The Silent Oil Crisis
In this article we look at how just because developed economies are not suffering like they did during the 1970s that the oil crisis has not already begun. The final oil crisis has begun, silent to us, but dangerously there.
Adjusted to modern day prices, the historical record price for oil was $80 as a result of the second 1970’s oil crisis – a crisis brought about by political circumstances, not geological realities. The 25th August 2005 saw the price for a barrel of oil pass $68, just $12 from that high. Lessons from history suggest that high oil prices mean bad news for the economy, thus our jobs and way of life.
Yet analysts feared the worst when oil hit $30, then $40, then $50, and then $60. Somehow strong Western economies have shrugged these prices off and we are left asking whether anything has really changed for the major industrial economies so dependent on cheap oil? At present we do not seem to be in the same dire straits that the 1970’s oil crises brought upon the world.
Not that bad in the Western World
Apart from an increase in the cost of raw materials and in filling up the automobile, resulting in stronger inflationary pressures, making us (the Western World) a little less well off, it isn’t that bad. We can still get all the food we want from the other side of the world, flights are still historically cheap, it isn’t so bad that car drivers are sharing their daily commute, and economic growth has not gone into reverse - at least, not yet. The Boston Globe wrote recently:
“So far, expensive energy has not had much impact on the economic expansion. The US economy grew at a healthy 3.4 percent in the second quarter and most forecasters expect even stronger growth for the rest of 2005.”
In the same article, Richard DeKaser, chief economist at National City Corp., a bank based in Cleveland, said that every $10 increase in the price of oil shaves roughly a half a percentage point off the economy's growth rate, and that higher oil prices would slow but not derail the economy. It might not be until a $100 barrel of oil emerges that a recession will be triggered. And a recession equals demand destruction.
I am not an economist but I suspect that if demand dropped off at 2 to 3% a year in line with an economic recession, and oil supply dropped off at a similar rate, then oil will stay at around $100 if we assume we pass the global peak in the rate of oil production. It doesn’t take Chevron to tell us that the era of cheap oil is over (although they do with their website and campaign willyoujoinus.com).
Beginning of "The Great Decline"
So maybe everything is fine until that $100 barrel mark. People talk of an oil crisis, but surely, since we are waiting for the $100 barrel, there is nothing to worry about. Right? Wrong. Around the world, silent to us, the oil crisis has truly begun. They are at the beginning of what some are calling ‘The Great Decline’.
Just as rising sea levels threaten to flood low-lying lands unable to protect themselves, rising oil prices threaten countries with weak (low-lying) economies. Rising oil prices are a rising tide, and there are many examples to look at. The countries that will be first affected by rising oil prices are those with a more youthful oil-dependent economy or those that do not have the economic strength – either as a nation, or as individuals, to cope with it.
Eritra - the oil game is over
In October 2004, petrol sales in Eritrea had to be suspended - conserved only for essential use. Eritrea was struggling with the economic consequences of its border war with Ethiopia. Ethiopia used to be Eritrea’s largest export market, so with the border closed and the debt of war hanging around its neck, Eritrea found itself in a position where it was simply unable to pay for petrol due to a foreign currency shortage. Since February, private companies have not been allowed to import oil. The BBC wrote of the situation, “The usually busy streets of Asmara have almost entirely cleared of private cars as the rationing of fuel bites.”
What this means is that there is one less bidder at the World’s oil auction. Eritrea is among the first but it will not be the last. Furthermore, Eritrea is one of the most food-aid dependent countries in the world. However, although Eritrea is entirely dependent on imports for its oil, it is not an economy heavily dependent on oil. That is not to say that oil would not be beneficial to their country as it could give them the energy to fuel farm machinery, irrigate land, transport crops and make them self-sufficient in feeding their population.
The oil game and any hope for the kind of prosperity seen in The West is effectively over for Eritrea. With Hubbert’s Peak in sight there is little hope this country will rejoin the international oil game. It is almost in a catch 22 situation – it needs oil to get back in the game, but it can’t get the oil without being in the game.
Indonesia begins to feel the pressure
Indonesia is another country that is beginning to feel the pressure (again) of rising oil prices. Once a net exporter of oil, this current OPEC member is an example of a more industrialised country that is now struggling, not just economically, but socially and politically. Fuel is subsidised in Indonesia but the rising oil costs have had to be passed on to consumers and that has proved increasingly unpopular. However, unless Indonesia removes the subsidies, experts predict the economy will suffer. As the CIA Factbook on Indonesia notes, “Indonesia became a net oil importer in 2004 due to declining production and lack of new exploration investment. As a result, Jakarta is not reaping the benefits of high world oil prices, and the cost of subsidizing domestic fuel prices has placed an increasing strain on the budget.”
The Indonesian government is caught between a rock and a hard place – if they remove subsidies, there will be civil unrest, and if they don’t, the economy suffers. However, they will be familiar with recent history. In May 1998, during a period of severe economic problems and fears of foot (is this right word???) shortages, the Indonesian government announced IMF-mandated fuel price hikes. Riots followed, and the fuel prices were quickly rolled back. What followed were 17 days of chaos resulting in President Soeharto resigning. It is thus no shock to find that Indonesia is listed in the U.S Department of Energy “Oil Hot Spots”. The extra profits that can be made from it’s 4billion+ barrel oil reserves as oil prices increase will ameliorate the situation to an extent but there is no doubting the damage the oil crisis brings to Indonesia.
Philippines - oil prices having an impact on daily life
The oil crisis is getting particularly acute in The Philippines. Already, President Macapagal-Arroyo is talking of rationing oil if prices don’t fall and conservation efforts not made. Furthermore, there are calls for political unity across all parties, as well as demand for the public to take this problem seriously. "We cannot afford a divided nation amid this oil crisis. We have to unite to ensure and survive, and let not the people blame their leaders for not taking up the challenge", said presidential spokesman Ignacia Bunye on August 15th 2005. Unlike Indonesia though, there seems to be a wider acceptance that the oil price is market-driven. But the oil crisis is having an impact on daily life.
Employees have three rest days every week; supermarket workers are dismissed one hour earlier at night; streets are only coloured by neon lights after 9:00 p.m; and night golfing lovers have to temporarily quit their hobby. Gas stations are operating only 20 hours a day instead of 24. "To implement mandatory and voluntary measures for fuel demand restraint and efficient use of electricity will help combat adverse effects of relentless increase in world oil prices on the local economy", the DOE said in a statement. There are other measures proposed too, including fuel rationing, recycling waste oil, regulation of air-conditioning and regulation of motor vehicles to conserve fuel and relieve traffic congestion.
The potential for such a situation throughout the world is clearly expected by international agencies. On the 28th April 2005 the IEA launced a book called “Saving Oil In A Hurry” which is a “New analysis of measures that governments can use to “save oil in a hurry”. Measures suggested include telecommuting, car-pooling, transit use and “ecodriving” (fuel efficient driving styles), among other measures.
The stark example of North Korea
One of the starkest examples of the silent oil crisis is in North Korea, where there is a virtual news blackout. The news that does get out is incredibly worrying. This is a country that is totally isolated to the world and where the daily food rations are just 250 grams. These meagre rations are the simple sign of a country unable to feed itself due to a lack of fertiliser and farm machinery. Nor does North Korea have the fuel to run irrigation systems or power tractors. The population of North Korea was able to increase, boosted by energy and food imports from it’s Soviet allies during the Cold War. Now that support has gone, the carrying capacity of the land is below that of the population levels. As Edward Goldsmith wrote for the Global Warming Crisis Council:
“If three million people starved to death in North Korea in the last few years, it was partly because, as a result of the collapse of the Russian market which absorbed most of its exports, it could no longer afford to import the vast amount of oil on which its highly mechanised, Soviet inspired, agricultural system had become so totally dependent. Its ‘farmers’ had simply forgotten how to wield a hoe or push a wheelbarrow.”
An article in the Seoul Times called ‘Glimpses of a hermit nation’ paints a dire picture of a country deprived of energy, although its problems also come from choosing not to trade internationally.
A re-emerging energy crisis in Cuba
Cuba is often touted as the ‘flip-side’ to North Korea. Although not totally isolationist, the collapse of the Soviet Union left Cuba adrift with much reduced oil imports and in a fairly similar situation to North Korea. Nonetheless it has managed to find a way to get by on less and less oil – not without struggle. A report by CommunitySolution.org posited the country in a positive light, considering its resources. But an aging energy infrastructure has seen an energy crisis re-emerge in Cuba. Recent power outages have caused small protests and prompted comparisons to the early 1990s power crisis that resulted in the 1994 rafter crisis as thousands of Cuban refugees headed to South Florida’s shores. Billions of dollars are said to be needed for the power plants and oil to alleviate Cuba’s immediate energy problems.
There are many more countries with similar problems and there will be those who have never had the chance or will ever have the chance to fully industrialise or reach the levels of prosperity enjoyed by so many in economically developed nations. For the environment, this may be a good thing but there is no doubt that economic prosperity is one path to battling problems such as hunger. This is not to suggest that fossil fuels such as oil are a magic fix for all the world’s woes – to be dependent on something unsustainable is a mistake, especially when that mistake will ravage your climate and make surviving the great decline even harder.
What we have learned from the last 100 years is that having oil makes work easier and more profitable and enables a way of living otherwise impossible. Without oil, work becomes harder, less profitable and limits your options. The rising tide of oil poverty will drown country after country, until even the high lands become low lands.
Signs of an oil crisis in West
The signs of an oil crisis are already here in the UK, in Europe and also in the US, even if is still too inaudible to be heard as a serious warning by the general public. However, France's prime minister, Dominique de Villepin is already giving that very warning when he told a news conference on the 16th August 2005 that, “This crisis, we know, is likely to last. All the factors have come together for oil to remain expensive in the years and decades to come," he said. "Our refining capacity is saturated and cannot adequately cope with French demand."
This is a crisis because oil enables growth and growth is the aim of most individuals, businesses and nations. If the aim was not growth but sustainability, this would not be an oil crisis but an oil opportunity. As it stands, without increasing amounts of cheap oil, growth becomes ever more difficult to achieve. And not just growth but even more basic things such as providing food, warmth and water will become more of a challenge.
“Many of the truckers who distribute produce are charging higher prices or getting out of the business, making it harder for farmers to get their crops to wholesalers… Fertilizer manufacturers are also facing much higher domestic natural gas prices, driving the prices they charge higher”, a report in the NCTimes revealed. It is not much better in the UK. In April 2005, a story in The Herald revealed, “Farmers in Britain are beginning to feel the pinch. A decade ago, when the value of malting barley was close on £150 per tonne, haulage rates were a minor issue. However, with grain now selling for little more than £80 per tonne, the slice carved off by transport charges bites hard. The added factor in the farming equation is that the price of fertiliser has shot up by at least 30%, while the availability has gone down dramatically.” The plastics industry in the UK is also under threat by rising energy costs, according to Plastics & Rubber Weekly. If you listen in the right places, you will see the oil crisis is maybe not so silent.
As person after person, business after business and country after country drops out of the scramble for oil, those still in the game will be able to continue and feel that things are alright. We must take warning now because even though it may be The Philippines today, in 30 years, with North Sea oil depleted and Britain struggling with huge levels of debt, it could be us.
Fuel poverty - a new social evil
The oil crisis gets louder, not just country by country or business by business but person by person as well. The silent oil crisis has indeed begun in the UK with fuel poverty being called ‘a new social evil’. According to the BBC, “latest figures suggest there are currently over two million households across the UK that cannot afford to keep adequately warm at a reasonable cost. As energy prices rise, this number will go up. The consequences are enormous. Fuel poverty can and does kill.” In addition, as oil prices increase, this will add to inflationary pressures that will, as a result, see interest rates rise to cool inflation. This will bring about very tough times for the average Briton who is said to have £5000 of person debt each and unsustainable levels of house prices.
And the oil crisis has many stark implications other than simply economic or agricultural ones. On a global stage, Iran, a country that has passed its oil production peak, is looking to build domestic nuclear power to compensate, and maybe also to develop nuclear weaponry to keep at bay outside interests with eyes on its remaining reserves. With America none too keen on this situation, the potential for conflict, as a result of the oil crisis, is high, and will make the silent oil crisis a very loud one.
Compete or concede
What we have seen then is just because the rising price of oil does not seem too damaging to us, it is already damaging many parts of the world where it is having a similar effect to how the 1970s oil crises affected the world. There are two obvious options left for everyone in the oil game, on whatever level. Those options are that you compete or you concede.
We either compete for the remaining oil resources and cling to the way of life we know at whatever cost, or we concede, ease our way out of the game and make the oil crisis an oil opportunity. That makes it sound all too easy when in fact it presents human civilisation with the greatest decline it will ever know. Both paths will be filled with incredible difficulties. The oil crisis gets louder – listen to it, talk about it, prepare for it – it is out there, the tide is rising and rushing towards us.