollars).

Figure 8 depicts the U.S. oil situation.

Figure 8:  U.S. Oil Production & Reserves


Chart courtesy of Dr. Albert Bartlett. Dots are actual; lines are calculated production.


The appearance of world and U.S. oil graphs, Figures 5 (p56) and 8, are nearly identical except that due to earlier industrialization, excluding the Gulf, U.S. production peaked in 1971 at 9.2Mbl per day and turned down at an earlier time.  By 2001, U.S. production had declined more than 60% to approximately 3.7 Mbl per day.  Over the 1971 2001 period, the decline averaged about 2.9% per year, increasing after 1990 to more than 3.7% each year.  The world is now in the plateauing phase of production and will soon follow the trendline evident in the U.S. oil chart.24  If the U.S. and world trends had followed a trendline parallel in time, the energy situation the world is confronting today would have taken place approximately 15 or more years earlier.  Nevertheless, there can be little doubt the world pattern is following the leading U.S. trend.  EIA production data indicates world oil production peaked in 2000 or early 2001 and, although there possibly remains a 1% OPEC reserve margin, has probably slipped under the peak.

In the early periods, on the left side of the U.S. or world oil graph, drilling and pumping oil was highly energy efficient.  In the larger fields when the oil basin was initially penetrated, as those old Texas and Oklahoma oil movies illustrated, reservoir pressures were so high that oil would gush out of the ground reaching heights well above the drilling rigs!  Indeed, the discovery of the giant East Texas Field in 1930 (and depression) resulted in oil prices falling through the floor —from approximately $1.10 per barrel to $0.10.  As a consequence, in 1932 the Texas Railroad Commission began to monopolize prices (aka, OPEC) by rationing production.  More importantly, in terms of production costs and energy, a single barrel equivalent of energy was used in producing 40 to 50 barrels of oil.  Extracting oil or natural gas was literally dirt-cheap!

Today, the situation is very different.  Rather than finding a few large reservoirs, new production is from more numerous smaller finds with short production lives.  This is clearly evident is natural gas fields.  On average, new U.S. wells require roughly one barrel equivalent of oil to obtain one other barrel.25  On the positive side of this situation is that this is an example of how higher prices have the potential to slightly increase oil production.  At some price level, even the “goo” from stripper-wells can be pumped if the price is adequate. (See the section on “Pricing Economics” for a thorough explanation.)  However, no nation's economy can be supported from such production.

U.S. oil discovery peaked in 1962 and Canada’s in 1950.  Between 1990 and 1999, there were 67 discoveries of Giant reservoirs —greater than 500 billion barrels (bbl)— totaling 89 bbl of oil equivalent.  Of that total only 26 bbl was oil.  The discoveries in the most recent decade amount to slightly more than a single year’s oil consumption.26  1970 was also notable for being the final year the U.S. was self-sufficient in oil.  The early 1970s was also the time of peak Canadian oil production.  Recall the last Super Giant field, Alaska's Prudhoe Bay, was discovered in the 1930s and placed into production 34 years ago.  In every year since 1970, U.S. oil imports have increased.  U.S. oil imports are increasing at about 1½% per year and the rate of increase is increasing.  Currently about 65% of U.S. oil requirements are from foreign sources, often politically unstable and unfriendly nations.

The procedure described previously regarding the world population-oil ratio (table 8, p58) applies to the U.S.  The U.S. data suggests an equally distressing situation.  Peaking in 1972, the U.S. preceded the world oil peak by 28 years (not shown in the table).  At the time, daily U.S. oil production peaked at 11,185,000 barrels per day with a population of 209,896,000.  Dividing oil production by population yields 0.05329 barrels per person (11,185,000 ÷ 209,896,021 = 0.05329).  In order to match today’s population of approximately 294 million with the same 1972 oil ratio, daily production of approximately 15,600,000 barrels is needed.  However, today’s daily U.S. production is 11 million less, in the 4 million barrels range.  The U.S. population consistent with the current U.S. production of 4 million barrels would therefore be approximately 75 million (4,000,000 ÷ 0.05329).  In other words, to match the 1972 U.S. oil population ratio requires a U.S. population 220 million smaller ―and not growing.  With continued production declines —down to 1.9 million barrels per day by 2020 according to the Association for the Study of Peak Oil & Gas — and only nominal volumes at 2050— to calculate an oil to population ratio as performed for the world would provide little helpful information.27  In seven years from 1979, U.S. oil production had fallen 9.4% to 10.1 million barrels and the oil to population ratio had fallen 15.6% because of the additional 19 million increase in population and the nearly 1.1 million barrel fall in oil production.  Increases in U.S. oil consumption since 1972 are primarily met by increasing imports.  Table 8, Column C indicates this strategy is limited.

Note in Figure 8, after peaking, the approximately 10 year plateauing effect in the U.S. from the early 1970s to early 1980s.  The graph illustrates the struggle to maintain production and the consumer response to higher prices and weakened economy over the period.  The current flattening of the downslope is due to increased production from the Gulf of Mexico and improved technology locating smaller fields.  These will be found to be temporary.  The graph also shows that the conservation policies implemented over the period were overwhelmed by an improving economy and population growth.

The greater the volume of energy imports, the greater the unreliability of supply.  Figure 9 applies to oil imports —as will be discussed, the identical situation will prevail in a few years for natural gas imports in the form of LNG.  The trendline also represents the probability of environmental and balance of payments consequences, increasing baseline costs of oil and implications for the U.S. (and Canadian) economy, and national repercussions for securing oil supply.  The graph illustrates the precarious nature of oil supply.  According to James L. Williams, President, WTRG Economics, and Dr. A. F. Alhajji U.S. “vulnerability is at a historic high, higher than any of the preceding energy crises.” 28

Figure 9:  U. S. Oil Supply Vulnerability


Courtesy of WTRG Economics


Figure 10 (next page) is similar to the world data in Figure 5 (p56) in that it illustrates the relationship between consumption and production since 1950 but for the U.S. and adds the shortfall made up from imports.  The trendlines are visual evidence of the struggle as 1970 approached to maintain U.S. production —to the actual peak in the early 1970s.  It is equally clear that the U.S. production trend is down and the slope steepening.  On the other hand, U.S. demand is expected to increase more than 2.3% in 2003 and 2004, slightly below half a million barrels per day.29  Imports more than mirror the U.S. declines because it combines declining U.S. production and U.S. growth.

Punctuating the import position, total U.S. oil reserves are more than two-thirds depleted and those that remain are expensive to produce, increasingly difficult to pump, and often of lower quality.30  Perhaps the most instructive use of examining the U.S. “consumption gap” is to note that it mirrors the circumstances the world is confronting today.  The troublesome difference is that are no “imports” possible.  There can be no reversal of the trend: from 1970 the gap represents the continuing world oil shortfall going forward from the present time.

Figure 10:  U.S. Oil Production-Consumption Gap


Chart courtesy of Cutler J. Cleveland & Robert Kaufmann.
31
 

Conventional Oil Reserve Sources

The peak in (world oil) finding was back in the 1960s, and if you go on finding one barrel for every four barrels you produce, pretty soon you're out of business.
L.F. “Buzz” Ivanhoe. Petroscientist. 1997


This part discusses the major sources and competition for U.S. and world oil: Alaska’s North Slope (ANWR), Mexico, China and Japan, the North Sea, and the Mideast.  Possibilities for new production are discussed.  After describing sources, the next section discusses the Olduvai Peak processes, several implications, and the U.S. dollar and the economy.

The IEA, API, and government estimates appear to be highly optimistic.  Studies show that the Mideast states recently have peaked —Saudi Arabia has been mentioned.  Oman, the world’s 17th largest producer, peaked in early 2001 at 983,000 barrels per day and has now fallen 28%.  Colombia is apparently past its peak and now in long-term decline.  Indonesia is past its peak; the great fields of Norway, Venezuela, and Mexico evidently peaked in 2000 and with China peaking in 2002, are now entering long-term declines.  Venezuela, it should be noted, is the world's 5th largest oil exporting nation and supplies 13% of U.S. oil.


ANWR

Caribou like pipelines because it gives them a place to scratch.
Alaska Senator Ben Nighthorse Campbell, June 15, 2000.
(Stating why drilling will not affect wildlife in the Arctic Refuge.)


The oil and natural gas in the North Slope of Alaska will be expensive to transport and produce little overall contribution to U.S. oil or natural gas supply.  Dr. James Mackenzie of the World Resources Institute states that developing the Arctic National Wildlife Refuge (ANWR) will not change the long-term outlook for U.S. oil.32  Data from the U.S. Geologic Survey indicates the remaining recoverable oil from ANWR as approximately 3.2 billion barrels.33  The volume available suggests less than six months of U.S. consumption while the very long transport suggests the high consumer cost involved.

A similar situation prevails in the Gulf of Mexico.  A thoroughly explored region, the Gulf has more than 4,000 oil and natural gas drilling platforms connected with 33,000 miles of underwater pipelines.  Still, 93% of all new offshore U.S. drilling is in the Gulf.  The resulting production increase has been unremarkable.

Why is oil and gas crucial to Alaska?  According to the state Department of Revenue, “80% of General Fund unrestricted revenues comes from oil and gas taxes”.34

The region surrounding Prudhoe Bay was initially developed for its oil and natural gas about two decades ago by three very large (and influential) petroleum companies: BP Exploration (Alaska), Exxon-Mobil, and Phillips Petroleum.  With estimated total reserves of 13.8 billion barrels (18th in size worldwide), the economics and tax potentials of its development were compelling.  Production began in the Sadlerochit field with the opening of the Alaska Pipeline in 1977.  Less than two years later, there were two hundred wells producing the limit of 1.5 million barrels per day.

Although few realize it, Prudhoe Bay oil production peaked in 1987 and has been steadily declining more than 10% each year.  Symptomatic of the severity of the looming U.S. energy predicament, the region nevertheless still accounts for nearly a quarter of total U.S. oil inventories.

In the late 1990s Alaska projected there would be a short-term oil production plateau after the year 2000 that will temporarily slow the production decline.  The reason is the newly developed but much smaller Alpine and Northstar fields were brought into production.  Following the plateau authorities estimated a continuation of the rapid production decline now in progress.  The projection was for oil production to decline approximately 700,000 barrels per day between 2000 and 2020.  Apparently alarmed by the tax implications, revised state budget forecasts now push the resumption of the decline out about eight years.
 

Figure 11:  Alaska Oil Production 1955 – 2020


Chart courtesy of Jean LaHerrere


Indicating the corresponding tax revenue declines, the Oil & Gas Journal recently reported an analysis that found Alaska oil had declined 7 – 12% per year since 1991 (note Figure 11).  Initial reserves have now fallen over 65% to less than 4.9 bbl in 1999.  Consistent with the sharp reserve declines, annual production fell by nearly half, about 950,000 bbl per day.  Since 1988 when the state's production reached its maximum, production levels have fallen approximately 60%.  The most recent state forecasts are for oil prices to rise to $22 from $18 per barrel and production to level off to approximately one million barrels per day and then increase as new fields come on line in 2010.35  These “new” fields are the National Petroleum Reserve and ANWR.  Because of the dire financial straitjacket Alaska is confronting, one could suspect these forecasts are preliminary.

A Prudhoe Bay analysis by Thomas Standing in the Oil & Gas Journal, nevertheless concluded that oil could be uneconomic to extract in a few more years, well before 2010.  “Let's be clear about Prudhoe Bay oil production: under the best of circumstances in a very short time, its total cost of delivery will exceed the value of its oil” reports the Oil & Gas Journal.36


Mexico

The rebirth of the Mexican petroleum industry concerns not only the destiny of Pemex, but of all Mexico, because if Pemex fails, the nation will fail.
   Díaz Serrano, c. 1976. Director General, Pemex.37

 

Mexico lied about proven oil reserves, report says …

will have to import large amounts of crude within 10 years.
   Los Angeles Times, December 10, 1991.38


Pemex, the national oil company of Mexico, was formed by the Institutional Revolutionary Party in 1938 by nationalizing American and British oil and changing the Constitution to prohibit foreign ownership.  Celebrating the takeover, Expropriation Day is a national holiday in Mexico.  Pemex is important to Mexico because approximately 40% of its tax revenues are from oil and natural gas sales.

Mexico's largest oil producer, the offshore Super-Giant Cantarell Field, produces approximately one-third of Mexico's total oil production, 1.2 million barrels per day.  The Cantarell Field is an old petroleum source, discovered in 1976 and pumped continuously.  Production peaked in 1982 and subsequently has been on a production plateau.  Production is maintained by Cantarell managers spending more than $1 billion yearly injecting nitrogen in an attempt to maintain adequate pressure in the field.  Producing 1.2 Bcf of nitrogen daily, a new nitrogen plant is ten times larger than any existing nitrogen plant, doubling the world's current production.39  Without the expensive nitrogen injections, the field's output would be declining approximately 5% per year.40  Over the next 12 years, the field will require $9 billion of injections in order to sustain oil pumping.  Like other petroleum fields in decline, its natural gas production rose steeply beginning in 1995.  Not only does the nitrogen pressuring program demonstrate the precarious realities of Mexican oil and natural gas, it is an excellent example of increasing cost to extract the last remaining deposits.  If it can afford to, Mexico is destined to become a substantial oil and natural gas importer.  Indeed, Mexico now imports approximately 25% of its oil, 1.5 Mbl, with imports growing 2.5% per year.  The rate of increase is likely to increase as Cantarell Field production falls.


China & Japan

It appears that another non-OPEC oil powerhouse, China, has now reached peak production.  The IEA reported that China's three largest oil fields were in decline in the year 2001.  Together with the Daqing field (a 1,600 square mile region in the Songliao Basin of northeastern China), the two largest and oldest producing fields, Shengli and Liaohe make up 60% of China's total oil production.  All three have peaked.  The remaining two significant fields, Huabei and Zhongyuan are also in decline.  Producing approximately one-third of China's total oil production, declines were evident in China's largest field, Daqing —falling 3% in 2001 and 4% in 2002 with increasing water infiltration.41  PetroChina reported that output would fall by 30 to 40 thousand barrels per day until 2005.42  The production increases from offshore drilling has only marginally been able to replace the onshore declines.  The offshore basins are relatively small and unable to increase China’s oil supply.

China’s rapidly developing economy and large and growing population creates the fastest growing volume demand for oil of any nation.43

South Korea’s rate of growth exceeds that of China but its volume increases are substantially smaller.  In the decade of the 1990s China’s oil demand increased approximately 110%, from 2.3 to more than 4.8 million barrels per day.44  With struggling production from all onshore oilfields, PetroChina and the Chinese government are becoming concerned regarding oil supply, oil imports and the economic and political consequences of growing imports.  China is now consuming 7% of the world’s total oil production with annual demand growing 5.8% and total energy consumption 20%.  Its oil imports increased 29.8% in the first eight months of 2003.  Indicating the challenging level of imports, in 2002 China’s domestic production trailed demand by more than 1.6 million barrels per day.  Primarily due to rapidly increasing transportation needs, the IEA predicts that China will need over three times their current consumption by 2020.45  China’s economic and population growth has resulted in a 29.8% increase in oil imports in only the first seven months of 2003.  The increase is approximately 1.8 million barrels per day —by itself, an increase of 2.3% in total world production.46  In other words, half-a-year’s increase by China, alone, has removed all of OPEC’s possible reserve increases.  The staggering energy costs of constructing the transportation infrastructure or advancing economy is not included in the already staggering increased oil demands.

Pitting a rapidly expanding China against the world's oil market, China's lack of domestic oil potential has substantial non-domestic implications.  Growing demands will be derived from imports.  Significantly increasing imports from Mideast producers in markets characterized by diminishing supply will increase international energy competition and tensions.47  China’s increasing oil demand also places Japan in a delicately vulnerable position.  China imports oil from Russia and other markets while exporting oil to Japan.  Indeed, China’s Daqing basin is the only Chinese field exporting oil to Japan, approximately 22.5 million barrels in 2002.  The balance of Japan’s oil is purchased from the Mideast with minor quantities from the U.S.  Japan’s oil imports are primarily used to generate electricity.

With few domestic natural resources, the energy core and success of Japan’s economy is dependent on the ability to obtain foreign energy resources.  Japan’s economy and standard of living is based on converting foreign energy into products for export; automobiles is an example.  Peaking and decline of the primary Chinese oil producing fields implies that Japan’s oil relationship with China will soon be evaluated.48  The Chinese are likely to continue to sell oil to Japan if the selling price meets Chinese objectives.  Unfortunately for Japan, the domestic price utility of imported oil will soon reach a level where oil investments spends down its economic capital; Japan’s GDP will decline even as its energy demands remain unmet.  The outlook for China, although less obvious, is one with lowered expectations —a return in many respects to China’s former economy.

Attempting to diversify oil purchases, Japan has its sights on Prudhoe Bay oil and is lobbying Russia to construct a $5 billion 2,500 mile one million barrel per day pipeline from Siberia to the Sea of Japan for delivery to Japan.  Pitting a tense Japan against a potentially adversarial China, a shorter proposed pipeline bypasses Japan transporting Russian oil to northern China.  Japan having invested $8 billion thus far is also the principal investor in a 10 year $22 billion project to develop natural gas fields off disputed Sakhalin Island.49


North Sea

The 2001 U.S. Department of Energy's annual long-term energy report states that European oil consumption is not expected to increase measurably this decade and North Sea oil production is projected to decline.  In addition to China and other developing nations, the result will be another significant source of competition for oil —now from developed nations previously significant oil producers and exporters.

Matthew Simmons, President of Simmons International and energy policy adviser to President George W. Bush, said, “North Sea oil production is collapsing, and will reach its final oil peak this year [2001]... before declining ... and [will] make Britain a net oil importer.  The numbers are scary, … output was now below last year's average and struggling.”50  Production from the North Sea reservoir after falling 2.5% in 2002 is expected to fall another 3.5% in 2003.  The forecast is that before 2010 England will be a substantial oil and natural gas importer.  Up to 50% of England’s natural gas consumption will be imported before 2010 and 80% by 2020.51  In an economy heavily dependent on oil for transportation and nearly 50% dependent on natural gas, there are significant energy source changes and regional food production consequences.  In order for this development to occur, massive and expensive infrastructure changes or a new source of ample cheap oil will be required in a short period of time.

The regional petroleum industry is undergoing structural changes in line with the reserve reductions and increasing production costs.  For example, the number of new wells is rapidly declining and is now at the lowest level in 30 years,52  big oil is departing, and as British Petroleum and Shell Oil are doing, selling assets for more profitable investments elsewhere.53


Mideast

In the face of such staggering needs, where will the additional oil come from?  The answer is that the majority of the world's oil imports will be produced and shipped from the Mideast.  While the Middle East has substantial remaining oil reserves —ten giant or super giant fields produce more than 60% of daily production— these fields are now 40 to 70 years old and are either peaking or are in actual decline.

 

Although suggesting no immediate crisis, it appears that an insignificant quantity of OPEC production flexibility remains at this time.  It is possible that with significant investments, OPEC will be able to marginally produce a new high in oil production.  OPEC's marginal capacity is perhaps two million barrels a day, about 1% of today's world consumption in a weak global economy with weakened demand.  Peaking production implies that constructing additions to OPEC's present standby capacity cannot be justified by economics and reserves.  In another few years, the identical situation will apply to Mideast natural gas.

 

Underscoring the precarious Western situation, Muslim nations’ oil production is “forecast to exceed the non-Muslim nations’ oil production in 2001, and by 2040 these oil rich Muslim and OPEC nations will produce 73% of the world’s oil”.  Examining the production and declines now evident in all major non-OPEC fields, one concludes that 2040 is optimistic by more than 30 years.54

 

There is additional information regarding the peaking and ensuing declines.  Although anecdotal, there is further evidence that OPEC's president is correct and that OPEC's primary producers in particular have achieved or are at production limits.

 

Several examples:

 

·  When OPEC reduced production a year ago last spring/summer, there was very little outspoken concern from recipient nations. Indeed, when several leaders began to voice concern, their voices were quieted after meetings were held. Subsequently, very little has been heard from OPEC representatives or the primary oil importing nations regarding reserves or production. The worldwide economic slowdown appears to have arrived at an opportune time.

·  The U.S. is contracted to build ($25 billion) a large-scale system of natural gas pipelines in Saudi Arabia. The explanation given was to help increase Saudi exports of crude oil. In place of using oil for domestic purposes, Saudi Arabia and other Mideast states are in the process of converting domestic energy use to natural gas.

·  The large producing OPEC nations since 1999 have engaged in a significant drilling program with little reported increases in reserves.

Recognizing their limits, Saudi Arabia is requesting bids from 40 energy companies to open their energy industry to international firms.55  In addition, a study by the Institut Français du Pétrole and Simmons & Company to be completed in the summer of 2004 will evaluate the production capacities and potentials to meet demand by the largest Mideast oil producers: Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab Emirates.56

In a March 2003 study Matthew Simmons stated that U.S. oil inventories are approximately 10% below levels typically found at this time of the year and that world “oil and natural gas inventories are near all-time lows”.  Of interest, Simmons reported that 80% of the world’s current oil supply comes from a 150 mile strip in Saudi Arabia ―the Ghawar field immediately south of Kuwait on a line from Iraq.  The northeastern portion of this great field is now producing oil mixed with the water.  Intending to increasing production, one region of central Ghawar being pumped in April 2003 began to produce a 50% water-oil mix and resulted in water displacing the oil in a process called “coning”.  The result is increasing processing costs.  The heart of the area’s processing lies in a single compact location, the Abqaiq processing complex where 6 – 7 million barrels are processed per day.  The complex produces all of Saudi Arabia’s high quality light crude.57  As OPEC’s president indicated, Saudi Arabia has reached its maximum production limit of approximately 9.2 Mbl per day and publicly announced this fact in March of 2003.58  It is possible the region could marginally increase production.  However, it is possible only by investing heavily.  Increasing production is unlikely: increasing oil production at this time is costly, would only quicken the pace of depletion, and reduce long term revenues and oil supply available for future periods.

Figure 12 (following page) indicates that OPEC States have experienced little real (inflation adjusted) increase in revenues for almost two decades.  In great measure, the lack of real revenue growth in the face of large population increases explains why the economies of the Mideast have produced miserable per capita increase in well-being and why government stability is questionable for several OPEC states.  To overcome the apparent lack of revenue growth OPEC has recommended a Euro 2.56 to Euro 3.41 increase from a range of US$22 $28 (Eoro18.76 23.88) per barrel to $25 $32 (Euro 21.32 27.29).59

The chart suggests that in order to return to the former real revenues an approximate doubling of the current per barrel price is necessary.  The chart also indicates that after bottoming in real dollar terms in 1998, higher consumer prices are directly ahead.

Figure 12: OPEC Revenues 1972 2003


OPEC Revenues Fact Sheet”, Energy Information Administration June 2003
See at < http://www.eia.doe.gov/cabs/opecrev.html >.

 

Diminishing field reserves helps explain the OPEC transition from oil to natural gas for domestic energy services.  Running hard to maintain equilibrium, these fields may be experiencing rates of decline in the range of 15% to 20%.

Adding the annual decline to projected demand increases to the year 2010, indicates that if the annual decline rate is 5% then approximately 30 million (and at 10%, 50 million) additional barrels per day will be required to equal depletion.  Adding today's approximately 80 million consumption to the 50 million additional petroleum barrels of demand, implies that extraction of 130 million barrels per day will be necessary to match demand.  Rather than the projected requirement, the data reveals production could be 25% or more below today's level of production.60  This targeted need will be found by all but a few Pollyannas —such as the EIA supported Taylor's Curve to be a daunting task.  Column F of Table 8 (p58) shows total oil required does not include additional additional quantities needed to match depletion, and therefore depletion volumes must be added in order to determine total oil production requirements.

Oil reserves of Muslim versus non-Muslim nations are shown in Figure 13.

Figure 13:  World Oil Reserves by Region


Chart courtesy of Karl Davies, Davies & Company, 2002
61

 

Consequences For Major Producers

U.S. and Western oil dependence, in particular, may have unanticipated consequences.  It is well documented that the major producer nations are not known to respect Western nations, their cultures, or religions, and have a history of doing what they perceive to be in their own best economic and political interests.62  From a geopolitical perspective, if oil production were interrupted but briefly, the worldwide lack of additional production capacity and high and increasing demand implies potentially serious international repercussions.  Further reflection begs the question of why focus on foreign affairs when much of problem resolution takes place in the domestic arena, especially of encouraging growth?  The potential ramifications may not only be in the near future.  Saudi Arabia's Crown Prince Abdullah stated that the Saudi relationship with the U.S. is “at a crossroads” because of internal Saudi politics (fractious Muslims).  An editorial in the Wall Street Journal describing this development said that “the Saudi ruler (Crown Prince Abdullah) wrote to President Bush in August [2001] that 'a time comes when peoples and nations part' and that 'it is time for the U.S. and Saudi Arabia to look at their separate interests.  Those governments that don't feel the pulse of the people and respond to it will suffer the fate of the Shah of Iran.’”63

In a recent San Francisco Chronicle article, Frank Viviano makes an equally disturbing statement, “the hidden stakes in the war against terrorism can be summed up in a single word: oil.”  In perusing a map of oil rich nations destined to supply oil to the U.S. and world for the next two decades and nations harboring, if not condoning the destruction of the U.S. (and the West), one is amazed at the similarity.  The map also sheds light on Russia, Turkmenistan's oil and gas reserves and the significance of pipelines to the Pakistan region.64

Reliance on a single commodity is now evident in OPEC's competition with increasing Russian oil production.  Although publicly saying a price war is winnable against Russia, research by Simmons International concludes that Russia will be the winner in this contest.  Their research pointedly states that it will result in a “price war that will send oil prices through the floor” and “… will do more to hurt the oil cartel than to fell Russian production.”65  On the one hand, lower prices should directly benefit oil consumers, economies, and the U.S. dollar.  On the other, if oil prices declined for the poorer oil exporting countries such as Mexico, poverty would be magnified.  An apparent outcome is that In early September 2003, Saudi representatives met with Russian authorities for the first time in 70 years —in Moscow— to discuss oil issues.  A month later OPEC agreed to reduce output 900,000 barrels.  The reason given was that increases due to the Iraq situation were being reversed.  On the other hand, with difficulties maintaining oil pumping at high levels in several large Saudi basins, another reason was likely to prevent over-pumping and damaging OPEC reservoirs.  It also implies that prices will remain high and competition reduced.

According to analysis from Strategic Forecasting, Russia's refineries are employed at 60% of capacity with ample production possible and further development of little utilized newer fields.  It's not insignificant; Russia's October 2001 production was 7.2 million barrels per day, up 550,000 from only a year ago.66  Russia is in the catbird seat with little incentive to moderate production when clearly in a position to garner additional market share.  At least for the next several years, Russia will be in the enviable position of playing off political considerations and agendas for oil —while in the public's eye considered allies.  There is also the potential for anxiety from another quarter.  Russia, as discussed earlier in the context of Japan, has a close neighbor with rapidly growing energy and water resource demands: profoundly troubled, and possibly adversarial China.  China is a nation that other resource hungry nations must continually appraise.

The tension between OPEC and the West is more than political and cultural.  Economic diversity is not a characteristic of most oil producing nations.  The Mideast and other OPEC nations hinged their social and economic strategies on petroleum, a diminishing asset.  Like Alaska and Mexico, the overwhelming income source for OPEC members is oil.  OPEC and Muslim governments' budgets and economies —as are many in the U.S.—  are highly dependent on oil production; yet, oil leverages their economies in two directions.

Were it not for other considerations, a potentially agreeable, almost symbiotic, association would describe oil transactions.  However, because the dependencies are reciprocal, low prices or low volumes of production can be economically devastating to producing states.  This troublesome economic situation is gravely exacerbated by their phenomenal fertility and rates of population growth.  A blueprint drawn from restless youth under 25 approaching 70% of the population, in many respects abhorring the West, and providing 75% of the world’s oil supply is likely to build a combustible political structure.  At this moment OPEC nations have reached peaks of production and will soon begin their inexorable slide.  Once the plateau rolls over, the future for most resource and water poor (and high fertility) Muslim nations becomes grim.  With relentless population momentum propelling population increases even as the foundation of their economy contracts, their economies and societies will begin to implode and what now characterizes their environment may be reduced to a wasteland.


New Production & Construction?

Because estimates of future oil or natural gas inventories have a degree of uncertainty, it is prudent to base projections on historical actual developments.  An intelligent reason is as implied by the statement from Jean Laherrere opening the section on U.S. oil: estimates from government or allied factions appear to pace production with consumption by creative use of statistics inflating reserve growth.  The appearance of increasing reserves is due to increased drilling in existing or new fields, revisions of previous estimates, known but not yet public reserve data only now made public, and OPEC and the other petroleum producers manipulating reserve data for political reasons.  Mentioned earlier, the correct methodology is to backdate or revise the previous reserve estimates.

In order to maintain production, oil producers are required to drill existing regions and develop large numbers of known but smaller new fields.  As seen in other areas discussed in this paper, production costs are increasing at a time of diminishing capacity.  According to Dr. Jan Lundberg, there is virtually no new drilling for oil now because there is relatively little net energy benefit from drilling: energy expended approximately equals energy benefit and production cost parallel the increasing energy costs.  The process is described by Figure 21 (p128).  Perhaps Dr. Lundberg is subtly indicating that prices will rise to encourage additional drilling.67  “Conservation” in this instance may mean not having.  The suggestion is that profitable oil and natural gas developments in North America are becoming scarce and better investments are found overseas.  Asia, Africa, and the Mideast are the growth regions with the U.S. showing a 20% and Canada 10% investment declines.  The primary reason is rapidly increasing production costs.  In 1999 it cost $4.76 per barrel while in 2002, the cost was $11.85.  A barrel of oil in the Asia-Pacific region costs approximately $3.31 and in Africa and the Mideast, $3.33.

The relationship between expected prices and exploration programs now underway could be indicative of anticipated price changes.  According to a CNN broadcast, Salomon Smith Barney estimates oil companies were planning to invest a record $113.5 billion searching for additional reserves and extraction during 2001.  This amount was approximately $20 billion or about 18% more than the industry spent the previous year.

The magnitude of the expenditure implies that at the then current per barrel price of $25 the industry anticipates discovering 4.5 billion barrels per year.  However, the estimated average price per barrel is about $20.  With the enormous investment, lower prices imply larger reserves must be discovered.  $20 oil implies the discovery of Super-Giant fields, 5.7 billion barrels.  It should be clear that discovering those volume levels is unrealistic.  On the other hand, at $40 per barrel, although still a generous estimate, a much lower 2.8 billion-barrel rate of discovery is indicated.  Because the higher discovery volumes are inconsistent with actual discovery trends, the suggestion is that the industry is planning on very substantial consumer price increases or sudden substantial increases in cheap oil fields in order to recapture the $113 billion invested and earn a reasonable profit.  Unless world economies remain weak, $40 oil implies gasoline prices at the pump at a minimum of $2.50 and likely $3 per gallon.

Responding to production issues raised by the California energy situation —and Minnesota pipelines— questionable reserves explain in great part why few, if any, multimillion-dollar oil production facilities or infrastructure are under construction.  Apparently, substantially higher prices are required.  The construction of additional generating facilities requires vast sums of capital, money that should be otherwise invested.  The construction of additional production infrastructure makes economic sense only when reserves are sufficient to justify the increased production facilities.  There is no prudent economic reason to justify construction of expensive facilities of any sort requiring a soon to be diminishing resource with the facility's useful life limited by the firing resource.  On the contrary, assuming higher prices create additional supply overlooks the fact that higher prices reduce demand, negating the need for the facilities.  Because all major oil and natural gas producers know the reserve situation with a significant degree of certainty, they match expected potential reserves with production facilities.

Moreover, in increasing current supply, the constructing additional energy facilities minimizes price increases, encouraging current use, and shortens the life of remaining reserves.  It therefore needs emphasizing that the construction of new refineries, generating plants, and oil or natural gas infrastructure is an expensive and temporary measure that in the final analysis aggravates intergenerational conflict and reduces the life of remaining reserves.

The Olduvai Theory’s connections with resource consumption and availability were raised previously in Part II.  The following section discusses several characteristics of peaking and mentions some of the probable consequences.
 

The Olduvai Process and Peaking

People will not go gently into that good night. They will rage,
rage against the dying of the light from the oil lamp.

Ron Patterson, 200368


Part II began with an introduction to Dr. Richard Duncan’s Olduvai Theory stating that energy patterns of industrial society will peak and began to return to a less energy intensive era over a 100-year period ending in 2030.  “Olduvai” refers to Africa’s Olduvai Gorge, known as the “Cradle of Mankind” because of its location of the earliest known “humanity”, a predecessor of modern Man.2  The metaphor is to the lifecycle from birth and growth to decline.  The world is now at the inflection point without precedent between maximum growth and possible decline —between increasing and declining energy: petroleum and natural gas production.

Peaking does not necessarily imply imminent shortages, only that the world view of continually diminishing reserves replaces the long held notion of ample, if not inexhaustible, reserves.  This is more than a philosophical change; it is a reversal of the most fundamental of Western cultural attitudes and the foundation of Western economics.

Unlike the U.S. and Western society's experience with declining domestic reserves, there is no other “world” to obtain petroleum or natural gas resources.  The inescapable fact is that the rate of growth of reserves and discovery has declined since the late 1970s and per capita oil production which peaked in 1979 has now entered the plateau phase.

The Olduvai Theory focuses on the core global energy, electricity generation.  Energy shortages Dr. Duncan asserts, begin as localized or occasional energy supply disruptions followed in succeeding periods with the onset of chronic transient or possibly permanent electrical brownouts.  The early discomforts will help condition the public into believing the situation is temporary.  In subsequent years disruptions become more significant and widespread, brownouts deteriorating into blackouts becoming commonplace.  Public confusion and economic dislocations will be manifest.  Austere methods to reduce consumer use and rotating brownouts or blackouts will become government and industry tools to control demand.

Petroleum expert Dr. Kenneth S. Deffeyes sums up the nature of depletion and extraction with these insightful words: “This much is certain, no initiative put in place starting today can have a substantial effect on the peak production year. No Caspian Sea exploration, no drilling in the South China Sea, no SUV replacements, no renewable energy projects can be brought on at a sufficient rate to avoid a bidding war for the remaining oil.”69

The approximately five years leading up to and immediately following the oil production peak is a period where industrial societies generally maintain historical energy patterns, but with increasing difficulty.  The reason is that geological rather than economic or social factors gain the upper hand in petroleum and natural gas production.  As will be discussed in the section following on natural gas, as the peak is approached the energy and therefore financial costs of extraction and energy production increases.  That is to say, the material presented in Table 8 (p58) becomes evident: living standards become increasingly vulnerable and stressed.  The previous charts indicate why Dr. Duncan characterizes this period as the “Olduvai Plateau” or shelf.  In the world graph, Figure 5 (p56), the dot pattern of actual production reflects roughly a 10 year plateauing pattern; the same pattern is remarkably evident in the U.S. chart, Figure 8 (p61).  The peaking and rollover process is also apparent in Table 8 Column C, years 1995 – 2005.

Dr. Duncan uses the term “cliff event or slide” to describe the rollover period following the plateau.  The initial study, year-2000, indicated the event would occur approximately 2012.  Duncan’s update, year-2001, moved forward in time five years the expected date —to 2007— and a minor refinement in 2003 found the year 2006 to the year of world rollover.70

The energy dilemmas in California two years ago and natural gas restrictions last winter can be thought of as a warning shot across the energy ship’s bow.  The short term crisis in California —primarily natural gas— should be seen as a moderate example of what he foresees for national and world economies on the immediate horizon.  Demonstrated by California, shutting down generating plants also limits the transportation industry by reducing gasoline production as refineries are shutdown.

In the U.S., Dr. Duncan concludes energy disruptions will initially be due to natural gas, with the “cliff” occurring soon ―within a few years of this writing.  Extraction of natural gas in the U.S. peaked in the late 1990s.  Indeed, as discussed later, the coming winter of 2003 – 2004 will likely experience moderately serious natural gas supply unreliability in several industries and regions in Canada and the U.S.  Internationally, diminishing oil will soon begin to stress all societies and compound the effects of natural gas limits in the U.S., Canada and Great Britain.  After a few years of increasing “electrical epidemics” the frequency, severity, and duration of these episodes will evolve into “blackouts”, first rolling from region to region (nationally and internationally) then becoming a way of life.71  “Conservation” in this instance means, not having.72

The plateau and beginning rollover period is a colossal struggle between eras that the current era cannot win.  The earth is neither flat nor endless and other worlds are unavailable.  Change is evident but not sufficient to establish a trend.  Prices may fluctuate in rapid succession as forces play out, new reserves and drilling at increasing costs strain to match increasing demand.  As the plateau inevitably rolls over downward, markets will begin to separate from prior trends.  Rapid price volatility and supply unreliability could result with only moderate or little demand increase.

Once the world passes the oil (and natural gas) peak and plateau period and commences the rollover, the repercussions will initially affect the transportation and farming industries, and hundreds of thousands of petroleum based products such as plastics and various synthetics.  The industrial sectors, basic economic activity, are directly and immediately impacted by unreliable electricity.  Local government will assume greater control over energy allocations —critical services being first-in-line.  The federal government may usurp resources for military functions.  Unforgiving weather will play a substantial role in moderating or exacerbating the degree of economic difficulties in the early transition periods.

Since the oil shock of the early 1970s, effects of higher energy prices have impacted economies with each price run-up.  The temporary conservation and production measures implemented during each crisis served to forestall the approaching period of adjustment.  Conservation attempts during a period of chronic energy shortages, although of some short-term benefit, are of little consequence in the face of growth.  The additional 85,000 or more Minnesotans and 4,000,000 U.S. residents each year overwhelm any conservation program.  Indeed, in postponing the right-side trendline slide of Figures 5 (p56), 8 (p61) and 19 (p123) with conservation or temporarily increased drilling, the inevitable ensuing descent will be steeper, the probabilities of chaotic outcomes increased, range of options fewer and economically and politically difficult to implement.

Historians will record the 1970 – 2000 period as the sublime energy era.  The world, U.S., and Minnesota will never again be so energy fortunate or profligate than during this short three-decade period.

Energy facilities had been constructed, a 15% to 20% peak generating reserve safety margin was maintained (generally required by regulation), only relatively minor additions to the existing energy infrastructure were necessary, and, of overarching importance the easy to mine coal fields, readily accessible and higher grade uranium ores, and the largest and last remaining Super Giant oil and natural gas fields had been discovered and placed into commercial service.  The costly work had been accomplished, all that remained was to add another coal car or pipe and flip the switch or open the spigot!

Due to the inexpensive resource flows available, increasing demands from increasing populations were manageable, if not short term positive due to economies of scale.  Decades of flat or declining real energy prices stimulated consumption while masking implications to a sustainable society of the burgeoning U.S. and world population.  For the bulk of the 20th century, increasing demand met increased supply and economic expansion.  The economist’s “law” of economies of scale held the day: large fixed costs were spread over more consumers making each item less expensive.  Leveraged by Ponzi scheme-like debt creation frequently mortgaging the future 30 years or more, it is the germ of the economic philosophy of supply-side economics: growth begets growth.  Its underpinning was the faith that energy was without limit and environmental consequences unimportant or negotiable.  Although government and private researchers documented the ominous long run negative implications, those perceptive Cassandras were discounted or disregarded.

Discounting growth was blasphemy!

In weak economic periods prior to the early 1970s and extending back to the 1700s, cost of energy was generally not a significant factor in economic recessions.  These recessionary periods were primarily caused by cycles of inventory accumulation and consumer over-enthusiasm.  In previous economic recessions low cost energies contributed to economic recoveries and wars were occasionally fought to guarantee additional energy and other resources.  Expanding populations and resource availability resulted in new and existing nations to rapidly increase in size and in power.

Mighty armies are supported by mighty quantities of energy resources.  Military conflict for both winners and losers is environmentally damaging, economically disruptive, and results in staggering consumption of scarce energy resources.  Consuming enormous quantities of energy resources, war materials are built and destroyed and infrastructures of entire nations require rebuilding.  The enormous energy resources used to initially build the infrastructure will necessitate the doubling of energy lost due to conflict.  The world’s energy future implies the energy costs of war are excessive.  Energy losses due to military conflict imply lower living standards for the world’s poor and social upheaval for high energy nations.

The energy resources peaking process and ensuing rollover implies that the established modern-day growth processes will begin to unwind.

The Olduvai Theory implies that policymakers will confront a nightmare of taxation.  Substantial revenues are received from growth and taxing oil and related products such as gasoline.  Continuing tax policies designed for a different era under the reality of resource changes and increasing commodity prices will come under scrutiny as revenues plummet, disparities increase, and consumers resist typical legislative responses.

Yet, the experiences and perceptions of many of today's leaders were formed during the sublime energy period.  Thus, it will likely be difficult for some to recognize their mindset and deal with it in the public's interest.  A classic but difficult anachronism: with future expectations derived from a bountiful earlier energy era, confronting a different era may entail personally difficult but scientifically unavoidable decisions, policies, and expectations.

It will be difficult for some to grapple with the realization that an irreversible progression to a different energy era is now underway.  In developed and developing nations, potential social, economic, and government instability can be expressed in a variety of ways.  Powerful importing nations, as an example, may employ a wider variety of options to secure reliable resources.  Those nations with reserves could or will begin to restrict or re-price remaining reserves in order to meter volumes over a longer time period.

In summary, the topping plateau is the final opportunity for society to rationally implement the social, economic and energy decisions that could provide for a reasonably comfortable and sustainable standard of living.  The public requires information and forums for discussion and policymakers to institute well considered policies.
 

Oil, the U.S. Dollar, & Economics

Oil imports today cost $115 billion and increase with every passing year.  Because oil is generally priced in US-dollars, in world markets the value of the US-dollar is critical to the U.S. economy.  A strong US-dollar makes oil imports less costly because the U.S. currency is the medium for oil exchange.  A weaker US-dollar favors U.S. exports and disadvantages Europe and its Euro economically against the U.S.  However, the negative cash flow of oil reflects its true nature as a national liability and claim on American assets —the deficit represents an excess of imports over exports.

The more petroleum (and natural gas) the U.S. imports, the more US-dollars sloshing around world currency markets.  Although in some measure greater imports (and export of US-dollars) reflects greater integration of global capital markets, paying for the considerable oil imports is the major reason for the serious U.S. balance of payments deficit.  Of some concern, it sets up conditions which could precipitate a potentially devastating decline in the value of the U.S. dollar on world currency markets.

A strong US-dollar often accompanies a rising U.S. stock market, especially buoying up firms with significant international sales.  In that regard, a strengthening US-dollar implies that domestic inflation will be held in check or possibly reduced and debt and equity markets buoyed.  Because more than 80% of U.S. employment is in the service sector and service is perceived as higher growth and less risky, service sector investing tends to encourage overvaluation in securities markets and invites the “bubble economy”.  It also suggests energy demands are becoming less flexible or subject to change and that recessions due to inventory corrections will be limited.

The opposite effects hold equally true.  Although a weaker US-dollar encourages exports of U.S. goods and services, generally overseas economies are weaker under these circumstances.  Strengthening foreign currencies (weakening US-dollar) encourages lower domestic (foreign) interest rates and investing closer to home than abroad —and falling U.S. markets.  Trade and oil valuation are the reasons China and Japan prefer a stronger dollar (large net exporters).  To reduce the substantial U.S.-China and U.S.-Japan trade deficits the U.S. would like the Chinese Renminbi to gain roughly 40% (and, quietly, the Japanese currency as well).  However, Japan’s economy and stock market has been weak for a decade and Japan is a big buyer of U.S. bonds (holding about $500 billion).  China is a large and growing U.S. bond buyer ($300 billion) with approximately $400 billion of U.S. investments.  Reducing their bond purchases combined with a weakening Euro means European bankers would also reduce purchase of U.S. bonds: much higher U.S. interest rates.  Closing in on a trillion dollars is a means to leverage an economic (and other) viewpoint.  It also suggests that American corporations could suffer a 40% devaluation in their Chinese assets —economically difficult for any company.  If the U.S. attempted to coerce a currency revaluation it would also imply that the Euro could be more frequently used in oil transactions.  The effect would be to further devalue the U.S. dollar.

In an economy with an overvalued U.S. dollar, U.S. businesses import cheap labor from legal and illegal immigration in a downward spiraling effort to remain competitive against Europe, China, and Japan.  With a weak economy and worldwide excess production capacity, the strategy will do more damage than is apparent to policymakers.

The U.S. debtor status is untenable and like in any other third-world debtor nation, is a growing economic concern.  It is a double-edged sword, however.  Because lifestyles are predicated on energy use (“the ability to do work”), energy in turn determines the value of the currency.  If the ability to perform work is reduced, it follows that the value of the currency is reduced.  When the US-dollar weakens (buying Euros for example) foreign investors will sell U.S. and US-dollar denominated assets.  As a result of a weakening dollar, the Fed will be required to raise U.S. interest rates to defend the US-dollar to encourage foreign investment in U.S. Treasuries and assets.  Lacking competitive interest rates, foreign investors will cease financing the U.S. balance of payments deficits.  The U.S. economy will be clobbered.

A decline in foreign interest rates further weakens the U.S. dollar and affects U.S. foreign investments.  This is critical when one realizes that beginning around 1970 and worsening from the mid 1980s, the U.S. has been borrowing from foreigners in order to sustain its economy.  With a strong US-dollar this presents no immediate threat to the 44% of Treasuries now held by foreign investors.73  However, the potential repercussions are apparent in that foreign ownership of U.S. assets is more than $7.3 trillion —more than 70% of U.S. GDP.74

Debt is a gamble on the future and inflation.  Nations and individual borrowers prefer moderate inflation to re-pay debt in cheaper dollars; disinflation or deflation decreases the value of debt purchased assets and makes repaying debt a greater burden.  A deflationary economy encourages borrowers to walk away from debt financed assets.  Large international financial institutions with substantial overseas loans will be among those most affected.  The value of their loans could be at risk and the net worth of the firm as well.  Maintaining the stability of the U.S., London, and Tokyo financial markets is likely a fundamental reason for the status quo politics of oil.

Importing nations are caught in a trap.  In addition to significant price increases, foreign nations may limit export volumes, finding it more practical to use domestic resources for domestic purposes.  Identical to the OPEC situation and oil —and as will be made clear when discussing Canada and its natural gas reserves— the possibility exists for foreign nations to exact a high price for their resources.

Slowing economic activity will help stem energy flows and assist in the transition period.  However, the overall economic impact is unlikely to be inflationary.  “Higher oil prices operate like a tax that depresses growth, so their medium-term impact would be to heighten the deflation risk”, states Japanese economist Kojima Akira.75  Higher resource prices are deflationary because rising energy prices permeate industrial society, raising prices over a broad spectrum of the economy.  Akira cites a statement by Peter Drucker that over the preceding half-century natural resources declined in price while industrial products edged higher.  Today, the situation is in the process of reversing with inflationary forces driving natural resource prices and deflationary forces, industrial prices.76  Due to higher energy prices, consumers will have less money to purchase other consumer items.  Thus, energy dilemmas reduce economic activity at the consumer and producer levels, and reduce rates of economic growth, demands for labor, and energy.

In a direct sense the wherewithal to save and provide investment capital will also decline at a time of increasing capital needs (and as money managers believe, some opportunity for investors).  The consequence of reduced capital investment will be to reduce long run productivity and living standards.  The coming energy, economic, and social changes will critically test free market resolve, market institutions, and notions of government involvement in both private lives and economic decision making. 
 

US-Dollar vs. the Euro & U.S. Economic Security

Underlying oil issues is another potentially difficult and alarming economic situation: the US-dollar exchange rate with the Euro currency.  The US-dollar is the world’s currency —80% of all exchange transactions, oil transactions, and all IMF loans are in U.S. currency.  It is generally understood that the value of the US-dollar relative to the Euro is not supported by economics.  Journalist Peter Scott states that the value of the US-dollar is “maintained by political arrangements, one of the primary of which is to ensure that all OPEC oil purchases will continue to be denominated in US dollars.”77  With US-dollar implications, in a well planned program Kuwait has withdrawn hundreds of millions of dollars from the U.S. —$90 million in December 2000.  The reason is that Kuwaitis believe it to be in their best financial interests —that it is safer.  They also contemplate being a source of funding for construction projects in Iraq.  A more profound reason is that “there is a perception among Kuwaitis that the US is no longer the friendly place to invest in that it once was.”78

Thus, it is entirely possible that defending the U.S. economy by defending the US-dollar is a fundamental reason underlying the Administration's Iraq posturing.  It is clear that the Administration's intransigence became evident immediately after Iraq abrogated the use of Euro for the US-dollar in the Fall of 2000.79  In the Spring of 2003, Venezuela began the process of converting oil dollars into the Euro.  Iran and now Russia is considering changing to the Euro currency and Saudi Arabia with its potential for social upheaval is considering changing to the Euro oil currency standard as well.  The threats to the US-dollar appear to be spreading beyond the Mideast.  Beginning in 2003, Islamic Malaysia will begin to use the “Gold Dinar” for foreign trade and together with other regional Muslim nations replace the US-dollar in commercial arrangements between Islamic countries.  The result is a currency trend negating US-dollar hegemony throughout the world.  The Morabeteen (regional Muslim nations) believe the change will “unify the Islamic world” on the economic level and “establish a united Islamic market”.80  Of greater interest, OPEC has instituted a fledging electronic barter program between members and is considering replacing the US-dollar for the Euro in oil transactions.  Venezuela according to a researcher has “established barter deals for trading its oil with 12 Latin American countries.”81

It is clear the U.S. prefers a US-dollar currency standard.  Few are aware that Iraq ceased using the US-dollar as an oil transaction medium replacing it with the Euro in November 2000.  In addition, Iraq converted its US-dollar denominated $10 billion UN reserve fund into the Euro currency.  Were the Euro to assume a widening role in replacing the US-dollar, the effects on the US-dollar and U.S. economy would have worldwide repercussions.  Increasing Euro demand and consequent falling US-dollar has been evident for several months.  Certainly, the Federal Reserve and the Administration understood the implications and in closed door meetings decided on an action program.  There is little the Federal Reserve could do to counter the potential domestic and international implications of a non US-dollar reserve currency.  The impacts on the U.S. economy would be unpleasant to consider, a currency debacle on the order of Mexico or Argentina or worse.82  Aware of the implications, one tactic in the overthrow of the current Iraq government would be the establishment of another currency, setting up a new banking system and controlling the money supply.  Supporting this thesis, immediately subsequent to the invasion of Iraq, the Bush Administration announced that the U.S. will control Iraq’s financial system, its former UN (food and health care) deposits, and use the US-dollar as its medium of exchange.83  Iran is likely reconsidering its decision to convert to the Euro.

In summary, after exploiting its vast original natural resource treasure chest, the U.S. is now purchasing foreign energy and natural resources.  In the face of relentless growth it is vainly attempting to maintain current standards of living.  The U.S. is a growing debtor nation, borrowing capital from overseas investors in order to maintain its current standard of living.  In the long term, debtor nations (like debtor individuals and companies) will fall into the high financial-risk category.  In any US-dollar currency crisis the ripple effects on U.S. financial institutions will be rapid and possibly serious.  To begin thinking about this, recall the “Asian Meltdown” a short while ago.

There will be no escape; reductions in the availability of energy and rising prices of essential energies also serve to increase the price of substitute energies as well.  The earlier appropriate policies are implemented, the less disruptive the changes and smoother the transition.


Food & Oil

Because U.S. food commodities are often used to pay for U.S. oil imports, there also is a circular link to oil and food production.  Exacerbating the emerging situation are the growing populations in food short regions.  Those nations are breeding poverty and an inability to purchase U.S. foodstocks.  With rising oil prices creating higher input prices, U.S. food production may decline and with higher farm expenses and increasing poverty overseas, the ability to fund oil imports will decline.  The irony of this depressing situation is that commodity prices at the farm level may also decline.  For more on the relationships between resources, alternative energies, and food production see the discussion on ethanol under the topic of alternative energies, sections of Part III and more thoroughly in Part IV.
 

Securing Oil Resources

A time comes when silence is betrayal. That time is now.
Martin Luther King Jr., New York City, 1967


The changing energy scene places large and small, developing and developed countries in direct competition for diminishing oil and natural gas resources.  Declining resources implies that overtime less competitive nations will be compelled to limit energy used in production of goods and services, including transportation and food.  The relatively wealthy Western societies, and energy hungry and burgeoning U.S. population implies the competition will be fierce and may involve the use of the military. 

Despite the political issues involved in the Kosovo, Kuwait, Iraq, and Afghanistan conflicts, U.S. military might was fundamentally used to protect the foreign petroleum resources upon which the U.S. and Western society depend.  Defining U.S. vital interest in oil terms has been an established strategic policy, formally, since January 1975.  At that time, vital interests were determined to include oil and specifically, OPEC.  The 94th Congress (August, 1975) made explicit the role of the military to occupy foreign oil fields if it appeared the vital national interest were threatened. 84

Securing water resources in the region also plays a significant role.  Given the oil situation discussed in Part II, maintaining influence over oil reserves will be the foreign policy imperative and implies that global energy conflicts are in the early stages.  The reasons are well known: the ability to influence Mideast commerce and relationships implies power, power to control access to resources, level of living standard, and the ability to compete internationally —economically and militarily.  However, recent military involvements appear to be an extension of previous policy: an exit strategy or time horizon has not been articulated.  Indeed, the strategy could be to use Iraq as an example to other non-Western nations and base for further Mideast operations.

With the U.S. administering Iraq’s oil, OPEC may find the cartel’s ability to control member oil production and pricing increasingly difficult.  In effect, the U.S. will have Iraq’s reserves —including domestic reserves, 25% of the world’s total— and virtually become the world’s largest oil producer.85  The potential 2 to 3 million additional barrels of oil per day would drive down prices, OPEC production, and leverage.  Assuming the oil can be pumped and that the pipeline infrastructure remains operating, transactions for the “new” oil reserves would now be in US-dollars, stemming the decline of the dollar in currency markets.  The huge cash accumulation would be invested (probably under UN auspices) in US-dollar denominated securities.  In great measure the revenues will be invested in U.S. government securities.  The potential negative consequences of a weak dollar to the U.S. economy would be avoided.

The use of Iraqi petroleum to fund British and U.S. businesses in Iraq construction projects follows.  On the other hand, the Iraqis no doubt would have preferred the significant wealth its economy would have generated over the previous decade-plus were it not prevented by the U.S.  With substantial untapped oil reserves, today’s Iraqis may have been among the wealthiest of people and held in high regard by Muslim and non-Muslim states.

In the desert, water is power —power that the U.S. would find strategically useful.  Iraq, for example, has the region's most extensive river system and a complex system of dams and river control developments.  More than a millennium ago, Iraq was the region's granary with a network of irrigation works.  Today, the same region produces over half of the nation’s total cereals —corn, wheat, rice, and barley.  A decade ago a “Peace Pipeline” was proposed to carry water from the Tigris and Euphrates south to as far as Israel.  For obvious political reasons, Iraq was opposed.  The region's water resources are prizes that are visible to all and equally subject to control.  A strong U.S. regional presence implies considerable influence over regional water, food, and oil decisions.

With some apprehension those in the larger Mideast area and the West's large energy providers undoubtedly also took note of military incursions.  The U.S. modified its long-held doctrine of leading by virtuous example, deterrence, and reaction, to a policy of “pre-emption” —attacking first.  For example, the Afghanistan incursion could be a tactic in a geopolitical strategy for securing the Iraqi oil fields and of encircling oil-rich but anti-Western Iraq and Iran.  The U.S. steadily and quietly constructed a series of military complexes in the Mideast.  The U.S. constructed three new bases in the region including a recently completed giant airbase complete with two-mile long airstrips and bombproof hangers capable of holding 40 bombers each.  There is no Mideast state with modern weapons capable of impeding or harming a U.S. military presence.  Indeed, the Mideast states have no modern weapons and appear to use WW I tactics.  Thus, one must look north to Russia and Russian hegemony as a temporary alignment against a growing and energy hungry China.

China is a rapidly developing nation approaching an energy wall on par with developed Western nations.  Increasing resource competition dictates that this otherwise low cost economy is likely to experience restrained economic development.  The short of it is that China is a potential threat on a number of fronts.  China is fully aware of the looming energy implications.86  Moreover, a joint report by Canada's Secret Intelligence Service and the Royal Canadian Mounted Police indicated that large numbers of Chinese are moving into Canada and engaging in smuggling illegal drugs and humans.  Many Chinese are in the U.S. via the Hb-1 program.  Thus, an infrastructure will be in place for other purposes as well.


Afghanistan & Iraq Region

If the U.S. and Western nations are to successfully compete with low cost producers it is possible only by increasing productivity or reducing labor costs.  In general, increasing production by increasing productivity requires increasing energy consumption, capital investment and operating costs, and securing cheap oil.  The looming energy future implies the definition of productivity will increasingly be the decrease in energy consumed per unit of output.  Productivity in terms of units of time, labor, or investment is appropriate if it coincidentally reduces energy use.  Capital investment will soon signify reductions in energy use patterns.

Vice President Dick Cheney recognized the strategic importance of the region while CEO of Halliburton in 1998.  At that time he said that “I can't think of a time when we've had a region emerge … to become as strategically significant as the Caspian.”  As CEO of a major petroleum company, Mr. Cheney had profit motives behind his viewpoint; today as Vice President his views are enmeshed in the geopolitics of oil.

How can landlocked and far-away Afghanistan or Iraq be critically important to U.S. interests?

The region appears to be part of a greater U.S. strategic plan to maintain a constructive alignment with Saudi Arabia and Kuwait, initially assure a Russian pipeline, then degrade Russian regional hegemony and restrict Chinese access.  Reminding one of Germany's motives in WW-II, in a conflict with China these oil resources would literally be priceless.

The Afghanistan-Iraq area is the primary route that proposed oil and natural gas pipelines will use to connect the Central Asia and Caspian regions to those in the south, Pakistan and India or to ports for loading into tankers with foreign destinations.  A pipeline would also lay the foundations for economic and political associations of Russian, Afghanistan and area states with Pakistan and Indian interests with oil dependent Asia, specifically Japan, Taiwan, and South Korea.  Importing much of its food and lacking oil reserves, Japan is in the awkward position of importing oil from both Russia and China.  It would like to increase imports from these nations.  Yet, these nations would be staging areas in any regional conflict.  With the construction of additional port facilities improving the potential of oil and LNG shipments, international interest notably the U.S., would also be served.  It should be clear that securing the region for Western commerce would be an important international strategy.

The U.S. National Energy Policy Group (NEPG) report makes explicit the policy intentions.  NEPG stated that the “President direct the Secretaries of Commerce, Energy, and State to deepen their commercial dialogue with Kazakhstan, Azerbaijan, and other Caspian states to provide a strong, transparent, and stable business climate for energy and related infrastructure projects.”  Further it recommends that the “President direct the Secretaries of State and Energy to work with India's Ministry of Petroleum and Natural Gas to help India maximize its domestic oil and gas production”.87  Less frequently stated is that the pipeline will provide China with another source of natural gas.

Two pipelines are under construction in the area.  (For a map of the area see the reference.)  On the western and southern Russian side, the first pipeline is the $1.13 billion Bulgaria-Macedonia-Albania pipeline designed to deliver 750,000 barrels per day.  This Trans-Balkan pipeline will connect Bulgaria's Black Sea port of Burgas with Albania's Adriatic port of Vlora.  The oil will then be loaded into 300,000-ton supertankers in Vlora.  From there it will be shipped to Europe and the U.S.  Not surprisingly, the consortium is based in New York under the name, AMBO Corp., the New York-Albanian, Macedonian and Bulgarian Oil Corporation.  The big players are BP, Amoco-Arco, Chevron-Texaco, Halliburton, Mobil, and Agip.88

On the eastern side, Russia is also preparing pipelines to transport oil and natural gas to the port of Nakhodka by the Sea of Japan and the Chinese oil production facility at Daqing from the Lake Baikal region.  It is likely China has a keen interest in the oil resources of eastern Russia.  It is also probable that western-side pipelines play a significant role in the Russia, China, and United States’ oil and strategic political interests.  A second pipeline from the Angarsk region to Nakhodka would provide oil to Japan, South Korea, and the U.S.89  Likewise, one purpose of the less known conflicts in Macedonia would be to guard the strategic Bulgaria-Macedonia-Albania oil pipeline corridor connecting the Black Sea to the Adriatic coast.90

Petroleum scientists evaluating state provided reserve estimates of this region believe they appear grossly overstated, thus state estimates are not presented here.  However, if the inventories total half those of the Mideast, it would, nevertheless be a major contribution to the world's natural gas and oil supply.  On the other hand, because petroleum geologists already knew the fields, their reserve contributions are already included in the estimated reserve data.  Thus, the construction of pipelines will determine its allocation but not prolong world consumption.91

The second pipeline has been temporarily tabled because of the instability in the region.  In 1997, an energy consortium of six major oil companies lead by Unocal in collaboration with the government of Turkmenistan formed Central Asia Gas Pipeline, Ltd. (CentGas).  The $4.5 billion, 48 inch, 790 mile pipeline project connects western Siberia, the southern and northern Caspian regions, Azerbaijan and Uzbekistan and the Turkmenistan and Kazakhstan regions to southern states.  It was designed to carry natural gas from the Dauletabad Field in southeastern Turkmenistan, then follow the Herat-to-Kandahar Road through Afghanistan, to Pakistan in the vicinity of Quetta to Multan, Pakistan.  From that point it would connect with existing pipeline systems.  A subsequent plan was to construct an additional 400 mile $600 million pipeline to the New Delhi area of India.  Oil pipelines could be constructed in tandem with the natural gas pipelines.

Unocal said the pipeline proposal was the “Silk Road for the 21st Century”.  When political disturbances involved the U.S., the plan was tabled in 1999.  The presence and dominance of the U.S. military in the region may be the stabilizing catalyst.

Oil and natural gas connect the Bush Administration to the region and to the Taliban.  The Administration's intention was for the Taliban to be a stabilizing force in the area and to lay the political foundation for the oil pipeline across Central Asia through Afghanistan and Pakistan, to the Indian Ocean.  Securing oil on U.S. (and Western) terms was the motivation behind the well-known brouhaha of the CIA funding of the Taliban when that same group is being discredited and bombed today.92  As always, in geopolitical exchanges each party exploits the other in its self-interests.

Today, their interests are no longer aligned.  Similar events were played-out in Kosovo with the Christian Serbs pitted against the Muslim Albanians.  Today the U.S. is attempting to consolidate disparate Afghan factions around U.S. and Western interests in order to secure access to oil and natural gas in Central Asia.  Whether it's the Taliban or the Northern Alliance or any of the other dozen or more tribal regimes, the goal is to achieve an administration supporting practical commercial recognition of Western interests.  When the Unocal consortium agreed to pay the Taliban more than $100 million a year they misunderstood, as did the CIA, Western interest rarely coincide with the Muslim.93

Sean Gonsalves also connects the dots linking oil to U.S. interests and Afghanistan.  In a recent article he quotes Matthew J. Sagers of Cambridge Energy Research Associates stating “once we bomb the hell out of Afghanistan, we will have to cough up some projects there, and this pipeline is one of them.”  British Petroleum weighs in here as well.  Gonsalves finds another interesting connection in a New York Times article.  Baker & Botts, “the law firm of James A. Baker III”, he quotes the Times, is a “Bush family confidant and former secretary of state”.94

Reporting by yet another journalist concludes that the “main obstacle to investigate Islamic terrorism were U.S. oil corporate interests and the role played by Saudi Arabia in it”.  It should not be forgotten that Saudi Arabia —as are the other regional Muslim nations, with a rapidly growing population and approximately 45% of its population entering the age of social activism under the age of 15 ―is set to enter a period of social unrest.  How aligning with unstable governments with strong undertows of internal social change impacts Western societies is a matter the U.S. has apparently not fully considered.  Evidently the Bush Administration's regional hegemony was to demote Russian influence.  Julio Godoy says of Russian regional dominance that the Bush Administration “wanted to change all that”.95

When the Taliban would not accept U.S. terms, the strategy evolved from one of conducting an energy policy to a military tactic.  Sounding very much like Matthew Sagers (above), during the Taliban negotiations, according to Godoy, U.S. negotiator Brisard bluntly said “either you accept our offer of a carpet of gold, or we bury you under a carpet of bombs.”96

After beginning to pursue the Taliban initiative immediately after the Bush election, the meetings ceased five weeks before the World Trade Center and Pentagon attacks.

For history aficionados, think back to the roles of Germany and Japan in WW II and consider if there could be modern day analogies.  It appears that securing access to oil and natural gas supplies has become the primary mandate of the U.S. military.  Indeed, in discussing the Middle East, one author succinctly says that “... in reality, we are an occupying force protecting our access to their oil”.97  Continuing this theme, in reviewing an oil resource book the editorial review from Publishers Weekly states “Klare analyzes the most likely cause of war in the century just begun: demand by rapidly growing populations for scarce resources”.98, 99

The upshot of this disheartening situation is that in the very near, perhaps immediate future:

·         energy availability could become unreliable and may vary at times;

·         prices will be increasingly predicated on geopolitical considerations;

·         those considerations will often take precedence over domestic matters;

·         internationally, a serious geopolitical conundrum pitting the “East” against the “West” could be developing; and

·         domestically, social unrest may reach levels now commonly associated with less stable nations.

Because oil and exported natural prices are set by world markets, prices of domestic U.S. energies such as coal and natural gas will reflect changing international resource prices.

Contrary to the industry position, the change from a petroleum-based society is unlikely to proceed smoothly.  Thus, every increment of growth brings us that much closer to a harsh reality while significantly reducing our ability to cope with the inevitable social and economic changes to adjust to that reality.  It would seem unnecessary to say but the larger the U.S. or Minnesota population the sooner the day of reckoning, the fewer the options, more unmanageable the effects and greater the taking of intergenerational resources for present-day use.
______
Used with permission of Dell Erickson
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