The Cheap Oil Mirage
By James Kunstler
The American public is understandably happy to see the bottom fall out of the oil futures market. But temporary circumstances are only sending them another false signal that everything is perfectly okay on the oil scene. And it only reinforces the foolish belief that when prices go up it is solely because corporate finaglers tweak them up on purpose. In fact, these days it's the other way around: often prices go down because corporate finaglers are tweaking the markets, dumping positions, playing shorts rather than acting like real oil users bidding on real contracts for delivery for real purposes like making gasoline. When oil goes up, as it certainly will again, it is primarily because of geology -- what's left in the ground -- and secondarily because of geopolitics -- where it's left in the ground (and what's happening there).
The supernaturally warm winter temperatures have also played a part, keeping inventories high while the home furnaces idle. (Last week it was 70 degrees in Albany, NY.) There is surely some demand destruction in the background. Third World nations are increasingly dropping out of the bidding (meaning their generators quit making electricity and their trucks stop running). And a contracting US economy may also play a part. But even these circumstances may not overcome the supply problems in the real oil world. Here's what's going on:
As a baseline, it helps to understand that the four largest super-giant oil fields of the world are now in decline. They have been responsible for producing 14 percent of the world's oil supply. They are now old and tired (thirty years is old in the oil world) and they are in depletion. These are The Cantarell field of Mexico, the Burgan field of Kuwait, the Daqing field of China, and the granddaddy of them all, the Ghawar field of Saudi Arabia.ncy.
The Cantarell field is a horror story. Pemex, the Mexican national oil company, tried to conceal the dire developments, because Cantarell alone is practically the whole Mexican oil industry. But it is now self-evident that Cantarell is crashing, with a 40 percent annual decline rate projected ahead, meaning a couple of years and it's out. Mexico is America's second largest source of oil imports (after No. 1 Canada and before No. 3 Saudi Arabia). When Cantarell crashes, the Mexican oil industry will crash and the US will be out a major source of imported oil. The US will also be out of imports that were so conveniently close they could be shipped by pipeline rather than tanker ships. For its part, Mexico will be out of a major source of export hard currency revenue and as its economy crashes will probably become even more politically unstable -- meaning more Mexican citizens desperately seeking to get out. Guess where.
Burgan is is in decline. The Kuwaitis announced it themselves last year. Daqing has been the major source of China's domestic oil, which is otherwise paltry, meaning Daqing's decline will only make China more desperate for imports. Ghawar remains shrouded in mystery, since Saudi Aramco does not welcome outside audits. But at 50 years old it is well past the mean age of peak production for oil fields and that alone probably tells the story. Beyond that, we know that Ghawar is producing with a (best case) 35 percent "water cut" (and perhaps much higher). They have to pump seawater into the field (a standard practice) to keep the oil coming out under pressure. The trouble is that they are getting this substantial water cut after redeploying their equipment for horizontal drilling -- an ominous sign. Saudi Arabia declared last year that it would increase production to 12 million barrels a day by 2009. By close of 2006, it appeared to have trouble producing 9 million, with prospects for a 4 percent annual decline rate in the years just ahead.
Elsewhere, Iran is not only past peak, but its domestic demand is so high that it cannot maintain its export levels. The North Sea, which saved the West's ass through the 1990s, is now crapping out at a steep decline rate. Iraq is on track to Palookaville, despite substantial reserves, and even if, by some miracle, its tired old oil infrastructure survives the war, the US may lose access to future production for geopolitical reasons that should be obvious.
Venezuela is past peak for conventional liquid crude and hurting badly for technical expertise to work its oil fields since Hugo Chavez purged the state oil company's management. Last year, Venezuela had to import Russian oil to avoid defaulting on contracts. Whatever the true condition of Venezuela's industry, Chavez is not disposed favorably toward the US -- he hosted Iran's president Ahmadinejad last week to signal that both of them were on the same page where the US was concerned.
The situation in US production is grim. We peaked in 1970. East Texas is near total depletion, with a 99 percent water cut (it produces "oil-stained water). Prudhoe Bay in Alaska now has a 75 percent water cut. We're on track to produce under 5 million barrels a day in 2007 (down from a 1970 high of about 10 million), and heading relentlessly further down year-on-year. We burn through more than 20 million barrels a day. Do the math and see above (re: potential imports) for our prospects.
So, for now the US public (here in the East, anyway) is enjoying both a winter-of-no-winter and a season of comfortably lower oil prices. The financial markets are doing a triumphal dance in expectation of soaring equity values. And the news media is lumbering along with its head up its ass.
Last week, however, the US Senate Committee on Energy and Natural Resources, in an extraordinary session, heard testimony that the nation is in grave danger of a permanent oil crisis. Some of these senators affected to be shocked and surprised. What planet have they been living on? What is the nation getting for the hundreds of million of dollars paid to their staffers? Outgoing Republican chair, Senator Pete Domenici (R-NM), said to the witnesses that “what you told us today is absolutely startling with reference to the future.” Is it too early for a dumbfuck of the year award?
Perhaps the most valuable message the committee got came from Dr. Flynt Leverett from the New America Foundation, who said: “…there is no economically plausible scenario for a strategically meaningful reduction in the dependence of the United States and its allies on imported hydrocarbons during the next quarter century.” That's the straight dope and we'd better stop pretending otherwise.
We'd also better stop pretending that alt.fuels such as ethanol, bio-diesel, coal liquids, or hydrogen will allow us to keep up the happy motoring. We have to make other arrangements for daily life. We don't have a moment to lose. Our "to do" list is very long. If we waste our time in recrimination or hand wringing we are going to lose the things we value most, including an orderly society. So, don't be fooled by the temporary fall in oil prices. We're in the zone of the long emerge.