May 01, 2005

Bush Abomination’s #2 Failure: Economic Security

Bush Abomination’s #2 Failure: Economic Security

The end of oil is closer than you think

Oil production could peak next year, reports John Vidal. Just kiss your lifestyle goodbye

Thursday April 21, 2005
The Guardian

The one thing that international bankers don't want to hear is that the second Great Depression may be round the corner. But last week, a group of ultra-conservative Swiss financiers asked a retired English petroleum geologist living in Ireland to tell them about the beginning of the end of the oil age.
They called Colin Campbell, who helped to found the London-based Oil Depletion Analysis Centre because he is an industry man through and through, has no financial agenda and has spent most of a lifetime on the front line of oil exploration on three continents. He was chief geologist for Amoco, a vice-president of Fina, and has worked for BP, Texaco, Shell, ChevronTexaco and Exxon in a dozen different countries.
"Don't worry about oil running out; it won't for very many years," the Oxford PhD told the bankers in a message that he will repeat to businessmen, academics and investment analysts at a conference in Edinburgh next week. "The issue is the long downward slope that opens on the other side of peak production. Oil and gas dominate our lives, and their decline will change the world in radical and unpredictable ways," he says.
Campbell reckons global peak production of conventional oil - the kind associated with gushing oil wells - is approaching fast, perhaps even next year. His calculations are based on historical and present production data, published reserves and discoveries of companies and governments, estimates of reserves lodged with the US Securities and Exchange Commission, speeches by oil chiefs and a deep knowledge of how the industry works.
"About 944bn barrels of oil has so far been extracted, some 764bn remains extractable in known fields, or reserves, and a further 142bn of reserves are classed as 'yet-to-find', meaning what oil is expected to be discovered. If this is so, then the overall oil peak arrives next year," he says.
If he is correct, then global oil production can be expected to decline steadily at about 2-3% a year, the cost of everything from travel, heating, agriculture, trade, and anything made of plastic rises. And the scramble to control oil resources intensifies. As one US analyst said this week: "Just kiss your lifestyle goodbye."
But the Campbell analysis is way off the much more optimistic official figures. The US Geological Survey (USGS) states that reserves in 2000 (its latest figures) of recoverable oil were about three trillion barrels and that peak production will not come for about 30 years. The International Energy Agency (IEA) believes that oil will peak between "2013 and 2037" and Saudi Arabia, Kuwait, Iraq and Iran, four countries with much of the world's known reserves, report little if any depletion of reserves. Meanwhile, the oil companies - which do not make public estimates of their own "peak oil" - say there is no shortage of oil and gas for the long term. "The world holds enough proved reserves for 40 years of supply and at least 60 years of gas supply at current consumption rates," said BP this week.
Indeed, almost every year for 150 years, the oil industry has produced more than it did the year before, and predictions of oil running out or peaking have always been proved wrong. Today, the industry is producing about 83m barrels a day, with big new fields in Azerbaijan, Angola, Algeria, the deep waters of the Gulf of Mexico and elsewhere soon expected on stream.
But the business of estimating oil reserves is contentious and political. According to Campbell, companies seldom report their true findings for commercial reasons, and governments - which own 90% of the reserves - often lie. Most official figures, he says, are grossly unreliable: "Estimating reserves is a scientific business. There is a range of uncertainty but it is not impossible to get a good idea of what a field contains. Reporting [reserves], however, is a political act."
According to Campbell and other oil industry sources, the two most widely used estimates of world oil reserves, drawn up by the Oil and Gas Journal and the BP Statistical Review, both rely on reserve estimates provided to them by governments and industry and do not question their accuracy.
Companies, says Campbell, "under-report their new discoveries to comply with strict US stock exchange rules, but then revise them upwards over time", partly to boost their share prices with "good news" results. "I do not think that I ever told the truth about the size of a prospect. That was not the game we were in," he says. "As we were competing for funds with other subsidiaries around the world, we had to exaggerate."
Most serious of all, he and other oil depletion analysts and petroleum geologists, most of whom have been in the industry for years, accuse the US of using questionable statistical probability models to calculate global reserves and Opec countries of drastically revising upwards their reserves in the 1980s.
"The estimates for the Opec countries were systematically exaggerated in the late 1980s to win a greater slice of the allocation cake. Middle East official reserves jumped 43% in just three years despite no new major finds," he says.
The study of "peak oil" - the point at which half the total oil known to have existed in a field or a country has been consumed, beyond which extraction goes into irreversible decline - used to be back-of-the envelope guesswork. It was not taken seriously by business or governments, mainly because oil has always been cheap and plentiful.
In the wake of the Iraq war, the rapid economic rise of China, global warming and recent record oil prices, the debate has shifted from "if" there is a global peak to "when".
The US government knows that conventional oil is running out fast. According to a report on oil shales and unconventional oil supplies prepared by the US office of petroleum reserves last year, "world oil reserves are being depleted three times as fast as they are being discovered. Oil is being produced from past discoveries, but the re¬serves are not being fully replaced. Remaining oil reserves of individual oil companies must continue to shrink. The disparity between increasing production and declining discoveries can only have one outcome: a practical supply limit will be reached and future supply to meet conventional oil demand will not be available."
It continues: "Although there is no agreement about the date that world oil production will peak, forecasts presented by USGS geologist Les Magoon, the Oil and Gas Journal, and others expect the peak will occur between 2003 and 2020. What is notable ... is that none extend beyond the year 2020, suggesting that the world may be facing shortfalls much sooner than expected."
According to Bill Powers, editor of the Canadian Energy Viewpoint investment journal, there is a growing belief among geologists who study world oil supply that production "is soon headed into an irreversible decline ... The US government does not want to admit the reality of the situation. Dr Campbell's thesis, and those of others like him, are becoming the mainstream."
In the absence of reliable official figures, geologists and analysts are turning to the grandfather of oil depletion analysis, M King Hubbert, a Shell geologist who in 1956 showed mathematically that exploitation of any oilfield follows a predictable "bell curve" trend, which is slow to take off, rises steeply, flattens and then descends again steeply. The biggest and easiest exploited oilfields were always found early in the history of exploration, while smaller ones were developed as production from the big fields declined. He accurately predicted that US domestic oil production would peak around 1970, 40 years after the period of peak discovery around 1930.
Many oil analysts now take the "Hubbert peak" model seriously, and the USGS, national and oil company figures with a large dose of salt. Similar patterns of peak discovery and production have been found throughout all the world's main oilfields. The first North Sea discovery was in 1969, discoveries peaked in 1973 and the UK passed its production peak in 1999. The British portion of the basin is now in serious decline and the Norwegian sector has levelled off.
Other analysts are also questioning afresh the oil companies' data. US Wall street energy group Herold last month compared the stated reserves of the world's leading oil companies with their quoted discoveries, and production levels. Herold predicts that the seven largest will all begin seeing production declines within four years. Deutsche Bank analysts report that global oil production will peak in 2014.
According to Chris Skrebowski, editor of Petroleum Review, a monthly magazine published by the Energy Institute in London, conventional oil reserves are now declining about 4-6% a year worldwide. He says 18 large oil-producing countries, including Britain, and 32 smaller ones, have declining production; and he expects Denmark, Malaysia, Brunei, China, Mexico and India all to reach their peak in the next few years.
"We should be worried. Time is short and we are not even at the point where we admit we have a problem," Skrebowski says. "Governments are always excessively optimistic. The problem is that the peak, which I think is 2008, is tomorrow in planning terms."
On the other hand, Equatorial Guinea, Sao Tome, Chad and Angola are are all expected to grow strongly.
What is agreed is that world oil demand is surging. The International Energy Agency, which collates national figures and predicts demand, says developing countries could push demand up 47% to 121m barrels a day by 2030, and that oil companies and oil-producing nations must spend about $100bn a year to develop new supplies to keep pace.
According to the IEA, demand rose faster in 2004 than in any year since 1976. China's oil consumption, which accounted for a third of extra global demand last year, grew 17% and is expected to double over 15 years to more than 10m barrels a day - half the US's present demand. India's consumption is expected to rise by nearly 30% in the next five years. If world demand continues to grow at 2% a year, then almost 160m barrels a day will need to be extracted in 2035, twice as much as today.
That, say most geologists is almost inconceivable. According to industry consultants IHS Energy, 90% of all known reserves are now in production, suggesting that few major discoveries remain to be made. Shell says its reserves fell last year because it only found enough oil to replace 15-25 % of what the company produced. BP told the US stock exchange that it replaced only 89% of its production in 2004.
Moreover, oil supply is increasingly limited to a few giant fields, with 10% of all production coming from just four fields and 80% from fields discovered before 1970. Even finding a field the size of Ghawar in Saudi Arabia, by far the world's largest and said to have another 125bn barrels, would only meet world demand for about 10 years.
"All the major discoveries were in the 1960s, since when they have been declining gradually over time, give or take the occasional spike and trough," says Campbell. "The whole world has now been seismically searched and picked over. Geological knowledge has improved enormously in the past 30 years and it is almost inconceivable now that major fields remain to be found."
He accepts there may be a big field or two left in Russia, and more in Africa, but these would have little bearing on world supplies. Unconventional deposits like tar sands and shale may only slow the production decline.
"The first half of the oil age now closes," says Campbell. "It lasted 150 years and saw the rapid expansion of industry, transport, trade, agriculture and financial capital, allowing the population to expand six-fold. The second half now dawns, and will be marked by the decline of oil and all that depends on it, including financial capital."
So did the Swiss bankers comprehend the seriousness of the situation when he talked to them? "There is no company on the stock exchange that doesn't make a tacit assumption about the availability of energy," says Campbell. "It is almost impossible for bankers to accept it. It is so out of their mindset."
Crude alternatives
"Unconventional" petroleum reserves, which are not included in some totals of reserves, include:
Heavy oils
These can be pumped just like conventional petroleum except that they are much thicker, more polluting, and require more extensive refining. They are found in more than 30 countries, but about 90% of estimated reserves are in the Orinoco "heavy oil belt" of Venezuela, which has an estimated 1.2 trillion barrels. About one third of the oil is potentially recoverable using current technology.
Tar sands
These are found in sedimentary rocks and must be dug out and crushed in giant opencast mines. But it takes five to 10 times the energy, area and water to mine, process and upgrade the tars that it does to process conventional oil. The Athabasca deposits in Alberta, Canada are the world's largest resource, with estimated reserves of 1.8 trillion barrels, of which about 280-300bn barrels may be recoverable. Production now accounts for about 20% of Canada's oil supply.
Oil shales
These are seen as the US government's energy stopgap. They exist in large quantities in ecologically sensitive parts of Colorado, Wyoming and Utah at varying depths, but the industrial process needed to extract the oil demands hot water, making it much more expensive and less energy-efficient than conventional oil. The mining operation is extremely damaging to the environment. Shell, Exxon, ChevronTexaco and other oil companies are,13026,1464050,00.html

Week in economics: New oil shock
By Friederike Tiesenhausen Cave, Economics Reporter
Published: April 7 2005 20:56 | Last updated: April 7 2005 20:56

A series of stark warnings about risks to the world economy - particularly from higher oil prices - added spice to an otherwise relatively quiet week in which interest rates stayed unchanged in Japan, South Korea, Europe and the UK.

The world economy needed to adjust to sustained high oil prices in the next two decades, the International Monetary Fund warned on Thursday. Demand from emerging countries was set to accelerate and production outside the Organisation of the Petroleum Exporting Countries might peak in the next five years. Expressed in today’s money, the price of oil could rise to $65-$95 by 2030.
This followed a warning by the World Bank, the IMF’s Washington-based sister organisation, that developing countries which have built up large US dollar reserves face large potential losses as the dollar declines. A potential collapse in the dollar could expose weaknesses in banking and financial sectors in poor countries, hampering their capacity to manage their economies.
The IMF had already reached out on Tuesday by warning investors of complacency about the resilience of the world’s financial system. Even though the climate for investors had improved in the past six months, nasty surprises lay ahead because the economic and credit cycles had advanced, it said. While the system would cope with a single event, the combination of several shocks could lead to herd behaviour and declining asset prices.
Rates and data
Meanwhile, interest rates stayed unchanged in Europe and Japan as concerns about the sustainability of growth led to a cautious attitude among policy-makers across different continents.
The European Central Bank left interest rates unchanged at 2 per cent for the 22nd consecutive month as its president warned soaring oil prices were partly responsible for the failure of the eurozone economy to gather pace. Jean-Claude Trichet, ECB chief, also urged consumers to become “good energy savers”.
His comments came after the European Commission earlier in the week substantially cut its forecast for eurozone growth this year from 2 per cent in October to 1.6 per cent.
Among the more dramatic downgrades, the Commission expected growth of only 0.8 per cent this year in Germany, compared with 1.5 per cent forecast previously, and 1.2 per cent in Italy, compared with an earlier 1.8 per cent.
The Bank of England also kept its repo rate at 4.75 per cent, marking the eighth month of no change. The move follows disappointing manufacturing output in February and comes amid growing concerns that private consumption in the UK is slowing.
The Bank of Japan held interest rates at almost zero after its Tankan survey revealed confidence among large Japanese manufacturers fell to its lowest in a year due to pressure on profits from rising oil prices. South Korea too kept the cost of borrowing unchanged.
The only exception was the Philippines’ central bank, which raised rates for the first time in more than four years to dampen inflation.
Economists in the US enjoyed one of the quietest seven days in a long time with hardly any new data. The only fodder to keep markets busy was Thursday’s news that the number of new claims for jobless insurance had dropped by 19,000 last week, largely offsetting an unexpected spike the previous week.
Higher Prices, Stagnant Wages Produce Pay Cut for US Workers
By Nicholas Riccardi
The Los Angeles Times
Monday 11 April 2005
For the first time in 14 years, the American work force has in effect gotten an across-the-board pay cut.
The growth in wages in 2004 and the first two months of this year trailed the growth in prices, compounding the squeeze from higher housing, energy and other costs.
The result is that people such as Victor Romero are finding themselves falling behind.
The 49-year-old film-set laborer had to ditch his $1,100-a-month Los Angeles apartment because his rent kept rising while his pay of $24.50 an hour stayed flat.
"There's no such thing as raises anymore," Romero said. This is the first time that salaries have increased more slowly than inflation since the 1990-91 recession. While salary growth has been relatively sluggish since the 2001 downturn, inflation had stayed relatively subdued until last year, when the consumer price index rose 2.7 percent. But average hourly wages rose only 2.5 percent.
The effective 0.2-percentage-point erosion in workers' living standards occurred while the economy expanded at a healthy 4 percent, better than the 3 percent historical average.
At the same time, corporate profits hit record highs as companies got more productivity out of workers while keeping pay raises down.
Some see climbing profits and stagnant wages as not only unfair but ultimately unsustainable. "Those that are baking the larger pie ought to see their slices expanding," said Jared Bernstein, an economist with the liberal Economic Policy Institute in Washington.
On the other hand, higher wages could hurt the economy by stoking inflation. Employers might pass the costs on to consumers in higher prices, and that in turn might prompt the Federal Reserve to raise interest rates even more aggressively, possibly slowing the recovery or even triggering a recession.
For now, workers' wallets are being pummeled by something of a perfect storm of economic forces: a weak job market, rising health insurance premiums and inflationary pressures.
The biggest factor is the slack employment market, which means there is little pressure on businesses to boost pay. "They take advantage of you because there's no work and anyone will work for anything," Romero said.
Although the unemployment rate has dropped to a relatively low 5.2 percent, that figure doesn't count the hundreds of thousands of jobless people who've given up their searches and dropped out of the labor market at a greater rate than any time since 1988.
At the same time, the cost of health premiums has skyrocketed, eating into the pool of corporate cash set aside for raises. While pay increased only about 2.4 percent last year, benefit costs jumped almost 7 percent.
With benefits factored in, workers' total compensation did outpace inflation in 2004, even if they didn't see it in their paychecks. But employers also are requiring workers to pay a greater share of their premiums.
"Health care has eroded the wage base," said Janemarie Mulvey, chief economist with the Employment Policy Foundation, a business-funded think tank in Washington. "In the long run, we can't continue like this. If health care keeps crowding out wages forever, something's got to give."
The squeeze is especially intense on the 47 percent of the work force whose employers don't directly provide their health insurance. For lower-income workers, who are more likely to be uninsured, the falling value of their wages is even more serious, because they're more likely to live paycheck to paycheck. And rising food and energy prices take a higher toll on the poor than on the rich.
Historically, periods when wage growth is outpaced by inflation rarely last more than 18 months. That's partly because businesses don't want their employees' living standards to fall, as that injures morale, said Trewman Bewley, a Yale University economist who has studied wage activity during economic downturns.
Many economists figure it's only a matter of time until workers can pry more money out of their employers to catch up to inflation again. If economic growth remains robust, as many forecasters predict, workers may gain greater leverage to negotiate wage hikes.
"Chances are that those workers that have problems getting by because of higher fuel prices will probably tell their employers, `I can't make it,"' said John Lonski, chief economist at Moody's Investors Service.
So far that hasn't worked for Brian Chartier. The 29-year-old Glendale, Calif., resident handles inventory for a Los Angeles manufacturing company. No one there, he said, has gotten a raise in two years.
"They're able to do this and I haven't quit, because where am I going to go?" he said. "There are no jobs."
While his salary remained flat, rising health-care premiums kept eating up more and more of his take-home pay, so he dropped out of his employer's insurance program. His rent also is climbing.
As Chartier loaded bags of groceries into his Honda Civic last week, he boasted that they were full of bargains. "I don't get a single thing that's not on sale," Chartier said. "I can't afford to anymore."
Despite their wages failing to keep pace with inflation, American consumers have kept shopping. Consumer spending has continued to rise. Analysts say that's partly because some shoppers are thinking less about their paychecks and more about their biggest asset: their homes.
Home prices have risen 9 percent nationwide since last February, sheltering consumers, and the economy, from much of the pinch of higher prices.
"There's been a wealth effect afoot throughout much of the recession and the recovery," said Bernstein of the Economic Policy Institute, "because no matter what people's incomes were doing, their wealth was improving -- their biggest assets, their homes, were accruing."
As inflation sparks higher interest rates, most economists expect the housing market to cool, making shoppers more dependent on their paychecks. And even those who have seen their paper wealth rise phenomenally aren't happy about rising costs and stagnant pay.
Corina Swatz has seen the value of her Los Angeles home triple during the 10 years she's owned it. But neither she nor her husband has gotten a raise in more than a year. At the same time, gas prices have forced them to shell out $55 to fill the tank of their Chevy Tahoe.
"I used to spend $600 a month (on groceries). Now I spend $800," Swatz, a mother of two, said as she made her weekly Costco run last week. The increased value of her home gives her only so much solace. "We're hanging in there."
The danger is that people such as Swatz, despite their home-equity cushion, may rein in their spending and pull the rug out from under the economic expansion.
That's what Gabriel Torres has done. The 56-year-old cook hasn't gotten a raise in years but pays ever higher prices to fill his Nissan X-terra. He and his wife have come up with a solution: cut down on driving.
"We don't go out much," Torres said. "We used to. But now we only drive when we really have to."

Posted by richard at May 1, 2005 10:58 AM