salameh - an impeding oil crunch by 2015

8/3/2019 Salameh - An Impeding Oil Crunch by 2015

1/21Electronic copy available at: http://ssrn.com/abstract=1715853

USAEE Working Paper Series

----------------------------------------------------------------An Impending Oil Crunch by 2015?

----------------------------------------------------------------

ByDr Mamdouh G. Salameh

DirectorInternational Oil Economist

World Bank ConsultantUNIDO Technical Expert

Oil Market Consultancy ServiceSpring CroftSturt AvenueHaslemere

Surrey GU27 3SJUnited Kingdom

Tel: (01428) 644137Fax: (01428) 656262

e-mail: [email protected]
mailto:[email protected]:[email protected]


2/21

Electronic copy available at: http://ssrn.com/abstract=1715853


WORKING PAPER

An Impending Oil Crunch by2015?

Mamdouh G. Salameh, International OilEconomist & World Bank Consultant

USAEE-IAEE WP 10-054

November 2010

The United States Association for Energy Economics and the International Association for EnergyEconomics have established this working paper series for the purpose of sharing members latest

research findings and to facilitate the exchange of ideas. Papers included in the series havebeen approved for circulation by USAEE/IAEE but have not been formally edited or peerreviewed. The findings and opinions expressed herein are those of the individual author(s) anddo not represent the official position or view of the USAEE/IAEE.


3/21


The United States Association for Energy Economics (USAEE) is a non-profitorganization of academic, business, government, and other professionals that strives toadvance the understanding and application of economics across all facets of energydevelopment and use, including theoretical, applied, and policy perspectives. TheUSAEE was founded in 1994 to provide a forum for the exchange of ideas, experiencesand issues among professionals interested in energy economics. For more information

on membership programs, conferences, and publications of the USAEE, visit ourwebsite: www.usaee.org

The International Association for Energy Economics (IAEE) was founded in 1977 inresponse to the 70's energy crisis. IAEE is a worldwide non-profit professionalorganization based in the United States, which has members in over 90 countries, whoprovide an interdisciplinary forum for the exchange of ideas, experience and issuesamong professionals interested in energy economics. IAEE actively seeks those who areinterested in energy economics and those who shape opinions and prepare for eventswhich affect the energy industry.

IAEEs main objective is to provide for the mutual association of persons interested in

energy economics in order to create a forum for professional, multinational discussionand to provide a means of professional communication and exchange. To achieve thisgoal, IAEE publishes two periodicals. "The Energy Journal"is a quarterly professional

journal available to all members; the IAEE Energy Forum(newsletter) delivers the latestinformation on the association, and contains timely articles that appeal to a generalaudience interested in the energy field.

In order to meet IAEEs objectives, it holds an International Energy Conference eachyear. These conferences attract delegates and speakers from around the world, andfrom some of the most influential government, corporate and academic circles.

Membership in IAEE is open to anyone who has an interest in the field of energy

economics.


4/21

An Impending Oil Crunch by 2015?

----------------------------------------------------------------By

Dr Mamdouh G. Salameh*Oil Market Consultancy Service / World Bank

Abstract

An analysis of the global oil market fundamentals indicates that a severe oil crunch couldbe in the offing probably by 2015 or thereabouts. By 2012, global oil production surpluscapacity could entirely disappear if the global economy continues to grow and by 2015the shortfall in oil output could reach nearly 10 million barrels a day (mbd) causing asevere oil crunch and pushing the oil price to levels matching if not exceeding the pricelevels reached in July 2008, namely $147/barrel. And while it is difficult to predictprecisely what economic, political and strategic effects such a shortfall might produce, itwould surely, at best, lead to periods of harsh economic adjustment in the globaleconomy and, at worst, to conflict and even war should one of the major oil consumernations choose to intervene forcefully. The war on Iraq was a foretaste of whats tocome. This war was instrumental in precipitating the recent global banking crisis and therecession from which the global economy is still suffering.

Key Words: Capacity, production, crunch, China, depletion.

Introduction

Ten years into the 21st century, and the world remains heavily dependent on the fuel thatpowered the last 100 years: crude oil.

Concern about the depletion of conventional global oil reserves seems to haveintensified for several reasons, including technological improvements in geological datagathering and analysis, the increasingly sparse reserves discovered by new drilling,question marks over the real size of global proven reserves and concerns that much ofthe worlds conventional oil especially in the Middle East, is coming from old and over-exploited mega-fields that are becoming less productive. There is no risk that we arerunning out of oil but chances of being able to match the projected growth in demandover the medium term with a rise in production is being seriously questioned.

The pressure on the oil price will continue unabated in coming years because of thegrowing global demand for oil and the dwindling global proven oil reserves.

Conventional oil production peaked in 2006. My own research, however, indicates thatthe peak may have already been reached in 2004 if we factor in what I describe asOPECs inflated proven oil reserves. My research indicates that OPECs proven oilreserves are overstated by some 300 billion barrels (bb). 1

Eight of the top oil producers in the world have already peaked. USA peaked in1971,Canada in 1973, Iran in 1974, Indonesia 1977, Russia in 1987, UK in 1999,


5/21

Norway in 2001 and Mexico in 2002 while China and even Saudi Arabia are about topeak (see Table 1). The only one among the top producers that has clear capability toincrease production is Iraq once stability is restored to the country.

Table 1The Peak & Depletion of Conventional Crude Oil

---------------------------------------------------------------------------------------------------------------------Country Date of Peak Date of Peak % % Ultimate

Discovery Production Discovered Depleted Production(bb)

---------------------------------------------------------------------------------------------------------------------China 1960s 2006 93 47 57Canada 1950s 1973 95 76 25Iran 1960s 1974 94 76 130Iraq 1970s 2019 87 20 135

Indonesia 1950s 1977 93 65 31Kuwait 1950s 1971 93 34 90Libya 1960s 1970 94 42 55Mexico 1950s 2002 94 55 55Norway 1970s 2001 93 48 33Russia 1940s 1987 94 61 200Saudi Arabia1940s 2013 96 31 300UAE 1960s 2014 94 23 78UK 1970s 1999 94 63 32USA 1930s 1972 98 88 195Venezuela 1950s 1970 96 48 95The World 1962 2005-2010 94 49 2100

---------------------------------------------------------------------------------------------------------------------Sources: Association for the Study of Peak Oils (ASPO) websit www.peakoil.net / The

Energyfiles Ltd / Chevron / Petroleum Review.

Moreover, three of the worlds largest oilfields have already peaked. Kuwaits Burgan,the worlds second largest accounting for 60% of Kuwaits reserves, peaked inNovember 2005. Also Mexicos giant Cantarell peaked in March 2006 and has seen itsproduction fall from 1.99 mbd in 2006 to 0.600 mbd by the end of 2009. Saudi ArabiasGhawar, the worlds largest oilfield accounting for 60% of Saudi oil production, or 5 mbd,peaked in April 2006 and is now declining at a rate of 8% per year. 2

Many experts have questioned the exact size of OPEC proven oil reserves and those of

other major OPEC producers such as Saudi Arabia, Iran & Kuwait. The Saudis claim tohave more than 264 billion barrels (bb) of proven reserves. However, manyIndependentexperts have disputed the Saudi claims. Their estimates of Saudi reserves range from90 bb-148 bb. 3 Saudi Arabias four biggest oilfields (Ghawar, Safaniya, Hanifa andKhafji) are all more than fifty years old, having produced almost all Saudi oil in the lasthalf century. These days they have to be kept flowing in large measure by injection ofwater. This is of explosive significance since they could be on the verge of seeing acollapse of 30%-40% of their production in the imminent future and imminent meanssometime in the next three to five years but it could even be tomorrow.

Iran is another case of highly inflated proven reserves. Iran claims to have provenreserves of 137.6 bb. However, independent experts estimate Iranian proven oil
http://www.peakoil.net/http://www.peakoil.net/


6/21

reserves at no more than 30 bb to 36 bb. 4

Then in January 2006, Petroleum Intelligence Weekly (PIW) reported that instead of the

99 bb of proven reserves which Kuwait claims to have, it had seen internal documentsprofessing that Kuwaits proven reserves are only 24 bb, 15 bb of them the remaining oilin the Burgan oilfield.

And despite all the technology we hear about, world discovery peaked in1962 andproduction of conventional oil peaked in 2006. As for the Middle East, discovery peakedin 1965 and peak production may have been reached in 2009. Since production has tomirror discovery, it should surprise no one that we now face the corresponding peak ofproduction.

The Ultimate Global Proven Reserves

Estimates at the beginning of 2010 indicate that there are just 955 bb of conventional oilyet-to-produce. This is defined as the sum total of global remaining reserves and anyreserve additions from new discoveries (see Table 2).

Table 2Ultimate Global Conventional Oil Reserves

& Depletion Rate (end of 2009)---------------------------------------------------------------------------------------------------------------------Volume Description---------------------------------------------------------------------------------------------------------------------Ultimate Reserves (bb) 2,100 Amount of production when production ceases.Produced so far (bb) 1,145 Until the end of 2009.

Yet-to-produce (bb) 955 Ultimate reserves less produced.Discovered so far (bb) 1,984 Produced plus remaining reserves.Yet-to-find (bb) 116 Ultimate reserves less discovered.Discovery rate (bb/y) 7 Annual additions from new fieldsDepletion rate (%) 3 Annual production as % of the yet-to-produce---------------------------------------------------------------------------------------------------------------------Sources: USGS / BP Statistical Review of World Energy, June 2010 / IHS Energy

Group, World Petroleum Trends (WPT).

The Global Oil Market Fundamentals

The current global oil market is characterised by a slowdown in oil production, a growing

supply deficit, declining discovery rate of new oil and tightening production capacity.

(i) A Slowdown in Oil Production & a Growing Supply Deficit

World oil production has virtually been flat since 2004 and is projected to continue itsdownward trend between now and the 2030s. As a result, the deficit between globalsupplies and demand will continue to widen reaching 9.20 mbd by 2015 and rising to18.90 mbd in 2020 and 34.40 mbd by 2030 (see Table 3).


7/21

Table 3Current & Projected Global Oil Demand & Supply, 2009-2030

(mbd)

---------------------------------------------------------------------------------------------------------------------2009 2010 2011 2015 2020 2025 2030

---------------------------------------------------------------------------------------------------------------------Demand 84.08 86.19 87.41 90.40 100.00 112.35 117.40Supply 79.95 81.32 81.25 81.20 81.10 80.50 80.00Supply / Demand

Deficit - 4.13* - 4.87* - 6.16 - 9.20 - 18.90 - 31.85 - 37.40---------------------------------------------------------------------------------------------------------------------Sources: US Department of Energys International Energy Outlook, 2010 / IEA, World

Energy Outlook, 2010 / BP Statistical Review of World Energy, June 2010 /OPEC World Oil Outlook, 2010 / US Joint Operating Environment (JOE) 2010 / Authors projections.

* Deficit is offset by OPECs production cuts.

A most recent report released by the United States Joint Command in February 2010and entitled: The US Joint Operating Environment (JOE) 2010, states that global oildemand is projected to increase by almost 50% between 2010 and 2030. The reportgoes on to say that to meet this projected demand, even assuming more effectiveconservation measures, would require the addition of roughly the equivalent of SaudiArabias current oil production every seven years and would also require that OPECraises its oil production from 30 mbs currently to at least 50 mbd. The report points out,however, that OPEC may have a vested interest in restricting production increases, bothto conserve finite resources and to keep prices high. It concludes that a severe oilcrunch as early as 2015 is, therefore, inevitable without a massive expansion of oil

production and refining capacities. 5

(ii) Declining Discovery Rate

The world is currently consuming just over 31 bb a year, yet on average finding just over5.42 bb a year. Over the period 1992-2009, only 19% of the global oil production hasbeen replaced by new discoveries or by enhanced oil recovery (EOR) (see Table 4).

Table 4Global Crude Oil Reserve Additions, 1992-2009

(bb)

Year Added in Year Annual Production As % of Annual Production

1992 7.80 23.98 331993 4.00 24.09 171994 6.95 24.42 281995 5.62 24.77 231996 5.42 25.42 211997 5.92 26.22 231998 7.60 26.75 281999 13.00 26.22 502000 12.60 27.19 462001 8.90 27.81 32


8/21

2002 9.00 26.99 312003 2.27 28.11 82004 1.40 30.10 5

2005 0.91 30.84 32006 - 31.30 -2007 - 29.73 -2008 - 29.93 -2009 0.70 29.18 21992-2009 92.09 493.05 19

Average 5.42 29.00 19

Sources: IHS Energy Groups Data / BP Statistical Review of World Energy, 1993-2010.

(iii)- Tight Production Capacity

Because of OPECs production cuts in October 2008, net global production capacity

currently stands at 3.157 mbd (see Table 5). By 2011 net capacity will amount to only1.19 mbd.

Table 5Capacity Addition & Capacity Erosion, 2005-2011

(mbd)---------------------------------------------------------------------------------------------------------------------

2005 2006 2007 2008 2009 2010 2011---------------------------------------------------------------------------------------------------------------------OPEC new capacity 1.160 1.520 1.420 1.320 2.240 2.235 2.235Non-OPEC capacity 1.416 1.865 2.320 1.886 1.710 1.035 1.035Total new capacity 2.576 3.385 3.740 3.206 3.950 3.270 3.270

Capacity erosion &slippage* 1.526* 2.348* 2.440* 1.750* 2.328* 2.081* 2.081*

---------------------------------------------------------------------------------------------------------------------Net new capacity 1.050 1.037 1.300 1.456 5.722** 3.157*** 1.189---------------------------------------------------------------------------------------------------------------------Sources: Petroleum Review, (various issues 2006-2010).* Assumes 20% slippage and 10% capacity shortage** Includes 4.1 mbd of production cut by OPEC in October 2008 because of the

recession.*** Includes 1.968 mbd of OPECs production cuts.

The top five producers in the Arab Gulf: Iran, Iraq, Kuwait, Saudi Arabia and UAE

currently produce around 20 mbd, a quarter of the global total. The combined current netcapacity of the five Gulf producers is estimated at 22.95 mbd (see Table 6). The sparecapacity of 2.95 mbd in 2010 is not due to any expansion of their production capacity buta result of OPECs earlier production cuts.

By 2012, global oil production surplus capacity could entirely disappear if the globaleconomy continues to grow. 6 And by 2015 the shortfall in oil output could reach nearly10 mbd pushing oil prices to levels matching if not exceeding the price levels reached inJuly 2008, namely $147/barrel.


9/21

Table 6Current & Projected Net Production Capacity of the Gulf Producer

2006-2010

(mbd)------------------------------------------------------------------------------------------------------------

2006 2007 2008 2009 2010------------------------------------------------------------------------------------------------------------Iran 3.95 3.90 3.75 3.75 3.75Iraq 2.00 2.00 2.40 2.40 2,40Kuwait 2.60 2.65 2.70 2.70 2.80Saudi Arabia 9.50 10.00 10.25 10.50 11.00UAE 2.60 2.68 2.70 2.80 3.00------------------------------------------------------------------------------------------------------------Total 20.65 21.23 21.80 22.15 22.95------------------------------------------------------------------------------------------------------------

Source: Petroleum Review / OPEC Secretariat data / Authors projections.

Can Unconventional Oil Resources Bridge the Energy Gap?

A large share of the worlds remaining oil resources is classified as unconventional.These resources such as Canadas tar sands, Venezuelas extra-heavy oil and shale oilhave been promoted as a major source of energy that could offset the decline inconventional oil production and reduce dependence on Middle East oil.

Recoverable unconventional oil resources are estimated at 603 bb: 173 bb of tar sandsoil reserves in Canada, an estimated 270 bb of extra-heavy oil and bitumen reserves inVenezuela and 160 bb of oil shale worldwide (see Table 7).

Table 7Unconventional Oil Reserves

(bb)---------------------------------------------------------------------------------------------------------------------

Canada Venezuela Worldwide TotalTar sand oil Extra-heavy oil Oil shale

---------------------------------------------------------------------------------------------------------------------173 270 160 603

---------------------------------------------------------------------------------------------------------------------Sources: BP Statistical Review of World Energy, June 2010 / US Department of Energy

(DOE).

Production of unconventional oil production currently amounts to 1.55 mbd and isprojected to rise to 3.05 mbd by 2020 and 3.75 mbd by 2030. In 2010, unconventional oilcontributed 2% to global oil demand and this is projected to rise to only 3% by 2030 (seeTable 8).

Ironically, concerns are emerging that Canadian natural gas reserves are depleting sofast that there might not be enough power available to heat water for the oil sandsexpansion operations anyway. Tar sands oil and extra-heavy oil are especially voraciousconsumers of energy, consuming about 1000 cubic feet of natural gas to convert a barrelof bitumen into light crude oil that refiners want. In 2009 Canada produced 1.2 millionmbd of tar sands oil consuming in the process an estimated 1.2 billion cubic feet (bcf) of


10/21

natural gas a day, equivalent to 8% of Canadas entire daily production. Canadasprojected production of 2.8 mbd of tar sands oil in 2025 will require an energy input of2.8 bcf/d of natural gas, about one-fifth of projected daily Canadian gas production then.

The only way the 173 bb of tar sand oil could be extracted is to build nuclear powerplants dedicated to the job. 7

Table 8Current & Projected Contribution of Unconventional Oil to Global

Oil Demand, 2009-2030(mbd)

2009 2010 2015 2020 2025 2030

Demand 84.08 86.19 90.40 100.00 112.35 117.40Supply 79.95 81.32 81.20 81.10 80.50 80.00

Of whichUnconventional* 1.55 1.55 1.93 3.05 3.40 3.75As a % of global

Demand 2 2 2 3 3 3---------------------------------------------------------------------------------------------------------Sources: US Department of Energys International Energy Outlook, 2009 / IEA,

World Energy Outlook 2009 / BP Statistical Review of World Energy,June 2010 / OPEC World Oil Outlook 2009 / Authors projections /The US Joint Operating Environment (JOE) 2010.

*Excludes biofuels.

As for renewable energy sources, they contributed only 1% to the global primary energy

demand in 2009. Their contribution may not exceed 6% in 2025, possibly rising to 13%by 2050 (see Table 9).

Table 9Primary Energy Consumption, 2009-2050

(mtoe)

2009 2025 2050

Primary Energy 11164 16194 19679Oil 3882 5135 5288Natural gas 2653 5119 6927Coal 3278 3526 2748

Nuclear 610 1061 1937Hydro 669 314 299Renewables 72 1039 2480

As a % of total 1% 6% 13%

Sources: Shell International, Scenarios to 2050 / BP Statistical Review of World Energy,June 2010 / IEA, World Energy Outlook 2009.

The Impact & Trends in the Global Economy

After decades of uneven globalization, the world is now witnessing the rise of manyemerging economies and the shifting of global economic power balance from the Westto the emerging countries and the oil-exporting countries. The West plus Japan


11/21

currently account for 52% of the global GDP. However, by 2015 the emergingeconomies and the developing world are projected to account for 50% of the globalGDP. 8

Also as a result of the rise of the emerging economies, we are seeing a shift of wealthtoward countries that supply energy and raw materials. Since 2002, the major global oilexporters have seen their oil revenues more than double and surpluses quadruple whilethe external accounts of the major oil-importing countries have deteriorated, intensifyingglobal economic imbalances and dampening growth. The overall transfers from oilconsumers to oil producers in 2008 were estimated at $1.3 trillion, or 3% of world GDP.

As Asian economies, particularly China, grow and their current surpluses grow along,Asian money becomes more and more important globally. While the US over the last 10years had an average current account deficit of $800 bn, several East Asian countriestogether had an average $400 bn surplus, more than a third of the worlds surplus. 9

The Arab Gulf Sovereign Wealth Funds (SWFs) are equally growing in importanceglobally. They control assets estimated at $1777bn (see Table 10).

Table 10Estimates of Assets under Management for Gulf SWFs

---------------------------------------------------------------------------------------------------------------------Country Name of Fund Assets (US$ bn end of 2008)---------------------------------------------------------------------------------------------------------------------UAE Abu Dhabi Investment Authority 875Saudi Arabia Saudi Arabian Monetary Authority 433Kuwait Future Generation Fund 213

Dubai Investment Corporation of Dubai 82Libya Oil Reserve Fund 65Qatar Qatar Investment Authority 60Algeria Revenue Regulation Fund 47Oman State General Reserve Fund 2---------------------------------------------------------------------------------------------------------------------Total 1777---------------------------------------------------------------------------------------------------------------------Source: IMF, Sovereign Wealth Funds: a work agenda, http:// www. Imf.org, accessed 4

July 2008 / Sovereign Wealth Fund Institute (Jan. 2009).

A recent study by Morgan Stanley estimates that by 2015 the financial assets of

oil funds and other SWFs will be approximately $6 trillion each.

McKinsey Global Institute estimates that at the end of 2006 oil exporters collectivelyowned between $3.4 tn to $3.8 tn in foreign financial assets. The GCC states (SaudiArabia, Bahrain, Kuwait, UAE, Oman and Qatar) owned $1.8 tn or 47%-53% of theseassets according to the Institute of International Finance at the end of 2007.

In the first half of this decade, an estimated $542 bn of GCC international assetshad been injected into global capital markets. Most of these investments hadbeen made by oil funds.


12/21

An Asian Oil Demand Shock?

While we recognize the risks associated with a supply shock in the oil patch, we believe

investors should be just as concerned about the demand shock evolving from Asia. Atthe moment, Asias energy resources are grossly inadequate (see Table 11). Thegrowing deficit between Asian supply and demand alone could keep energy prices highin the years ahead.

Table 11Current & Projected Crude Oil Demand, Supply,

Imports & Reserves in the Asia-Pacific Region (2008-2010)(mbd)

---------------------------------------------------------------------------------------------------------------------% of change

2008 2009 2010 2015 2020 2025 (2008-2025)

---------------------------------------------------------------------------------------------------------------------Production 8.18 8.04 7.88 6.94 6.00 5.29 - 35%

Consumption 25.66 26.00 26.68 30.18 34.15 38.63 + 51%Net imports 17.48 17.96 18.80 23.24 28.15 33.34 + 91%As a % of

Consumption 68 69 70 77 82 86---------------------------------------------------------------------------------------------------------------------Sources: BP Statistical Review of World Energy, June 2010/ Authors projections.

In 2009 the Asia-Pacific regions dependence on oil imports amounted to 69%. This isprojected to rise to 70% in 2010 and 86% by 2025. The bottom line is that neither ofAsias fastest-growing economies has enough energy to feed its rapid industrialization

and urbanization.

It is against this background that the concept of peak oil becomes more worrisome. Highoil prices might not simply be a cyclical phenomenon brought about by peak demand inthis five-year-old global economic recovery. Instead, high oil prices might be an earlyindication of a supply-demand imbalance that cant be reconciled by still higher prices. Inthis case, a more comprehensive oil shock surely awaits.

The Interplay Between Oil & Geopolitics

As the worlds number one consumer, the United States will have much to say abouthow the crisis - whether of early depletion or inadequate infrastructure and investment,

or both plays out. The geopolitics of American oil dependency sees four key trends inUS energy behaviour: more imports, increasingly unstable and unfriendly suppliers andrising competition for diminishing supplies.

And despite efforts to diversify the US energy mix, the United States is still heavilydependent on oil imports and this dependency can only deepen in the future (see Table12).

The bottom line is that a rising competition for diminishing oil supplies could lead to adeadly confrontation between the worlds military powers. Because obviously in a worldas enduringly addicted to oil as ours is, others are going to be looking for their ownsupplies. China will be among them. Over the coming years we will see China more


13/21

involved in Middle East politics. And they will want to have access to oil by cutting dealswith corrupt dictatorships in the region, and perhaps providing components of weaponsof mass destruction, ballistic missiles and nuclear technology, and that could definitely

put them on a collision course with the United States. Oil dependency could yet prove tobe the route to a third World War.

Table 12US Current & Projected Crude Oil Production, Consumption & Imports

2008-2025(mbd)

---------------------------------------------------------------------------------------------------------------------% change

2008 2009 2010 2015 2020 2025 2008-2025

Crude oil production 6.73 7.20 7.05 5.79 5.24 4.73 - 30%Consumption 19.50 18.69 19.06 21.00 23.19 25.60 + 31%Net imports 12.77 11.49 12.01 15.21 17.95 20.87 + 63%

As a % ofConsumption 65 61 63 72 77 82

Sources: US Energy Information Administration (EIA) / BP Statistical Review of WorldEnergy, June 2010 / Authors projections.

Most US presidents since the Second World War have ordered military action of somesort in the Middle East. American leaders may prefer to dress their militaryentanglements east of Suez in the rhetoric of democracy building, but the long-runningstrategic theme is obvious. It was stated most clearly, paradoxically, by the most liberalof them. In 1980 Jimmy Carter declared access to the Persian Gulf a vital nationalinterest to be protected by any means necessary, including military force. The US hasbeen doing this ever since, clocking up a bill measured in thousands of billions of dollars,and counting.

The China Factor

China is racing to secure Middle East deals, putting it on a possible collision course withUS interests in the Worlds most volatile region. China is now the biggest importer ofSaudi oil, the second-biggest of Iranian oil, and the largest player in the Iraqi oil game.China is putting a lot of money on the bet that having ownership of oilfields is a betterguarantee of supply than buying oil on the open market. 10

Beijing is betting big in Iraq, which many Western companies are avoiding. In November2009, the Chinese National Petroleum Company (CNPC) won a large stake in a $15 bndeal to develop the Rumaila oilfield in southern Iraq, thought to be the second largest inthe world with estimated proven oil reserves of 17.8 bb. That followed a $3 bn deal todevelop the Ahdab oilfield in 2008. And two other Chinese firms just closed a deal on alarge oilfield in eastern Iraq. Chinese companies have also shown much greaterwillingness to take on risk by placing their own nationals in war zones: Sudan and Iraqwhere CNPC has an office in Baghdad led by Chinese nationals.

China is also ramping up its ties to Iran as many Western firms pull out. In 2009, China


14/21

signed $8 bn in oil and gas deals with Tehran. It also increased sales of gasoline to Iran,which has a shortage of refining capacity. In fact, China is now Irans biggest economicpartner with more than $21 bn in annual trade. China is reluctant to follow the US line on

Iran sanctions because of its oil interests. China has also signalled that it is prepared todefend its new oil ties in the Middle East with firepower.

For their part, US officials have tried to reassure Beijing that it can meet growing energyneeds without dealing with Iran and have pressured Saudi Arabia to give China oilguarantees to wean it off Iranian oil. Still, there will likely be plenty of otherdisagreements ahead as China increases its Middle East footprint.

The Oil Crunch

Global oil demand is projected to rise from 86.19 mbd in 2010 to 118.00 mbd in 2030.To meet this projected demand, even assuming more effective conservation measures,

would require the addition of roughly the equivalent of Saudi Arabias current oilproduction every seven years and would also require OPEC to raise its oil productionfrom 30 mbs currently to at least 50 mbd. Significantly, no OPEC nation, except perhapsSaudi Arabia, is investing sufficient sums in new technologies and recovery methods toachieve such a growth. However, OPEC nations may either be unable to raise theirproduction to that level or may have a vested interest in restricting production increases,both to conserve finite resources and to keep prices high.

Oil must continue to satisfy most of the global demand for energy. Assuming the mostoptimistic scenario for improved oil production through enhanced recovery means, thedevelopment of unconventional oil and new discoveries, oil will be hard pressed to meetthe projected future demand of 118 mbd by 2030 (see Figure 2).

At present, the United States possesses approximately 250 million cars, while Chinawith its immensely larger population possesses only 40 million. The Chinese are layingdown approximately 1,000 kilometers of four-lane highway every year, a figure indicativeof how many more vehicles they expect to possess, with the concomitant rise in their oildemand. The presence of Chinese personnel in the Sudan to guard oil pipelinesunderlines Chinas concern for protecting its oil supplies and could portend a future inwhich other states intervene in Africa to protect scarce resources. The implications forfuture conflict are ominous, if oil supplies cant keep up with demand and should statessee the need to militarily secure dwindling energy resources. 11

To generate the oil required worldwide by 2030 would require us to find an additional 1.4

mbd every year between now and then. During the next twenty-five years, fossil fuels willremain indispensable to meet energy requirements. However, the discovery rate for newoil over the past two decades (with the possible exception of Brazil) provides little reasonfor optimism that future efforts will find major new oilfields.

By 2030 the world will require production of 118 mbd, but oil producers may only be ableto produce only 100 mbd. By 2012, oil production surplus capacity could entirelydisappear if the global economy continues to grow. And by 2015 the shortfall in oil outputcould reach nearly 10 mbd causing an oil crunch which will be reflected in higher oilprices matching if not exceeding the price levels reached in July 2008, namely$147/barrel.


15/21

Figure 2

Source: International Energy Agency (IEA), World Energy Outlook.

A severe oil crunch is, therefore, inevitable by 2015 or thereabouts without a massive

expansion of oil production and refining capacities. While it is difficult to predict preciselywhat economic, political and strategic effects such a shortfall might produce, it surelywould reduce the prospects for growth in both the developing and developed worlds.Such an economic slowdown would exacerbate other unresolved tensions, push fragileand failing states further down the path toward collapse, and perhaps have seriouseconomic impact on the two most populous nations on earth, namely China and India.

At best, such a crunch would lead to periods of harsh economic adjustment and, atworst, to conflict and even war should one of the major oil consumer nations choose tointervene forcefully. The war on Iraq was a foretaste of whats to come. This war wasinstrumental in precipitating the recent global banking crisis and the recession the globaleconomy is still suffering from. 12

Can the World Be Weaned Off Oil?

I have so far endeavoured to prove the case for two big arguments. First, there is plentyof oil and gas left but not enough to feed growing global energy demand for muchlonger. Second, global conventional oil production peaked in 2006.The truth of the matter is that the shortfall between current expectation of oil supply andactual availability will be such that neither gas, nor renewables, nor liquids from gas andcoal, nor nuclear, nor any combination thereof, will be able to plug the gap in time tohead off the economic trauma resulting from the peak. But doing nothing is not anoption. It will only lead to conflicts and devastating wars in the future. This begs the


16/21

question as to whether the world could eventually be weaned off oil. The answer to thatis that it can only be done if we endeavour to change our way of life, easy said thandone. But the dire alternative will eventually force us to change the way we live and seek

alternative energy sources.

Meanwhile, there are short-term and long-term measures that governments can urgentlytake to reduce our addiction to oil and ward off the adverse impact of an energy crisis.Energy efficiency could be a first step. Automakers, for instance, could increase fuelmileage to 80 mpg from the current 30 mpg at little additional cost. This could have animmediate impact on global oil demand.

Another option is the electric car. But the push for electric cars would still increasedemand for gas- and oil-based electricity; so an age under electric cars has to becoupled with a shift to solar, wind, nuclear and other sources of renewable energy forelectricity generation.

Hydrogen is also a feasible source of energy for transport. Id say we are 25 to 30 yearsaway from using hydrogen fuel cells as a substitute to oil. Whatever the world decideseventually, it will have to be a concerted effort by governments, manufacturers and evenoil producers.

Conclusions

Global oil demand is projected to rise by 50% between now and 2030. To meet thisprojected demand, even assuming more effective conservation measures, would requirethe addition of roughly the equivalent of Saudi Arabias current oil production everyseven years and would also require that OPEC raises its oil production from 30 mbd

currently to at least 50 mbd. However, OPEC may be either unable to raise itsproduction to that level or it may have a vested interest in restricting productionincreases, both to conserve finite resources and to keep prices high.

By 2030 the world will require a production of 118 mbd, but oil producers may only beable to produce only 100 mbd. And by 2012, oil production surplus capacity couldentirely disappear if the global economy continues to grow and by 2015 the shortfall inoil output could reach nearly 10 mbd.

A severe oil crunch could, therefore, be in the offing probably by 2015 or thereabouts.Such a crunch would, at best, lead to periods of harsh economic adjustment in the globaleconomy and, at worst, to conflict and even war should one of the major oil consumer

nations choose to intervene forcefully. The war on Iraq was a foretaste of whats tocome.

And while it is impossible to wean the world off oil without a radical change in our lifestyle, there are already technologies which can help reduce our addiction to oil. Majorinvestments should therefore be channelled towards enhancing energy efficiencyglobally and the further development of electric cars and ultimately hydrogen motortechnology.

* Dr Mamdouh G. Salameh is an international oil economist, a consultant to the WorldBank in Washington DC and a technical expert of the United Nations Industrial


17/21

Development Organization (UNIDO) in Vienna. Dr Salameh is Director of the Oil MarketConsultancy Service in the UK and a member of both the International Institute forStrategic Studies (IISS) in London and the Royal Institute of International Affairs. He is

also a member of the Energy Institute in London.


18/21

Footnotes

1 I was the first among oil experts to calculate and prove that OPEC proven oil

reserves are inflated by at least 300 bb. This figure has become a worldreference quoted by energy experts and energy Institutes and organizationsworldwide. I presented the results of my research in a paper entitled: OPECProven Reserves: How Realistic? at the 24th USAEE/IAEE North AmericanConference, July 8-10, 2004, Washington DC, pp.3-4.

2 Mamdouh G Salameh, Peak Oil & the Global Economy (a paper given at theinvitation of the All Party Parliamentary Group on Peak Oil at the House ofCommons in London, 29 April 2008.

3 Mamdouh G Salameh, Saudi Proven Crude Oil Reserves: The Myth & theReality Revisited (a paper given at the 10th IAEE European Conference, 7-10,September 2009, Vienna, Austria), p. 4.

4 Mamdouh G Salameh, Oil & Irans Nuclear Programme (A USAEE Working

Series Paper No: 09-036, published on 28 December, 2009) pp. 5-6.5 The US Joint Operating Environment (JOE) 2010 (published by the United

States Joint Forces Command, 18 February 2010), pp.24-29.6 Ibid., p. 29.7 Mamdouh G Salameh, Conventional & Unconventional Oil Resources

Shouldnt Be Classified Equally as Crude Reserves (a paper given at the11th IAEE European Conference, 25-28 August, 2010, Vilnius, Lithuania), pp.3-4.

8 Mamdouh G Salameh, Oil & the Global Financial & Economic Crises &Their Impact on the Economies of the Arab Countries (a lecture given at theinvitation of the Economics Department at the American University of Beirut, 18May 2010, Beirut, Lebanon), p. 10.

9 Ibid., p. 11.

10 Babak Dehghanpisheh, Chinas Middle East Oil Lust, Newsweek, May 17,2010, p. 8. (for further details on Chinas oil thirst, refer to Mamdouh GSalamehs paper entitled: Chinas Global Oil Diplomacy: Benign or Hostile?given at the 31st IAEE International Conference in Instanbul, Turkey, 18-20 June,2008.

11 The US Joint Operating Environment (JOE) 2010, p. 26.12 Mamdouh G Salameh, Over a Barrel (London, UK: Salameh, June 2004), pp.

191-192; also Mamdouh G Salameh The 21st Centurys First Oil War: TheWar on Iraq & ItsImpact on the Oil Price (a paper given at the 2nd LatinAmerican Energy Conference, 22-24 March 2009, Santiago, Chile).


19/21


20/21


21/21

salameh - an impeding oil crunch by 2015

Documents