The Energy Emergency
Oil is America's Achilles heel. WE are addicted to it. Every American consumer burns about double what a European consumes—26 barrels a year for us, 12 for Europeans. We have 5 percent of the world's population and consume 25 percent of the world's oil, and we have only 3 percent of the world's reserves. If you think there is a gas crunch now, marked by the largest oil price spike in a generation, it will be a bagatelle when China and India bring a couple of billion more people on to their highways: They are replicating our love affair with the automobile. Expect them within a generation to buy 80 million cars.
We are in a new world order. The balance of power has shifted between the fuel-guzzling West and the oil-rich producing countries. They have increasing leverage over us, with political, economic, and military consequences. We are literally over a barrel.
Here's how the chips fall. After World War II, the oil world was dominated by the "Seven Sisters," the name given to the oil companies controlling Middle East oil. These have shrunk to four: Chevron, British Petroleum, Exxon Mobil, and Royal Dutch Shell. They have been pushed aside by seven state-owned national companies, Seven Brothers, if you like: Saudi Arabia's Aramco, Russia's Gazprom, CNPC of China, NIOC of Iran, Venezuela's PDVSA, Brazil's Petrobras, and Petronas of Malaysia. The Seven Brothers control almost a third of the world's oil and gas production and more than a third of its total oil and gas reserves. By contrast, the survivors of the Seven Sisters control only about 10 percent of output and hold just 3 percent of the reserves. The Brothers are the rule makers, the international oil companies the rule takers. It is not going to change. In the next 40 years, 90 percent of new supplies, according to the International Energy Agency, will come from developing countries. Thirty years ago, 40 percent came from the industrialized nations.
Massive consequences. Nor is oil discovery keeping pace with demand. In 1930, we found 10 billion new barrels of oil and used 1.5 billion; in 1964, we discovered 48 billion barrels and consumed approximately 12 billion; in 1988, we found 23 billion barrels and used 23 billion barrels; in 2005, we found 5 billion to 6 billion barrels and consumed 30 billion barrels. With countries like China and India now in the mix, worldwide demand is growing by an average of 2 million to 3 million barrels a day every year. The world has to discover a new Saudi Arabia-size oil supplier every five years to meet this demand. But it's just not going to happen. These overwhelming numbers could produce oil prices above $100 a barrel in short order, which will ultimately have massive consequences for the world's economy and the way we live our lives. They might well cause a global recession.
How will we in the West cope when by 2030 the IEA nations will have to import 85 percent of their oil (it's 63 percent today)? None of the oil companies are investing enough. Big Oil in the West is allocating as much as 60 percent of profits to dividends and stock buybacks and reinvesting only about a third in the oil business. And the Seven Brothers are keeping an ever tighter leash on both production and investment.
They have the money, all right. Revenues have roughly doubled in the past four years. But their governments see high prices for us as meaning more income for them, while they see investment in new capacity as risking the kind of sharp price decline that occurred in the 1990s. So the national energy firms are obliged to dedicate a big chunk of their profits to support national treasuries and various political constituencies.
Mexico has treated its oil company as a national bank vault; Hugo ChÃÂÃÂ¡vez of Venezuela spends two thirds (that's now about $7 billion) of PDVSA's budget on populist social programs; Gazprom spends the majority of its money on nonenergy activities such as banks and media companies. Even worse, because these national companies have become a source of political patronage, they are short of skilled workers and experienced managers. National pride inhibits them from relying on the technological skills of the western companies, so they don't have the professionals needed to grow their production (with the exception of Saudi Aramco and, to some extent, Petrobras). We can no longer count on the Middle East to act as the world's energy shock absorber, raising output to meet a shortage.
So much for supply. Simultaneously, the oil-producing countries are consuming more of their own production. While China's energy appetite has grabbed the headlines, by the end of this decade alone, domestic consumption will reduce the oil exports of the producers by as much as 2.5 million barrels a day. And they are guzzlers. How could they not be when gasoline prices in places like Venezuela, Iran, and the rest of the Middle East are as little as a tenth of U.S. domestic prices, averaging between 20 and 80 cents a gallon?
The net effect of all this is that the world is going to be even more energy dependent on the Organization of Petroleum Exporting Countries and Russia. Keeping oil safe for the West once meant safeguarding supply lines from the Middle East. Now we have to build alliances and deploy ships and troops to protect other supply routes outside the Middle East, going as far as the Caspian Sea, the Andean region of South America, and West Africa.
There are other political complications inhibiting new supplies. In many countries, environmental issues have become absolutist. They conflict with the capacity to tap additional energy resources in Alaska, not to speak of the continental shelf in the waters off the lower 48 states, which, according to a recent study by the National Petroleum Council, contains enough oil to provide gasoline for 116 million cars for 47 years. Some trade-off is going to have to be considered, and this will roil the political scene forever.
As for conservation, it is not enough for the West to improve its own energy policies. Countries such as India and China must also do so. We don't know how fast these countries can and will reduce the energy intensity of their own rapid economic growth. How are we going to maintain our efforts to fight global warming by curtailing carbon dioxide when consumers in developing countries thirsting for oil will want to resort to abundant national sources of coal? They will argue that they are entitled to a phase of cheap (that is, coal) energy-intensive economic development. Is it fair, they argue, to penalize them for coming late to the development party when rich countries, during their period of rapid growth, were allowed to use as much energy as they wished with no restrictions?
Political purposes. Then there are the implications of state-owned companies in countries like Russia and Venezuela that are not just responding to market forces but are using their pricing and power for political purposes. The income generated by oil exports has supported their authoritarian regimes, which means that political reform and liberalization may suffer as the oil wealth is used by leaders in producer states to buy off their opposition. The oil revenues have clearly helped Vladimir Putin in Russia, ChÃÂÃÂ¡vez in Venezuela, and Mahmoud Ahmadinejad in Iran. Indeed, they deliberately seek control of the energy sectors to make sure that they themselves are the source of opportunity and wealth for their people. So how is our policy of promoting democracy going to work when this oil wealth tends to empower authoritarian elites?
The big winners will be countries like Russia and the Middle East oil producers, including Iran. The big losers will be the poorer countries. The wealthier countries can absorb higher prices because of the continuing declines in the energy intensity of their growth. But poorer countries will be disadvantaged even more. Look at a poor country like Pakistan, which doesn't have oil and may lose as much as 10 percent of its gross domestic product over the next 25 years to higher oil prices. Pakistan's economy doesn't work well even today, and its demographic curve shows a continuing rise in population.
In America, the energy crunch will intensify a lot of old political issues and bring in some new ones. We have witnessed the bipartisan failure to institute a vigorous program of conservation. We have not even been able to enact an adequate, graduated program of targets for automobile and truck gas mileage. Despite their public advocacy and political promises, the Democrats in Congress have failed to take steps to deal with these issues. In fact, we live in a political culture where neither the Republicans nor the Democrats wish to ask Americans to make sacrifices, including taxes to reduce our consumption of gasoline. Just think: If our cars had the same energy efficiencies as Europe's today, we could save 4 million barrels a day-the equivalent of Iran's total production.
This whole question of energy should be a central issue in the presidential campaign. But which of the candidates has the nerve and ingenuity to devise a way of meeting environmental concerns while seeking reliable domestic production of energy at home? We certainly cannot assume that alternative energy sources will have a major impact on an acceptable cost basis. We can build as many wind farms as we like, or as many ethanol plants, but it is not going to be possible to make much of a dent at an acceptable cost, because of the enormous volume of our daily imports of oil.
We are facing a world of higher prices and increasingly tighter supplies, creating a growing gap between worldwide demand and worldwide production, at a time when non-OPEC energy production is peaking within a few years. Eventually, this will make us even more dependent on OPEC?with all of what that means. We also can't seem to develop an appropriate energy policy that by definition will take years to implement, so that delays are only postponing the higher costs to the next generation.
It is we who are placing our own country over a barrel now.
This story appears in the September 10, 2007 print edition of U.S. News & World Report.