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THE POLITICS OF OIL: CASHING IN ON THE FEAR FACTOR
By Michael T Klare
Asia Times Online, Hong Kong
Sept 27 2006
Just six weeks ago, gasoline prices at the US pump were hovering at
the $3-per-gallon (79 cents a liter) mark; now they're inching toward
$2 (53 cents a liter) - and some analysts predict even lower numbers
before the November elections. The sharp drop in gasoline prices has
been good news for US consumers, who now have more money in their
pockets to spend on food and other necessities - and for President
George W Bush, who has witnessed a sudden lift in his approval ratings.
Is this the result of some hidden conspiracy between the White House
and Big Oil to help the Republican cause in the elections, as some
are already suggesting? How does a possible war with Iran fit into
the gasoline-price equation? And what do falling gasoline prices tell
us about "peak oil" theory, which predicts that we have reached our
energy limits on the planet?
Since gasoline prices began their sharp decline in mid-August, many
pundits have tried to account for the drop, but none have offered
a completely convincing explanation, lending some plausibility to
claims that the Bush administration and its long-term allies in the
oil industry are manipulating prices behind the scenes.
In my view, however, the most significant factor in the downturn
in prices has simply been a sharp easing of the "fear factor" -
the worry that crude-oil prices would rise to $100 or more a barrel
because of spreading war in the Middle East, a US strike at Iranian
nuclear facilities, and possible Katrina-scale hurricanes blowing
through the Gulf of Mexico, severely damaging offshore oil rigs.
As the summer commenced and oil prices began a steep upward climb,
many industry analysts were predicting a late-summer or early-autumn
clash between the US and Iran (roughly coinciding with a predicted
intense hurricane season). This led oil merchants and refiners to fill
their storage facilities to capacity with $70-$80-per-barrel oil. They
expected to have a considerable backlog to sell at a substantial
profit if supplies from the Middle East were cut off and/or storms
hit the Gulf of Mexico.
Then came the war in Lebanon. At first, the fighting seemed to confirm
such predictions, only increasing fears of a regionwide conflict,
possibly involving Iran. The price of crude oil approached record
heights. In the early days of the war, the Bush administration
tacitly seconded Israeli actions in Lebanon, which, it was widely
assumed, would lay the groundwork for a similar campaign against
military targets in Iran. But Hezbollah's success in holding off the
Israeli military combined with horrific television images of civilian
casualties forced leaders in the US and Europe to intercede and bring
the fighting to a halt.
We may never know exactly what led the White House to shift course on
Lebanon, but high oil prices - and expectations of worse to come - were
surely a factor in administration calculations. When it became clear
that the Israelis were facing far stiffer resistance than expected,
and that the Iranians were capable of fomenting all manner of mischief
(including, potentially, total havoc in the global oil market),
wiser heads in the corporate wing of the Republican Party undoubtedly
concluded that any further escalation or regionalization of the war
would immediately push crude-oil prices over $100 per barrel.
Prices at the gasoline pump would then have been driven into the
$4-$5-per-gallon range ($1-$1.30 per liter), virtually ensuring a
Republican defeat in the mid-term elections. This was still early in
the summer, of course, well before peak hurricane season; mix just
one Katrina-strength storm in the Gulf of Mexico into this already
unfolding nightmare scenario and the fate of the Republicans would
have been sealed.
In any case, Bush did allow Secretary of State Condoleezza Rice to
work with the Europeans to stop the Lebanon fighting and has since
refrained from any overt talk about a possible assault on Iran.
Careful never explicitly to rule out the military option when it
comes to Iran's nuclear enrichment facilities, since June he has
nonetheless steadfastly insisted that diplomacy must be given a chance
to work. Meanwhile, we have made it most of the way through this year's
hurricane season without a single catastrophic storm hitting the US.
For all these reasons, immediate fears about a clash with Iran,
a possible spreading of war to other oil regions in the Middle
East and Gulf of Mexico hurricanes have dissipated, and the price
of crude oil has plummeted. On top of this, there appears to be a
perceptible slowing of the world economy - precipitated, in part,
by the rising prices of raw materials - leading to a drop in oil
demand. The result? Retailers have abundant supplies of gasoline on
hand and the laws of supply and demand dictate a decline in prices.
Finding energy in difficult places How long will this combination of
factors prevail? Best guess: the slowdown in global economic growth
will continue for a time, further lowering prices at the pump. This is
likely to help retailers in time for the Christmas shopping season,
projected to be marginally better this year than last precisely
because of those lower gasoline prices.
Once the election season is past, however, Bush will have less
incentive to muzzle his rhetoric on Iran and we may experience a sharp
increase in the bashing of Iranian President Mahmud Ahmadinejad. If
no progress has been made by year's end on the diplomatic front,
expect an acceleration of the preparations for war already under way
in the Persian Gulf area (similar to the military buildup witnessed
in late 2002 and early 2003 prior to the US invasion of Iraq). This
will naturally lead to an intensification of fears and a reversal
of the downward spiral of gasoline prices, though from a level that,
by then, may be well below $2 per gallon.
Now that we've come this far, does the recent drop in gasoline prices
and the seemingly sudden abundance of petroleum reveal a flaw in the
argument for this as a peak-oil moment? The peak-oil theory, which had
been getting ever more attention until the price at the pump began
to fall, contends that the amount of oil in the world is finite;
that once we've used up about half of the original global supply,
production will attain a maximum or "peak" level, after which daily
output will fall, no matter how much more is spent on exploration
and enhanced extraction technology.
Most industry analysts now agree that global oil output will eventually
reach a peak level, but there is considerable debate as to exactly
when that moment will arise. Recently, a growing number of specialists
- many joined under the banner of the Association for the Study of
Peak Oil - are claiming that we have already consumed about half the
world's original inheritance of 2 trillion barrels of conventional
(ie, liquid) petroleum, and so are at, or very near, the peak-oil
moment and can expect an imminent contraction in supplies.
In the autumn of 2005, as if in confirmation of this assessment,
the chief executive officer of Chevron, David O'Reilly, blanketed US
newspapers and magazines with an advertisement stating, "One thing is
clear: the era of easy oil is over ... Demand is soaring like never
before ... At the same time, many of the world's oil and gas fields are
maturing. And new energy discoveries are mainly occurring in places
where resources are difficult to extract, physically, economically
and even politically. When growing demand meets tighter supplies,
the result is more competition for the same resources."
But this is not, of course, what we are now seeing. Petroleum supplies
are more abundant than they were six months ago. There have even been
some promising discoveries of new oil and gas fields in the Gulf
of Mexico, while - modestly adding to global stockpiles - several
foreign fields and pipelines have come online in the past few months,
including the $4 billion Baku-Tbilisi-Ceyhan (BTC) pipeline from
the Caspian Sea to Turkey's Mediterranean coast, which will bring
new supplies to world markets. Does this indicate that the peak-oil
theory is headed for the dustbin of history or, at least, that the
peak moment is still safely in our future?
As it happens, nothing in the current situation should lead us to
conclude that the peak-oil theory is wrong. Far from it. As suggested
by Chevron's O'Reilly, remaining energy supplies on the planet are
mainly to be found "in places where resources are difficult to extract,
physically, economically and even politically". This is exactly what
we are seeing today.
For example, the much-heralded new discovery in the Gulf of Mexico,
Chevron's Jack No 2 Well, lies beneath 8 kilometers of water and
rock some 280km south of New Orleans, Louisiana, in an area where, in
recent years, hurricanes Ivan, Katrina and Rita have attained their
maximum strength and inflicted their greatest damage on offshore
oil facilities.
It is naive to assume that, however promising Jack No 2 may seem in
oil-industry publicity releases, it will not be exposed to Category 5
hurricanes in the years ahead, especially as global warming heats the
gulf and generates ever more potent storms. Obviously, Chevron would
not be investing billions of dollars in costly technology to develop
such a precarious energy resource if there were better opportunities
on land or closer to shore - but so many of those easy-to-get-at
places have now been exhausted that the company has been left with
little choice in the matter.
Or take the equally ballyhooed BTC pipeline, which shipped its first
oil in July, with top US officials in attendance. This conduit
stretches 1,675km from Baku in Azerbaijan to the Turkish port of
Ceyhan, passing no fewer than six active or potential war zones along
the way: the Armenian enclave of Nagorno-Karabakh in Azerbaijan;
Chechnya and Dagestan in Russia; the Muslim separatist enclaves
of South Ossetia and Abkhazia in Georgia; and the Kurdish regions
of Turkey. Is this where anyone in his right mind would build a
pipeline? Not unless one were desperate for oil, and safer locations
had already been used up.
In fact, virtually all of the other new fields being developed
or considered by US and foreign energy firms - the Arctic National
Wildlife Refuge in Alaska, the jungles of Colombia, northern Siberia,
Uganda, Chad, Sakhalin Island in Russia's Far East - are in areas
that are hard to reach, environmentally sensitive, or just plain
dangerous. Most of these fields will be developed, and they will
yield additional supplies of oil, but the fact that we are being
forced to rely on them suggests that the peak-oil moment has indeed
arrived and that the general direction of the price of oil, despite
periodic drops, will tend to be upward as the cost of production in
these out-of-the-way and dangerous places continues to climb.
Living on the peak-oil plateau Some peak-oil theorists have, however,
done us all a disservice by suggesting, for rhetorical purposes, that
the peak-oil moment is ... well, a sharp peak. They paint a picture
of a simple, steep, upward production slope leading to a pinnacle,
followed by a similarly neat and steep decline. Perhaps looking back
from 500 years hence, this moment will have that appearance on global
oil-production charts. But for those of us living now, the "peak"
is more likely to feel like a plateau - lasting for perhaps a decade
or more - in which global oil production will experience occasional
ups and downs without rising substantially (as predicted by those who
dismiss peak-oil theory), nor falling precipitously (as predicted by
its most ardent proponents).
During this interim period, particular events - a hurricane, an
outbreak of conflict in an oil region - will temporarily tighten
supplies, raising fuel prices, while the opening of a new field
or pipeline, or simply (as now) the alleviation of immediate fears
and a temporary boost in supplies, will lower prices. Eventually,
of course, we will reach the plateau's end and the decline predicted
by the theory will commence in earnest.
In the meantime, for better or worse, we live on that plateau today.
If this year's hurricane season ends with no major storms, and we get
through the next few months without a major blowup in the Middle East,
Americans are likely to start 2007 with lower gasoline prices than
they've seen in a while.
This is not, however, evidence of a major trend. Because global oil
supplies are never likely to be truly abundant again, it would only
take one major storm or one major crisis in the Middle East to push
crude-oil prices back up near or over $80 a barrel. This is the world
we now inhabit, and it will never get truly better until we develop
an entirely new energy system based on petroleum alternatives and
renewable fuels.
Michael T Klare is a professor of peace and world security studies at
Hampshire College in Amherst, Massachusetts and the author of Blood
and Oil: The Dangers and Consequences of America's Growing Dependency
on Imported Petroleum.
By Michael T Klare
Asia Times Online, Hong Kong
Sept 27 2006
Just six weeks ago, gasoline prices at the US pump were hovering at
the $3-per-gallon (79 cents a liter) mark; now they're inching toward
$2 (53 cents a liter) - and some analysts predict even lower numbers
before the November elections. The sharp drop in gasoline prices has
been good news for US consumers, who now have more money in their
pockets to spend on food and other necessities - and for President
George W Bush, who has witnessed a sudden lift in his approval ratings.
Is this the result of some hidden conspiracy between the White House
and Big Oil to help the Republican cause in the elections, as some
are already suggesting? How does a possible war with Iran fit into
the gasoline-price equation? And what do falling gasoline prices tell
us about "peak oil" theory, which predicts that we have reached our
energy limits on the planet?
Since gasoline prices began their sharp decline in mid-August, many
pundits have tried to account for the drop, but none have offered
a completely convincing explanation, lending some plausibility to
claims that the Bush administration and its long-term allies in the
oil industry are manipulating prices behind the scenes.
In my view, however, the most significant factor in the downturn
in prices has simply been a sharp easing of the "fear factor" -
the worry that crude-oil prices would rise to $100 or more a barrel
because of spreading war in the Middle East, a US strike at Iranian
nuclear facilities, and possible Katrina-scale hurricanes blowing
through the Gulf of Mexico, severely damaging offshore oil rigs.
As the summer commenced and oil prices began a steep upward climb,
many industry analysts were predicting a late-summer or early-autumn
clash between the US and Iran (roughly coinciding with a predicted
intense hurricane season). This led oil merchants and refiners to fill
their storage facilities to capacity with $70-$80-per-barrel oil. They
expected to have a considerable backlog to sell at a substantial
profit if supplies from the Middle East were cut off and/or storms
hit the Gulf of Mexico.
Then came the war in Lebanon. At first, the fighting seemed to confirm
such predictions, only increasing fears of a regionwide conflict,
possibly involving Iran. The price of crude oil approached record
heights. In the early days of the war, the Bush administration
tacitly seconded Israeli actions in Lebanon, which, it was widely
assumed, would lay the groundwork for a similar campaign against
military targets in Iran. But Hezbollah's success in holding off the
Israeli military combined with horrific television images of civilian
casualties forced leaders in the US and Europe to intercede and bring
the fighting to a halt.
We may never know exactly what led the White House to shift course on
Lebanon, but high oil prices - and expectations of worse to come - were
surely a factor in administration calculations. When it became clear
that the Israelis were facing far stiffer resistance than expected,
and that the Iranians were capable of fomenting all manner of mischief
(including, potentially, total havoc in the global oil market),
wiser heads in the corporate wing of the Republican Party undoubtedly
concluded that any further escalation or regionalization of the war
would immediately push crude-oil prices over $100 per barrel.
Prices at the gasoline pump would then have been driven into the
$4-$5-per-gallon range ($1-$1.30 per liter), virtually ensuring a
Republican defeat in the mid-term elections. This was still early in
the summer, of course, well before peak hurricane season; mix just
one Katrina-strength storm in the Gulf of Mexico into this already
unfolding nightmare scenario and the fate of the Republicans would
have been sealed.
In any case, Bush did allow Secretary of State Condoleezza Rice to
work with the Europeans to stop the Lebanon fighting and has since
refrained from any overt talk about a possible assault on Iran.
Careful never explicitly to rule out the military option when it
comes to Iran's nuclear enrichment facilities, since June he has
nonetheless steadfastly insisted that diplomacy must be given a chance
to work. Meanwhile, we have made it most of the way through this year's
hurricane season without a single catastrophic storm hitting the US.
For all these reasons, immediate fears about a clash with Iran,
a possible spreading of war to other oil regions in the Middle
East and Gulf of Mexico hurricanes have dissipated, and the price
of crude oil has plummeted. On top of this, there appears to be a
perceptible slowing of the world economy - precipitated, in part,
by the rising prices of raw materials - leading to a drop in oil
demand. The result? Retailers have abundant supplies of gasoline on
hand and the laws of supply and demand dictate a decline in prices.
Finding energy in difficult places How long will this combination of
factors prevail? Best guess: the slowdown in global economic growth
will continue for a time, further lowering prices at the pump. This is
likely to help retailers in time for the Christmas shopping season,
projected to be marginally better this year than last precisely
because of those lower gasoline prices.
Once the election season is past, however, Bush will have less
incentive to muzzle his rhetoric on Iran and we may experience a sharp
increase in the bashing of Iranian President Mahmud Ahmadinejad. If
no progress has been made by year's end on the diplomatic front,
expect an acceleration of the preparations for war already under way
in the Persian Gulf area (similar to the military buildup witnessed
in late 2002 and early 2003 prior to the US invasion of Iraq). This
will naturally lead to an intensification of fears and a reversal
of the downward spiral of gasoline prices, though from a level that,
by then, may be well below $2 per gallon.
Now that we've come this far, does the recent drop in gasoline prices
and the seemingly sudden abundance of petroleum reveal a flaw in the
argument for this as a peak-oil moment? The peak-oil theory, which had
been getting ever more attention until the price at the pump began
to fall, contends that the amount of oil in the world is finite;
that once we've used up about half of the original global supply,
production will attain a maximum or "peak" level, after which daily
output will fall, no matter how much more is spent on exploration
and enhanced extraction technology.
Most industry analysts now agree that global oil output will eventually
reach a peak level, but there is considerable debate as to exactly
when that moment will arise. Recently, a growing number of specialists
- many joined under the banner of the Association for the Study of
Peak Oil - are claiming that we have already consumed about half the
world's original inheritance of 2 trillion barrels of conventional
(ie, liquid) petroleum, and so are at, or very near, the peak-oil
moment and can expect an imminent contraction in supplies.
In the autumn of 2005, as if in confirmation of this assessment,
the chief executive officer of Chevron, David O'Reilly, blanketed US
newspapers and magazines with an advertisement stating, "One thing is
clear: the era of easy oil is over ... Demand is soaring like never
before ... At the same time, many of the world's oil and gas fields are
maturing. And new energy discoveries are mainly occurring in places
where resources are difficult to extract, physically, economically
and even politically. When growing demand meets tighter supplies,
the result is more competition for the same resources."
But this is not, of course, what we are now seeing. Petroleum supplies
are more abundant than they were six months ago. There have even been
some promising discoveries of new oil and gas fields in the Gulf
of Mexico, while - modestly adding to global stockpiles - several
foreign fields and pipelines have come online in the past few months,
including the $4 billion Baku-Tbilisi-Ceyhan (BTC) pipeline from
the Caspian Sea to Turkey's Mediterranean coast, which will bring
new supplies to world markets. Does this indicate that the peak-oil
theory is headed for the dustbin of history or, at least, that the
peak moment is still safely in our future?
As it happens, nothing in the current situation should lead us to
conclude that the peak-oil theory is wrong. Far from it. As suggested
by Chevron's O'Reilly, remaining energy supplies on the planet are
mainly to be found "in places where resources are difficult to extract,
physically, economically and even politically". This is exactly what
we are seeing today.
For example, the much-heralded new discovery in the Gulf of Mexico,
Chevron's Jack No 2 Well, lies beneath 8 kilometers of water and
rock some 280km south of New Orleans, Louisiana, in an area where, in
recent years, hurricanes Ivan, Katrina and Rita have attained their
maximum strength and inflicted their greatest damage on offshore
oil facilities.
It is naive to assume that, however promising Jack No 2 may seem in
oil-industry publicity releases, it will not be exposed to Category 5
hurricanes in the years ahead, especially as global warming heats the
gulf and generates ever more potent storms. Obviously, Chevron would
not be investing billions of dollars in costly technology to develop
such a precarious energy resource if there were better opportunities
on land or closer to shore - but so many of those easy-to-get-at
places have now been exhausted that the company has been left with
little choice in the matter.
Or take the equally ballyhooed BTC pipeline, which shipped its first
oil in July, with top US officials in attendance. This conduit
stretches 1,675km from Baku in Azerbaijan to the Turkish port of
Ceyhan, passing no fewer than six active or potential war zones along
the way: the Armenian enclave of Nagorno-Karabakh in Azerbaijan;
Chechnya and Dagestan in Russia; the Muslim separatist enclaves
of South Ossetia and Abkhazia in Georgia; and the Kurdish regions
of Turkey. Is this where anyone in his right mind would build a
pipeline? Not unless one were desperate for oil, and safer locations
had already been used up.
In fact, virtually all of the other new fields being developed
or considered by US and foreign energy firms - the Arctic National
Wildlife Refuge in Alaska, the jungles of Colombia, northern Siberia,
Uganda, Chad, Sakhalin Island in Russia's Far East - are in areas
that are hard to reach, environmentally sensitive, or just plain
dangerous. Most of these fields will be developed, and they will
yield additional supplies of oil, but the fact that we are being
forced to rely on them suggests that the peak-oil moment has indeed
arrived and that the general direction of the price of oil, despite
periodic drops, will tend to be upward as the cost of production in
these out-of-the-way and dangerous places continues to climb.
Living on the peak-oil plateau Some peak-oil theorists have, however,
done us all a disservice by suggesting, for rhetorical purposes, that
the peak-oil moment is ... well, a sharp peak. They paint a picture
of a simple, steep, upward production slope leading to a pinnacle,
followed by a similarly neat and steep decline. Perhaps looking back
from 500 years hence, this moment will have that appearance on global
oil-production charts. But for those of us living now, the "peak"
is more likely to feel like a plateau - lasting for perhaps a decade
or more - in which global oil production will experience occasional
ups and downs without rising substantially (as predicted by those who
dismiss peak-oil theory), nor falling precipitously (as predicted by
its most ardent proponents).
During this interim period, particular events - a hurricane, an
outbreak of conflict in an oil region - will temporarily tighten
supplies, raising fuel prices, while the opening of a new field
or pipeline, or simply (as now) the alleviation of immediate fears
and a temporary boost in supplies, will lower prices. Eventually,
of course, we will reach the plateau's end and the decline predicted
by the theory will commence in earnest.
In the meantime, for better or worse, we live on that plateau today.
If this year's hurricane season ends with no major storms, and we get
through the next few months without a major blowup in the Middle East,
Americans are likely to start 2007 with lower gasoline prices than
they've seen in a while.
This is not, however, evidence of a major trend. Because global oil
supplies are never likely to be truly abundant again, it would only
take one major storm or one major crisis in the Middle East to push
crude-oil prices back up near or over $80 a barrel. This is the world
we now inhabit, and it will never get truly better until we develop
an entirely new energy system based on petroleum alternatives and
renewable fuels.
Michael T Klare is a professor of peace and world security studies at
Hampshire College in Amherst, Massachusetts and the author of Blood
and Oil: The Dangers and Consequences of America's Growing Dependency
on Imported Petroleum.