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The Next Oil War is likely or increasingly possible because the old, mature, or ‘post-industrial’ urban consumer societies, and the burgeoning new and emergent industrial economies of the planet are totally dependent on oil, gas and coal. One of these big chunks of humanity will have to rival the other for a bigger share of a smaller fossil fuel supply pile. However, burning fossil fuels in vast quantities not only ensures fast depletion and possible armed conflict, but also and surely causes the climate change some citizens, and some politicians in most of these countries claim to regard as a serious problem. By a whim of Jurassic geology most remaining oil and gas reserves are located in the Middle East and Central Asian region. Very logically, almost surely any subsequent and probably final Oil War following those that occurred, or continue, in the region since 1991 will also occur in this region. This is a geological fatality.
Particularly in the ‘post-industrial’ societies of the OECD, awash in an ocean of cheap industrial goods made with, and operated, using oil, gas and coal-based energy, many persons claim they aspire to "ecological lifestyles" and protection of the environment. This is not only a form of mass schizophrenia, but also an increasingly acute and politicized question, simply because the consumer-society industrial-urban lifestyle, whether ‘post-industrial’ or ‘new industrial’ is extremely energy and resource intensive. This results in a stark real choice. Political speeches, or posturing at G8 summits lauding “sustainable development and renewable energy”, is finally no substitute for measurable and concrete action. This must target, and achieve, reduction in average fossil energy consumption per capita. Action must start soon.
Kuwait’s liberation from Iraqi occupation in 1991 was hailed by the markets as a triumph for cheap oil and a signal for ‘exuberant’, almost daily increases in general stock values on major markets. Today, however, Kuwait and other GCC countries focus alternate energy investing as part of their After Oil strategy. Kuwait’s national oil corporation reportedly admits and accepts national oil reserves have been heavily over-estimated, and may only be about 43 billion barrels remaining (reported by Petroleum Intelligence Weekly in 2007). World consumption in 2008 will be about 32 billion barrels. Apart from any other factor, the actual size of remaining reserves, and the extreme high rate of extraction makes it possible to conclude that full and final depletion may intervene before any final Oil War could be started — thus preventing this war from occurring!
Unsatisfied Demand
This no-war outcome due to “the prize’, abundant oil reserves, disappearing before the final oil war can be organized is however unlikely. To be sure, “ecologically correct” lifestyles are media friendly, and appeals to these lifestyles are larded into the political speeches of economic growth-chasing political leaders, who know exactly what their consumer and voter masses really want. That is a new car, flat screen TV, suburban swimming pools, cellphones with permanent Internet access, jet travel holidays in faraway but cheap tourist locations, and mountains of plastic, metal and cheap food produced using several barrels-equivalent of energy per hectare cultivated. By direct consequence, economic growth must continue!
This permanent quest for more of everything automatically assumes — in fact demands and imposes — that there will always be more oil to satisfy this expression of individual and collective greed, schizophrenia and ignorance of ever clearer limits on satisfying this primitive urge to overconsume. Kuwait may almost ashamedly avow that it lied about its oil reserves, perhaps to spur its Western oil consumer ‘friends’ to chase out Iraqi invaders 17 years ago, so Kuwait can continue producing at least as much, perhaps more than previously. The same ‘performance logic’ is applied to any other oil exporter country, except Russia and because of its thermonuclear weapons, ballistic missiles, and rather evident willingness to exert its newly regained Oil and Gas Power on the world stage. Bullying Russia into ‘performing’ better at more quickly exhausting its national oil and gas reserves and driving down world prices, and its revenues as a result, is not on the table, but for the others, it is.
As we know, this farce is operated “because there is no alternative” and despite the vast emissions of greenhouse gases it produces being officially, today, described as ‘regrettable’ or ‘critical’. At worst this mass schizophrenia is fantastic hypocrisy, and terrible confusion at best or least. In this antinomic and irrational political, social and cultural context, both rational and irrational decisions can be expected. One of these decisions, from a nexus of rational and irrational being interwoven and seamless can easily be the Next Oil War. This would be launched by consumer nations against some ‘underperforming’ oil exporter. Another strand of irrationality, and already a discredited kneejerk ‘response’ to oil crisis, well documented in the 2005-2007 period from boom to slump, was the attempt to massively develop the agrofuels or biofuels. These food crop-based and of course ‘low carbon’ fuels would, under almost any hypothesis, never have provided more than insignificant quantities of oil saving fuels for the Apocalypse Wagon, or family passenger car. Many billions of dollars were however poured from the pockets of investors into their development, to little avail. As oil prices rise, so does the cost — and alternate value as food and feeds — of their ‘basic feedstocks’, the grains and vegetable oils.
New Kuwait or North Korea?
Since late 2005 and increasingly since then, agrocommodity prices reflect, and agroindustrial investment analysts underline, the new trend for "full barrel price indexation". In other words the main crops used, or potentially to be used, for producing fuel ethanol and biodiesel oil, to save petroleum-source gasoline and diesel fuel, now reflect their real, or future potential alternate use for feeding cars and vice versa, letting the car starve. The biofuels boom-slump cycle was short, no more than about two years, but at least served to educate the consumer masses that they really do have a choice: to drive or eat. This decision has already been made, by force majeure, in North Korea and Cuba, cut-off from cheap Soviet oil when the USSR collapsed.
North Korea, in particular, pursued copybook Soviet and Western ‘modern agriculture’ development, or the massive substitution of oil for manpower, draught animals, crop rotation, composting and all other ‘primitive and traditional’, non-mechanized forms and methods of industrial food production. Far behind Japan but close to the USA in direct oil intensity of its food production, North Korea in the 1980s utilised about 1.75 barrels per hectare every year, especially as fertilisers, insecticides and pesticides, as well as for irrigation, agricultural machines and road transport. Today it uses about one-half that amount — and starves, although it does possess rudimentary atom bombs and exportable if rustic ballistic missiles, if not all-year and all-day electric power supplies from its mostly oil-based power stations, chronically short of fuel. Cuba, a little less drastically, has also been forced to make adjustment to reality, severely cutting both direct and indirect oil intensity of its agriculture. Its poverty and nice climate make this an ideal location for low-cost holiday flights from the “ecologically concerned” OECD post-industrial countries, of course not including the USA, for ideological reasons.
Not for ideological reasons but simply because oil prices have started to reflect reality — in particular there are no easy and cheap substitutes and reserves are declining — even the post-industrial countries are beginning to pay more for their food. Since they essentially ‘eat oil’ this is no surprise for anybody able to scan a list of energy inputs to ‘no alternative’ modern food production, distribution, its predatory soil mining, biodiversity destruction and complete unsustainability. A future more like that of present-day North Korea or Cuba will however be a very bad surprise to the average innocent consumer, and rather difficult to manage for their current-crop leaderships. Much more attractive to some, an exemplary and quick war aimed at ‘securing’ oil supplies ‘at reasonable prices’ will almost inevitably bubble to the surface in the mind of our decision-making elites and be faithfully trumpeted by every government-friendly and patriotic media outlet. See: www.energybulletin.net/node/45944
Coming Fast
World consumption of fossil or mineral petroleum and 'fossil hydrocarbon liquids' in 2007 was about 5150 billion litres or around 4.8 barrels per head of world population. The world's two biggest biofuel programmes, or industries, in Brazil based on sugarcane ethanol and in USA based on maize ethanol, produced a combined total of about 38 billion litres of anhydrous ethyl alcohol the same year. The European Union biofuels program targeted 5.75% by volume of all European motor fuels being substituted by 2010, mostly based on rapeseed biodiesel, but is now in the process of being ‘disowned’ by most political decision-making elites, due to its sheer uneconomic performance. A more rational target could be 0.5% or 1% on a sustainable basis.
Any increase in petroleum demand, even tiny fractions of one percent, sets yet more impossible targets for biofuels expansion. This is at least in the real world of ‘current generation’ biofuels based on food crops, and not the fantasies of ‘next generation’ biofuels produced from using miracle plants not needing irrigation, pesticides, agricultural machinery and only the slightest processing energy — for example jatropha curcus. In addition, world consumption of motor fuels is locked on to the growth of the world car and vehicle fleet, increasing at about 55 million units per year. Excluding their production, which is in no way low energy, the annual increase in oil demand, only for motor fuels, due to fleet expansion, can be estimated at about 85 billion litres, equivalent to about the fuel value of 110 billion litres of anhydrous fuel ethanol. From this, we get an idea of how far the biofuels — or the ‘next best hope’ of electric cars — have to go, and grow, to start representing a credible alternative to oil.
We can note that even to hold the not-so-impressive rank of 1% bioethanol/99% fossil petroleum in world car fuel terms, the world's two-biggest bioethanol production industries would have to increase output by stellar amounts. Supposing, for example, that Brazil and USA were to expand their annual bioethanol output at the rate of world motor fuel demand growth, then in 2007-2008 their mission-impossible target increase would need to be about 400%. Taking a more rational target, and assuming the world's two biggest biofuel industries targeted firstly achieving 5% of world motor fuels supply in volume terms, and then maintenance of this 5% part of the total, their combined output will have to grow at a sustained rate of at least 25%pa for more than a decade. Long before this, Brazil would run out of sugar and Amazonian forest to clear for grazing cattle displaced by sugarcane growing expansion further south. And the US would run out of maize and the water to grow it. This is the simple reality behind the 'biofuel revolution' and reason for its very quick end.
World oil production is facing an exactly similar mission impossible. So long as there is any growth in the system, so long as more people eat more industrial food, drive more cars and fly more planes, consume more plastic and metal and continue being good industrial-urban consumers, we will get closer to the point where supply is in permanent shortfall. Very surely, promoters and defenders of the ‘alternate and renewable energy revolution’ will point to encouraging signs of massive investment intentions and cashflow projections, and spiraling mergers and acquisitions in ‘New Energy’. But on the ground and in the fuel tanks of the world's approximately 975 million car equivalent road and off-road vehicles, ocean shipping fleets and 25,000 Boeing 767 and Airbus A320-size planes it is fossil petroleum, either liquid or LPG, which makes around 98.5% to 100% of these vehicles operate.
For market traders and operators in the arena of formerly dual-use, but now again simple food commodities, the time is ripe for testing new 'psychological price ceilings', due to oil’s recent and proven ability to grow about 33% in price over 6 months. Soft commodities still have some way to go in catching up the hard commodity boom, itself driven by and dependent on rising oil, gas and energy prices, and sometimes-rapid depletion of ore bodies and exploitable reserves. Almost unknown to the minds of media commentators and business analysts, the entropy-linked requirement for oil and energy prices to keep moving higher in order to make intrinsically low-performing substitutes feasible or ‘economically attractive’ is the only way forward for alternate energy. By doing this, they could drag the biofuels and electric cars, solar electricity, geothermal heat or other alternate energy ‘solutions’ behind them, into the realms of long-term economic feasibility — as opposed to their present de facto role as vehicles for short-term financial and speculative trading interest. The bottom line cost, of course, is to spend more of personal and national income on anything containing or using energy, and less on the trinkets and gadgets so prized by economic growth fanatics.
Beware of Overheads
Infrastructure and overhead energy costs, in the OECD countries, and increasingly in the Emerging Economies are either very high or extremely high. The survival value of the whole production process is therefore low. Without cheap, or at least abundant, oil and gas, the construction and operation and maintenance of current production systems and their infrastructures is compromised. The successive shells or layers of the urban-industrial consumer economy, that is, economic infrastructures, have high or very high embodied amounts of energy, and this dependence increases as we mount the successive infrastructure layers, due to previous shells or layers being energy intensive. The much touted image of cellphones as ‘jumping the infrastructure barrier’ of landlines made from copper and recycled tree trunks, is a classic claim of those profiting from placing extreme high frequency emitters close to the brains of children and adults.
In 2007, around 10% to 12% of US total electricity consumption was swallowed by Internet and cellphone, portable computer and pager systems. Some 55% of US electricity comes from coal-fired power stations, burning hundreds of millions of tons of rail-shipped coal each year. Champions of the ‘mobile office’ and the ‘communication revolution’ sometimes call this the ‘dematerialized’ economy!
Embodying and incorporating abundant and previously cheap fossil energy in productive and support infrastructures of the economy, these structures and economic processes need energy to be maintained, operated and renewed. Without this energy supply, cheap or otherwise, the North Korean or Cuban ‘solution’ becomes the No Alternative. Unfortunately, replacing ‘current generation’ productive systems and their infrastructures with alternate energy will not be just difficult, but rather totally impossible. Arbitrage, or choices, will have to be operated, surely not by the blind and chaotic 'free play of market forces', and preferably not by Our Heroic Leader and his clique.
This reality is in fact known to many persons, even to traders, speculators, and business analysts who track big spending on alternate energy, 'to save oil', in their market surveillance. It is also known to the scientific community, but care is taken by politicians and the media to avoid clearly spelling out such fatal and total weakness and dependence to Average Joe Citizen. Even less spoken of are the concrete, real world results of failed energy transition. In particular, as we have discussed elsewhere, these include oil war, military invasion, and mass killing in the wider Middle East and Central Asian (MECA) region, triggered by failed attempts to increase ‘pumping performance’ and supply of real world petroleum for the real world, fatally doomed, economy.
Partying on with Alternate Energy Investing
The continued growth of the 'alternate energy boom' is entirely linked to the oil price. What is required is an oil price near the pain threshold, but well below the panic level we can place at around 150 to 200 USD/barrel. After the panic level is attained, the world economy will enter into troubled but classic waters of deep economic recession, cutting oil demand, and shaving its price. This is the ‘slump dividend’ for surviving consumers!
Sufficiently intense world economic recession can however easily result in only the war option for improved oil pumping ‘performance’ from exporters being retained. But we could also argue the opposite may ensue through reduced needs for energy in the slowed world economy, plus the ‘prudence premium’ on ray-jeem-changing underperforming oil pumping countries ‘for their own good’, but finding they produce less for some while after their military ‘liberation’ and democratization. We can conclude that if we stay inside the pain threshold price, below 150 USD/barrel, fast development of many alternate energy sources and systems will remain a healthy new business. It can continue to attract not only the pension funds, but also the Bill Gates, Vinod Khoslas, Peter Thiels and Richard Bransons of this world. These extreme consumers of every imaginable fossil fuel can continue to scurry round the world, preaching 'environmentally correct energy' as well as classic ways to make more money.
The most important future effect of the 'biofuels revolution' is however on food prices. The production of biofuels on a large, or even massive scale is unlikely, but it comes at a bad time for world agriculture and food production. In large part due to climate change, but also because of rising fuel prices, erosion and loss of biodiversity due to industrial overkill being used against the biosphere, world agricultural output has stagnated. More strictly economic reasons for stagnating world food production can also be added, for example, water supply limits and declining amounts of prospective new agricultural land for raising production. Prices for basic food commodities are rising, independently of real or potential biofuel ‘feedstocks’ demand on available grains, sugars and oilseed supply. This problem is already recognised, in the action taken to develop GM non-food "fuel crops", such as jatropha and grasses (in general, leguminous species) which can or might be planted in non-irrigated lands, take less existing agricultural land, and potentially use less or no fertilisers, pesticides and machinery for production.
We find there is a firm and surprisingly low limit on how much alternate energy, such as the biofuels, can be produced before danger signals are set for the growth economy. As any economic textbook will explain, the amount of "discretionary non-food revenue" available to consumers has always has been the key determinant of economic growth, and growth potential in any economy. This 'iron law' of the economy, much discussed by Ricardo, Say, Malthus, Engels and Marx, among others, is easy to understand. As the consumer cypher or Economic Man spends more of his income on food and energy, and has less to spend on Microsoft products, iPods or flights in 100%-kerosene-fuelled Virgin airliners, this hits company revenues and corporate profits, employees are thrown out of their jobs, company spending decreases, and so on.
The moral question of do we need to feed cars and keep modern “ecologically minded” consumers high on the barrel, rather than feeding the approximately 900 million underfed persons of the planet is usually avoided. Likewise, the urge to do something to limit climate change is certainly present in the media, but concrete action to cut oil, gas and coal burning is not. To what extent the growth economy survives, or more precisely how long it survives, is of course low-key or absent in media treatment of the Alternate Energy Investor Boom, which is yet another asset bubble.
More important for us at this moment, in late 2008, we can note how quickly real world energy-economic limits cut into the agrofuels boom, leaving a trail of unused or underused biofuels processing plants, in the case of G W Bush’s US Renewable Fuel Scheme — unable to operate through too costly corn or soybean oil on one hand, and insufficiently expensive imported oil from ‘underperforming’ oil exporter countries on the other. This tradeoff, between food and fuel, was and is arbitrated by rising food and energy prices and their impact on the economy, political ideas and public opinion.
What Happens Next
Any asset boom is under imminent threat of implosion whenever stock markets wilt in the face of reality and investors scurry to salvage what they can of the bets they made that more and following gamblers would come along to the same party, bringing fresh cash. Continued growth of the Alternate Energy asset bubble therefore depends on stock markets avoiding a crash. In turn this means there must be neither an oil price crash, nor a continued oil price explosion.. If we take the second and rational hypothesis, a classic economic crisis generated by oil prices moving to 150+ USD/barrel, the crisis will trigger a cut in world oil demand, reducing oil prices. Plenty of arguments support this outlook, particularly the extreme oil and gas intensity, or total oil dependence of the OECD 'post-industrial' societies. These ultimate consumer societies are under recession threat almost any time because of the debt-driven, resource-intensive, unstable, cycle-prone bases of economic growth in these societies. Not only the banks and finance houses, but most home- and even car-buyers are ‘highly leveraged’, that is debt-dependent, exactly like OECD governments, most of which also run big trade deficits.
Another possible cause of a serious tilt to the Alternate Energy asset bubble’s Titanic deck is simply a boom-bust sequence in the 'stock growth and decline cycle'. Exactly the same happened in a quick period with the dotcom and hi-tech asset bubble, ending in the crash of 1999-2000. Since then, the Asian economy growth explosion, mergers and acquisitions mania, the real estate bubble and its subprime afterglow, all driven by stepwise increases in world liquidity, low interest rates and consumer debt, have taken over as economic cycle drivers. This extreme fragility is unlikely to resist the ‘external shock’ of oil prices climbing to their real equivalent price of the early 1980s, corrected for competing asset prices and the US dollar’s world value. This is probably around 175 USD/bbl, in any case more than 150 USD/bbl. Reaching this panic price level will be signalled by stock exchange falling any time oil prices rise, instead of the reverse, which was the pattern right through 2005-2007, but not now in 2008.
Also, and ironically, any prolonged fall of oil and gas prices can help ‘crater’ the world economy by strangling the 'real resource boom' and depriving the world economy of liquidity transfusions generated by high metals, minerals, agrocommodity and energy prices. The Alternate Energy asset bubble is therefore caught between two stools the same way Kuwait, and other small GCC petro-countries are caught between Iran and US-occupied Iraq plus Saudi Arabia.
If we take the 1980-1982 shakeout or meltdown of the world economy as at least partly oil-price-triggered, this recession cut world oil demand about 9.5% in 3 years. The same economic slowdown, today, would also cut oil prices until falling supply due to Peak Oil caught up. Thanks to market over-reaction or ‘exuberance’ this process would naturally be a fireworks show of extreme volatility, but could end up cutting oil prices to below 100 USD/bbl, wreaking havoc on biofuels feasibility and return on investment, as well as the financial performance of other alternate energy investor vehicles.
Later on, long-term shrinkage of oil and gas supplies, which will surely start from 2011-2014, intensifying after that, will finally cut world energy demand by unimaginable amounts. The economic spinoff, or economic impact of much higher oil and gas prices spilling through the economy, will simply mask the underlying physical causes of economic recession. In the 'longer-term’ future of about 2015-2018, it is not certain the alternate energy sources, including biofuels will have any larger role to play than today, simply due to the world economy practicing — for force majeure — the kind of de-growth that is the only solution for fighting climate change and limiting outright destruction of the biosphere. To be sure, the percentage weight in world energy of Alternate Energy will be higher, that is rising from around 1.5% today, to perhaps 5% of a smaller world total energy demand by around 2015. Much higher food prices, simply reflecting energy prices and environment costs of current agriculture, will also play their part in economic de-growth, and mightily constrain ‘first generation’ biofuels production we can easily note. Kuwait can practice After Oil investing, with ever-increasing real need, but the Alternate Energy asset bubble may be off trader’s screens well before that!
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Copyright 2008 Andrew McKillop