subject: The Twilight Era of Petroleum
posted: Sat, 06 Aug 2005 13:25:19 +0100

The Twilight Era of Petroleum

Published on Friday, August 5, 2005 by
by Michael T. Klare

Several recent developments -- persistently high gasoline prices,
unprecedented warnings from the Secretary of Energy and the major oil
companies, China's brief pursuit of the American Unocal Corporation --
suggest that we are just about to enter the Twilight Era of
Petroleum, a time of chronic energy shortages and economic stagnation
as well as recurring crisis and conflict. Petroleum will not exactly
disappear during this period -- it will still be available at the
neighborhood gas pump, for those who can afford it -- but it will not
be cheap and abundant, as it has been for the past 30 years. The
culture and lifestyles we associate with the heyday of the Petroleum
Age -– large, gas-guzzling cars and SUVs, low-density suburban
sprawl, strip malls and mega-malls, cross-country driving vacations,
and so on -- will give way to more constrained patterns of living
based on a tight gasoline diet. While Americans will still consume
the lion's share of global petroleum stocks on a daily basis, we will
have to compete far more vigorously with consumers from other
countries, including China and India, for access to an ever-
diminishing pool of supply.

The concept of a "twilight" of petroleum derives from what is known
about the global supply and demand equation. Energy experts have long
acknowledged that the global production of oil will someday reach a
moment of maximum (or "peak") daily output, followed by an
increasingly sharp drop in supply. But while the basic concept of
peak oil has gained substantial worldwide acceptance, there is still
much confusion about its actual character. Many people who express
familiarity with the concept tend to view peak oil as a sharp
pinnacle, with global output rising to the summit one month and
dropping sharply the next; and looking back from a hundred years
hence, things might actually appear this way. But for those of us
embedded in this moment of time, peak oil will be experienced as
something more like a rocky plateau -- an extended period of time,
perhaps several decades in length, during which global oil production
will remain at or near current levels but will fail to achieve the
elevated output deemed necessary to satisfy future world demand. The
result will be perennially high prices, intense international
competition for available supplies, and periodic shortages caused by
political and social unrest in the producing countries.

The Era of Easy Oil Is Over

The Twilight Era of oil, as I term it, is likely to be characterized
by the growing politicization of oil policy and the recurring use of
military force to gain control over valuable supplies. This is so
because oil, alone among all major trading commodities, is viewed as
a strategic material; something so vital to a nation's economic well-
being, that is, as to justify the use of force in assuring its
availability. That nations are prepared to go to war over petroleum
is not exactly a new phenomenon. The pursuit of foreign oil was a
significant factor in World War II and the 1991 Gulf War, to offer
only two examples; but it is likely to become ever more a part of our
everyday world in a period of increased competition and diminishing

This new era will not begin with a single, clearly defined incident,
but rather with a series of events suggesting the transition from a
period of relative abundance to a time of persistent scarcity. These
events will take both economic and political form: on the one hand,
rising energy prices and contracting supplies; on the other, more
diplomatic crises and military assertiveness. Recently, we have
witnessed significant examples of both.

On the economic side, the most important signals have been provided
by rising crude oil prices and warnings of diminished output in the
future. A barrel of crude now costs just over $60 -- approximately
twice the figure for this time a year ago -- and many experts believe
that the price could rise much higher if the supply situation
continues to deteriorate. "We've entered a new era of oil prices,"
said energy expert Daniel Yergin in an April interview with Time
Magazine. If markets remain as tight as they are at present, "you'll
see a lot more volatility, and you could see prices spike up as high
as $65 to $80."

Analysts at Goldman Sachs are even more pessimistic, suggesting that
oil could reach as high as $105 a barrel in the near future. "We
believe that oil markets may have entered the early stages of what we
have referred to as a ‘super-spike' period," they reported in April,
with elevated prices prevailing for a "multi-year" stretch of time.

Of course, the world has experienced severe price spikes before --
most notably in 1973-74 following the October War between Egypt and
Israel and the Arab oil embargo, as well as in 1979-80 following the
Iranian Revolution -- but this time the high prices are likely to
persist indefinitely, rather than recede as was the case in the past.
This is so because new production (in such places as the Caspian Sea
and off the West coast of Africa) is not coming on line fast enough
or furiously enough to compensate for the decline in output from
older fields, such as those in North America and the North Sea. On
top of this, it is becoming increasingly evident that stalwart
producers like Russia and Saudi Arabia have depleted many of their
most prolific fields and are no longer capable of boosting their
total output in significant ways.

Until recently, it was considered heresy for officials of the oil
industry and government bodies like the U.S. Department of Energy to
acknowledge the possibility of a near-term contraction in oil
supplies. But several recent events signal the breakdown of the
dominant consensus:

*On July 8, Secretary of Energy Samuel Bodman told reporters from the
Christian Science Monitor that the era of cheap and abundant
petroleum may now be over. "For the first time in my lifetime," he
declared, major oil suppliers like Saudi Arabia "are right at their
ragged edge" in their ability to satisfy rising world demand for
energy. Despite the huge increase in international demand, Bodman
noted, the world's leading producers are not capable of substantially
expanding their output, and so we should expect a continuing upward
trend in gasoline prices. "We are in a new situation," he asserted.
"We are likely at least in the near-term to be dealing with a
different pricing regime than we have seen before."

*One week later, oil giant Chevron took out a two-page spread in the
New York Times, the Wall Street Journal, and other major papers to
signal its awareness of the impending energy crunch. "One thing is
clear," the advertisement announced, "the era of easy oil is over."
This was an extraordinary admission by a major oil company. The ad
went on to say that "many of the world's oil and gas fields are
maturing" and that "new energy discoveries are mainly occurring in
places where resources are difficult to extract, physically,
economically, and even politically." Equally revealing, the ad noted
that the world will consume approximately one trillion barrels of oil
over the next 30 years -- about as much untapped petroleum as is
thought to lie in the world's known, "proven" reserves.

Oil Shockwave

These, and other recent reports from trade and industry sources,
suggest that the anticipated slowdown in global petroleum output will
have severe economic consequences. If prices spike at $100 a barrel,
as suggested by Goldman Sachs, a global economic recession is almost
unavoidable. At the same time, the slowdown in output is sure to have
significant political and military consequences, as suggested by
another set of recent events.

The most notable of these, of course, is the domestic brouhaha
triggered by the $18.5 billion bid by the Chinese National Offshore
Oil Corporation (CNOOC) for U.S.-based Unocal, originally known as
the Union Oil Company of California. Unocal, the owner of substantial
oil and gas reserves in Asia, was originally wooed by Chevron, which
offered $16.8 billion for the company earlier this year. The very
fact that a Chinese firm had been prepared to outbid a powerful
American firm for control of a major U.S.-based oil company is
immensely significant in purely economic terms.

Since abandoned by the Chinese because of fierce American political
opposition, the effort, if consummated, would have represented the
largest transaction ever by a Chinese enterprise in the United
States. But the bid triggered intense political debate and resistance
in Washington because of CNOOC's ties to the Chinese government -- it
is 70% owned by the state -- and because the principal commodity
involved, oil, was considered so vital to the U.S. economy and was
thought to be less plentiful than once assumed. Fearing that China
might gain control over valuable supplies of oil and gas that would
someday be needed at home or by U.S. allies in Asia, conservative
politicians sought to block CNOOC's acquisition of Unocal by
recasting the matter in national security terms.

"This is a national security issue," former CIA Director R. James
Woolsey testified before the House Armed Services Committee in July.
"China is pursuing a national strategy of domination of the energy
markets and strategic dominance of the western Pacific" -- a
strategy, he argued, that would be greatly enhanced by CNOOC's
acquisition of Unocal. Seen from this perspective, CNOOC's bid was
considered a threat to U.S. security interests and thus could have
been barred by Congress or the President.

The notion of blocking a commercial transaction by a major foreign
trading partner of the United States obviously flew in the face of
the reigning economic doctrine of free trade and globalization. By
invoking national security considerations, however, the President is
empowered to bar the acquisition of a U.S. company in accordance with
the Defense Production Act of 1950, a Cold War measure designed to
prevent the flow of advanced technologies to the Soviet Union and it
allies. This is precisely what was being proposed by a huge majority
in the House of Representatives. On June 30, the House adopted a
resolution declaring that CNOOC's takeover of Unocal could "impair
the national security of the United States" and therefore should be
barred by the President under terms of the 1950 law. This outlook
then made its way into the omnibus energy bill adopted by Congress
before its summer recess: Citing potential national security aspects
of the matter, the bill imposed a mandatory 120-day federal review of
the CNOOC bid -- effectively ensuring its demise.

Further evidence of a growing amalgamation between energy issues and
U.S. national security policy can be found in the Pentagon's 2005
report on Chinese military power, released on July 20. While in
previous years this report had focused mainly on China's purported
threat to the island of Taiwan, this year's edition pays as much
attention to the military implications of China's growing dependence
on imported oil and natural gas. "This dependence on overseas
resources and energy supplies... is playing a role in shaping China's
strategy and policy," the report notes. "Such concerns factor heavily
in Beijing's relations with Angola, Central Asia, Indonesia, the
Middle East (including Iran), Russia, Sudan, and Venezuela...
Beijing's belief that it requires such special relationships in order
to assure its energy access could shape its defense strategy and
force planning in the future."

The unclassified version of the Pentagon report does not state what
steps Washington should take in response to these developments, but
the implications are obvious: The United States must strengthen its
own forces in key oil-producing regions so as to preclude any drive
by China to dominate or control these areas.

Just how seriously American policymakers view these various energy-
related developments is further revealed in another recent event: the
first high-profile "war game" featuring an overseas oil crisis. Known
as "Oil Shockwave," this extraordinary exercise was chaired by
Senators Richard Lugar of Indiana and Joe Lieberman of Connecticut,
and featured the participation of such prominent figures as former
CIA Director Robert M. Gates, former Marine Corps Commandant General
P. X. Kelley, and former National Economic Adviser Gene B. Sperling.
According to its sponsors, the game was conducted to determine what
steps the United States could take to mitigate the impact of a
significant disruption in overseas production and delivery, such as
might be produced by a civil war in Nigeria and a terrorist upsurge
in Saudi Arabia. The answer: practically nothing. "Once oil supply
disruptions occur," the participants concluded, "there is little that
can be done in the short term to protect the U.S. economy from its
impacts, including gasoline above $5 per gallon and a sharp decline
in economic growth potentially leading into a recession."

Not surprisingly, the outcome of the exercise produced a great deal
of alarm among its participants. "This simulation serves as a clear
warning that even relatively small reductions in oil supply will
result in tremendous national security and economic problems for the
country," said Robbie Diamond of Securing America's Energy Future
(SAFE), one of the event's principal sponsors. "The issue deserves
immediate attention."

Entering the Era of Resource Wars

>From what is known of this exercise, "Oil Shockwave" did not consider
the use of military force to deal with the imagined developments. But
if recent history is any indication, this is sure to be one of the
actions contemplated by U.S. policymakers in the event of an actual
crisis. Indeed, it is official U.S. policy -- enshrined in the
"Carter Doctrine" of January 23, 1980 -- to use military force when
necessary to resist any hostile effort to impede the flow of Middle
Eastern oil.

This principle was first invoked by President Reagan to allow the
protection of Kuwaiti oil tankers by U.S. forces during the Iran-Iraq
War of 1980-88 and by President Bush Senior to authorize the
protection of Saudi Arabia by U.S. forces during the first Gulf War
of 1990-91. The same basic principle underlay the military and
economic "containment" of Iraq from 1991 to 2003; and, when that
approach failed to achieve its intended result of "regime change,"
the use of military force to bring it about.

A similar reliance on force would undoubtedly be the outcome of at
least one of the key imagined events in the Oil Shockwave exercise: a
major terrorist upheaval in Saudi Arabia leading to the mass
evacuation of foreign oil workers and the crippling of Saudi oil
output. It is inconceivable that President Bush or his successor
would refrain from the use of military force in such a situation,
particularly given the historic presence of American troops in and
around major Saudi oilfields.

In setting the stage for its simulated crisis, Oil Shockwave
identified a set of conditions that provide a vivid preview of what
we can expect during the Twilight Era of Petroleum:

*Global oil prices exceeding $150 per barrel
*Gasoline prices of $5.00 or more per gallon
*A spike in the consumer price index of more than 12%
*A protracted recession
*A decline of over 25% in the Standard & Poor's 500 stock index
*A crisis with China over Taiwan
*Increased friction with Saudi Arabia over U.S. policy toward Israel

Whether or not we experience these precise conditions cannot be
foreseen at this time, it is incontestable that a slowdown in the
global production of petroleum will produce increasingly severe
developments of this sort and, in a far tenser, more desperate world,
almost certainly threaten resource wars of all sorts; nor will this
be a temporary situation from which we can hope to recover quickly.
It will be a semi-permanent state of affairs.

Eventually, of course, global oil production will not merely be
stagnant, as during the Twilight Era, but will begin a gradual,
irreversible decline, leading to the end of the Petroleum Age
altogether. Just how difficult and dangerous the Twilight Era proves
to be, and just how quickly it will come to an end, will depend on
one key factor: How quickly we move to reduce our reliance on
petroleum as a major source of our energy and begin the transition to
alternative fuels. This transition cannot be avoided. It will come
whether we are prepared for it or not. The only way we can avert its
most painful features is by moving swiftly to lay the foundations for
a post-petroleum economy.


Michael T. Klare is the Professor of Peace and World Security Studies
at Hampshire College and the author, most recently, of Blood and Oil:
The Dangers and Consequences of America's Growing Dependence on
Imported Petroleum (Owl Books) as well as Resource Wars, The New
Landscape of Global Conflict.

© 2005 Michael T. Klare

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