June 22, 2005 was a day that shook the American Oil industry as if a cannon had exploded on the scene without warning. On that day, the Chinese state-controlled oil company CNOOC Ltd (China National Offshore Oil Corporation) shot a volley across the bow of the American oil industry, by announcing an offer to buy the 115 year-old American energy company UNOCAL (Union Oil Company of California). At a time when many Americans were becoming fearful of China’s rising economic power and its spreading sphere of influence, to imagine that the Chinese would dare to come into America’s back yard and attempt to control part of its energy supply, was shocking and unthinkable. Of equal concern was the growing awareness that Americans felt about the global supply of energy and whether gasoline supplies in the future could reliably feed the glutinous, energy-consuming demands of the American economy. At the time the offer was made by CNOOC, UNOCAL was no longer a major player in the domestic U.S. oil market, having sold their “Union 76″ chain of service stations to ConocoPhillips. But they still had substantial untapped oil and gas deposits in Asia and North America, making the company an appealing target for any country trying to expand its energy future and enhance its reserves. In the 1970s, the United States had hit its “peak oil” condition, after which domestic oil production was in decline (see accompanying graph); it was natural to ask whether something similar might happen to the world’s oil supply some day, so knowledge of projected reserves has become a topic of keen interest. The UNOCAL offer suddenly brought home the intense competitive nature of establishing oil reserves and whether the world might be running out of oil, something that could happen like one magical day and then poof–there goes to global economy. Now, with the BP oil spill in the Gulf and the freeze on new deep water oil permits (if the new regulatory change can pass through judicial review), the United States, indeed the world, shares a far greater sense of panic created by the growing awareness of oil projections that point to a shortage of oil and possibly natural gas by the year 2030. Serious doubts now exist about whether the future oil supplies can be expanded to meet the expected growth of India and China, both of whom have rapidly developing economies. Can the future world’s need for energy be suitably matched by expansion of oil and gas supplies? After briefly enjoying a victory in the Cold War in favor of the United States, it looked as if the world was rapidly shifting to a new strategic yardstick–one that depended more on a country’s level of oil reserves and less on the presence of a robust military, though the two conditions are not exactly easy to separate. Thus, an increased awareness and doubts about the global capacity to continue providing relatively cheap sources of energy, prompted many to ask when would our planet reach the ominous year of “global peak oil”–the year in which global oil production reaches a maximum and then begins to decline, as it has in the United States.
Peak Oil Production and Imports in U.S.
In response to CNOOC’s offer for UNOCAL, the Republicans, ever anxious to demonstrate why the free market system doesn’t apply to essential commodities, moved to prevent the sale by attaching an amendment to the Energy Policy Act on July 26, 2005, calling for a four-month review of China’s energy policies. This effectively killed CNOOC’s chances for acquiring UNOCAL, as another bid for the company from Chevron was coming up. The Chinese saw the writing on the wall and withdrew their offer, but remained in hot pursuit of oil contracts throughout the far reaches of the globe.
The unsolicited offer from the Chinese to purchase UNOCAL brought chills to the American spine about energy policies and raised new questions about whether the United States had the right policies in place to secure its own energy future. If China was looking for oil in America’s backyard, maybe that’s because there isn’t any more oil in all the other backyards? That was a question for which Americans wanted an answer. Or maybe not. One of the problems that traditional oil companies face is the rising tide of nationalism in oil company ownership. Thirteen of the top fifteen oil producing and reserve holding companies are nationally owned, including Saudi Aramco, National Iranian Oil, Iraq National Oil, Kuwat Petroleum, Abu Dhabi National Oil, Pertoleos de Venezuela S.A., National Oil Corp of Libya and the Nigerian National Petroleum. The top eight companies in terms of oil reserves are all nationally owned. The only international oil companies in the top fifteen include Lukoil (Russia) and Chevron (USA). Many have argued that with nationalization of such an essential economic commodity as oil, those companies that remain private will increasingly operate at a disadvantage, as nationalized companies form relationships between governments that enhance shared oil reserves but also go deeper to promote trade and solve other issues to enhance the arrangement. International oil companies, like Shell, Chevron and BP can’t negotiate such holistic deals. Thus, Saudi Arabia is increasingly selling oil to China.
The urgent state of Americans over oil reserves was a driving force for the new gas and oil drilling leases that the Obama administration announced earlier this year, many of which are now on hold because of the Gulf spill, though I doubt this action will last for very long–there’s too much American panic. A state of urgency has now reached every oil and gas producing organization around the globe, as countries and companies try to enter into new relationships to secure oil and gas reserves as far into the future as possible. It appears that no stone will be too sacred in our global thirst for oil and gas. While we move sluggishly to think and talk about getting off the oil habit by becoming more self-sufficient in energy, and moving away from fossil fuels, the rest of the world is buying up as much of the reserve oil supply as new energies are unleashed to discover more. But, while drilling more, they are finding less. The United States could reach a permanent new oil crisis before any transition in energy dependency takes place. That fear will haunt every administration beginning with the current one. Suddenly, a new world order is taking shape out there, one based, not on the size and extent of one’s economy or military, but instead derived from the sense of national security that a country can bestow on its citizens by guaranteeing energy capacity well into the future. Right now that future seems to be measured in twenty year increments. So alarmed was the Bush administration over the future of oil in the American gunsights, that in January 2008, Bush met with the Saudi king Abudllah during a swing through the Middle East and and pleaded on behalf of the beleaguered American public for increased production to ease the price of gasoline. Normally that would be a role for an oil company executive, but those days are over. We are now talking about the future of our national economy.
The global need for energy promises to expand in a major way within the next twenty years, primarily because of the huge growth anticipated by the expansion of the Chinese and Indian economies. China’s energy demands were at 68.6 quadrillion BTUs in 2006, amounting to 15.6% of the world’s energy consumption. But in 2030, the Chinese energy projection is for 145.4 quadrillion BTUs and 20.1% of the world’s oil consumption. In the next 20 years, China will have to add the equivalent of what Europeans currently consume if they are to meet this expectation. Projections for India are almost equally expansive, though less overall: in 2006 India energy consumption was at 17.1 quadrillion BTUs and in 2030, they are projected to need 31.9 quadrillion BTUs or about 4.5% of the world’s energy. Right now things look best for China. They have a lot of hard currency on hand and can afford to pay top $ for energy contracts. In the meantime, America is bogged down in wars that we cannot possibly win and we suddenly appear to be very disadvantaged in many cases when competing with nationalized oil companies.
The major unanswered question about our oil future is this: Obama recently used the BP Gulf oil spill to sound a clarion call for national action to get out from underneath the heal of oil companies, begin to diversify our energy sources and move away from fossil fuels. It seems simple enough: diversify our economy by expanding it into the production of renewable forms of energy and conservation and, as an added benefit, save the planet. But, if you were sitting in the White House and you had a choice to remove subsidies from oil companies, or better yet, begin to charge oil companies and gas consumers a tax to support this energy transition, would you do it, given the new form of panic that seems to have set in by the CNOOC offer for UNOCAL and the ongoing BP Gulf oil spill? It will take a considerable and risky amount of political capital to make the sensible choice, because one oil shortage later and your ticket to Mount Rushmore, if you think that’s where you were headed, would be suddenly exchanged for a ticket to Palookaville.
Note added: the quantitative numbers on energy consumption and projections were taken from Michael T. Klare’s book “Rising Powers, Shrinking Planet: the New Geopolitics of Energy.”
RFM
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