Does "Big Oil" have the resources to carry out your plan?
For starters, is it right to assume that the oil industry has an enormous amount of money to invest somewhere else at this time and in the short-term future? Apparently, yes. As oil becomes depleted, exploratory drilling drops because it is futile, additional tankers are largely unnecessary if there isn't additional oil, and as the industry approaches peak production there is less reason to expand refinery capacity. The industry isn't about to announce its investment strategy, but to the extent available, statistics bear this out. When oil was a growth industry, it was necessary steadily to increase refinery capacity. But it is uneconomical to build refineries that will be unnecessary long before their useful life is over. Global refinery capacity has hardly grown at all since the early eighties, and the excess of refinery capacity over production/demand dropped from 15 mbpd (close to enough to meet the entire US demand) to zero between 1980 and the peak in production of conventional oil, 1 increasingly recognized as having occurred in or around 2005. (Refineries are again being built, but overall, e.g. with several being built in China while five of Britain's eight have "for sale" signs, "the world needs fewer oil refineries.") 2 Additionally, exploratory drilling for conventional oil dropped from 11,000 wells to 3000 wells in the same period. 3 Similarly, oil tanker construction (92% of which takes place in South Korea, China and Japan) is slowing. 4 These changes began three decades ago, which suggests, notwithstanding a stance of public denial that continued until this year, the industry has been aware for that long of the coming peak. 5
And then, of course, is the industry's coming "free ride" from price escalation. It has been calculated that a 4% drop in supply could result in a 177% increase in gasoline prices(i.e. from $3/gal to $8.31/gal) and that a 15% drop in supply could result in a 550% increase in prices, (i.e. from $3/gal to $19.50/gal.), 6 that peak oil could "soon", according to Robert Hirsch, 7 result in $12-15/gal gasoline, and according to the former Shell President that gas will rise to $5/gal in 2012. 8 None of this should be too surprising, because the prices will have to cut consumption of oil generally by perhaps 20% by 2020. 9
While oil is sitting pretty relative to the rest of us, such figures might present almost as scary a prospect to the industry as they do to you and me. How can the oil industry get away from the oil shortages to which everyone else is about to fall victim? Well, China is increasing its demand by 10%/yr, doubling its consumption in 7 years, and (if it can keep up the frenetic pace) quadrupling consumption in 14 years. That would run the rest of the world down to zero. Zero petroleum by 2025. Of course doubling your consumption twice in fourteen years is a pretty good trick, but then you might get fire sale prices because the oil industry is rooting for you, and buying the oil and leaving it in the ground where no one else could touch it would work as well to take the oil away from everyone else. As we shall see, China is well on its way with the potential to increase its consumption by 50% just from its overwhelming success at the 2009 Iraq oil auction. In fifteen years, all the world could be destitute except for China and its chosen few neighbors, with a population arguably not too many for a permanent global steady state, and with half a trillion barrels of oil left all to itself to tide it over to sustainability, assuming it does not pollute the world to death.
China sitting by itself with its population is far from sustainable, notably because of a massive groundwater deficit for agriculture on the North China Plain 10 The country has long prided itself as being self-supportive for food, but has more recently been considering importation of grain as an alternative to extremely expensive water importation to the North China Plain, but neither alternative should be out of reach of a nation holding most all the oil. China, after all, performs a trick that looks inconceivable: being the world's greatest grain producer with farms averaging under an acre in size. 11 And were China to corner the world oil supply with enough to keep it going for a century or so, the rest of the world would be virtually defenseless to any attempts it makes to pick the plums of the remaining world's resources. It will be said by anyone who survives, "The sun never sets on the Chinese empire." 12
Is "Big Oil"moving into China as if it's planning to stay?
Is the oil industry in fact putting down roots in the Chinese economy? Glad you asked. Yes. International oil companies have been "pumping money into China," with BP, Shell and Exxon-Mobil "leading the surge." They are making the sort of investment that suggests they intend to stay awhile and think their industry will, too. They've been building 100 gas stations per month for years, the Kuwaiti Oil Company is building one refinery in China, 13 and Shell is building another. 14 And China itself is building refineries in Nigeria and Brazil. 15 This isn't how they'd behave it they thought China was going to run out of oil in a hurry. It's more as if they think China is cornering the market. And they should know.
Of course, there are the five billion or so people who would rather not see all the remaining oil going to China and its neighbors, and if it appears that's what's happening, may wish to intervene. Fifteen years is not much time, and while the scenario, like China's "astonishing" January 2009 to January, 2010 28% demand increase, seems improbable on its face, there is surprisingly little to stop it. A partnership between the oil industry and China is a pretty formidable one.
What we might expect is that the United States, with the most to lose, the most military might, and endless lip service to the importance of "energy independence," would step in to create some balance.. But consistent with Congress' long-established subservience to oil (the industry, not the commodity), the reverse is in fact happening.
Getting the oil to the "right market"
The oil industry has long had the ability to use the US Government to steer oil resources away from the US itself. Maybe you remember the fight over construction of the pipeline from Alaska's North Slope. This was just after peak US oil, and concerns about American oil "security," and American "oil independence" were as strong as they are today. There were two alternative pipeline routes: up the Mackenzie River Valley in Canada, ending in the US Midwest (the environmentally preferred alternative), and down through the completely undeveloped Alaskan interior to Valdez, the oil-industry preferred alternative. To be fair, "completely undeveloped" is hardly an accurate phrase. There were native Alaskan villages in the way, the rights of which Congress swept away in favor of the oil industry with the Alaska Native Claims Settlement Act of 1971. 16 The oil industry maintained that it was important for the sake of "security" and "oil independence" that the route be entirely "on American soil." All of that made sense until Charles Cicchetti, then an economist at John Hopkins, pointed out that from an economic point of view it made no sense to build the pipeline to Valdez rather than to the Midwest if the oil were to remain in the US, because there was a surplus of low-priced oil on the West Coast but a short supply of high-priced oil in the Midwest. . The only way the oil industry would prefer the Alaskan route, he said, was if it intended to sell to Japan rather than to the US. 17 So much for American oil "independence." The Alaskan route was chosen by Congress anyway. A restriction was placed in the bill that said the oil could not be shipped directly from Valdez to Japan, but that did not change Cicchetti's calculus—that we needed the oil in the Midwest, and didn't need it on the West coast. Thus the US Government was willing as long ago as 1972 to assist oil companies in reducing the supply of American oil to American citizens, all in the name of oil independence.
Since at least 1998, there has been an odd dichotomy between the perceived strategic aims of the US in Afghanistan and Iraq, and the actual beneficiaries of our intevention.. Almost immediately after 9/11, there arose a cottage industry of "It's about oil" writing, 18 and it probably is. This writer recalls being part of the fan club and an occasional contributor That is not the focus of this article. What is odd is the dichotomy—a confusion between a war for oil and a war for oil companies.
Columnist George Monbiot said it all on October 23, 2001, in a column titled "America's pipe dream. A pro-western regime in Kabul should give the US an Afghan route for Caspian oil." He argued,
If the US succeeds in overthrowing the Taliban and replacing them with a stable and grateful pro-western government and if the US then binds the economies of central Asia to that of its ally Pakistan, it will have crushed not only terrorism, but also the growing ambitions of both Russia and China. Afghanistan, as ever, is the key to the western domination of Asia. 19But what was the "Afghan route for Caspian oil" that a "pro-western regime in Kabul should give the US"? John Maresca. Unocal Vice President and former US diplomat, 20 described it in testimony on invitation from Congress in February, 1998, 21 in which he discussed the need to remove the Taliban so as to make way for pipelines to carry Caspian crude and natural gas across Afghanistan to the coast of Pakistan, where it could be shipped to India and China. Maresca's testimony is a fount of information for conspiracy buffs, but it stands on its own as an indicator of US policy with regard to energy for China. Maresca said that the Caspian oil was likely "enough to service Europe's oil needs for 11 years" if exported through a pipeline to the Mediterranean, and that the Caspian could be producing 4.5 mbpd by 2010. In 1998 China, by comparison, consumed 4.1 mbpd. 22 Nonetheless, Maresca recommended against reliance on the pipeline to the Mediterranean and in favor of a pipeline across Afghanistan that would service India and China. Unocal presumably was aware that peak oil would occur in the interim, so giving oil to China was taking it from the rest of the world.
While Maresca's testimony later proved optimistic and the oil pipeline across Afghanistan for Caspian crude, specifically endorsed by Robert W. Gee, Assistant Secretary for Policy, U.S. Department of Energy at the time of Maresca's testimony, 23 is apparently no longer on the table, it is nonetheless indicative of what Congress was willing to give away to China. Why was this Maresca's recommendation?
He explained that a western route, out through the Mediterranean, would not have the capability to move it to the "right markets." The Mediterranean route was designed for export of Caspian oil to the United States and Europe, 24 implicitly the "wrong markets." Predictably, he mentioned Europe but not the United States in this testimony invited by the US Department of Energy. East Asia, he predicted, was "a different story altogether" and could be expected to more than double its demand before 2010. That in fact happened.
Such predictions, of course, always have an element of self-fulfilling prophecy. As discussed below, investment rather than exports is the primary driver of GDP growth in China, and foreign investments in China multiplied by ten in the six years prior to Maresca's testimony, to a level that has been approximately 10% of the GDP ever since. 25 So in modern China, if one must ask "Which came first, the chicken (foreign investment) or the egg (economic growth)?" the answer appears to be, "The chicken." Promoting oil for China promoted foreign investment.
Next, Maresca told his listeners, twice for emphasis, that:
"The territory across which the pipeline would extend is controlled by the Taliban, an Islamic movement that is not recognized as a government by most other nations. From the outset, we have made it clear that construction of our proposed pipeline cannot begin until a recognized government is in place that has the confidence of governments, lenders and our company."
Maresca was asking Congress to intervene in Afghanistan in a manner that would shift oil, and ultimately jobs, to China.
Notes:
1 See http://www.imf.org/external/pubs/ft/weo/2006/01/chp1pdf/fig1_21.pdf. "Conventional" oil means that which is pumped from fields on the land or under shallow water, is not under deep sea and does not come from "tar sands," shales, etc. See Colin Campbell, "Peak Oil: an Outlook on Crude Oil Depletion." The "unconventional" oils exist in staggeringly high amounts, but are often useless as energy sources because the energy recovered over the energy in ("EROEI") is numerically less than one. Even to the extent practically recoverable, none of these sources can be developed quickly enough to eliminate shortfalls in the near future.
2 Martin Quinlan,"Refining: short-term improvement, long-term problems." Petroleum Economist June 2010
3 Colin Campbell, "Peak Oil: an Outlook on Crude Oil Depletion."
4 MIC, "World Ship-Building forecast shows weak-but-steady growth in oil and as tanker fleet over next five years."
5 1980 was when Ronald Reagan was elected President. His environmental policies demonstrated a strong allegiance to the oil industry, and his support for massive public and private debt and large-scale development of unsustainable oil-guzzling suburbia, set the stage for much of America's present predicament. Did his policies reflect what the oil industry knew would come three decades later? That's a question for historians, if history survives the next few decades.
6 Stanton, "Is the UK ready for an oil shortage?"
8 From Cleanmpg.com
9 See graph in Nicholas C. Arguimbau, "Imminent Crash of the Oil Supply..."
10 "Water Policy Briefing: Choosing Appropriate Responses to Groundwater Depletion," International Water Management Institute, Colombo, Sri Lanka. This report is exclusively on the North China Plain problem. IWMI in Sri Lanka is an excellent source of materials on global water problems.
11 UN Food and Agricultural Organization (FAO), Agricultural Outlook 2010-2019 (2010)
12 Credits to John Wilson, who is said to be the originator of "The sun never sets on the British Empire."
13 "China: Foreign Oil Companies Boosting Investments," Energy Tribune January 27, 2007
14 "Shell, CNOOC Parent in Talks on Refinery Deal, China Daily Says," Bloomberg News, Jan 10, 2011
15 http://www.glennbeck.com/2011/01/14/footnotes-research-for-tv-1142011-china-special/
16 (43 USC 1601-1624) — Public Law 92-203, approved December 18, 1971 (85 Stat. 688)
17 Cicchetti, C.J. 1972. "Alaskan Oil: Alternative Routes and Markets." Baltimore: Johns Hopkins University Press. Congress placed a provision in the bill limiting direct shipment from Valdz to Japan; whether it alleviated the situation, this writer does not know. But it could not change the fact that from an American standpoint, the oil was needed in the Midwest but not on the West Coast.
18 Cvf. Ted Rall, "It's About Oil". The San Francisco Chronicle: November 2, 2001
19 George Monbiot, The Guardian, Tuesday 23 October 2001
20 http://commdocs.house.gov/committees/intlrel/hfa48119.000/hfa48119_0.HTM
21 Mr. Maresca's testimony, made on invitation of the House Committee on International Relations Subcommittee on Asia and the Pacific, may be read at http://www.serendipity.li/wot/wsap212982.htm.
22 US Energy Information Administration. Independent Statistics and Analysis, International Petroleum (Oil) Consumption. Researchers will find the EIA data bank invaluable
23 http://commdocs.house.gov/committees/intlrel/hfa48119.000/hfa48119_0.HTM
24 Leyla Tabasaranskaya (Senior Supply Chain Officer, Supply Chain Management Department, BP Azerbaijan Business Unit) "Baku—Tbilisi-Yhan Pipeline Project Underway," UK Trade and Investment
25 FDI inflows into China 1984-2009,The rise of foreign direct investment (FDI), Chinability
