Dwindling global oil supplies are leaving the world ever more reliant on a group of unstable countries вЂ“ many of which are themselves facing major domestic problems right now.
Believe it or not, many of the worldвЂ™s major oil exporters cannot maintain their own domestic energy requirements. Venezuelan consumers endure electricity blackouts of вЂњseven or eight hours a day,вЂќ but less well known is the situation in the Middle East, where residents are facing rolling power outages just as summer temperatures soar, and with it, the demand for air conditioning.
Furthermore, a report in Forbes this month points to growing fears about the stability of Saudi Arabia, for decades the swing producer maintaining the worldвЂ™s oil exports at a steady level. While any upheaval in any of the main oil exporting nations would be felt across the globe, Saudi is a special case, as its reserves are acquiring an ever more geopolitical significance due to the decline of non-Opec oil. The West is becoming more reliant on the health of this highly secretive nation вЂ“ essentially, if Saudi Arabia sneezes, the rest of the world catches cold.
ItвЂ™s a fact of life that oil tends to come from unstable places вЂ“ the very term petro state is shorthand for a country with вЂњweak institutions and a malfunctioning public sector,вЂќ and an economy based around imports, not exports, due to exchange rates. Power is in the hands of the few, essentially the government, that control the petro-rent, and these are essentially violent, unhappy places for much of the population.
The reality is that seven of the countries currently listed by the US Energy Information Administration as the nationвЂ™s current Top 15 sources of crude oil are also on the State DepartmentвЂ™s Travel Warning List, for their вЂњlong-term, protracted conditions that make a country dangerous or unstable.вЂќ These are: Saudi Arabia, Mexico, Nigeria, Iraq, Columbia, Algeria, and the Democratic Republic of the Congo вЂ“ with Saudi Arabia, Mexico and Nigeria being respectably second, third and fourth most important source of US imports. (Of course, Canada, the USвЂ™s largest single source of oil imports, is a model of staid stability вЂ“ but many observers question the future expansion of its oil sands output which has arguably been overhyped for years.)
Oil fuels our industry, maintaining our lifestyles вЂ“ and is as addictive to the West as it is to the producing nations. As US president Barack Obama said, when addressing the nation on June 14 in the immediate aftermath of BPвЂ™s Deepwater Horizon oil disaster, вЂњEach day, we send nearly $1 billion of our wealth to foreign countries for their oil.вЂќ This is all money that isnвЂ™t being invested at home. ItвЂ™s going on a product that is causing global climate change, which is making many unstable parts of the world more desperate, with geopolitical commentators now talking of coming wars over resources as basic as water. So addicted are we to oil that we apparently have little money left over to prepare for the transition to a future based around renewable energy. Instead, buying vast amounts of imported oil is taking money out of the US domestic economy and funding, in the main, rogue states that are adding to global security risks.
Read the State DepartmentвЂ™s travel advisory about Nigeria for an idea of the kind of regimes that oil is maintaining:
Violent crime committed by individuals and gangs, as well as by persons wearing police and military uniforms, is a problem throughout the country.
Since January 2009, over 111 foreign nationals have been kidnapped in Nigeria, including 18 in 2010. Six foreign nationals were killed in connection with these abductions; two U.S. citizens were killed in separate abduction attempts in Port Harcourt in April 2010. Local authorities and expatriate businesses operating in Nigeria believe that the number of kidnapping incidents throughout Nigeria is underreported. Since March 2010, five improvised explosive devices (IEDs) have been detonated in the Niger Delta region with no reported casualties.
ItвЂ™s the same situation in Algeria, Columbia and the Congo вЂ“ yet the remaining, more stable petro states are in turmoil of some sort, albeit less headline grabbing. An item in Abu Dhabi English language newspaper The National earlier in July, Gulf braces for power shortages, is worth quoting at length:
The big heat has come early to the Gulf, and residents opting to stay are settling in for another summer of discontent punctuated by power cuts.
All Gulf states except Qatar face electricity shortages that intensify during the airconditioning season. Already this year, the emirate of Sharjah as well as Kuwait and Saudi Arabia have suffered disruptions.
On May 10, a 90-minute power cut grounded flights at King Abdul Aziz International Airport near Jeddah.
Last month, a series of electricity disruptions afflicted cities in the north and west of Saudi Arabia, including Mecca, Medina, Jeddah and Taif, amid temperatures reaching 52В°C. Some schoolchildren taking exams passed out from the heat.
It goes on to state that other than in Iraq, where war destroyed much of the grid, these electricity blackouts are due to вЂњrapid industrialisation and population growth.вЂќ Underpinning it are low domestic energy prices that attract energy-intensive industries and вЂњwasteful consumer habits,вЂќ with the national focus on obtaining expansion as quickly as possible that overlooks any form of long-term energy efficiency. (This manic drive to have something to show for the oil bonanza is common to all petro states.) The article gives, as example:
Karim Elgendy, an architect and sustainable design researcher based in San Francisco, also believes the style of architecture has played a role. вЂњRapid urbanisation in the UAE, as well as in other GCC member states, has been characterised by forms of imported western architecture which were not environmentally responsive to the regionвЂ™s climatic conditions,вЂќ he said. вЂњHigh-rise buildings with large areas of glass facade, and huge demand for electricity for air conditioning can be seen in all new urban centres such as Dubai and Abu Dhabi, as well as other cities such as Riyadh and Doha.вЂќ
Saudi Arabia is the classic example of how striking oil can be a blessing and a curse. An item in Forbes earlier in the month, Saudi Arabia's House Of Cards, peels back the veneer. It cites an open letter to Saudi royals allegedly written by dissident prince Turki bin Abdul Aziz Al Saud, a prominent exile in Cairo. In this the prince supposedly states the government is no longer able to contain grassroots discontent, and that his fellow royals would be advised to flee before the masses "cut off our heads in streets." (A June 14 edict by the Saudi Press Agency claims the prince told them this letter was вЂњfabricated by enemy parties wishing to spread confusion and excitementвЂќ вЂ“ which seems, as far as I can tell, to be an implicit warning to the domestic media that reporting on the item will result in a rather swift visit from Saudi security forces.)
The Forbes article quotes from Matthew SimmonsвЂ™ peak oil classic, Twilight in the Desert, with questions of just how much longer the highly secretive state can go on as the worldвЂ™s major oil producer considering вЂњno major new energy fields have been found in Saudi Arabia since the 1970s, and the chances of such discoveries are now, in Simmons' words, вЂremote.вЂ™вЂќ But, stark as this may be, itвЂ™s followed by the sucker punch: Saudi Arabia doesnвЂ™t have to run out of oil to face collapse, вЂњthanks to the country's ballooning entitlement class.вЂќ It states:
The actual size of the Saudi royal family is subject to some debate, but informed estimates a few years ago placed the number at more than 30,000 members, with some 4,000 princes each afforded a luxurious monthly stipend of tens of thousands of dollars apiece. And because of officially sanctioned polygamy, their ranks are swelling exponentially, projected to reach 60,000 or more by 2020. Needless to say, their allowances, and the attendant extravagant indulgences, are possible solely because of Saudi petrodollars. All of which has prompted an insatiable appetite for ever greater production and consumption of the Kingdom's lifeblood.
Meanwhile, life is getting tougher for вЂњan impoverished underclassвЂќ вЂ“ essentially, everyone else outside the royal elite. It states: вЂњSince the oil boom of the 1970s, per capita income in Saudi Arabia has constricted precipitously, falling from $28,000 in the early 1980s to below $7,000 in 2001.вЂќ
According to a separate Bloomberg item, вЂњSaudi Arabian inflation accelerated to a 13-month high in June as housing and food costs increased in the largest Arab economy.вЂќ
The Saudi government cannot afford for the global economy to slip further, cutting both the volume of its own oil exports and prices per barrel. Theirs is a very expensive place to run.
The geopolitical implications of all this are staggering. Saudi Arabia, which has been accused of having a greater involvement in the 9/11 attacks than most realize and has shown subsequent вЂњindirect troublemaking in Iraq and Afghanistan,вЂќ has long been a source of regional instability. But that will be nothing as to the turmoil that will unfold from any domestic upheaval, such as an Iranian-style revolution (upheaval in that country, in 1979, caused the second energy crisis of the decade, mitigated somewhat by the Saudis increasing output). Groups like al-Qaeda have long been вЂњhighly critical of and violently opposed to western influence within the country,вЂќ especially its close relations with the US, and are reportedly working to bring about revolt.
What, then, would an Islamic revolution in Saudi Arabia mean to the oil consuming world? In the immediate term, supply would cease, due to the domestic turmoil. And beyond that, thereвЂ™s every reason to believe the new government would be less inclined to export so much oil to the West. This, is in effect, the nuclear option. As far as the rest of the world is concerned, there is not enough alternate oil to go around; right now a Saudi oil embargo would bring the economies of many Western nations to a grinding halt. ItвЂ™s all due to diminishing surplus production capacity.
A June Bloomberg report, Oil Price Swings to Worsen as Spare OPEC Capacity Shrinks: Energy Markets, stated that вЂњOPECвЂ™s shrinking spare production capacity increases tradersвЂ™ concern about supply shortages.вЂќ This states that output of non-Opec oil is unable to keep up with global demand, putting more and more importance on OpecвЂ™s ever dwindling spare capacity. It states:
OPEC, supplier of 40 percent of the worldвЂ™s oil, pumped 29.4 million barrels a day in May, with capacity of another 5.5 million barrels idled, according to data compiled by Bloomberg. The groupвЂ™s spare capacity was as low as about 2 million barrels a day in July 2008, when oil prices peaked, before tumbling as the global recession crimped energy consumption.
Spare production capacity will drop as supplies from outside the group fail to keep up with demand, according to the IEA. The agency estimates world oil usage will rise 6.4 percent by 2015 to 91.93 million barrels a day, while output, excluding OPEC crude, will increase 3.7 percent. That means the world will need more of the groupвЂ™s oil to meet demand.
This seems to be saying that, as world energy demand creeps up вЂ“ earlier this week China was confirmed as the world's biggest energy consumer, burning more energy than the US вЂ“ the key figure to watch is OpecвЂ™s surplus capacity. To which IвЂ™d add that, to all intents, the term diminishing spare production capacity can be used interchangeably with peak oil. If OpecвЂ™s surplus cannot meet demand, we will surely have passed the tip of HubbertвЂ™s peak, and find ourselves on the downslope вЂ“ which is when the market turmoil and recession sets in.
But things could get difficult a lot sooner than that. It doesnвЂ™t require the physical limits of the EarthвЂ™s oil to have been reached вЂ“ reserves are now low enough that domestic turmoil at any one of the major oil producers will have the same unfortunate results to most of the world. As Bloomberg states:
Saudi Arabia accounts for almost 60 percent of OPECвЂ™s spare capacity, according to Bloomberg estimates. The country is investing as much as $30 billion on new supplies over the next five years to keep a minimum 1.5 million to 2 million barrels-a- day of spare capacity, Oil Minister Ali al-Naimi said in a May 18 interview with consultant Petroleum Policy Intelligence.
вЂњMarkets are sensitive to when OPEC spare capacity starts getting down toward 3 million barrels a day,вЂќ according to Wittner of Societe Generale. Should supplies be disrupted from a producer such as Iran or Nigeria вЂњthere would not be much left after that,вЂќ he said.
Reading between the lines, itвЂ™s all a delicate balancing act. The rogue states that produce oil are now key players in this geopolitical game. At the same time, we are relying more and more on Opec output, as this is where the worldвЂ™s largest accessible reserves are. And Opec output is more and more dependent on Saudi reserves. Even without some calamity befalling global basket cases like Nigeria or Venezuela, we are desperately reliant on two distinctly plausible possibilities not happening: Saudi output dropping, or the Saudi economy being plunged into chaos for some internal economic or political reason.
ItвЂ™s a race to failure. But, then, thatвЂ™s the reality of betting everything on a non-renewable source.
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