IS THE WORLD RUNNING OUT OF OIL?
John Q. Student
Grantham University
Abstract
The focus of this research is to discuss the history of oil-based decision making by the United States Government, including the impacts of those decisions on world economics, energy policy, war, and diplomacy. The reader should be aware of any potential bias that exists due to the author’s perspective as a Veteran of the Armed Forces, as well as the writer’s role as a leader for a major utility in the United States. The period of review will include pre-World War II to present day. The purpose is to serve as a short single source document to assimilate facts from history about events surrounding oil, war, diplomacy, energy policy, and world economics. The hypothesis is that by showing predictabilities in economic impacts, combined with historical decision making by our government in a chronological order, readers will be able to more logically continue research of any aspect of the document that might interest them, while maintaining a focus on the events of the time period. The overall purpose of the document will be to zoom out on all of the proposed interrelated topics to raise awareness on how each item influences the other. By doing this, the intention is allowing the reader to decide if our recent history of war was for oil, or if there were more noble reasons such as advancing democracy and US prosperity. This document should create a thirst for knowledge around how consumer behavior can impact world economy, especially as it pertains to oil being used for energy production.
Keywords: world oil shortage, oil as currency, war for oil, US dependence on foreign oil, US oil dependency, historic oil shortages, world oil supply.
Is the World Running Out of Oil?
The author of this paper felt it necessary to identify the known sources of oil in the world, and the impact that oil has on the world economy. After doing so, the writer will take you back to World War II before returning you to present day. Throughout the document the writer will visit the reasons for war that were advertised, along with some of the less obvious potential explanations that were not offered to the general public. All of these historical reviews will provide the reader an opportunity to analyze the facts presented, and make their own decision about these events and the future of our country, oil, war, and the world economy.
So, how does one decide if the world is running out of oil, without first knowing where the oil is and how much is estimated to exist? According to the United States Geological Survey (USGS) discovery of new large oil fields peaked in 1962. The USGS also states that the largest three percent of oil fields discovered contain 94% of the world’s oil supply (MacKenzie, 1996). From this information alone the writer of this article was able to understand that this means discovery and exploration of new fields are on the decline. Why would companies invest huge sums of money on the chance of discovering small oil wells that may not even justify the effort? The answer in short is that they won’t. It stands to reason that based on current demand, forecast future demand change, along with production estimates, an expert could calculate a rough date when the country would likely run out of oil without significant change in consumer behavior.
The majority of the world’s oil supply is located in just a few places. These include the lower 48 states, the countries that comprise the Organization of Petroleum Exporting Countries or OPEC, several smaller countries known as non-OPEC producers, and small areas in Alaskan waters. The United States’ oil production peaked in the early 1970s and as we begin to talk about the impacts that this had on the economy, it will become clear how important oil is to the world (MacKenzie, 1996). So how much oil do the experts estimate the world has? In 1996 the estimates ranged from 1,800 billion barrels to 2,600 billion barrels. Assuming a 2% growth in demand, it is estimated that world-wide production would have peaked around 2014 (Mackenzie, 1996). That estimate nearly 20 years ago suggested that there was a need for government intervention. The proposal was to raise taxes, incentivize alternative energy sources, and regulate oil usage in other areas outside of transportation as well (MacKenzie, 1996).
The key thing to note in all of this is that the United States’ oil production peaked in the 1970s. In 1996 the United States government still had not changed policy, raised taxes, or incentivized studies to support alternative energy options. Instead, the government created an apparent economic crisis locally in 1970, while creating real issues in oil producing nations around the globe. The United States went from importing 35% of its oil in 1973 to importing 44% of its oil in 1995, and as of the same year about half of all oil usage in the world was by the United States (MacKenzie, 1996). The only action evident by the government of the United States was the fortification of oil reserves. OPEC nations did exactly the same thing to help counteract market shifts due to low prices and high demand.
That now brings into focus the economic impact of oil prices. The author will review the topic of how low oil prices can impact the world economy in greater detail later in the document. For now, it is important to note one key event that happened in conjunction with United States production peak in the early 1970s - the end of the Bretton Woods Agreement. This agreement was signed in July of 1944 and created the International Monetary Fund (IMF) and World Bank. These agencies established rules for exchange rates and international monetary cooperation (Hammes & Willis, 2005). The arrangement provided for a fixed currency exchange rate as compared to the US dollar. As an example gold was fixed at $35 per ounce. When this agreement ended in 1971, there was a run on US backed currency in exchange for gold. The US had over $70 billion dollars in liabilities at the time with only $12 billion in gold to back it (Hammes & Willis, 2005). Since oil transactions at the time were also linked to the US dollar, this evolution meant that not only was the dollar allowed to float freely but so was the value of barrels of oil being traded. This relationship is important to remember as this was the point at which the United States and the world economy became linked to the volatility of inflation and deflation. The Teheran Agreement of 1971 was then drafted whereby the rate of adjustment was reviewed on a quarterly basis and was compared to a basket of currencies from 9 industrialized nations (Hammes & Willis, 2005). This agreement did not last for very long because oil producing nations were seeing a rapid decline in value of their product. Why export a product based on a piece of paper that has an unknown value? To counteract this development, OPEC decided to take action by adjusting the value of oil against the value of gold instead of the dollar or a basket of currencies. This action by OPEC countries resulted in the further decline of the value of the dollar, and a call to action for a better solution. The effect was Americans coining OPEC as the “oil cartel”. The action by OPEC accomplished the goal it intended by stabilizing the gold value of oil to normal rates again, and at least for a short time balanced the world markets (Hammes & Willis, 2005).
With the provided information related to where all the oil is in the world, and how oil became so closely linked to world economy; this author would like to roll back the clock to 1939 and World War II. The reader should remember that oil production in the lower 48 states did not peak until 1970. Because of this it is apparent that during WWII the United States was not dependent on foreign oil at all. In fact, the British government was in control of most of the oil in the Middle East and it was their economy that was threatened most by WWII. The United States entered WWII to support Britain, or so it was advertised (Venn, 2012). It was during and immediately after this war that a review of historical records from both British and United States governments made it evident that the motive for cooperation and the motive for war was in fact oil (Venn, 2012). There are mounds of documented facts, only some of which this research will highlight, that suggest that following WWI and leading up to WWII the US and British governments often clashed whenever there was competing interest in oil fields abroad. During WWI the United States supplied two thirds of the world’s oil for consumption. The British was dependent on foreign oil and had a plan to monopolize as much of it as possible, with a particular focus on the Middle East. In 1915 the USGS produced a study that suggested the US would experience an oil shortage in as little as 15-20 years (Venn, 2012). This resulted in the United States cracking down at home, building reserves, and encouraging private oil businesses to seek and explore for oil opportunities elsewhere. What was soon discovered was that the British had often beat them to the punch. With WWII came an opportunity for the United States to get its foot in the door to Middle East oil. The British had to rely on the USA to supply the oil it needed for its war machines. The US devised what was referred to as the Lend-Lease scheme (Venn, 2012). The commercial and political front that both countries put forth during the course of WWII was one of cooperation, showing support as if there was an allied initiative for some greater purpose. Behind the scenes in annals of both countries, the distaste and lack of trust for one another was more obvious. During the last two years before the war ended, high level delegates from both countries were already working on an Anglo-American Oil Agreement in an effort to protect their own interests in Middle East oil reserves (Venn, 2012). It was these activities that are recorded in history that created the stigma that the United States, whenever involved in war surrounding oil producing countries could only be fighting for one reason…oil. In the end, the United States used its leverage created by the Lend-Lease scheme to corner the British into cooperation and shared interests in the Middle East oil supplies and exploration. Based on this manipulation, the US persona was further defined as one that would engage in war for oil. The Anglo-American Oil Agreement was never ratified. Later it was identified by political experts that an opportunity existed based on “Article 7 of the Lend-Lease Agreement that a post war economic order could be established and the British could compensate Americans for the large amounts of petroleum used during the war by surrendering some of their own petroleum reserves in the Middle East” (Venn, 2012).
The dispute between the United States and the British did not end with the war. It was clear that the United States used the war as an opportunity to promote its own interest in the Middle East oil reserves. Now in the timeline falls the World to the Bretton Wood Agreement of 1944. As discussed before, the US dollar became the international currency, and everything was based on the valuation of the dollar. This certainly would feel as if the United States had just positioned itself as the economic master of the world economy, upending the British government and its currency in the process. That would certainly not create any hostilities or breed any distrust, right? With oil, gold, and most other major commodities linked to the US dollar, adjusting currency value gives the US the ability to manipulate markets and thus impact other national economies. The author is not implying that this is the case, but rather recognizing this as a possibility and something that other countries may see as well. During this time period post WWII, the British relied heavily on imports of oil and the United States did not. The forecast was evident that there was to be either a shift in consumer behavior in the US or there would be a need to rely on foreign oil in the near future.
Fast forward now to the early 1970s and the reader should recall the end of the Bretton Wood Agreement. OPEC stands up for itself and begins adjusting the price of oil against gold, instead of the unstable dollar which is now floating against a basket of other national currencies. US oil demand makes up 25% of the world’s production at this time in history. As stated before, over the next two decades the United States did nothing with energy policy to protect this precious commodity. It was shown using the numbers on page two of this research, that the government instead turned its focus on importing more oil from the rest of the world while preserving supplies in the US. Meanwhile other large industrialized nations, particularly those in Europe and Britain took positive action to reduce consumption and dependency. Significant taxes were imposed on those citizens and consumption was reduced dramatically. In the United States the government did not recognize the full social cost of oil consumption. They did not want to raise taxes and kept the price of fuel artificially low. In the next section this author will outline what this inaction by the US has done to our economy, and to our dependency on foreign oil.
The author of this paper has witnessed first-hand the discrepancy between the cost of fuel in foreign countries versus here in the United States. How can this be right, if over 44% of our oil is imported from other countries? “No U.S. politician wants to be labeled as the person leading an effort to raise taxes (MacKenzie, 1996)”. It appears that the politics around taxes and the US economy were ignoring the social impacts of falsely low oil prices. Our nation is so dependent on oil, primarily in the transportation industry that a drastic price increase or decrease has impacts felt around the globe. Suggestions were being made as early as the 1980s to the Reagan administration that policy changes needed to be made that would change consumer behavior and result in fuel prices reflecting the full social impact that its use has on the world. Suggestions included adding taxes based on pollution, adding security due to dangers of foreign oil activities, and addressing the impacts of global warming (MacKenzie, 1996).
The world experienced a dramatic impact as a result of low oil prices in the mid-80s and just before the turn of the century. Looking at these two time periods it is evident that the dramatic change in price had far reaching impacts that, until now, were not likely predictable by the average person. Lower prices that are not attributable to improved technology and reduced production costs resulted in depleted oil reserves, a larger income gap between consumers and producers, issues between OPEC and non-OPEC producers, decline in oil revenue, budget deficits, borrowing and debt, and political unrest (Alhajji, 2001). On a more personal level, for individuals working in the countries of production it caused economic hardship due to layoffs. It resulted in governments cutting budgets usually related to social programs first, which has a direct impact on persons living and working in oil producing countries. In consuming countries, it had the opposite effect economically. More consumption means the government collects more taxes on the sale of fuel. In 1999 alone it was reported the United States collected $1.5 billion in additional gasoline taxes due to the increase consumption (Alhajji, 2001). Additionally, in consuming countries like the US, there is now more disposable income, lower legislative costs, and lower import costs for oil and other products. This does not mean that there are no disadvantages for consuming countries.
In fact, nearly two decades later the country is seeing the disadvantages. Low oil prices in consuming countries resulted in over consumption. This meant that the cost to produce oil in countries where economies rely on it, was higher than the value of the product. The effect was that from the producing countries perspective selling the oil was not worth it, and so they slowed production and the supply dwindled. This lead to the proverbial supply and demand cycle. The appearance of unlimited oil supply also drove negative behaviors in the world of energy technology and transportation. Less investments were made in researching alternative energy sources, fewer regulations were imposed, and in general the government and the populous lost focus on the future. So how do you make up for lost time and lack of foresight? The first thing would be to start implementing policy change. The next thing might be to paint a picture of an oil cartel as an enemy. The third action could be to attempt diplomacy. And finally, if all else fails stage a coup to take over governments then place a more cooperative regime in its place to give you what you need. Evidence that the final approach was the chosen one for the early 1990s Persian Gulf War is most apparent. An oil field expert Robert F Hepburn, the CEO of the Bahrain Petroleum Company, shares facts around the Persian Gulf War and the War in Iraq, and is able to demonstrate distinct differences between the two (Hepburn, 2003). He states that the 1991 Desert Storm operation was a cooperation wherein post war amends were made to the United States by cash or in kind from Saudi Arabia, Gulf States, and Japan (Hepburn, 2003). This activity along with the events of 9/11 on home soil were enough to begin a focus by the American public and media on the need for reduced dependency on foreign oil, especially in the unstable Middle East.
The United States Government then turns its focus to reducing dependency on foreign oil. They begin incentivizing alternative energy research. Universities and corporations look at developing electric vehicle technology, auto manufacturers are tasked to develop vehicles that can run on flex-fuels, and the utility industry begins to look at alternative means of producing electricity in the form of nuclear power and natural gas. Behind the scenes, the US government recognizes the volatility of the Middle East. Some of the world’s richest oil reserves are there. One in particular remains vastly undeveloped. If control of this falls into the wrong hands it could spell disaster for the US economy. Tensions in the Middle East result in countries beginning to trade oil for the Euro and not the American dollar. This would begin a war for supremacy that the United States could ill afford to allow (Micu, 2010). This is a summary of the scenario painted by one author about the reason for the March 20th 2003 invasion of Iraq. Another author provides information that according to declassified government planning documents, the State Department began planning an invasion of Iraq one month after the attacks of 9/11 with a goal of restructuring the nation’s political economy and oil industry (Bonds, 2013). The advertised reasons for the joint US and British invasion on Iraq were numerous: Saddam is evil, gasses his own people, violates human rights and Iraqi people deserve to be liberated from his regime; Saddam ignored and violated UN Security Council requirements for inspection and disarmament; Saddam has chemical and biological weapons of mass destruction which pose a threat to its neighbors and US interests in the region; Saddam has ties to Al Qaeda and has partial responsibility for 9/11; These things could pose a threat to US homeland security as well, due to the magnitude of the weapons and ties to Al Qaeda; Saddam has been trying to purchase aluminum tubes commonly used in a uranium separation plant to make atomic weapons; UN weapons inspectors will not do any good, they failed before and they will fail again to disarm Saddam (Micu, 2010). This version implies that beginning with the Persian Gulf war, the United States and Britain have conspired against Iraq in an attempt to overturn the regime and put in place a more cooperative government. This government would in turn allow the US and British governments access to develop and begin production of oil in what is known as the world’s third largest and least touched oil reserve.
The final version for consideration has plausible information from Mr. Hepburn, an oil expert with more than 40 years dealing with Middle East oil preserves. He points out the irresponsibility and the financial impacts of a war in Iraq for the purposes of a mere chance to develop and produce oil there. The timing of his article, combined with the information provided almost 15 years later might lead the reader to believe that his version must be closest to reality. This oil industry expert was armed with the knowledge of the quantity of oil untouched in the region, the cost to develop the technology and begin production, along with the cost of war. Assuming minimal damage to existing oil production sites he was able to systematically and mathematically teardown the previous theories on the reasons for the war in Iraq. His conservative estimates of all of the costs associated with the war, the rebuild, the repair, and the installation of government were in the neighborhood of $400 billion dollars. In the same ten-year period, assuming all goes as planned, the new government cooperates and oil production begins rapidly, the best case revenue projection would be $300 billion dollars (Hepburn, 2003). Leaving an obvious financial shortfall for the United States. This was his forecast in 2003 before the war began. Now some 15 years later there is still no government cooperation between the US and Iraq, no US access to oil in Iraq, but clearly a significant taxpayer burden on the American public for this war. As evidence of this tax burden, Economists Joseph Stiglitz and Linda Blimes argue that the total U. S. economic impact of the war will exceed three trillion dollars (Bond, 2013). The cost of the war was not just in dollars. Almost 4,500 U.S. Soldiers died, while thousands more were injured thus contributing to the continued costs from this war. Iraqi civilian death toll estimates range between 110,000 to over one million (Bond, 2013).
Today the United States government has refocused its effort on reducing dependency on foreign oil through advances in technology. Energy policy changes have focused the utility industry on using more renewable energy sources such as solar and wind. Incentives and funding for technology research to support energy storage through large batteries and other methods are very prevalent. Consumers have been incentivized to use solar power for their homes reducing burden on the power grid. Cap and Trade has driven large industry to either reduce emissions or pay a premium to operate. Auto manufacturers are offering consumers the opportunity to purchase wholly electric vehicles, hybrid gas-electric, and even flex-fuel options that reduce the depletion rates of oil reserves and have little to no impact on the environment for the immediate future. Consumer behavior and cooperation with these initiatives, combined with continued pressure by the government on transportation and utility industries to reduce carbon footprint can reduce our dependency on foreign oil, and ultimately reduce our interest in the unstable Middle East.
In summary, regardless of why the popular belief is that US involvement in war means interest in oil, there are always alternative explanations. Moving the world into the future and removing the tension that surrounds oil can be accomplished by reducing our dependency on oil in the first place. Until the United States is able to boast one of the lowest oil demands for a civilized and industrialized world leading nation, the country has not yet done enough to end these vicious cycles of war and economic disparity.
References
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References
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