Peak oil – Mar 4

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We can’t cling to crude: we should leave oil before it leaves us
Fatih Birol, The Independent
We are on the brink of a new energy order. Over the next few decades, our reserves of oil will start to run out and it is imperative that governments in both producing and consuming nations prepare now for that time. We should not cling to crude down to the last drop – we should leave oil before it leaves us. That means new approaches must be found soon.

Even now, we are seeing a shift in the balance of power away from publicly listed international oil companies. In areas such as the North Sea and the Gulf of Mexico, production is in decline. Mergers and acquisitions will allow “big oil” to replenish reserves for a while,and new technologies will let them stretch the lives of existing fields and dip into marginal and hard-to-reach pools. But this will not change the underlying problem. Oil production by public companies is reaching its peak. They will have to find new ways to conduct business.

Increasingly, output levels will be set by a very few countries in the Middle East. This does not necessarily mean an immediate return to the price shocks of the 1970s, because producing countries have learnt that stability is in their interests. Even so, it is not certain that they are ready to increase production to meet growing world demand. Building new capacity takes time.

On the demand side, we see two big transformations. Wherever possible, people have already switched from oil, particularly for industrial use, home heating and electricity generation. In future, oil will mainly be used in the transport sector, where we have no readily available alternatives.

Dr Fatih Birol is chief economist at the International Energy Agency
(2 March 2008)
Contributor sfarrell writes:
$150 A barrel by 2030 seems incorrect as inflation itself will at least double the price.

Contributor Carl Etnier points out that it is “Fatih” not “Faith” Birol. (FIXED) The original article at The Independent also had the misspelling. -BA

Ken Livingstone – Peak oil “opportunity” for London Mayor (text and audio)
David Strahan, Global Public Media
Peak oil is not a threat but an opportunity to force through the policies needed to combat climate change, according to London Mayor Ken Livingston.

Mr Livingston was speaking at the Ecobuild trade fair in London’s Earls Court on Thursday, during an environmental hustings featuring the three main candidates in the election for London mayor, to be held on 1st May. In answer to a question from Global Public Media’s David Strahan about what the candidates would do to protect London from peak oil, Mr Livingstone said “I don’t see this as a threat, I see it as an opportunity… it may be the only way that we face up to having to reduce our energy consumption”.

Mr Livingston said that “almost every government on the planet is too cowardly to tell its people how much they should pay for energy”, but when peak oil brings escalating prices “we’ll know the real cost of putting oil in the tank of our car, and we will scale down our energy consumption to cope with that”.

The mayor’s reply was the most coherent of the three, but none of the candidates appeared to grasp the severity of the crisis peak oil is likely to provoke. None offered policies that would address peak oil specifically, and all recited the usual list of technologies favored to combat climate change: solar, wind, hydro and carbon capture.
(28 February 2008)
Audio at original.

The World Has Plenty of Oil
Nansen G. Saleri, Wall Street Journal
Many energy analysts view the ongoing waltz of crude prices with the mystical $100 mark — notwithstanding the dollar’s anemia — as another sign of the beginning of the end for the oil era. “[A]t the furthest out, it will be a crisis in 2008 to 2012,” declares Matthew Simmons, the most vocal voice among the “neo-peak-oil” club. Tempering this pessimism only slightly is the viewpoint gaining ground among many industry leaders, who argue that daily production by 2030 of 100 million barrels will be difficult.

In fact, we are nowhere close to reaching a peak in global oil supplies.

Given a set of assumptions, forecasting the peak-oil-point — defined as the onset of global production decline — is a relatively trivial problem. Four primary factors will pinpoint its exact timing. The trivial becomes far more complex because the four factors — resources in place (how many barrels initially underground), recovery efficiency (what percentage is ultimately recoverable), rate of consumption, and state of depletion at peak (how empty is the global tank when decline kicks in) — are inherently uncertain.

… The impact of modern oil extraction techniques is already evident across the globe. Abqaiq and Ghawar, two of the flagship oil fields of Saudi Arabia, are well on their way to recover at least two out of three barrels underground — in the process raising recovery expectations for the remainder of the Kingdom’s oil assets, which account for one quarter of world reserves.

Are the lessons and successes of Ghawar transferable to the countless struggling fields around the world — most conspicuously in Venezuela, Mexico, Iran or the former Soviet Union — where irreversible declines in production are mistakenly accepted as the norm and in fact fuel the “neo-peak-oil” alarmism? The answer is a definitive yes.

Hundred-dollar oil will provide a clear incentive for reinvigorating fields and unlocking extra barrels through the use of new technologies. The consequences for emerging oil-rich regions such as Iraq can be far more rewarding. By 2040 the country’s production and reserves might potentially rival those of Saudi Arabia.

… Where do reasonable assumptions surrounding peak oil lead us? My view, subjective and imprecise, points to a period between 2045 and 2067 as the most likely outcome.

Mr. Saleri, president and CEO of Quantum Reservoir Impact in Houston, was formerly head of reservoir management for Saudi Aramco.
(3 March 2008)
Contributor sfarrell writes:
Mr. Saleri does not provide references for his numbers.

I leave it to others to challenge the rest of his statements.

Fears of a commodity crash grow
Ambrose Evans-Pritchard, Telegraph
… Sugar has been swept up with the whole gamut of commodities – grains, metals, oil and gas – in a fevered surge of investment in futures contracts, regardless of the real demand from daily users.

… The “culprit” is the new breed of commodity index funds. Each week over the last two months, between $5bn and $10bn of fresh money has been pouring into the Goldman Sachs Commodity Index, the Dow Jones-AIG Commodity Index, and other funds, according to a UBS study. Together, the indexes now hold $200bn.

… Crude oil has surged to $104 a barrel, yet US gasoline inventories are at the highest level in 14 years. Oil stocks have been rising for the last seven weeks, even though we are at the top of the winter season when inventories normally fall. The tsunami of pension money is beginning to distort the market for energy futures. Texas oilman T Boone Pickens said investment froth has pushed up prices by $15.

This is not to downplay the powerful reasons behind the oil boom. Output has been flat for four years despite efforts by BP, Shell and peers to find new supplies, yet China’s oil imports rose 14pc in 2007. The era of ‘peak oil’ is certainly with us. But it was with us a decade ago when oil prices fell to $10 a barrel.
(3 March 2008)

Bread and Oil: Rising Food Prices and the Middle East
Yair Wallach, The Oil Drum
Abstract

The use of food crops for biofuels is one of the key factors driving a dramatic increase in the global price of cereals. As Stuart Staniford demonstrated here in the past few weeks, this trend is set to intensify. This article will look at the potential implications of rising wheat prices for countries in the Middle East, taking Egypt and Morocco as examples. Government food subsidies in both countries have so far protected the poor urban population from much of the global hike in cereal prices. However, as food prices continue to spiral, subsidies will demand a growing share of national budgets. Subsidies cuts seem inevitable, leading to riots and political instability.

The further development of biofuels could make food too costly for millions of poor in the Middle East, and destabilise the region which supplies most of the world’s oil exports.

Introduction

Stuart Staniford’s article Fermenting the Food Supply exposed the dangerously rapid manner in which food crops have been diverted to biofuels in the USA, and the likelihood that this pattern will be copied elsewhere. Staniford attempted to gauge the impact of price rises on the global poor. Looking at the elasticity of food expenditure, he suggested a grim possibility of 60% of the globe’s population priced out of the food market within the next five years. In a later article, Death Rates and Food Prices he considered the mitigating effect of subsistence farming, which could support a considerable part of the global poor.

Staniford established convincingly that the impact of biofuels on food crops will be almost immediate – that is, within the next decade or even five years. However, within such a short time span, assessment based on universal parameters will give a very limited picture. I believe that a more detailed attention needs to be given to specific regions and countries. Which ones are most at risk?

The Middle East is my home region, with which I am familiar personally and professionally. It is natural for me to be interested in the dangers for the region’s population. But furthermore, a food crisis in the Middle East may have far reaching consequences, due to the importance of the region for oil and natural gas exports.

…The vulnerability of the region also lies in the fact that wheat-based bread is the main staple. Without bread there is no life – indeed, in Egypt the same word is used for both (‘aish). The global commodity price of wheat has gone up most drastically, tripling between 2000 and 2007. Maize and rice prices have doubled during this time. Countries in which wheat is the main cereal are likely to be more severely affected.

Outside the rich pockets of wealth in the Gulf, poverty is widespread in the Middle East. In Egypt, 45% of the population are estimated to live on US$2 per day or less (2007). The population in the region spends on average a third to half of its income on food. Poor urban households are in a precarious position to begin with, and they will be affected badly by any prices increases. However, the price of bread is not dictated directly by global cereals prices, because of generous government subsidies. Before examining the possible implications of the crisis by looking at the specific cases of Egypt and Morocco, a few words on the economics and politics behind food subsidies in the Middle East.

… Middle Eastern governments have been wary of eliminating food subsidies or replacing them, as it is clear that the issue is politically explosive. Subsidy cuts lead to riots. This has been the case in Egypt (1977), Sudan (1979), Morocco (1981, 1984, 2007) Jordan (1989, 1996), and Tunisia (1984). The riots are perceived as serious challenge for the regimes. In some cases (Morocco 1981) hundreds of demonstrators were killed. After clampdown of arrests and emergency measures, governments usually back down from the subsidy cuts. We have seen this happen in the last bread riots in Morocco (September 2007). This scenario will become increasingly unlikely as the subsidy bill becomes much more costly. As prices of oil and food go up, removing subsidies will become politically impossible, but sustaining them could become economically unviable. Whatever happens, subsidies are unlikely to be eliminated completely, and global price rises will be mitigated and not hit the population in their full toll. Famines are therefore not to be expected in the immediate future. Yet political unrest is unavoidable. Even if governments succeed in repressing food riots, popular disapproval will remain and the political situation will be much more volatile.

… In the recent Davos conference, Egypt was hailed as a success story for liberalisation reforms, and as one of the next emerging economies.

But in 2008 things are set to change. Egyptian oil production peaked in the mid 1990s. Oil consumption is growing strongly, due to economic growth. In 2008, Egypt is set to become a net importer of oil for the first time. From a dwindling source of income, oil will become a substantial fiscal burden. The government would have to import oil and sell it at a subsidised price – which would be a heavy burden, since fuel subsidies already made 20% of the government budget in 2005/6 (source: IMF).

Conclusion
Cereal prices in the Middle East are mediated through state subsidies. So far, the urban poor have not been exposed directly to the rise in prices. It seems inevitable, however, that at some point the price rises will be passed on to the public through subsidy cuts, either in 2008 or in 2009, in countries such as Egypt, Morocco, Tunisia, Iraq, and Jordan. Subsidy cuts will, without doubt, result in immediate riots. The urban poor will not wait until they reach a starving point: they will act immediately, as they have done before, against what they will see as the government betraying its fundamental duty to provide affordable food prices.

Egypt and Morocco are among the US’s closest allies in the region. Belonging to the so-called “moderate Arab/Muslim countries”, they have been the most accommodating in terms of supplying the US with intelligence and military cooperation against Islamist groups. In return the US has supported these regimes militarily and economically, through direct support (Egypt) or Free Trade Agreements. Political instability in these countries will put in serious risk the position of the US in the Middle East. The notion that food prices have gone up because of American (and other developed countries’) use of biofuels will not make the US more popular among people in the region.

… If this short article dealt with the problem in strategic terms, in grand summaries of numbers (population, oil, food), it is important to remember that behind all these are people, real people, and many of them. Poor families in Egypt and Morocco, for whom life is already very difficult, and who survive on the bare minimum, are going to be badly hit in the next two years, when even a pita bread will become too expensive. The important issue here is not the survival of certain political regimes, but rather the survival of these families.

This is a guest post by Yair Wallach. Originally from Jerusalem, he is completing his PhD in Cultural History in Birkbeck College, the University of London (writing about Palestine/Israel between 1858 and 1948). During his five years of study in London he has lived in precarious conditions, spending many months without electricity or hot water. These experiences have made him aware of issues of environmental sustainability, especially relating to energy, water, waste and the global food market. He currently makes his living by writing articles of economic analysis on the Middle East.
(3 March 2008)
Excellent article documenting the insidious interconnections between energy supplies, food, biofuels and political stability. -BA