2004 February 06 Friday
Demand For Oil Increasing From Rapidly Developing Nations

The National Interest has an essay about the increasing leverage that oil producing nations will wield as energy demand grows worldwide.

Russia's increasing geopolitical importance as a source of energy-whether oil, natural gas or electricity-rather than its military arsenal also points to another development likely to have geopolitical ramifications: competition for energy. Europe, for example, currently consumes approximately 44 percent of the world's energy supply-yet it cannot be assured that it will continue to have access to all of the energy that it needs. After all, China has now surpassed Japan as the second largest user of oil, after the United States, and has radically increased its own oil imports. With domestic production unlikely to increase, China is buying up more oil on the world markets-imports for 2003 are up by 30 percent from last year, and imports as a whole are expected to double, to 4 million barrels a day by 2010. In thirty years, China will be importing the same amount of oil that the United States currently does-10 million barrels per day.

While China has seen its rate of oil consumption skyrocket over the last decade (by 109 percent), it is not the only hungry consumer. During the same period South Korea's usage increased by 78 percent. By 2010, India is expected to be the world's fourth largest consumer of oil, absorbing 3.2 million barrels per day. This means that there will be increased competition not only for existing oil resources but also to discover and lock-in new discoveries. India is actively searching for assets in a number of countries, including Russia, Yemen, Sudan, Vietnam and Iraq.

This trend is going to weaken US influence over regions of the world which pose both terrorists and WMD proliferation threats to the US even as the US reliance on those regions for vital oil increases. The lack of Bush Administration criticism of the government of Vladimir Putin on everything from the decline in freedom of the press, human rights abuses, corruption, and the war in Chechnya is just one manifestation of the need for the US government to cater to countries that are major oil suppliers. This limits the ability of the US to pursue its national interests, most notably with regard to stopping the spread of Wahhabi Islam, terrorism, and WMD proliferation. See my post China Energy Consumption Growth Complicates Anti-Terrorist Efforts for a previous argument on this subject. There is a need for energy policy to be treated as national security policy first and foremost. As of yet the US government has not increased efforts to develop new energy technologies with a level of effort that is commensurate with that need.

The political competition for oil may become far more intense and prices may steeply rise even sooner if, as some experts have begun to speculate, world oil production may have already peaked.

"World production is flat now," says Kenneth Deffeyes, a Princeton University geology professor.

But that's a controversial view. Other pessimists talk about 2010; many analysts see no change until 2035.

There is an argument coming from many economists that since a world oil production peak has been forecasted for decades without ocurring that the harbingers of doom are wrong. But remember the lesson of the boy who cried wolf: the wolf eventually came. Past failures to accurately predict the point at which world oil production will peak have to be weighed against past successes in predicting peaks in production in some major producers. As the list of producers which have passed their peaks keeps getting longer (50 countries and counting) the question becomes just when will the remaining major producers reach their production peaks?

Some argue that the oil production peak is not happening right now but will happen within 10 years. See my previous FuturePundit post Will Sun Cooling And Oil Depletion Prevent Global Warming? for links to arguments in support of that view.

The estimates for production peaks depend on the accuracy of the oil reserve figures. Can the official oil reserve figures by various countries be trusted? Irish oil geologist Colin Campbell, a major proponent of the view that world oil production will peak in less than 10 years, argues some OPEC members have exaggerated the size of their oil reserves in order to get bigger OPEC oil production quotas.

Table 1A2 illustrates this flawed database. It shows that in 1985, Kuwait added 50% to its reported reserves, although nothing particular changed in the reservoir. It did so because OPEC quota was based in part on reserves: the higher the reserves, the higher the quota. That action, incidentally, greatly upset its neighbour Iraq and was one of the causes of the Gulf War. Then moving to Venezuela, in 1988 it doubled the size of its reserves, doing so by including the huge amounts of heavy oil that had been known for years, but which it now decided to include in the resource base for no particular reason. Its action then caused Abu Dhabi, Dubai, Iran and Iraq to retaliate with enormous, overnight increases in reported reserves to protect their OPEC quota. It is interesting to note that the Neutral Zone, which is owned equally by Kuwait and Saudi Arabia, had two owners with no motive to change the numbers.

My take on this subject is that the price of oil does not include in it major costs that we pay in terms of pollution effects, defense spending, and home security and anti-terrorist spending. As the price of oil rises and demand for oil from other countries increases all of those costs will rise. The US ought to treat energy research as vital for national defense and our national interest. Regardless of when oil production will peak we would be better off from a national security standpoint and from an economic standpoint if we had technologies for producing other forms of energy for a price that is lower than what we pay for oil.

Share |      By Randall Parker at 2004 February 06 03:18 PM  Politics Grand Strategy


Comments
Dan said at February 7, 2004 8:06 PM:

The book entitled "Hubbert's Peak: The Impending World Oil Shortage" does a nice job talking about the issue of declining production; reviewed at www.vivacapitalism.com


Wes Ulm said at February 8, 2004 12:09 AM:

An outstanding article Randall, and you're especially on the mark with your concluding statement here:

"My take on this subject is that the price of oil does not include in it major costs that we pay in terms of pollution effects, defense spending, and home security and anti-terrorist spending. As the price of oil rises and demand for oil from other countries increases all of those costs will rise. The US ought to treat energy research as vital for national defense and our national interest. Regardless of when oil production will peak we would be better off from a national security standpoint and from an economic standpoint if we had technologies for producing other forms of energy for a price that is lower than what we pay for oil."

Promulgate this message far and wide, from the mountains to the treetops. I've felt *exactly* the same thing, and I become livid every time some pseudo-economist trots out the trite, stale old idiot's claim that "investment in renewable energy is not sensible because oil is still just cheaper." This party line conventional wisdom attests to a pathological myopia, pure and simple: Reliance on oil only *appears* cheaper if we strap on 5-foot blinders and work diligently to avoid seeing the economic forest for the trees. The extraction, refinement, shipping, and distribution costs for oil may indeed by less expensive in themselves than the total analogous expenses for solar, wind, tidal, and other renewables. But economists too often fail to factor in the *real cost* of the oil dependence, which includes (as you rightly note) air pollution with all the concomitant health and ecological detriment, as well as the exorbitant defense and anti-terrorism expenditures that are directly tied in with the desperate need to safeguard petroleum supplies from the Middle East. If one factors in the cost of all the defense outlays to fight our wars in Iraq and maintain forces in the volatile region, as well as the counterterrorism measures that protect against Islamic fanatics who see American oil-protecting forces in the region to be thinly veiled imperialism, the cost of oil reliance is astronomically higher than an alternative that better utilizes renewable sources. And it's impossible to place a pricetag on the lost lives, loss of internal security, and loss of international respect that stems from this propensity to station our troops in the world's most volatile region to protect the oil. (I'm posting an article on my own Website, "The Real Cost of Fossil Fuel Dependence," where I support this claim further.)

That disastrous mistaken downing of an Iranian jetliner by the USS Vincennes in 1988-- which killed over 200 people-- resulted directly from the naval operations in the Persian Gulf, escorting Kuwaiti oil tankers and confronting Iranian gunboats. It was unfortunate that a loose-cannon commander and lousy computer equipment (the AEGIS fiasco) also collaborated to cause the disaster, but one raises the question about why we had to be in the volatile region in the first place. The US involvement in the Gulf War of 1991 (besides avenging Vietnam) stemmed directly from the desire to protect Kuwaiti oil supplies. Arab armies would have probably soon taken the job upon themselves to kick Saddam out of Kuwait, but our own involvement there laid the foundation stones that would provoke al-Qaeda in the first place: (1) George Bush Sr. idiotically stationing troops in the Islamic Holy Land of Saudi Arabia in 1991, a moronic action that was sure to rile the fanatics, and (2) the impossible dilemma of the sanctions against Saddam Hussein, which hamstrung him but also deprived Iraqi pediatric hospitals of medical supplies, fostering the emotional resentment that fueled al-Qaeda. The 9/11 attacks thus emerged directly out of protect-the-oil strategic imperatives, which drew the US into the maelstrom of the Middle East. The current war in Iraq probably has a lot to do with that too. We're talking *trillions of dollars* here in damage (chiefly 9/11), defense expenditures, and heightened security ensuing from the need to protect oil. The faster that we can wean ourselves from the oil teat, the better. We can't just disengage from the Middle East, but we can at least avoid implicating ourselves to the extent that we suck up to (and prop up) corrupt regimes that stab us in the back by deflecting internal bitterness against the "Great Satan" United States. There are plenty of smart people and R&D dollars to rapidly develop a more sustainable network dependent on renewable energy resources. Better to start now than later.

Top 10 Myths and Muddles about the Spanish Armada, History’s Most Confused and Misunderstood Battle

Randall Parker said at February 8, 2004 1:26 AM:

Wes,

I am glad you agree with me. What amazes me is just how few people make this argument. It seems obvious enough. Yet I hear it from few on the Left or the Right.

If people on the Left even engage on the energy issue it is mostly about "saving" ANWR from the oil companies or regulating SUVs or raising CAFE standards. But what we need is so much more radical than any of that. But the Lefties won't buy the national security argument because lots of them don't want to think about national security and the national interest.

Then on the Right we mostly hear about how the market can solve all problems. But there are large externalities involved in the use of fossil fuels with pollution being only one of them. The most important externality is probably all the ways the world's dependence on oil affects US national security. I think on the Right there is a stereotypical view of alternative energy sources as impractical hippy stuff promoted by anti-capitalists who are hostile to corporations.

Truly paltry sums are spent on solar photovoltaics research. Last I checked it was about $100 mil per year for photovoltaics That is chump change compared to the hundreds of billions spent on defense and military operations.

Engineer-Poet said at February 8, 2004 8:14 AM:

Wes parenthesized:

I'm posting an article on my own Website, "The Real Cost of Fossil Fuel Dependence," where I support this claim further.
Wes, you have no obvious link to that article on the http://www.people.fas.harvard.edu/~ulm site.  Did you forget something?

Randall, I have also been amazed, astounded and flabbergasted by the failure of "free-market" advocates to recognize the subsidies (mostly in defense) given to Middle East oil.  The lefty-loosy types similarly fail to recognize that people will change their behavior in response to price signals; if California really wanted to regulate greenhouse-gas emissions from cars, the state would already have taken the simplest and easiest way to get people to cut them:  tax the hell out of motor fuel.  This would also undermine the rationale for drilling in ANWR (which would not yield enough oil soon enough to make a worthwhile difference), but the opponents of ANWR oil have either intellectual blinders which prevent them from making the connection, or ideological membership requirements which prevent them from saying so.

I'm an iconoclast, sitting neither with the left nor the right.  This means I criticize both, and get flak from both.

(The post-preview compose window is a lot smaller than the pre-preview compose window.  Can this be fixed?)

Wes Ulm said at February 8, 2004 10:36 PM:

Sorry, Engineer-Poet; when I mentioned the article-posting on my own Website, I was using the present-progressive tense to indicate that the posting is in the currently-being-edited-and-upcoming-soon stage, not already up. I've got a scientific conference in Singapore later in February in addition to the usual work + girlfriend weekly two-step, so my Website updates have admittedly been lagging lately. (I basically cut-and-pasted much of my post here from the yet-to-be-uploaded essay on my site.) I'll have at least a draft of it up ASAP.

tom beta 2 said at February 11, 2004 8:23 AM:

Excellent column. Your conclusions are right on target.

Wes Ulm, while I agree that the US needs to greatly reduce its dependence on oil, I think your analysis has some problems.

First off, sales of Kuwaiti oil to the US were minimal, and would have easily been replaced by Iraq in any case. The Iraqis wanted the oil to sell, and they would have sold it to the US just like Kuwait did. US interests in oil there were never in real jeopardy, certainly not enough to risk a major war for (everyone predicted it would be much, much worse than it turned out to be).

From Wes Ulm:


but our own involvement there laid the foundation stones that would provoke al-Qaeda in the first place: (1) George Bush Sr. idiotically stationing troops in the Islamic Holy Land of Saudi Arabia in 1991, a moronic action that was sure to rile the fanatics,

One would think that Saudi Arabia would have objected to having troops stationed on its soil if it thought it would provoke extremists that much, so even the Arabs didn't read that right. How was Bush 1 supposed to? Or, of course, maybe the Saudis did read it right and allowed it to go ahead, using it in addition to the Israeli-Palestinian issue to fuel anti-US sentiments.

(2) the impossible dilemma of the sanctions against Saddam Hussein, which hamstrung him but also deprived Iraqi pediatric hospitals of medical supplies, fostering the emotional resentment that fueled al-Qaeda. The 9/11 attacks thus emerged directly out of protect-the-oil strategic imperatives

You are correct that the sanctions fostered resentment in the Arab world, but most of the ill effects were the direct result of Saddam's using the money available to improve his palaces, etc. At least once, he refused to import any medicine in a protest against sanctions. He didn't even use the money he got from illegal sales through Syria for medicine, etc. So the US gets the bad press from an Arab leader's actions, and the Arab leader is depicted as a hero for standing up against the US.

Beyond this, the US was going to get bad press anyway -- the constant anti-US rhetoric and outright lies in the Arab media provoke much more hatred there than the things the US has actually done. The US could in fact have acted perfectly and would have still been demonized.

While I see your overall point, and mostly agree with it (specifically about getting away from oil dependency), the 9/11 attacks did NOT result primarily from US actions related to oil interests. They primarily resulted from Arab leaders needing a foreign enemy to maintain power domestically, consequently demonizing the US, and then the whole thing getting out of control and al Qaeda attacking the US.

Wes said at April 4, 2004 5:32 PM:

That's an excellent post, Tom, and I concur with your points. I'm sorry if I gave the impression to the contrary in my 2nd posting. I agree strongly that the chief catalyst for al-Qaeda's visceral hatred prior to Sept. 11 was the corrupt core of the rotten apples among the Saudi political leadership, who sought to deflect attention from their own cupidity and internal fiascos, while demonizing the easy target across the Atlantic Ocean. The fundamentalism of the Gulf's religious zealots, in conjunction with the scurrilous anti-American invective constantly circulating in the Saudi media, combined into a volatile brew-- which, of course, has now stricken the Saudis themselves twice, as well as the US on Sept. 11. This is, in fact, one of the reasons that I found the postings of the troops in Saudi Arabia to be so infuriating; ostensibly one of the motivations (besides enforcing the no-fly zones) was to protect the Saudi political structure, which had been effectively stabbing us in the back. To the Saudis' credit, they've cracked down substantially on al-Qaida following the Riyadh bombings in May of 2003, sharing intelligence, rounding up leaders, and stemming nefarious financial flows.

I still think that the troop posting in S.A. was both unnecessary and a veritable flashpoint for the al-Qaeda radicals. Cheney had promised that the Saudi base would be occupied for only a year; instead, the troops remained there for over a decade. Having a substantial foreign military presence right in the backyard of the holiest sites for a creed with 1 billion followers-- it was just not sensible, and even many normal folks on the Saudi street were riled by this. If nothing else, the garrison-- which didn't have popular support-- had the trappings of an occupation, which suppressed moderate voices in the country. This, combined with the Iraqi sanctions, likely muzzled some countervailing voices in the region who might have been inclined to counter the rhetoric of the radicals. But overall, I agree, a problem and a menace were brewing regardless of US actions there, owing to the vitriol regularly spewed out in the local media.

Also, I should add that development of renewable energy sources shouldn't simply impel us to disengage from the Gulf region, which if anything might further drive some of the local governments into the arms of autocracy and corruption. Rather, having less dependence on oil would give us more flexibility; we'd no longer be at the mercy of reckless oligarchs and plutocrats with the propensity to deflect popular rage at the big bad infidel across the pond.


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