Friday, August 03, 2007

Oil: Temporary Turbulence or Worlwide Crisis?

We have known since the 1970s that oil is more of a finite resource than we thought it was. Early predictions dating from the 1930s had us awash in oil for many generations to come. The supply of natural gas in the United States, alone, was supposed to be good for perhaps as long as 500 years, by which time it was assumed we would find other sources of energy. Certainly the optimism was high after the Middle Eastern discoveries of the 1940s. But US production in the lower 48 began to fall in the 1970s. The other noteworthy development is that worldwide, for the last twenty years, new oil discoveries have totaled fewer and fewer millions of barrels and those barrels are harder to reach and more expensive to produce. And those new discoveries, on average, are not keeping pace with consumption.

Sooner or later, preferably sooner, we need to find new sources of energy to replace the powerful source of energy we call fossil fuels, fuels, in fact, that took millions of years for the earth to form. Obviously, we don't have millions of years if we wish to maintain our way of life. Fossil fuels take several forms but the most useful include light sweet crude and natural gas. This is what we get out of the oil fields that are increasingly the center of attention whether in Saudi Arabia or the Gulf of Mexico or elsewhere.

The problem is that no one knows for sure when worldwide oil production will begin to fall, not because of economic or political vagaries but simply because we will not find enough new oil deposits to make up for the depletion of existing oil fields. We know the day will come when producers will not be able to match the production of previous years. Some argue the day has already arrived and some say it will come in the next five to ten years and others, using varying definitions of liquid fuels, extend the day twenty to fifty years down the road. The last group is becoming smaller as the price of oil continues to climb. Worldwide demand for oil is high these days and we are finding that meeting worldwide demand has become problematic. The truth is that no one knows exactly what is going on.

US oil production and the size of our reserves are to a large extent public knowledge and this is the case for some countries around the world. It's not that difficult, for example, to find good honest numbers about North Sea oil production. It is very difficult, however, to find good verifiable numbers for those oil-producing nations that belong to OPEC. Oil numbers for countries like Iran and Saudi Arabia are not transparent, though members of OPEC tend to assure us everything is fine.

Making predictions is a hard business; so it is extremely useful to have hard data. But even hard data can't make up for things not easily seen at the time. In the 1930s, when future supplies of oil were being discussed, no one imagined the many uses of fossil fuels that would enter our lives and no one really anticipated the worldwide population explosion and the rising economies that would emerge in coming decades. Given the consequences of indifference, though, you deal with the data at hand the best you can.

Sometimes, in the absence of hard data, we start looking at bits and pieces of evidence. Out of those bits and pieces, it's possible sometimes to construct a simple hypothesis that might be proved or disproved over time.

One hypothesis that has interested me is the possibility that the seriousness of the current oil crunch may be partially hidden because wealthy countries are benefitting from poor countries (and perhaps poorer areas within some countries with above average GDP) who can no longer afford the high price of oil, thus making more oil available for wealthier countries. This would distort the worldwide picture of oil use. Like I said, this is hypothetical.

In a recent article by Michael Wine in The New York Times, the energy situation in Africa was examined, though the article focused on power generation:
Power blackouts — “load shedding,” in utility jargon — are hardly novel in sub-Saharan Africa, where many electricity grids remain chewing-gum-and-baling-wire affairs. Even so, this year is different. Perhaps 25 of the 44 sub-Saharan nations face crippling electricity shortages, a power crisis that some experts call unprecedented.

The causes are manifold: strong economic growth in some places, economic collapse in others, war, poor planning, population booms, high oil prices and drought have combined to leave both industry and residents short of power when many need it most.

“We’ve had no significant capital injection into generation and transmission, from either the private or public sectors, for 15, maybe 20 years,” said Lawrence Musaba, the manager of the Southern African Power Pool, a 12-nation consortium of electricity utilities at the continent’s tip.


Once a major power exporter, Uganda now blacks out parts of its capital, Kampala, for as much as a day at a time and has leased two 50-megawatt generators, burning diesel at a time of record oil prices. The demand for hydropower in Uganda and its neighbors, with drought, is blamed by some for a steady reduction in the water level of Lake Victoria, Africa’s largest.

Uganda’s gas stations are now short of diesel for vehicles — in part, paradoxically, because power shortages are shutting down a pipeline from Kenya. News reports say the nation has spent enough on diesel-fueled power generation to build two hydroelectric dams.

The article presents a very complex picture and I admit that it's not clear if it illuminates my hypothesis. But I've been reading articles periodically over the last two years about fuel shortages in various African countries as well as elsewhere. Are the shortages due to the high price of oil or are the shortages due to infrastructure problems or even a mix of the two? It is not an easy question to resolve.

Dave Cohen of the Energy Bulletin has a post called "What about the poor?" that attempts to examine what is happening in poorer countries; he offers anecdotal evidence and then his post goes on to say:
The sporadic, almost anecdotal, nature of such stories in the press hides the systematic reduction of oil consumption in the developing world. The poorer countries get priced out of the market, or can not obtain the fuels they require when supplies are tight. The western press rarely covers the issue. Stories that address the problem surface, and are then forgotten. (See Toiling in the Dark: Africa's Power Crisis, New York Times, July 29, 2007.) Web searches often turn up reports from 2005, when oil prices first hit $70/barrel. Press accounts from the developing world are hard to find. These stories tend to report on local events, and assume some knowledge of local conditions. Some commentators in peak oil circles have labeled these events with the unorthodox (for economists) term "demand destruction", but the phenomenon is poorly documented..

The problem created by high oil prices is widespread, as Africa's Energy Crisis Worsens: Viable Clean Energy Alternatives Are Imperative (Center for American Progress, July 17, 2007) makes clear.
With world crude oil prices nearing $75 a barrel, economies across Africa are grinding to a halt under the burden of soaring energy costs. The spike in world oil prices this summer will exacerbate economic problems, pounding already fragile national budgets and offsetting hard-fought gains from poverty reduction programs, international development aid, and debt relief efforts.

In Senegal’s capital city of Dakar, the cost of taxis has almost doubled since 2005 and blackouts occurred every day last summer because the state-owned utilities couldn’t afford to pay for fuel. The country relies on oil imports to power its diesel-fired generators, and while conditions relaxed somewhat over the winter, power cuts are on the rise again. As of May, the capital was facing 10-hour power cuts several times a week and the government was warning of impending, unprecedented shortages.

It's almost impossible to discuss what is happening in poor countries without coming right back to vague anecdoctal evidence. Cohen's article mentions a study that will soon be out that may clarify what is going on in poor countries. If it includes data on oil imports for a large number of poor nations, that will be a major improvement. However, getting hard data on how much oil various poor countries are importing can be complicated since there has recently emerged a major black market for stolen fuel across national borders.

Nevertheless, even in wealthier countries there is growing concern. US Energy Secretary Sam Bodman has recently said the high price of oil "threatens US economy." And the International Energy Agency is urging OPEC to increase production:
The head of the International Energy Agency (IEA) urged the OPEC oil cartel on to increase production after the price of crude hit a new record.

'Oil prices are very high because they are reacting to the announcement of American stocks, which have fallen a lot more than expected,' Claude Mandil, the head of the energy watchdog told AFP.

'I hope that everyone will draw the consequences,' he said, in reference to the Organisation of the Petroleum Exporting Countries, which has resisted previous IEA calls to pump more crude to keep oil prices down.

OPEC, however, paints a very different picture of oil; here's Qatar's official response:
Opec can do nothing about the high price of oil as there is no shortage of crude in the market, Qatar’s deputy premier said yesterday.

“We can’t do anything because this price is not related to a shortage of supply,” HE Abdullah bin Hamad al-Attiyah, who is also energy and industries minister, told Reuters by telephone.

“Inventories in industrialised countries are at high levels. That proves there is no shortage of supply at all.”

Other OPEC countries have made similar Orwellian statements (of course, the Bush Administration has pretended for six years that we don't need an energy policy, though the invasion of Iraq may indeed be Bush's lame version of an energy policy).

I want to make it clear that I'm primarily raising questions with this post. I'm quite aware that right wing Republicans have been giving us anecdotes for the last twenty-five years that have little bearing on the world as it really is; anecdotes have their place if they're followed by hardnosed attempts to find out for sure what is happening. In fact, I laughed when I came across this quote by Steve Clemons of The Washington Note:
...House Speaker Nancy Pelosi said at a recent Maria Leavey breakfast, the plural of anecdote is not data.

If the reader can pardon my perverse whimsy for a moment, I should point out that the antidote to anecdotes is data.

I'll keep my eyes open for hard data and would appreciate a note in comments from any readers that have seen data on how much gain or loss of oil imports poor countries have been experiencing in the last five to ten years. In the meantime, I take seriously the oil crunch. I believe we are now up against a world changing event that requires we start dealing with it now rather than waiting for things to get worse. We knew we had a problem thirty years ago and we did little. By no means have I proved my hypothesis to my satisfaction, but the tragedy of these times may very well be that poor countries are involuntarily buying time for the industrialized world, and particularly the US, to get moving at last on serious energy policies. In any event, we have a moral obligation to make use of the time remaining.

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