The forces driving the price of oil to $50.12 (U.S.) a barrel may wax and wane. Still, the quagmire that the industry is sinking into won’t blow over any time soon.
With each dramatic leap in the world oil price, North Americans who remember the oil shocks of the 1970s and the decade of debilitating inflation triggered by that sudden upheaval have reason to worry: Are we on the brink of another energy crisis, with unsettling implications for runaway inflation and stalled economic growth? Will we have to embrace disruptive changes in both consumer behaviour and industrial use of scarce energy resources?
While there’s no easy answer to those questions, the smart bet is not to fret about the short-term impact of this week’s historic rise in the world oil price to $50 (U.S.) per barrel, which, after all, is still far shy of the inflation-adjusted $80 a barrel of the early 1980s. But there is ample reason to take seriously the longer-term implications for energy security.
Crude oil closed above $50 in New York for the first time yesterday, at $50.12. The most recent price run-up has the earmarks of an anomaly, a perfect storm of threats by Nigerian rebels to disrupt production, damage to Gulf of Mexico rigs from Hurricane Ivan, continuing sabotage of Iraqi oil installations and a traditional low in U.S. oil inventories with the winter home-heating season on the horizon.
And all that comes against the backdrop of soaring oil demand from the world’s two fastest-growing economies, China and India, coinciding with a dearth of major new oil finds by a rapidly consolidating oil industry that has focused on mergers since the late 1990s rather than exploration for new sources of supply.
Before we worry about China’s voracious appetite for not only oil, but copper, nickel, zinc, aluminum and steel, besides — all to the greater good of Canadian exporters, by the way — it’s worth noting the forecast by the International Monetary Fund, or IMF, this week of an easing in China’s dynamic economy next year. Under pressure from the United States and other industrial nations, and itself fearing the inflationary consequences of an overheated economy, Beijing has imposed enough constraints on its breakneck growth to convince the IMF that China’s economic growth next year will fall to 7.5 per cent from this year’s 9 per cent.
Indeed, the IMF is so confident about the prospect of slowing global growth and an upturn in oil supply that it estimates a much lower world oil price for next year averaging just $37.25.
And before we blame the oil companies for contributing to the current supply squeeze, remember that their urge to merge, creating today’s half-dozen super-sized oil and gas players, was prompted by a disastrous late 1990s slump in the world price to less than $10. With further consolidation opportunities nearly exhausted, the cash-swollen major producers have every incentive to resume vigorous exploration projects.
That process is well underway. In reaction to a recent scandal over its artificially inflated reserve estimates, Royal Dutch/Shell Group has just boosted its exploration budget in a bid to catch up with peers like ExxonMobil Corp. and BP PLC in reserve strength and production capacity. And BP has struck a remarkable deal this year to partner with a Russian firm in exploiting Siberian oil fields whose capacity has already been vastly expanded with the introduction of modern technology.
The longer-term outlook is more troubling, however.
On the demand side, North Americans, the world’s biggest per capita energy consumers, have shown no inclination to abandon the two- and three-vehicle family, or trade in their SUVs for hybrid-fuel vehicles of unproven practicality.
And even at its somewhat less dynamic economic growth rate forecast for next year, China is destined for decades to have a near-insatiable appetite for oil, only partially offset by the fitful development of its own considerable oil and gas resources. True, by the time Chinese consumption rises to anything approaching the North American level, alternative energy sources — nuclear; wind and solar power; liquefied natural gas; and the like — will have become a sizeable part of China’s energy mix. Just the same, even moderate sustained increases in Chinese and Indian demand will put tremendous pressure on the world supply structure.
Most troubling, though, is the factor of political risk.
The world has been consuming more oil than it finds since the early 1980s. Not coincidentally, that’s roughly the point at which global exploration shifted from the stability of North America and the North Sea to the geopolitically risky regions of Africa, Central Europe, South America and the Pacific Rim. That’s when oil producers began to slash their exploration spending to the current 12 per cent of total budgets, down from 30 per cent three decades ago.
The oil companies weren’t padding their bottom lines. They’d run out of easy places to explore. The dilemma is that today’s biggest discoveries, and the bulk of global production, are tilting toward regions notable for varying degrees of political instability.
The current insurgency in Iraq, for instance, has prevented oil companies from testing their theory that Iraq’s uncharted territory may yield more oil reserves than even Saudi Arabia. Russia has similar, long-neglected potential, with reserves estimated by some oil companies of two or even three times its official 70 billion barrels.
Here again, though, politics gets in the way of expeditious granting of exploration licences and approvals for pipeline construction. There is a continuing clash between skeptical regard for new technology among Soviet-era Russian managers and the wildcatter, technology-obsessed managers to whom the Kremlin has cautiously opened Russia’s doors.
The Kremlin insists that Western exploration companies partner with locals whose expertise is not always readily apparent; and Russia habitually reneges on contracts with non-Russian producers — including a current dispute over alleged licence violations with the otherwise favoured BP.
Similar reversals due to government fiat brought on the insolvency of Calgary’s Hurricane Hydrocarbons Ltd. in oil-rich Kazakhstan, before the company’s re-emergence as PetroKazakhstan Inc. Civil wars and political instability have been the bane of major producers in Sudan, Indonesia and Venezuela, as well.
It’s a plain fact that most of the world’s oil riches, whether in the Mideast, Southeast Asia, West Africa, South America or Mexico, provide virtually no benefit to the invariably impoverished populations who live about the reserve wealth.
While by longstanding tradition every resident of Alaska gets a cheque each year for his or her portion of the state’s oil revenues, the norm in developing- world producing nations is for royalties to disappear into the pockets of a Saudi royal family, Kuwaiti emirs, a kleptocratic dictator in Kazakhstan or a theocratic Muslim regime in Khartoum using Sudan’s oil wealth to finance its 17-year civil war against Christians living in the nation’s oil-producing region in the south.
In short, the global industry is gradually evolving into a geopolitical quagmire, pitting industrial-nation consumers against peasant farmers whose lives are disrupted by oil rigs and pipelines without any significant benefit apart from the occasional Western-built clinic, school or summer camp.
For now, the rebellion against that state of affairs is sporadic. It manifested itself in the election of Venezuela’s populist leader Hugo Chavez, and in this week’s threat by Nigerian rebel forces to shut down that country’s 2.3 million barrels per day in oil production. The impoverished Ijaw tribe that populates the mangrove swamps of the Niger Delta, where most of the nation’s oil is produced, succeeded last year in shutting down 40 per cent of Nigeria’s production.
The Nigerian rebels have built their moral case for sovereignty from Lagos not on abstract concepts of liberty and self-determination, but rather a straightforward grab for the oil wealth beneath their villages. Similar scenarios are bound to play out throughout West Africa, the former Soviet republics in Central Europe, the sprawling Indonesian archipelago — in short, everywhere that local oil wealth does not translate into better local living conditions.
Long before the world runs out of oil, disputes escalating into warfare over the ownership of oil reserves and the benefits accruing from them will make supply disruptions commonplace. By ExxonMobil’s rosy estimate, against the 900 billion barrels of oil the world has consumed to date, another 14 trillion barrels remain, some consisting of the oil sands of Venezuela and Alberta, and oil-shale rock in the Western United States, Australia and elsewhere.
But that forecast doesn’t speak to accessibility. Will we, in fact, be able to tap these new oil sources? Lately, in Iraq, Nigeria, Indonesia and other rough neighbourhoods, we’ve been learning that the mere existence of economic life-giving fossil fuels doesn’t equate with our ability to achieve access to it.
In that sense, the Nigerian rebels’ warning this week was directed not so much at the regime in Lagos as the rest of us, as we enter a long struggle over the morally legitimate ownership of the world’s oil wealth, and how to deal with the unequal sharing of its blessings.
One of the authors of the IMF forecast hinted at the troubles to come. Presenting the IMF’s report in Washington, Raghuram Rajan, the organization’s chief economist, said: “While it is alarmist to call this the first resources crisis of the 21st century, it is a wake-up call.”
