|Iraq: It’s the Oil, Stupid
What if this is the beginning of an oil war?
Newsweek 09/30/02: Temma Ehrenfeld
Original Link: http://stacks.msnbc.com/news/811049.asp
Ok, pessimists, gather round. I’ve a story to tell that you won’t ordinarily hear—about Iraq, the Middle East and oil. Maybe it’s just a fairy tale, but maybe not. If not, this Iraqi affair isn’t just about Saddam. We might be in the opening phase of a permanent oil war, pitting buyers, such as the United States, against the major sellers (and their allies) in the Middle East.
WHAT RAISES THIS apocalyptic thought is the question of oil supplies. How much of the black stuff is actually left in the world? If there’s plenty, then Saddam is a local and temporary scare. But the picture changes if the era of cheap and abundant oil is drawing to a close. With less oil on tap, oil-importing countries like ours would take a far more aggressive interest in the gulf states that run the world’s last big reserves. Investors would also perk up if they saw a vital commodity sure to rise in price.
Here’s what we know today:
New oil isn’t being discovered at the rate we’re using it up. For every two barrels pumped out of the ground, the industry finds less than one barrel to add to reserves. Production in the United States peaked 30 years ago. Russia peaked in 1987. North Sea production appears to be peaking now.
We’re still finding new oil, of course. Fields are being developed in Russia, the countries around the Caspian Sea and on the ocean floor off the West African and Brazilian coasts. But the industry hasn’t lucked into any giant scores. “Around 70 percent of the oil you consume today was found 25 years ago or longer,” says oil analyst Charles Maxwell of the brokerage firm Weeden & Co. In countries that don’t belong to the Organization of Petroleum Exporting Countries (OPEC, dominated by the Middle East), demand will outrun supply in less than 10 years, Maxwell believes. World oil production might peak by 2015.
Meanwhile, demand for oil keeps moving up, especially in the newly developed world. Look at China, whose city roads are crammed with cars instead of bicycles. Look at India, whose vast new computer industry sucks up electricity in Bangalore. And, of course, the industrial countries keep swigging oil, too. Over the next 30 years total demand will grow by two thirds, predicts the new edition of World Oil Outlook, released this week by the Paris-based International Energy Agency.
You don’t realize that reserves are falling because there’s still plenty of crude oil to pump. We can fill gas tanks, heat homes and fly planes for another generation. But if oil really is a shrinking resource, the price is going to rise a lot. That’s bad for future economic growth. What’s more, fights will break out over who gets oil first.
This brings me to the tricky question of where those future oil reserves are going to be. In the view of the IEA, most of the growth in world demand can be met only by the OPEC countries, mainly those of the Middle East. Iraq contains one of the planet’s largest reserves. President George W. Bush would hardly go after Saddam for the oil alone, but it’s certainly a factor. An Iraq “on our side” could pump more than three times the oil it did last year.
Mention oil risk and the first thing the Bushies suggest is to drill in the Arctic National Wildlife Refuge. As Maxwell reads the seismic work, there’s not enough oil under the snow to make a meaningful contribution to world reserves. Still, I can see a great political trade. Exchange ANWR drilling for rules requiring higher gas-mileage standards in SUVs. Cars, vans, pickups and SUVs account for close to 40 percent of U.S. oil consumption, yet the fleet’s fuel economy stands at a 21-year low. Fix that, and you’d see imports shrink.
As I said at the start, many industry people call this story a fairy tale. The U.S. Geological Survey predicts that world oil production won’t peak until 2037, thanks to new resources yet unfound. “People have said we were going to run out of oil ever since the 1880s,” scoffs Daniel Yergin, chairman of Cambridge Energy Research Associates.
Crude-oil prices jumped 45 percent this year (to $30 a barrel), partly on war fears but also because OPEC tightened up on supplies. That threatens to stifle economic growth, Yergin says. But the promise of prices at least in the $25 range also makes it profitable to drill again.
Even if you don’t believe in the doomsday theory of oil supplies, this year’s rise in the price of crude has raised investment prospects for some of the energy sectors. Oil-service companies should profit, as the industry spends more money on developing reserves, says Charles Ober at the T. Rowe Price New Era Fund. (Service companies run drilling rigs, analyze oilfields and so on.) Ernst von Metzsch of Vanguard Energy leans toward natural gas, due to growing demand from utilities and the difficulty of adding new gas supplies. The Invesco Energy Fund’s John Segner sees strong demand for oil and not much spare capacity for producing it—adding up to healthy prices and profits for several years.
One fact I hope you’ll take away: for the United States, there’s no such thing as energy independence. We import nearly 60 percent of the oil we use and won’t switch to other energy sources any time soon. The more we guzzle, the more we’re exposed to geopolitical trouble—and that’s no fairy tale.