Sample text for The empty tank : oil, gas, hot air, and the coming global financial catastrophe / Jeremy Leggett.

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Chapter 1





We have allowed oil to become vital to virtually everything we do. Ninety percent of all our transportation, whether by land, air, or sea, is fueled by oil. Ninety-five percent of all goods in shops involve the use of oil. Ninety-five percent of all our food products require oil use.1 Just to farm a single cow and deliver it to market requires six barrels of oil, enough to drive a car from New York to Los Angeles.2 The world consumes more than 80 million barrels of oil a day, 29 billion barrels a year, at the time of writing. This figure is rising fast, as it has done for decades. The almost universal expectation is that it will keep doing so for years to come. The U.S. government assumes that global demand will grow to around 120 million barrels a day, 43 billion barrels a year by 2025.3 The International Energy Agency, the organization set up by industrialized countries to give them advice on oil and other energy matters, is scarcely less bullish. Its 2004 World Energy Outlook forecasts 121 million barrels a day by 2030.4 Few question the feasibility of this requirement, or the oil industry’s ability to meet it. They should, because the oil industry won’t come close to producing 120 million barrels a day. The most basic of the foundations of our assumptions of future economic well-being is rotten. Our society is in a state of collective denial that has no precedent in history, in terms of its scale and implications.

Of the current global demand, America consumes a quarter. Because domestic oil production has been falling steadily for thirty-five years, with demand rising equally steadily, America’s relative share is set to grow, and with it her imports of oil. Of America’s current daily consumption of 20 million barrels, 5 million barrels are imported from the Middle East, where almost two thirds of the world’s oil reserves lie in a region of especially intense and long-lived conflicts.5 Every day, 15 million barrels pass in tankers through the narrow Strait of Hormuz, in the troubled waters between Saudi Arabia and Iran.6 The U.S. government could wipe out the need for all their 5 million barrels, and stanch the flow of much blood in the process, by requiring its domestic automobile industry to increase the fuel efficiency of autos and light trucks by a mere 2.7 miles per gallon.7 But instead it allows General Motors and the rest to build ever more oil-profligate vehicles. Many sport utility vehicles average just four miles per gallon. The SUV market share in the United States was 2 percent in 1975. By 2003 it was 24 percent. In consequence, average U.S. vehicle fuel efficiency fell between 1987 and 2001, from 26.2 to 24.4 miles per gallon. This at a time when other countries were producing cars capable of up to sixty miles per gallon.8

Most U.S. presidents since the Second World War have ordered military action of some sort in the Middle East. American leaders may prefer to dress their military entanglements east of Suez in the rhetoric of democracy building, but the long-running strategic theme is obvious. It was stated most clearly, paradoxically, by the most liberal of them. In 1980 Jimmy Carter declared access to the Persian Gulf a vital national interest to be protected “by any means necessary, including military force.”9 This the United States has been doing ever since, clocking up a bill measured in the hundreds of billions of dollars, and counting.10

With such a strategy comes an increasingly disquieting descent into moral ambiguity, at least in the minds of something approaching half the country. The nation that gave the world such significant landmarks in the annals of democracy as the Marshall Plan is forced by its deepening oil dependency into a foreign policy maze that involves arming some despotic regimes, bombing others, and scrabbling for reasons to make the whole construct hang together.

America is not alone in her addiction and her dilemmas. The motorways of Europe now extend from Clydeside to Calabria, Lisbon to Lithuania. Agricultural produce that could have been grown for local consumption rides needlessly along these arteries the length and breadth of the European Union. The Chinese attempt to emulate this model even as they enforce production downtime in factories because of diesel shortages and despair that their vast national acreage seems to play host to so little oil.11

This half-century of deepening oil dependency would be difficult to understand even if oil were known to be in endless supply. But what makes the depth of the current global addiction especially bewildering is that, for the entire time we have been sliding into the trap, we have known that oil is in fact in limited supply. At current rates of use, the global tank is going to run too low to fuel the growing demand sooner rather than later this century. This is not a controversial statement. It is just a question of when. One purpose of this book is to explain this.

Why, then, have we not been seeking an earlier transition to the alternatives that must lie beyond oil dependency? Hydrogen fuel, biofuels, fuel cells, and advanced batteries are among the technologies that can provide the direct power for transportation in the future. Solar and many other forms of alternative energy can provide the electricity to split water into hydrogen and charge batteries. This too we have understood for decades. We have also known that there are massive untapped reservoirs of oil savings in energy-efficiency measures and innovative mass transit. These alternatives may not be able to replace oil quickly or easily, given their tiny current markets. But they work, and in most cases they have been waiting for a green light for years. This is without any further fruits of human ingenuity, suitably directed. In a society that put a man on the Moon more than three decades ago, surely there can be no doubt that we could replace oil use if we seriously wanted to. I ask again, why have we not been fast-tracking the solutions to the problem long since? A second purpose of this book is to examine that question.

A third purpose of the book is to pose and endeavor to answer the question of how fast oil is now depleting. Finite resource that it is, there will come a day, inevitably, when we reach the highest amount of oil that can ever be pumped. Beyond that day, which we can think of as the topping point, or “peak oil” as it is often called, will lie a progressive overall decline in production. Putting the same question a different way, then, at the current prodigious global demand levels, where does oil’s topping point lie?

This is a question, I contend, that will come to dominate the affairs of nations before the first decade of the new century is out, and one whose broad parameters I will outline now.

The Late Toppers Versus the Early Toppers

A great battle is raging today, largely behind the scenes, about when we reach the topping point, and what will happen when we do. In one camp, those I shall call the “late toppers,” are the people who tell us that 2 trillion barrels of oil or more remain to be exploited in oil reserves and reasonably expectable future discoveries. This camp includes almost all oil companies, governments and their agencies, most financial analysts, and most business journalists. As you might expect, given this lineup, the late toppers hold the ascendancy in the argument as things stand.

In the other camp are a group of dissident experts, whom I shall call the “early toppers.” They are mostly people who have worked in the heart of the oil industry, the majority of them geologists, many of them members of an umbrella organization called the Association for the Study of Peak Oil and Gas (ASPO). They are joined by a small but growing number of analysts and journalists. The early toppers reckon that 1 trillion barrels of oil, or less, are left.

In a society that has allowed its economies to become geared almost inextricably to growing supplies of cheap oil, the difference between 1 and 2 trillion barrels is seismic. It is roughly the difference between a full Lake Geneva and a half-full one, were that lake full of oil and not water.12 If 2 trillion barrels of oil or more indeed remain, the topping point lies far away in the 2030s. The “growing” and “cheap” parts of the oil supply equation are feasible until then, at least in principle, and we have enough time to bring in the alternatives to oil. If only 1 trillion barrels remain, however, the topping point will arrive sometime soon, and certainly before this decade is out. The growing and cheap parts of the oil supply equation become impossible, and there probably isn’t even enough time to make a sustainable transition to alternatives.

Should the early toppers be right, recent history provides clear signposts to what would happen. Figure 1 shows the history of the oil price since 1965. We will return to this history in some detail later in the book, but let me summarize its main themes now. There have been five price peaks since 1965, all of them followed by economic recessions of varying severity.13

The most intense peaks were the first two. The first oil shock, in 1973, saw the oil price more than double, reaching around $35 per barrel in modern value. The cause was an embargo by the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, and triggered through overt American support for Israel at the time of the Yom Kippur War. World oil supplies fell only 9 percent, and the crisis lasted only for a few months, but the effect was simple and memorable for those who lived through it: widespread panic.

The embargo was short-lived in large part because the Saudis feared that if they kept it up they would create a global depression that would cripple the Western economies, and hence their own. As it was, the short embargo created a miserable economic recession. I spent much of it doing my homework by candlelight. I didn’t see much of my father. He was queuing for petrol.

The second and worst oil shock was triggered by the toppling of the Shah of Iran in 1979, and prolonged by the outbreak of the Iran-Iraq War in 1980. The first shock did not push prices as high as those at the time of writing, but the second shock pushed them to more than $80 a barrel in today’s terms. Again panic reigned, even though the interruption to global supplies was only 4 percent.

The crisis ended when the price fell in 1981 for three main reasons. First, the Saudis opened their taps. With their huge reserves, mostly discovered in the 1940s and 1950s, they were able to act as a “swing producer,” increasing the flow to bring prices down just as they had decreased it in 1973 to push prices up. Second, new oil came onstream from giant oilfields in more stable regions of the globe, including the North Sea. Third, large amounts of oil were released from government and corporate stockpiles.

These three reasons are high on the list of why we should worry today, because in the face of another shock things could not be resolved in a similar way. First, there are grounds to worry that the Saudis are pumping at or near their peak, no longer able to act as a swing producer, as we will see later. Second, the early toppers fear that there are no more giant oilfields left to find, much less wholly new oil provinces like the North Sea. Third, there is not much oil in storage, relative to current demand. The modern world works on the principle of just-in-time delivery. Our economies, overall, are more efficient in their use of oil than in the 1970s—a point much emphasized by late toppers—but the sheer weight of demand is much higher today, and it is still growing without an end in sight, or even strong governmental or corporate leadership demands that there should be one.

The Peak Panic Point

The cost of extracting a barrel of oil doesn’t change much. A good rule of thumb might be $5 a barrel today, though obviously there are variations between oilfields in different geographic and political settings. What influences the price of oil most is confidence in supply and demand among oil traders. Oil prices are already at their second highest levels ever, in real terms, at the time of writing. Some pundits now profess that they will reach their highest ever levels, in modern value, within 2005.14 This situation has arisen for many reasons, which we will look at later. But one of those reasons is manifestly not fear that the oil production topping point is near. Early topper arguments are not on the radar screens of the oil traders and analysts, as things stand. Should that happen, and should the mood of the packs on the trading floors flip to the view that we live no longer in a world of growing supplies of oil, but rather shrinking ones, the price will soar north of $100 a barrel very quickly. (It has reached $65 at the time of writing.)

An investor friend of mine has already concluded that this scenario is inevitable. He has switched his investment portfolio to anticipate the moment of “market realization.” This peak panic point, as he calls it, will not be limited to oil traders. The worlds of economics and business routinely assume a future in which oil is in growing and cheap supply. Economists tend to assume that their “price mechanism” will apply. Higher prices will lead to more attractive conditions for exploration. This will lead to more oil being found, and the inevitable discoveries will bring the price down until the next cycle. Massive corporations write five-year plans based on assumed access to cheap oil and gas. Think, for example, how important such access must be to a chemical company dealing in plastics derived from oil. Or a food-processing company reliant on oil for every stage of food transportation, including of perishable final products, plus almost all the bottling and packaging and many of the preservatives and additives. But suppose the economists and corporate planners are wrong? Imagine the collapse of confidence when a critical mass of financial analysts, across the full breadth of sectors in a stock exchange, conclude that they are wrong?

If the topping point is indeed imminent, economic depression looms as a real prospect. The Saudis were right to be scared of this possibility in the 1970s. In the Great Depression of the 1930s, triggered in 1929 by the worst-ever stock market crash, economic hardship was horrific. World trade fell by a breathtaking 62 percent between 1929 and 1932.15 The widespread unemployment and social unrest bred fascism in many countries, in some nations on a scale that would change the course of human history. As for the stock markets, it took them fifty years to regain their pre-collapse value in real terms.16

Library of Congress subject headings for this publication:
Energy industries.
Energy consumption.
Economic development.
International economic relations.