One hangover from the ultraliberal 1980s (during which the New Economy emerged from the wreck of ” Keynesian economics “) is the myth or pious belief in so-called ‘supply side solutions’.

The myth itself, however, was built on the real world, realpolitik process of first destroying demand.

Intense recession in the 1980-83 period, brought on by swingeing interest rate hikes, triggered massive business failures and joblessness for millions of persons, after which the vaunted ‘supply side solution’ could be presented as being the real cause of ever falling labor costs, raw material prices and … above all … the oil price.

Following the ‘courageous medicine’ of destroying businesses and employment, persistent slow rates of economic growth, coupled with increasing oil supplies due to the certainly final burst of major world oil discoveries in the 1975-1985 period enabled the New Economy farce to be held aloft, with oil prices fixed at ‘reasonable’, that is derisory low levels.

Through 1986-1998 there was only one bottom line to oil prices … they were low and trending lower. Any business or finance guru could prove their credentials by mouthing the slogan ‘sunset commodities’ to explain why oil, like copper, coffee or tin was cheap and getting more so, and entirely virtual financial services generated vast profits. As late as March 1999 that unflinching cheerleader of neoliberal punk economics, the ‘Economist’ magazine, could announce that the future trend price of oil was ‘probably no more than US$5 per barrel.’

The same year oil prices approximately tripled for the simple reason that world economic growth had begun to shake off the death wish of neoliberal stagnation (called ‘stability’ by its defenders), inevitably resulting in world oil demand growth breaking out of its ‘long run trend rate’ of around 1.3%-per-year.

* Since then and with superb disdain for its price, oil demand shows no signs at all of being put back in the low-growth bottle.

The ‘break point’ for world oil demand growth, and then prices slipping out of New Economy ‘stability’ was in fact in the years 1995-97, and through 1999-2003 demand growth progressively ratcheted itself ever upwards, to attain the current rate of 2.6-2.8%/year. Higher oil and natural gas prices themselves played and play a major role in underpinning and reinforcing the demand growth process.

This totally contradicts the cosy liberal notion of ‘price elastic adjustment’, or an ‘inevitable’ reduction in demand reduction when prices rise, despite the simple facts of world oil demand growth being now, in 2004, at its highest rate for over 15 years, with prices also at their highest since 1985.

The oil policy cupboard of today’s New Economy crowd of world leaders is in fact nearly bare. Only swingeing interest rates hikes, and near instant economic recession exist as their demand side solutions to higher oil prices — together with trade or economic sanctions and military action against recalcitrant or ‘under-performing’ oil producers as handy ‘supply side’ tools.

True to form, the last defenders of cheap oil in a context where demand is strong and supplies get more hypothetical every day (and will soon trend down because oil is a fossil, not sunset resource), such as the International Energy Agency (IEA) and quotable, fit-to-pay energy ‘experts’ and oil analysts, now claim that world oil production can be cranked up to 120 million barrels/day (Mbd) by 2020.

In other terms, and based on a current daily average of around 81.5-82.5 Mbd, world oil production can or should be increased by 38 Mbd in about 14 years and 4 months.

The simplest challenge to this laughable fantasy is to ask if anything like this has ever been done before, to which the answer is NO.

The next challenge is to compare net additions to world production capacity needed to satisfy this fantasy (about 2.7 Mbd per year, not including compensation for annual losses of capacity, running at over 1.5 Mbd/year) with actual results in the real world during the last 10 or 20 years.

This returns the same bottom line: world oil output growth at this rate has never been achieved in any past period, but to get a handle on its impossibility we can calculate the number of ‘Iraq equivalents’, or ‘Saudi Arabia equivalents’ that must be generated from thin air, deep water or tar sand goo (or by ‘bringing democracy’ through military invasion to the Middle East), to enable any prospect of cheap oil ever returning. Completely ignoring depletion losses to world production capacity, something more than four ” new Saudi Arabia’s ” must be found, proven, developed and placed into reliable supply in less than 15 years.

Calculating this in ” Iraq equivalent ” terms is more difficult than for Saudi Arabia because it is hard to know what Iraqi production really is at any one time; Iraqi oil output now depends on which oil pipeline or pumping centre still remains un-attacked (and if the media care to report sabotage attacks on the invaders’ real reason for war, or not) but likely current average production is probably below 1.6 Mbd.

The ‘supply gap’ to 2020 is therefore well above twenty-three “new Iraqs” of the ‘liberated’ variety, if we take the actual and real trend of Iraqi production, the real world numbers rather than the fun-and-fantasy figures (talked up to ‘10 Mbd by 2009’) that well-paid ‘experts’ like D. Yergin of CERA proudly spouted at White House dinner debates preceding the Bush regime’s decision to invade and occupy Iraq, of course without the barest trace of any WMD being found.

Demand side reality

One part of the IEA fantasy equation is however shaping out to be real: world demand growth is now closing towards the 2.7 Mbd-per-year figure that presumably was set by the IEA’s well-paid ‘experts’ in its Chateau de la Muette HQ in Paris as the average annual growth rate for the long period of about 2000-2020.

This can be compared with the so-called ‘long-term trend rate’ of 1.3%-per-year that held from the mid-1980s until about 1995, generating annual demand increments of well below 1 Mbd for world oil consumption.

For BP Amoco, manfully struggling to stay afloat in Russia (through buying replacement politicians for those who go to jail or flee the country) while trying to recoup its massive investment in pipeline routes to ship out unimpressive amounts of high cost, sulphur and heavy metals contaminated Caspian oil, a single culprit can be named.

The leader writers in the 2003 edition of BP’s ‘Statistical review of world energy’ can and did finger this culprit … China.

Unexpectedly or not, this country is rapidly becoming the world’s biggest industrial producer and although currently using no more than about 1.7 barrels of oil per head per year is on a fast and unremitting upward track in oil, gas and electricity consumption. In 2004-2005, even using IEA figures, China’s growth of oil demand may attain 0.6 Mbd, translating to China’s import demand rising by more than 0.7 Mbd as domestic production continues its accelerating decline.

Fingering China as the unique culprit, BP Amoco’s well-paid journalists and a swath of finance journal leader writers can hope out loud that China’s leadership acts against ‘overheating’ (Chinese demand growth also being held as the main driver for surging non-oil commodity prices), but this entirely ignores the other two-thirds of current oil demand growth at the aggregate world level.

Not only China, but even the world’s ultimate oil-wasteful society and economy … the USA using a record 25 barrels per head per year … is consistently increasing its demand. Joining the world’s second and first-biggest oil importers (China and USA) are a swath of new industrial and re-industrializing countries that are rapidly increasing their oil demand, stretching from India and the Asian Tigers to Brazil and the re-industrializing economies of East Europe.

In total, this builds to an impressive 2.3–2.5 Mbd rise each year, on current trends. Rather less than 5 months or 150 days of world oil demand growth at this rate will make the Saudi princely boast of ‘raising exports by 0.8 Mbd’ a vital necessity … and not the harmless lie to help the Bush gang’s election chances, that it almost certainly is.

No way out but energy transition
With an ironclad determination to deny and thwart reality, the leaderships of most countries pursuing the US-European-Japanese energy intensive model of growth and development are each day moving the world closer to the very opposite of ‘sustainable’ anything, except endless international conflict and the clash of civilizations.

* Oil shortage made worse by spiralling demand growth and stagnating supply can only raise prices, then raise them again.

This can only be accepted by the more arrogant and weaker minded leaders and societies for a short period before invasion and occupation of producer countries is decided and applied as a ‘long-lasting solution’.

As the Iraq tragedy shows, the end result of pre-emptive invasion of oil producer countries (to ensure their output performance matches the ideas of so-called experts) is long-lasting war, both civil, international, and North-South.

Rivalry between so-called superpowers and nuclear armed groups of nations for diminishing oil production capacities can only increase until clear and courageous decisions are made to limit then decrease oil and gas demand, on a long-term, universal and rapidly progressive base.

For the most energy-intense oil-wasteful societies, energy transition targets will have to be set as high as a 50% reduction in oil utilization over 5–10 years, which will be entirely impossible through blind utilization of New Economy policy gimmicks and blind faith in so-called ‘market mechanisms.’

Without international cooperation no program of any kind will be possible, making energy transition at least equivalent to the task and scope of the likely failed Kyoto Treaty and process.

Under current real world conditions … even assuming that Iraq might regain its early 1980s peak of oil output (4 Mbd) by no later than 2008 … world oil supply will almost certainly fail to match demand within 3 years.

With Iraq submerged in conflict, the date when world oil markets fall into ‘structural undersupply’ is anytime, but late Autumn/early Winter stock builds and drawdowns will likely show the most vigorous price rises.

This may be in 2004-05, or may be pushed into 2005-06 if an increasingly likely post-election economic slump starting in early 2005 hits the USA, then Europe and Japan.

Andrew McKillop is a former expert-policy and programming, Division A-Policy, DG XVII-Energy, European Commission, founder member, Asian Chapter, Intl Assocn of Energy Economists.
You may contact Mr. McKillop by email at [email protected]