Our prosperity hangs by a thread as it is based on a limited resource – oil

Undoubtedly, oil is – next to water – the most vital resource for today’s economies. We depend on its energy in almost any regard ranging from transportation to heating and cooling to power generation to chemistry. Without it, the economy would come to a standstill and our prosperity would sink steeply. In consideration of this, we must be mad to rely on our very vulnerable oil supplies on such a grand scale. A disruption of oil supplies would immediately have disastrous consequences for everyone.

From http://www.oilcrashmovie.com/download.html

Just imagine what would happen if global oil supplies were reduced by 6 % from one day to the next. A 5% decline in global oil supplies is enough to push the entire global economy into a severe recession. Probably an unprecedented global recession affecting both, people in rich and in poor countries. Oil prices would at once head towards $300 to $400 dollars a barrel and higher. Gasoline would become unaffordable for large parts of the population. Nevertheless, shortages would occur. It is almost impossible to ration the oil reserves. Cars would become unsalable. Rental prices in cities would also hit record levels. People were forced to move close to their workplace. Airlines would go bankrupt and cease operations with the exception of a few flights for the super-wealthy. Public transport would become the major mean of transportation and ticket prices would also increase decisively. Unemployment could reach 25% and higher. In other parts of the world, the situation would spark violence and destabilize many countries. Aid organizations could hardly do their job. Food riots would break out. Oil fields would be occupied by rebels and government troops. The army would have to protect refineries and gas stations. But is this scenario an inevitable disaster? Is this likely to happen? How could this happen?

First, such a scenario is possible. Second, Whether it would be a disaster or not depends on how dependent we will be at the point of time this happens. If we were hit without warning, we are likely to exprience such a disaster. And finally, how could this happen? There are many incidents that could cause a sudden oil production decline. An omnipresent threat to the stability of oil supplies is the fact that most of the world’s oil reserves are located in politically unstable regions. A revolution in Saudi Arabia could have disastrous consequences for the rest of the world. Politically motivated supply reductions could be the consequence of a deeper polticalstandoff between Iran and the United States. Besides, Iran threatens to disrupt sea traffic in the Strait of Hormuz in the case of an attack by Israel or the U.S. With 40% of the global oil supplies passing through this strategic hotspot, the consequences can be extremely painful. (Check out Has the bubble popped? ) But beside all the political fragility, an accident in the world’s largest known oil field has also the potential to derail the world economy.

Ghawar Oil Field

The Ghawar oil field in Saudi Arabia which is by far the largest oil field in the world is currently producing about 5 million barrels a day which is the equivalent of 6.25% of the global production. More than 60% of the Saudi oil production between 1948 and 2000 came from Ghawar. Though Ghawar is gigantic, we don’t know much about the remaining oil reserves. Some oil experts say that Saudi Arabia is greatly exaggerating its oil reserves. This is aimed at first, causing western countries to stop worrying about scarce oil and second, to be able to pump out more oil as OPEC limits its members’ production based on the proven reserves. There are experts who expect that Ghawarhas already peaked and is dying. We don’t know whether this is true or not, as the Saudis would keep it a secret as long as possible. Anyway, oil reserves are a state-secret in Saudi Arabia. But we already know that Saudi Aramco, the state-owned largest oil corporation in the world is eagerly exploring new and unprofitable oil fields. Besides, they make a tremendous effort to get the oil out from below the desert. They’ve been injecting water into the oil fields in order to force the oil out. Seawater is pumped underneath the oil. The resulting pressure makes the oil come out more easily. But increasingly, what they’re bringing up is more water than oil. In 2004, the “watercut” was 55%. Saudi Aramco is injecting more than 7 million barrels of seawater per day into the Ghawar field. This shows the risk of an accident disrupting the oil flow. If one day, the injected water rose quicker than the  oil, when the water surpasses the oil on the way up, this could mean that no more oil would come out of the well. If one day the engineers of Saudi Aramco realize that they’re just pumping out water of the ground, this is very bad news for all of us.

The oil would never again flow out of the ground naturally. New drilling would be necessary and it would take years for Saudi Aramco to resume oil production at the Ghawar field. Ghawar is extremely important to the world’s well-being, but it an accident could kick it out of production. Even without an accident, the production rate will decline and Ghawar will die inevitably. At the same time, many oil fields all around the globe where oil can be pumped out easily are declining. Peak oil does not mean that there’s no more oil from one day to the next, but it does mean that we’re running out of cheap oil. The energy industry insider Matthew Simmons predicts the peak of Ghawar and he doubts that Saudi Arabia is able to maintain its production at current rates.

 

Though officially, the Saudi Arabian government wants the oil community to believe that its reserves will still last for decades, they are pouring billions of dollars into the exploration of new and old smaller oil fields that were considered not worth operating due to the bad quality or high amount of energy necessary to extract the oil. Next to the efforts to maintain the production capacity, an enormous amount of money is spend to strengthen the private sector. With the oil industry accounting for 45% of Saudi Arabia’s GDP and 90% of the country’s export earnings (according to Wikipedia), Riyadh’s ruling family tries to diversify the economy. A few mega projects are underway which should jump start the diversification process. Six so-called “economic cities” are planned to be launched in many parts of the country.

The King Abdullah Economic City which is due to completion in 2020 is the first planned city in Saudi Arabia which is being constructed in an undeveloped but centrally located area on the shore of the Red Sea. The city is set to become a commercial hub attracting domestic and international investments. Next to the planned largest seaport in the region, King Abdullah Economic City will also be home to a major financial center for the region. Quality of life was a major consideration during the planning stage and thus, parks and green spaces as well as many other public amenities are to make it a good place to live for the 500,000 people which are expected to move there. The city will also play a major role in the country’s aspiration to raise the educational level to international standards. Featuring several universities and R&D parks, international companies are supposed to find a qualified workforce.

The Economic Cities currently planned in Saudi Arabia are partly similar to the Masdar carbon-free city in the United Arab Emirates and the Dongtan eco-city in China.

So, what is the bottom line? If Saudi Arabia and other oil exporting countries make an effort to become less dependent on oil (exports), we have to get away from oil as it is our best interest! That’s why it is absolutely irresponsible for a presidential candidate to say that we just need some offshore drilling and the problem is fixed. John McCain even called for a “gas-tax holiday” earlier this year. This shows that he has obviously no idea of how serious the situation is and that the has no plan what needs to be done. I agree up to a point that it’s not a bad idea to explore the North American continental shelf and to evaluate whether drilling for oil is profitable there. But this should not be aimed at reducing prices at the gas pump! High prices indicate scarcity, that’s how the market works. This should prompt everybody to save gasoline wherever possible and to switch to alternatives. The longer we wait, the more painful will the impact of rising oil prices and dependence be. Even if we started offshore drilling right now, this wouldn’t have a considerable effect on gasoline prices. Moreover, it’s stupid to waste precious domestic oil by overcooling buildings or by driving inefficient SUVs withcombustion engines. We don’t have to hurry with offshore drilling. It’s good to know that there is oil in case we need it one day.

From http://www.oilcrashmovie.com/download.html; a depleted oil field in Azerbaijan:

Right now, high prices can help to encourage investments and research in the field of energy technology. At the moment, we need to reduce the insatiable demand for oil, not only to save money, but also to combat global warming. This requires some innovative changes in the way we live, work and travel. As the energy expert Matthew Simmons demands, we need to liberate the workforce to eliminate long-distance commuting. Next to reducing unnecessary driving, we ought to stop consuming oil wherever possible. Electric cars are likely to revolutionize transportation in just a few years from now. We will see many of them hitting the market in 2010 from all major car makers. The “reinvention of the automobile” Rick Wagoner, the CEO of GM, mentioned is absolutely necessary.

 Energy efficient buildings and intelligent heating and cooling systems can also help to cut consumption and costs. 

Whatever can be done to reduce our oil consumption has to be done. Oil prices will rise to new record levels in the medium and long term. The so-called “energy return on investment” ratio which compares the energy that goes into the process to the energy that comes out in the form of oil or natural gas, etc. has been declining steadily since the beginning of the 20th century. Whereas in the early 1900s, it took only the energy of one barrel of oil to get 100 barrels, today it takes the same amount of energy to get just 15 barrels of oil. This decline is due to the intensity of drilling. The production costs will keep rising,  the E.R.O.I. ratio will keep declining and global demand for oil will keep rising with the emerging economies’ strong growth rates. 

That means that the era of cheap energy is over. This does not necessarily mean that our living standard has to decline. Far from it! As soon as alternative energy sources are available at home, the transfer of wealth from western countries to oil-exporting countries will come to an end and such potentates as Hugo Chavez from Venezuela will face harder times.

Energy independence is vital for western countries and the death-blow for the OPEC cartel which recently decided to cut its output in order to prevent oil prices from falling below $100 per barrel. Instead, new industries will be created at home, millions of new jobs can be created and our carbon dioxide emissions can be reduced. Furthermore, alternative energy technologies can help to reduce price fluctuations. On top of that, e.g. the price of solar power wil come down with solar technology advancing and solar panels being mass produced.

The transition into a self-sufficient society has just began with the disillusionment of those who believed and acted as if energy were inexpensive and inexhaustible. However, the market alone cannot fix the problem itself. The problem is that there is the need to replace a technology that is already existent and cheaper. And it takes government intervention to make the price of the new technologies competitive. Europe is ahead in this regard as hefty taxation pushed gasoline prices to levels which are more than twice as high as in America. Though paying more at first is painful, it’s better to spend the money at home than to pour the money into the budgets of unreliable partners.

Check out http://www.simmonsco-intl.com/files/IEA-SOM.pdf to get an insight into the art of calculating oil reserves.

Read also Crude oil below $100 a barrel – should we stop worrying about energy efficiency, energy dependence and all the eco-stuff?

A Crude Awakening – The Oilcrash Movie: http://www.oilcrashmovie.com/index2.html

http://www.energybulletin.net/node/1269

http://www.energyandcapital.com/articles/opec-oil-reserves/436

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5 Comments

Filed under Economy, Environment, Global Issues, Politics, Uncategorized

5 responses to “Our prosperity hangs by a thread as it is based on a limited resource – oil

  1. “alternative energy technologies” only deals with the supply side of the problem. Developing demand side technology such LED Lighting is equally as important. If we collectively reduce our energy consumption that will massively reduce pressure on energy production.

  2. Pingback: How I gained 16.6% in three days while stock markets crashed « What Matters

  3. Pingback: Capitalism will survive: Why America will remain the #1 global superpower « What Matters

  4. Pingback: This car is hot! - Tesla Motors’ electric sportscar « What Matters

  5. splendid, I learned a lot from this. The images are viewtiful.

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