The Energy Crunch
BY AARON NAPARSTEK
The election-year mudslinging over gas prices officially began on March 29, when Dick Cheney accused John Kerry of flip-flopping on his support for increased gas taxes. "After voting three times to increase the gas tax and once proposing to increase it by 50 cents a gallon," Cheney charged, "he now says he doesn't support it."
With gas prices rising to record levels, Kerry was only too happy the vice president brought up the topic. That evening, Kerry told the crowd at a San Francisco fundraiser that if the cost of a gallon kept creeping toward $3, "Dick Cheney and President Bush are going to have to carpool to work together. Those aren't Exxon prices, ladies and gentleman, those are Halliburton prices!" That zinger elicited a huge roar and zipped around the world as the sound bite du jour. It was such a hit, Kerry added it to his stump speech.
The Bush campaign struck back with a new television ad, entitled "Wacky." "Some people have wacky ideas," says a mildly sarcastic male voice. "Like taxing gasoline more so people drive less. That's John Kerry." A vaudevillian image of 12 guys in business suits riding a gigantic, clownish bicycle jitterbugs across the screen.
You can't squeeze a whole lot of policy detail into a 30-second ad or an evening-news sound bite. But after sifting through the rhetorical chaff on gas prices, the parameters of the current national debate on energy policy become clear.
For the Bush campaign, gas taxes are out of the question. There will be no discussion of, say, the wide-ranging benefits that Europeans have derived from their $5 per gallon, or the fact that we pay a gas tax to the Saudis rather than our own public coffers. Gas taxes are simply "wacky." You'd have to be even more "wacky" to talk about people driving less.
The message coming from the Democrats is equally demagogic. Though the Kerry campaign has issued policy papers focused on reducing American dependence on foreign oil (buried deep within the Kerry web site), in public he has tended to steer clear of discussing these ideas. Rather, he uses his airtime to criticize the president.
While crowds love Kerry's line about Bush and Cheney riding to work together, there is something disappointing about the Democratic nominee ridiculing the idea of carpooling. In addition to reducing traffic, car-sharing happens to be one of the fastest, cheapest, most high-impact ways that Americans can make real reductions in daily oil consumption. Car-sharing should be part of the Democratic platform, not a laugh line.
Kerry and the Democrats' other gasoline talking points are equally ill-advised. Telling the president to do a better job of "jaw-boning" the Saudis does not address the need to make America less beholden to foreign energy suppliers. Nor does the call to release oil from the Strategic Reserve.
The strategy for both campaigns so far has been pretty simple: Gas prices are rising rapidly. Blame it on the other guy. Present yourself as the guy who will make gas cheaper.
In the age of the 30-second campaign ad, we've come to expect this sort of approach to complex issues. It's the norm. But America is on the cusp of an energy crisis that is going to redefine the way we live--whether our leaders prepare us for it or not.
IN 1956, a Shell Oil geologist named M. King Hubbert stood up before a meeting of the American Petroleum Institute and, much to the chagrin of his bosses, predicted that oil production in the continental United States would peak and begin to decline starting in the early 1970s.
According to his colleague and author of the book, Hubbert's Peak, Ken Deffeyes, "Almost everyone inside and outside the oil industry rejected Hubbert's analysis." They simply didn't want to hear it. The 1960s was the greatest decade of global oil discovery ever. Vast new reserves were found all over the world. Soon all but a faithful few simply forgot about Hubbert's forecast.
Hubbert arrived at his prediction through an analysis of oil-field discoveries. By 1956, after drilling tens of thousands of holes across the continental United States, some oilmen had a pretty solid idea of what was in the ground. The discovery of new reserves in the lower 48 had peaked in the 1930s and had been in decline ever since. Hubbert noted that, when plotted over time, the rate of discovery formed a nearly perfect bell-curve. He theorized that the annual rate of oil production would form a similar bell curve, more than a few decades later. The highest point of this second curve would be the year that the U.S. produced more oil than it ever had before and ever would again. That would be the "oil peak."
As Deffeyes is quick to tell you, "Old Hubbert was right." America never again produced as much as it did in 1970, despite a drilling boom that produced four times more oil wells each year. Since then, oil production has been in steady, rapid decline--the downhill side of Hubbert's bell curve. Today, we extract about 3.4 million barrels per day from the lower 48, about one-third of what we were getting at peak.
In recent years, scientists have built on Hubbert's techniques in an effort to discover how close we are to global oil peak. Though the estimates vary, everyone agrees that the question of global peak is not "if" it will occur, but "when." Based on 65 studies published over the last 50 years, the UK-based Oil Depletion Analysis Center estimates the world's original endowment of sweet, crude "conventional" oil to be somewhere between 2000- and 2400-billion barrels. As of today, humanity has consumed close to half that total.
The consequences of this are hard to overstate. Oil fuels 95 percent of all transportation and a significant portion of global food production. Industrial societies are dependent on a vast, steady flow of inexpensive petroleum for just about everything we make and do. Disrupt this flow, and modern society as we know it is inconceivable.
Global demand for oil has increased sevenfold over the past 50 years. In 1986 human beings consumed about 54 million barrels of oil each day. Today we use about 82 million. Though Americans make up only 5 percent of the world's total population, we consume more than one-quarter of this energy--about three gallons per person each day. U.S. oil demand sets a new record every few months.
The developing world, led by China, is catching up to us. In the last decade, Chinese oil consumption has doubled, while Chinese car ownership has jumped from 700,000 to seven million.
"There are basically six and a half billion people on earth today and five billion of them barely use energy. They all aspire to," says Matt Simmons, chief executive of Simmons & Company, the world's biggest energy-industry investment bank.
Yet new sources of oil are becoming increasingly difficult to find and more expensive to develop. Global discovery peaked in 1964 and has declined ever since. In 2000, there were 16 discoveries of oil "mega-fields." In 2001, we found eight, and in 2002 only three such discoveries were made. Today, we consume about six barrels of oil for every one new barrel discovered.
The U.S. Dept. of Energy estimates that the world will require 120 million barrels a day by 2025. To meet that demand we must find the equivalent of 10 new North Sea oil fields within a decade. These fields, before peaking at the end of the 90s, were producing close to six million barrels of oil per day. Today, we are hard-pressed to discover one new mega-field, let alone 10 reserves equaling the size of the North Sea, which is now in serious decline. This year, 11 new mega-projects came online; next year, 18 will start producing. But by 2008 only three big new fields are scheduled to start flowing, with no new projects on track for 2009 or 2010.
According to Dr. Colin Campbell, a former exploration geologist and oil company executive who is generally considered to be the dean of global oil depletion experts, "there is no way on Earth" that level of demand predicted by the U.S. government and many oil industry analysts "can be fulfilled."
Just as Hubbert predicted for the U.S., a decline in discovery presages a decline in production. Says Campbell: "If you add it all together, you get a peak of what I call ordinary oil in 2005 and a peak of unconventional oil in around 2007. By 2010 volatility comes to an end. Then, terminal decline."
Campbell's oil peak prediction is right in line with no fewer than 12 recent studies, using a variety of different assumptions and demand projections. They all foresee accelerating decline in global oil production within the coming decade. Even the most conservative studies, using highly optimistic estimates of future oil discoveries and low estimates of future demand, predict a global oil peak by 2020. No matter how you slice it, global oil supply will soon begin a steep, permanent, irreversible decline.
AS WE APPROACH the global oil peak, the world will grow increasingly dependent on Middle Eastern oil supplies. Already, 50 oil-producing countries have passed their peak, including the United States, which now imports 60 percent of its oil. The only excess production capacity in the world--that is, the only countries that are able to meet increasing daily demand--resides in the handful of oil-rich Persian Gulf states.
The Middle East accounts for nearly one-third of the world's total daily oil supply, and as other oil provinces reach their peak and begin to decline, that share is growing. Saudi Arabia alone controls one-quarter of these reserves. But despite Saudi assurances about the size of their future reserves, analysts are increasingly worried about the steady flow of Saudi oil that the world so depends upon.
First is the problem of security. A coordinated strategy has emerged among militants in the Middle East to sabotage oil infrastructure and target Western oil workers. In recent weeks, explosives-laden boats exploded alongside oil tankers in the Persian Gulf; gunmen burst into the offices of an Exxon-Mobil oil refinery in Saudi Arabia and killed seven workers; and Iraqi oil pipelines were sabotaged three times, disrupting the flow of 1.7 million barrels of oil per day.
The specter of increasing chaos in the region makes it difficult for Western oil companies to provide Saudi Arabia and other Gulf countries with the technological and financial support required to develop the reserves that would be necessary to increase its daily production.
"Even if the oil is there, is any American firm going to be anxious to go into Saudi Arabia and develop it at this point?" asks money manager Stephen Leeb and author of The Oil Factor. "You'd have to have rocks in your head."
The Oil Depletion Analysis Center estimates "the military costs of protecting pipelines and tanker routes, borne mainly by U.S. taxpayers, at around $15 to $20 per barrel."
A second major problem is the fact that the Saudis will not allow any independent third-party observer to examine their reserves, operations and books. It's off-limits and "totally opaque," according to Simmons. Analysts can't even know for sure exactly how much oil the Saudis produce each day. Often, the only way they can begin to divine these numbers is by measuring tanker traffic.
In general, OPEC numbers are extremely shifty, or as Colin Campbell less charitably describes them, "complete rubbish." Each OPEC member's daily production quota is based on their total reserves. Since each country tends to want to pump more and generate greater revenue, they have a history of overstating the estimates of how much oil they actually have in the ground. During the 80s, estimates of OPEC's total reserves magically jumped from 353 to 643 billion barrels, despite the lack of new oil fields or significant improvements in drilling technologies. The Saudis themselves jacked up their stated reserves from 170 to 257 billion barrels.
Matt Simmons has personally pored over 40 years' worth of Saudi petroleum reservoir engineering reports. A participant in Dick Cheney's secret energy taskforce meetings of 2001, he is lobbying for a totally new system of corporate disclosure in oil and gas data.
"I do data analysis," Simmons says. "And the data analysis is getting increasingly scary. We have clearly grossly overstated proved reserves."
Many believe the Saudis no longer have the excess production capacity necessary to calm global markets. "The good news," says Deffeyes, "is that OPEC is no longer in charge of the price of oil. The bad news is that nobody is in charge of the price of oil."
Simmons and others say that the recent Royal Dutch/Shell scandal is just the tip of the iceberg. Shell stunned the financial world four months ago by revealing that it had overstated its proven reserves by a full 20 percent. Since then, Shell has cut its reserves four times, wiping 4.9 billion barrels off of their balance sheet.
"Most of us can't believe Shell is the only one," says Deffeyes. "Traditionally, they've been very good and conservative in their accounting practices. A bunch of us suspect they are probably just the first to come clean."
Colin Campbell agrees, and sees the Shell case as a watershed event. "This really is the moment of truth, because all these games and foolery have finally reached their end," he says. "You can't paper over it anymore. I'm quite sure that all the major companies will come out with similar announcements."
Campbell points to mergers of companies like Exxon-Mobil and BP-Amoco as more evidence of impending decline. The mergers create growth on the companies' balance sheets despite the fact that actual oil discoveries are in rapid decline, production is tapering off and reserves are probably overstated.
The bottom line is that analysts don't have enough data to know what the suppliers of the world's most vital economic resource can or cannot provide in the coming years. But they know enough to be very worried.
As Simmons recently said in an interview with Julian Darley, founder of the Post Carbon Institute, "If this were corn flakes, it actually doesn't matter because if we ever ran short of corn flakes, then we have ample granola. But this isn't corn flakes."
His final assessment of the Saudis is chilling. "We could be on the verge of seeing a collapse of 30 or 40 percent of their production in the imminent future, and imminent means sometime in the next three to five years--but it could even be tomorrow. If we need a plan B, it would sure be nice to know that with a little bit of advance warning."
THE IMPLICATIONS OF the global oil peak could not be more profound. As increasing demand exceeds supplies, oil prices will rise substantially and international competition for reserves will grow ever more rancorous. The impact will be felt throughout the global economy and in every American's wallet.
Today, Americans are panicky over the impact of a $40 barrel of oil. In his new book, Stephen Leeb predicts, "Oil prices are likely to rise to triple-digit territory--$100 a barrel at a minimum, and probably higher--by the end of the decade and possibly sooner." He sees the high, unstable price of energy wreaking havoc.
"Inflation and deflation will seesaw back and forth in chaotic fashion, with inflation generally ascendant but not always."
Economic growth, as we have come to know it, is entirely dependent on a vast, continuous flow of remarkably cheap oil. As Simmons says, "Peak does not mean oil has run dry, it does mean that growth is over. Who would like to get on the plane and go tell India and China, sorry guys, your spurt is over. We used your energy."
Critics of the peak oil theory point out that we have heard these Malthusian doomsday predictions before. Ever since Col. Edwin Drake drilled the first oil well in Titusville, PA, in 1859, pessimists have been predicting the imminent end of oil. But this isn't 1973. We simply aren't discovering big new oil fields anymore. The oil crises of the 70s were about politics and the holding back of existing supplies. The coming crisis is about geology and the unchecked growth of demand.
"I have studied the depletion issue intensely for too long now to have any remaining doubts about the severity of the issue," Simmons says. "Not a soul has been able to produce evidence that the depletion issue is not real, nor have I had anyone at any time lay out a credible way that the world could actually add so much supply within such a short period of time. Sadly, there is no factual data to support the 'sense' that the world will be awash in cheap oil and gas forever."
Likewise, the U.S. economy has in the past been protected from the impact of energy price increases because energy costs have been so low and such a small percentage of total economic activity. According to Stephen Leeb, those days are coming to an end. "If the price of energy is only five percent of the total economy then increases aren't so important. When energy costs become 10 percent of the economy, that's significant. We're at about eight percent right now. That's very close to the tipping point."
When the tipping point comes, Americans will be compelled to live very differently than they do today. One leading American social critic, James Howard Kunstler, sees serious political and cultural turmoil up ahead as the way of life Americans have built over the last 60 years begins to break down. With decreasing access to cheap oil, Kunstler sees the fundamentals of industrial agriculture, manufacturing and retail trade changing significantly.
"The whole Archer Daniels Midland model of turning oil into corn into Taco Bell--that whole complex, that system, is really going to be over," says Kuntsler. "We're going to be forced to grow more of our food locally and return to a kind of agriculture that really hasn't been practiced here in a long time. A lot of the land that has only had value as suburban development in the past 30 or 40 years is going to have to be reassigned."
Likewise, Kunstler foresees "the demise of Wal-Mart style, big box, national chains." Companies whose profit margins depend on "merchandise made by factories 12,000 miles away" simply won't function in a world of $100-plus barrels of oil. "We're going to have to seriously reorganize our whole system of retail trade and economy."
Along with many scientists, Kunstler believes George Bush's "hydrogen economy" rhetoric is a "fantasy" and a stall tactic to avoid making immediate changes. "It's kind of a cruel hoax as far as the public is concerned because it raises expectations that we're going to be able to continue living this way, and we're not."
As the changes come down upon us, Americans may have a difficult time understanding what is happening and why. As we're already seeing in this year's simplistic and demagogic presidential- campaign discussion of gas prices, political leaders may find it easier to focus more on whom to blame rather than how to come together to address the fundamental problem.
"Many Americans will draw the conclusion that they're being somehow cheated by the oil companies or that there's some kind of corporate conspiracy that's causing all this trouble and they're going to militate to do something about it and, of course, that won't really be the problem. The problem is geological--about what's in the ground and where it's at and how much of it there is. I think that we'll elect maniacs to try to turn back the clock and bring back the 1990s," Kunstler says.
"It's going to be very painful and there are going to be a lot of losers created in this process. They're going to be angry."
Matt Simmons is not prone to hyperbole. That's why you sit up when he says Americans should be taking the peak oil crisis "as seriously as we took the threat of thermonuclear war."
He thinks there should be hysteria over rising gas prices, but the hysteria should be there for a different reason. "America got so spoiled with energy costs being free. We need to do a better job of explaining how cheap a $2 gallon of gas actually is."
There is ample evidence that Americans would respond favorably to a presidential candidate who stepped up and talked about energy issues in an honest, straightforward way and began preparing Americans for the bumpy ride ahead.
According to one participant in a recent series of yet-to-be-published campaign research studies by Republican pollster Frank Luntz, Americans are responding "favorably to any messaging that includes corporate accountability--and even more favorably to industry efforts to utilize alternative energy sources such as wind and solar."
Oil giant BP-Amoco's successful recent corporate makeover suggests the same thing. BP's public image, by any metric you choose, went through the roof after they changed their brand to mean "Beyond Petroleum" and began projecting an image of caring about the environment. If you want to buy a super-efficient Toyota Prius these days, there's an eight-month waiting list. Toyota can't make them fast enough to keep up with demand. The American people may be more ready to have a serious discussion about energy than their political leaders give them credit for.
Running as the Anti-Bush, Kerry has so far failed to craft a compelling theme for his campaign. Yet it is not at all difficult to imagine the Democrats building an inspiring message around energy. Americans' relationship to energy underlies and ties together most of today's headlines--gas prices, Middle Eastern terrorism and war, the environment, suburban sprawl, traffic-clogged roadways, the obesity epidemic. Talking about changing the way that we think about and use energy would give Kerry an entry point into discussing just about every hot-button issue in American life today.
Kerry could use rising gasoline prices and spiraling violence in the Middle East as a way to create a sense of urgency around energy issues. He could propose a Manhattan Project for energy independence. Such a project would include converting our blackout-prone electrical grid to wind power, incentives for high-fuel-efficiency automobiles, rebuilding the nation's passenger rail system and re-designing American communities for less automobile dependency. Like the creation of the federal highway system in the 50s--also predicated on urgent national defense needs--a massive investment in a sustainable energy economy would create new industries, research, jobs and benefits that we probably can't even imagine. It would also give the nation a sense of mission.
Unlike President Bush, who after the crisis of Sept. 11 asked the American people to go shopping, Kerry should ask something meaningful of the American people. He should ask every American to change at least one thing in their homes, workplaces and communities to make the nation a bit more independent of foreign energy. Americans would respond. We love self-help and personal transformation. It's our national religion.
In fact, only in the last few days, the Kerry campaign has started to head in this very direction, including more substantial discussion of energy in his campaign speeches. "A strong America begins at home," he said, "with energy independence from the Middle East... Our dependence on foreign oil is a problem we must solve together the only way we can: by inventing our way out of it. Let's ensure that no young American soldier has to fight and die because of our dependence on foreign oil."
Energy. Power. Change. These are the campaign themes of a presidential candidate worth electing this year.