USAEE Working Paper Series ---------------------------------------------------------------An Impending Oil Crunch by 2015?

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By Dr Mamdouh G. Salameh Director International Oil Economist World Bank Consultant UNIDO Technical Expert

Oil Market Consultancy Service Spring Croft Sturt Avenue Haslemere Surrey GU27 3SJ United Kingdom Tel: (01428) – 644137 Fax: (01428) – 656262 e-mail: mgsalameh@btconnect.com

Electronic copy available at: http://ssrn.com/abstract=1715853

WORKING PAPER
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An Impending Oil Crunch by 2015?
Mamdouh G. Salameh, International Oil Economist & World Bank Consultant
USAEE-IAEE WP 10-054 November 2010

The United States Association for Energy Economics and the International Association for Energy Economics have established this working paper series for the purpose of sharing members’ latest research findings and to facilitate the exchange of ideas. Papers included in the series have been approved for circulation by USAEE/IAEE but have not been formally edited or peer reviewed. The findings and opinions expressed herein are those of the individual author(s) and do not represent the official position or view of the USAEE/IAEE.

Electronic copy available at: http://ssrn.com/abstract=1715853
Electronic copy available at: http://ssrn.com/abstract=1715853

The United States Association for Energy Economics (USAEE) is a non-profit organization of academic, business, government, and other professionals that strives to advance the understanding and application of economics across all facets of energy development and use, including theoretical, applied, and policy perspectives. The USAEE was founded in 1994 to provide a forum for the exchange of ideas, experiences and issues among professionals interested in energy economics. For more information on membership programs, conferences, and publications of the USAEE, visit our website: www.usaee.org The International Association for Energy Economics (IAEE) was founded in 1977 in response to the 70's energy crisis. IAEE is a worldwide non-profit professional organization based in the United States, which has members in over 90 countries, who provide an interdisciplinary forum for the exchange of ideas, experience and issues among professionals interested in energy economics. IAEE actively seeks those who are interested in energy economics and those who shape opinions and prepare for events which affect the energy industry. IAEE’s main objective is to provide for the mutual association of persons interested in energy economics in order to create a forum for professional, multinational discussion and to provide a means of professional communication and exchange. To achieve this goal, IAEE publishes two periodicals. "The Energy Journal" is a quarterly professional journal available to all members; the IAEE Energy Forum (newsletter) delivers the latest information on the association, and contains timely articles that appeal to a general audience interested in the energy field. In order to meet IAEE’s objectives, it holds an International Energy Conference each year. These conferences attract delegates and speakers from around the world, and from some of the most influential government, corporate and academic circles. Membership in IAEE is open to anyone who has an interest in the field of energy economics.

Electronic copy available at: http://ssrn.com/abstract=1715853

An Impending Oil Crunch by 2015? ---------------------------------------------------------------By Dr Mamdouh G. Salameh* Oil Market Consultancy Service / World Bank
Abstract An analysis of the global oil market fundamentals indicates that a severe oil crunch could be in the offing probably by 2015 or thereabouts. By 2012, global oil production surplus capacity could entirely disappear if the global economy continues to grow and by 2015 the shortfall in oil output could reach nearly 10 million barrels a day (mbd) causing a severe oil crunch and pushing the oil price to levels matching if not exceeding the price levels reached in July 2008, namely $147/barrel. And while it is difficult to predict precisely what economic, political and strategic effects such a shortfall might produce, it would surely, at best, lead to periods of harsh economic adjustment in the global economy and, at worst, to conflict and even war should one of the major oil consumer nations choose to intervene forcefully. The war on Iraq was a foretaste of what’s to come. This war was instrumental in precipitating the recent global banking crisis and the recession from which the global economy is still suffering. Key Words: Capacity, production, crunch, China, depletion. Introduction Ten years into the 21st century, and the world remains heavily dependent on the fuel that powered the last 100 years: crude oil. Concern about the depletion of conventional global oil reserves seems to have intensified for several reasons, including technological improvements in geological data gathering and analysis, the increasingly sparse reserves discovered by new drilling, question marks over the real size of global proven reserves and concerns that much of the world’s conventional oil especially in the Middle East, is coming from old and overexploited mega-fields that are becoming less productive. There is no risk that we are running out of oil but chances of being able to match the projected growth in demand over the medium term with a rise in production is being seriously questioned. The pressure on the oil price will continue unabated in coming years because of the growing global demand for oil and the dwindling global proven oil reserves. Conventional oil production peaked in 2006. My own research, however, indicates that the peak may have already been reached in 2004 if we factor in what I describe as “OPEC’s inflated proven oil reserves”. My research indicates that OPEC’s proven oil reserves are overstated by some 300 billion barrels (bb). 1 Eight of the top oil producers in the world have already peaked. USA peaked in 1971,Canada in 1973, Iran in 1974, Indonesia 1977, Russia in 1987, UK in 1999,

Norway in 2001 and Mexico in 2002 while China and even Saudi Arabia are about to peak (see Table 1). The only one among the top producers that has clear capability to increase production is Iraq once stability is restored to the country. Table 1 The Peak & Depletion of Conventional Crude Oil --------------------------------------------------------------------------------------------------------------------Country Date of Peak Date of Peak % % Ultimate Discovery Production Discovered Depleted Production (bb) --------------------------------------------------------------------------------------------------------------------China 1960s 2006 93 47 57 Canada 1950s 1973 95 76 25 Iran 1960s 1974 94 76 130 Iraq 1970s 2019 87 20 135 Indonesia 1950s 1977 93 65 31 Kuwait 1950s 1971 93 34 90 Libya 1960s 1970 94 42 55 Mexico 1950s 2002 94 55 55 Norway 1970s 2001 93 48 33 Russia 1940s 1987 94 61 200 Saudi Arabia1940s 2013 96 31 300 UAE 1960s 2014 94 23 78 UK 1970s 1999 94 63 32 USA 1930s 1972 98 88 195 Venezuela 1950s 1970 96 48 95 The World 1962 2005-2010 94 49 2100 --------------------------------------------------------------------------------------------------------------------Sources: Association for the Study of Peak Oil’s (ASPO) websit www.peakoil.net / The Energyfiles Ltd / Chevron / Petroleum Review. Moreover, three of the world’s largest oilfields have already peaked. Kuwait’s Burgan, the world’s second largest accounting for 60% of Kuwait’s reserves, peaked in November 2005. Also Mexico’s giant Cantarell peaked in March 2006 and has seen its production fall from 1.99 mbd in 2006 to 0.600 mbd by the end of 2009. Saudi Arabia’s Ghawar, the world’s largest oilfield accounting for 60% of Saudi oil production, or 5 mbd, peaked in April 2006 and is now declining at a rate of 8% per year. 2 Many experts have questioned the exact size of OPEC proven oil reserves and those of other major OPEC producers such as Saudi Arabia, Iran & Kuwait. The Saudis claim to have more than 264 billion barrels (bb) of proven reserves. However, many Independent experts have disputed the Saudi claims. Their estimates of Saudi reserves range from 90 bb-148 bb. 3 Saudi Arabia’s four biggest oilfields (Ghawar, Safaniya, Hanifa and Khafji) are all more than fifty years old, having produced almost all Saudi oil in the last half century. These days they have to be kept flowing in large measure by injection of water. This is of explosive significance since they could be on the verge of seeing a collapse of 30%-40% of their production in the imminent future and imminent means sometime in the next three to five years – but it could even be tomorrow. Iran is another case of highly inflated proven reserves. Iran claims to have proven reserves of 137.6 bb. However, independent experts estimate Iranian proven oil

reserves at no more than 30 bb to 36 bb. 4 Then in January 2006, Petroleum Intelligence Weekly (PIW) reported that instead of the 99 bb of proven reserves which Kuwait claims to have, it had seen internal documents professing that Kuwait’s proven reserves are only 24 bb, 15 bb of them the remaining oil in the Burgan oilfield. And despite all the technology we hear about, world discovery peaked in1962 and production of conventional oil peaked in 2006. As for the Middle East, discovery peaked in 1965 and peak production may have been reached in 2009. Since production has to mirror discovery, it should surprise no one that we now face the corresponding peak of production. The Ultimate Global Proven Reserves Estimates at the beginning of 2010 indicate that there are just 955 bb of conventional oil yet-to-produce. This is defined as the sum total of global remaining reserves and any reserve additions from new discoveries (see Table 2). Table 2 Ultimate Global Conventional Oil Reserves & Depletion Rate (end of 2009) --------------------------------------------------------------------------------------------------------------------Volume Description --------------------------------------------------------------------------------------------------------------------Ultimate Reserves (bb) 2,100 Amount of production when production ceases. Produced so far (bb) 1,145 Until the end of 2009. Yet-to-produce (bb) 955 Ultimate reserves less produced. Discovered so far (bb) 1,984 Produced plus remaining reserves. Yet-to-find (bb) 116 Ultimate reserves less discovered. Discovery rate (bb/y) 7 Annual additions from new fields Depletion rate (%) 3 Annual production as % of the yet-to-produce --------------------------------------------------------------------------------------------------------------------Sources: USGS / BP Statistical Review of World Energy, June 2010 / IHS Energy Group, World Petroleum Trends (WPT). The Global Oil Market Fundamentals The current global oil market is characterised by a slowdown in oil production, a growing supply deficit, declining discovery rate of new oil and tightening production capacity. (i) A Slowdown in Oil Production & a Growing Supply Deficit World oil production has virtually been flat since 2004 and is projected to continue its downward trend between now and the 2030s. As a result, the deficit between global supplies and demand will continue to widen reaching 9.20 mbd by 2015 and rising to 18.90 mbd in 2020 and 34.40 mbd by 2030 (see Table 3).

Table 3 Current & Projected Global Oil Demand & Supply, 2009-2030 (mbd) --------------------------------------------------------------------------------------------------------------------2009 2010 2011 2015 2020 2025 2030 --------------------------------------------------------------------------------------------------------------------Demand 84.08 86.19 87.41 90.40 100.00 112.35 117.40 Supply 79.95 81.32 81.25 81.20 81.10 80.50 80.00 Supply / Demand Deficit - 4.13* - 4.87* - 6.16 - 9.20 - 18.90 - 31.85 - 37.40 --------------------------------------------------------------------------------------------------------------------Sources: US Department of Energy’s International Energy Outlook, 2010 / IEA, World Energy Outlook, 2010 / BP Statistical Review of World Energy, June 2010 / OPEC World Oil Outlook, 2010 / US Joint Operating Environment (JOE) – 2010 / Author’s projections. * Deficit is offset by OPEC’s production cuts. A most recent report released by the United States Joint Command in February 2010 and entitled: “The US Joint Operating Environment (JOE) – 2010”, states that global oil demand is projected to increase by almost 50% between 2010 and 2030. The report goes on to say that to meet this projected demand, even assuming more effective conservation measures, would require the addition of roughly the equivalent of Saudi Arabia’s current oil production every seven years and would also require that OPEC raises its oil production from 30 mbs currently to at least 50 mbd. The report points out, however, that OPEC may have a vested interest in restricting production increases, both to conserve finite resources and to keep prices high. It concludes that a severe oil crunch as early as 2015 is, therefore, inevitable without a massive expansion of oil production and refining capacities. 5 (ii) Declining Discovery Rate The world is currently consuming just over 31 bb a year, yet on average finding just over 5.42 bb a year. Over the period 1992-2009, only 19% of the global oil production has been replaced by new discoveries or by enhanced oil recovery (EOR) (see Table 4). Table 4 Global Crude Oil Reserve Additions, 1992-2009 (bb) Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Added in Year 7.80 4.00 6.95 5.62 5.42 5.92 7.60 13.00 12.60 8.90 Annual Production 23.98 24.09 24.42 24.77 25.42 26.22 26.75 26.22 27.19 27.81 As % of Annual Production 33 17 28 23 21 23 28 50 46 32

2002 9.00 26.99 31 2003 2.27 28.11 8 2004 1.40 30.10 5 2005 0.91 30.84 3 2006 31.30 2007 29.73 2008 29.93 2009 0.70 29.18 2 1992-2009 92.09 493.05 19 Average 5.42 29.00 19 Sources: IHS Energy Group’s Data / BP Statistical Review of World Energy, 1993-2010. (iii)- Tight Production Capacity Because of OPEC’s production cuts in October 2008, net global production capacity currently stands at 3.157 mbd (see Table 5). By 2011 net capacity will amount to only 1.19 mbd. Table 5 Capacity Addition & Capacity Erosion, 2005-2011 (mbd) --------------------------------------------------------------------------------------------------------------------2005 2006 2007 2008 2009 2010 2011 --------------------------------------------------------------------------------------------------------------------OPEC new capacity 1.160 1.520 1.420 1.320 2.240 2.235 2.235 Non-OPEC capacity 1.416 1.865 2.320 1.886 1.710 1.035 1.035 Total new capacity 2.576 3.385 3.740 3.206 3.950 3.270 3.270 Capacity erosion & slippage* 1.526* 2.348* 2.440* 1.750* 2.328* 2.081* 2.081* --------------------------------------------------------------------------------------------------------------------Net new capacity 1.050 1.037 1.300 1.456 5.722** 3.157*** 1.189 --------------------------------------------------------------------------------------------------------------------Sources: Petroleum Review, (various issues 2006-2010). * Assumes 20% slippage and 10% capacity shortage ** Includes 4.1 mbd of production cut by OPEC in October 2008 because of the recession. *** Includes 1.968 mbd of OPEC’s production cuts. The top five producers in the Arab Gulf: Iran, Iraq, Kuwait, Saudi Arabia and UAE currently produce around 20 mbd, a quarter of the global total. The combined current net capacity of the five Gulf producers is estimated at 22.95 mbd (see Table 6). The spare capacity of 2.95 mbd in 2010 is not due to any expansion of their production capacity but a result of OPEC’s earlier production cuts. By 2012, global oil production surplus capacity could entirely disappear if the global economy continues to grow. 6 And by 2015 the shortfall in oil output could reach nearly 10 mbd pushing oil prices to levels matching if not exceeding the price levels reached in July 2008, namely $147/barrel.

Table 6 Current & Projected Net Production Capacity of the Gulf Producer 2006-2010 (mbd) -----------------------------------------------------------------------------------------------------------2006 2007 2008 2009 2010 -----------------------------------------------------------------------------------------------------------Iran 3.95 3.90 3.75 3.75 3.75 Iraq 2.00 2.00 2.40 2.40 2,40 Kuwait 2.60 2.65 2.70 2.70 2.80 Saudi Arabia 9.50 10.00 10.25 10.50 11.00 UAE 2.60 2.68 2.70 2.80 3.00 -----------------------------------------------------------------------------------------------------------Total 20.65 21.23 21.80 22.15 22.95 -----------------------------------------------------------------------------------------------------------Source: Petroleum Review / OPEC Secretariat data / Author’s projections. Can Unconventional Oil Resources Bridge the Energy Gap? A large share of the world’s remaining oil resources is classified as unconventional. These resources such as Canada’s tar sands, Venezuela’s extra-heavy oil and shale oil have been promoted as a major source of energy that could offset the decline in conventional oil production and reduce dependence on Middle East oil. Recoverable unconventional oil resources are estimated at 603 bb: 173 bb of tar sands oil reserves in Canada, an estimated 270 bb of extra-heavy oil and bitumen reserves in Venezuela and 160 bb of oil shale worldwide (see Table 7). Table 7 Unconventional Oil Reserves (bb) --------------------------------------------------------------------------------------------------------------------Canada Venezuela Worldwide Total Tar sand oil Extra-heavy oil Oil shale --------------------------------------------------------------------------------------------------------------------173 270 160 603 --------------------------------------------------------------------------------------------------------------------Sources: BP Statistical Review of World Energy, June 2010 / US Department of Energy
(DOE).

Production of unconventional oil production currently amounts to 1.55 mbd and is projected to rise to 3.05 mbd by 2020 and 3.75 mbd by 2030. In 2010, unconventional oil contributed 2% to global oil demand and this is projected to rise to only 3% by 2030 (see Table 8). Ironically, concerns are emerging that Canadian natural gas reserves are depleting so fast that there might not be enough power available to heat water for the oil sands expansion operations anyway. Tar sands oil and extra-heavy oil are especially voracious consumers of energy, consuming about 1000 cubic feet of natural gas to convert a barrel of bitumen into light crude oil that refiners want. In 2009 Canada produced 1.2 million mbd of tar sands oil consuming in the process an estimated 1.2 billion cubic feet (bcf) of

natural gas a day, equivalent to 8% of Canada’s entire daily production. Canada’s projected production of 2.8 mbd of tar sands oil in 2025 will require an energy input of 2.8 bcf/d of natural gas, about one-fifth of projected daily Canadian gas production then. The only way the 173 bb of tar sand oil could be extracted is to build nuclear power plants dedicated to the job. 7 Table 8 Current & Projected Contribution of Unconventional Oil to Global Oil Demand, 2009-2030 (mbd) 2009 2010 2015 2020 2025 2030 Demand 84.08 86.19 90.40 100.00 112.35 117.40 Supply 79.95 81.32 81.20 81.10 80.50 80.00 Of which Unconventional* 1.55 1.55 1.93 3.05 3.40 3.75 As a % of global Demand 2 2 2 3 3 3 --------------------------------------------------------------------------------------------------------Sources: US Department of Energy’s International Energy Outlook, 2009 / IEA, World Energy Outlook 2009 / BP Statistical Review of World Energy, June 2010 / OPEC World Oil Outlook 2009 / Author’s projections / The US Joint Operating Environment (JOE) – 2010. *Excludes biofuels. As for renewable energy sources, they contributed only 1% to the global primary energy demand in 2009. Their contribution may not exceed 6% in 2025, possibly rising to 13% by 2050 (see Table 9). Table 9 Primary Energy Consumption, 2009-2050 (mtoe) 2009 2025 2050 Primary Energy 11164 16194 19679 Oil 3882 5135 5288 Natural gas 2653 5119 6927 Coal 3278 3526 2748 Nuclear 610 1061 1937 Hydro 669 314 299 Renewables 72 1039 2480 As a % of total 1% 6% 13% Sources: Shell International, Scenarios to 2050 / BP Statistical Review of World Energy, June 2010 / IEA, World Energy Outlook 2009. The Impact & Trends in the Global Economy After decades of uneven globalization, the world is now witnessing the rise of many emerging economies and the shifting of global economic power balance from the West to the emerging countries and the oil-exporting countries. The West plus Japan

currently account for 52% of the global GDP. However, by 2015 the emerging economies and the developing world are projected to account for 50% of the global GDP. 8 Also as a result of the rise of the emerging economies, we are seeing a shift of wealth toward countries that supply energy and raw materials. Since 2002, the major global oil exporters have seen their oil revenues more than double and surpluses quadruple while the external accounts of the major oil-importing countries have deteriorated, intensifying global economic imbalances and dampening growth. The overall transfers from oil consumers to oil producers in 2008 were estimated at $1.3 trillion, or 3% of world GDP. As Asian economies, particularly China, grow and their current surpluses grow along, Asian money becomes more and more important globally. While the US over the last 10 years had an average current account deficit of $800 bn, several East Asian countries together had an average $400 bn surplus, more than a third of the world’s surplus. 9 The Arab Gulf Sovereign Wealth Funds (SWFs) are equally growing in importance globally. They control assets estimated at $1777bn (see Table 10). Table 10 Estimates of Assets under Management for Gulf SWFs --------------------------------------------------------------------------------------------------------------------Country Name of Fund Assets (US$ bn end of 2008) --------------------------------------------------------------------------------------------------------------------UAE Abu Dhabi Investment Authority 875 Saudi Arabia Saudi Arabian Monetary Authority 433 Kuwait Future Generation Fund 213 Dubai Investment Corporation of Dubai 82 Libya Oil Reserve Fund 65 Qatar Qatar Investment Authority 60 Algeria Revenue Regulation Fund 47 Oman State General Reserve Fund 2 --------------------------------------------------------------------------------------------------------------------Total 1777 --------------------------------------------------------------------------------------------------------------------Source: IMF, Sovereign Wealth Funds: a work agenda, http:// www. Imf.org, accessed 4 July 2008 / Sovereign Wealth Fund Institute (Jan. 2009). A recent study by Morgan Stanley estimates that by 2015 the financial assets of oil funds and other SWFs will be approximately $6 trillion each. McKinsey Global Institute estimates that at the end of 2006 oil exporters collectively owned between $3.4 tn to $3.8 tn in foreign financial assets. The GCC states (Saudi Arabia, Bahrain, Kuwait, UAE, Oman and Qatar) owned $1.8 tn or 47%-53% of these assets according to the Institute of International Finance at the end of 2007.

In the first half of this decade, an estimated $542 bn of GCC international assets had been injected into global capital markets. Most of these investments had been made by oil funds.

An Asian Oil Demand Shock? While we recognize the risks associated with a supply shock in the oil patch, we believe investors should be just as concerned about the demand shock evolving from Asia. At the moment, Asia’s energy resources are grossly inadequate (see Table 11). The growing deficit between Asian supply and demand alone could keep energy prices high in the years ahead. Table 11 Current & Projected Crude Oil Demand, Supply, Imports & Reserves in the Asia-Pacific Region (2008-2010) (mbd) --------------------------------------------------------------------------------------------------------------------% of change 2008 2009 2010 2015 2020 2025 (2008-2025) --------------------------------------------------------------------------------------------------------------------Production 8.18 8.04 7.88 6.94 6.00 5.29 - 35% Consumption 25.66 26.00 26.68 30.18 34.15 38.63 + 51% Net imports 17.48 17.96 18.80 23.24 28.15 33.34 + 91% As a % of Consumption 68 69 70 77 82 86 --------------------------------------------------------------------------------------------------------------------Sources: BP Statistical Review of World Energy, June 2010/ Author’s projections. In 2009 the Asia-Pacific region’s dependence on oil imports amounted to 69%. This is projected to rise to 70% in 2010 and 86% by 2025. The bottom line is that neither of Asia’s fastest-growing economies has enough energy to feed its rapid industrialization and urbanization. It is against this background that the concept of peak oil becomes more worrisome. High oil prices might not simply be a cyclical phenomenon brought about by peak demand in this five-year-old global economic recovery. Instead, high oil prices might be an early indication of a supply-demand imbalance that can’t be reconciled by still higher prices. In this case, a more comprehensive oil shock surely awaits. The Interplay Between Oil & Geopolitics As the world’s number one consumer, the United States will have much to say about how the crisis - whether of early depletion or inadequate infrastructure and investment, or both – plays out. The geopolitics of American oil dependency sees four key trends in US energy behaviour: more imports, increasingly unstable and unfriendly suppliers and rising competition for diminishing supplies. And despite efforts to diversify the US energy mix, the United States is still heavily dependent on oil imports and this dependency can only deepen in the future (see Table 12). The bottom line is that a rising competition for diminishing oil supplies could lead to a deadly confrontation between the world’s military powers. Because obviously in a world as enduringly addicted to oil as ours is, others are going to be looking for their own supplies. China will be among them. Over the coming years we will see China more

involved in Middle East politics. And they will want to have access to oil by cutting deals with corrupt dictatorships in the region, and perhaps providing components of weapons of mass destruction, ballistic missiles and nuclear technology, and that could definitely put them on a collision course with the United States. Oil dependency could yet prove to be the route to a third World War. Table 12 US Current & Projected Crude Oil Production, Consumption & Imports 2008-2025 (mbd) --------------------------------------------------------------------------------------------------------------------% change 2008 2009 2010 2015 2020 2025 2008-2025 Crude oil production 6.73 7.20 7.05 5.79 5.24 4.73 - 30% Consumption 19.50 18.69 19.06 21.00 23.19 25.60 + 31% Net imports 12.77 11.49 12.01 15.21 17.95 20.87 + 63% As a % of Consumption 65 61 63 72 77 82 Sources: US Energy Information Administration (EIA) / BP Statistical Review of World Energy, June 2010 / Author’s projections. Most US presidents since the Second World War have ordered military action of some sort in the Middle East. American leaders may prefer to dress their military entanglements east of Suez in the rhetoric of democracy building, but the long-running strategic theme is obvious. It was stated most clearly, paradoxically, by the most liberal of them. In 1980 Jimmy Carter declared access to the Persian Gulf a vital national interest to be protected “by any means necessary, including military force”. The US has been doing this ever since, clocking up a bill measured in thousands of billions of dollars, and counting. The China Factor China is racing to secure Middle East deals, putting it on a possible collision course with US interests in the World’s most volatile region. China is now the biggest importer of Saudi oil, the second-biggest of Iranian oil, and the largest player in the Iraqi oil game. China is putting a lot of money on the bet that having ownership of oilfields is a better guarantee of supply than buying oil on the open market. 10 Beijing is betting big in Iraq, which many Western companies are avoiding. In November 2009, the Chinese National Petroleum Company (CNPC) won a large stake in a $15 bn deal to develop the Rumaila oilfield in southern Iraq, thought to be the second largest in the world with estimated proven oil reserves of 17.8 bb. That followed a $3 bn deal to develop the Ahdab oilfield in 2008. And two other Chinese firms just closed a deal on a large oilfield in eastern Iraq. Chinese companies have also shown much greater willingness to take on risk by placing their own nationals in war zones: Sudan and Iraq where CNPC has an office in Baghdad led by Chinese nationals. China is also ramping up its ties to Iran as many Western firms pull out. In 2009, China

signed $8 bn in oil and gas deals with Tehran. It also increased sales of gasoline to Iran, which has a shortage of refining capacity. In fact, China is now Iran’s biggest economic partner with more than $21 bn in annual trade. China is reluctant to follow the US line on Iran sanctions because of its oil interests. China has also signalled that it is prepared to defend its new oil ties in the Middle East with firepower. For their part, US officials have tried to reassure Beijing that it can meet growing energy needs without dealing with Iran and have pressured Saudi Arabia to give China oil guarantees to wean it off Iranian oil. Still, there will likely be plenty of other disagreements ahead as China increases its Middle East footprint. The Oil Crunch Global oil demand is projected to rise from 86.19 mbd in 2010 to 118.00 mbd in 2030. To meet this projected demand, even assuming more effective conservation measures, would require the addition of roughly the equivalent of Saudi Arabia’s current oil production every seven years and would also require OPEC to raise its oil production from 30 mbs currently to at least 50 mbd. Significantly, no OPEC nation, except perhaps Saudi Arabia, is investing sufficient sums in new technologies and recovery methods to achieve such a growth. However, OPEC nations may either be unable to raise their production to that level or may have a vested interest in restricting production increases, both to conserve finite resources and to keep prices high. Oil must continue to satisfy most of the global demand for energy. Assuming the most optimistic scenario for improved oil production through enhanced recovery means, the development of unconventional oil and new discoveries, oil will be hard pressed to meet the projected future demand of 118 mbd by 2030 (see Figure 2). At present, the United States possesses approximately 250 million cars, while China with its immensely larger population possesses only 40 million. The Chinese are laying down approximately 1,000 kilometers of four-lane highway every year, a figure indicative of how many more vehicles they expect to possess, with the concomitant rise in their oil demand. The presence of Chinese personnel in the Sudan to guard oil pipelines underlines China’s concern for protecting its oil supplies and could portend a future in which other states intervene in Africa to protect scarce resources. The implications for future conflict are ominous, if oil supplies can’t keep up with demand and should states see the need to militarily secure dwindling energy resources. 11 To generate the oil required worldwide by 2030 would require us to find an additional 1.4 mbd every year between now and then. During the next twenty-five years, fossil fuels will remain indispensable to meet energy requirements. However, the discovery rate for new oil over the past two decades (with the possible exception of Brazil) provides little reason for optimism that future efforts will find major new oilfields. By 2030 the world will require production of 118 mbd, but oil producers may only be able to produce only 100 mbd. By 2012, oil production surplus capacity could entirely disappear if the global economy continues to grow. And by 2015 the shortfall in oil output could reach nearly 10 mbd causing an oil crunch which will be reflected in higher oil prices matching if not exceeding the price levels reached in July 2008, namely $147/barrel.

Figure 2

Source: International Energy Agency (IEA), World Energy Outlook. A severe oil crunch is, therefore, inevitable by 2015 or thereabouts without a massive expansion of oil production and refining capacities. While it is difficult to predict precisely what economic, political and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on the two most populous nations on earth, namely China and India. At best, such a crunch would lead to periods of harsh economic adjustment and, at worst, to conflict and even war should one of the major oil consumer nations choose to intervene forcefully. The war on Iraq was a foretaste of what’s to come. This war was instrumental in precipitating the recent global banking crisis and the recession the global economy is still suffering from. 12 Can the World Be Weaned Off Oil? I have so far endeavoured to prove the case for two big arguments. First, there is plenty of oil and gas left but not enough to feed growing global energy demand for much longer. Second, global conventional oil production peaked in 2006. The truth of the matter is that the shortfall between current expectation of oil supply and actual availability will be such that neither gas, nor renewables, nor liquids from gas and coal, nor nuclear, nor any combination thereof, will be able to plug the gap in time to head off the economic trauma resulting from the peak. But doing nothing is not an option. It will only lead to conflicts and devastating wars in the future. This begs the

question as to whether the world could eventually be weaned off oil. The answer to that is that it can only be done if we endeavour to change our way of life, easy said than done. But the dire alternative will eventually force us to change the way we live and seek alternative energy sources. Meanwhile, there are short-term and long-term measures that governments can urgently take to reduce our addiction to oil and ward off the adverse impact of an energy crisis. Energy efficiency could be a first step. Automakers, for instance, could increase fuel mileage to 80 mpg from the current 30 mpg at little additional cost. This could have an immediate impact on global oil demand. Another option is the electric car. But the push for electric cars would still increase demand for gas- and oil-based electricity; so an age under electric cars has to be coupled with a shift to solar, wind, nuclear and other sources of renewable energy for electricity generation. Hydrogen is also a feasible source of energy for transport. I’d say we are 25 to 30 years away from using hydrogen fuel cells as a substitute to oil. Whatever the world decides eventually, it will have to be a concerted effort by governments, manufacturers and even oil producers. Conclusions Global oil demand is projected to rise by 50% between now and 2030. To meet this projected demand, even assuming more effective conservation measures, would require the addition of roughly the equivalent of Saudi Arabia’s current oil production every seven years and would also require that OPEC raises its oil production from 30 mbd currently to at least 50 mbd. However, OPEC may be either unable to raise its production to that level or it may have a vested interest in restricting production increases, both to conserve finite resources and to keep prices high. By 2030 the world will require a production of 118 mbd, but oil producers may only be able to produce only 100 mbd. And by 2012, oil production surplus capacity could entirely disappear if the global economy continues to grow and by 2015 the shortfall in oil output could reach nearly 10 mbd. A severe oil crunch could, therefore, be in the offing probably by 2015 or thereabouts. Such a crunch would, at best, lead to periods of harsh economic adjustment in the global economy and, at worst, to conflict and even war should one of the major oil consumer nations choose to intervene forcefully. The war on Iraq was a foretaste of what’s to come. And while it is impossible to wean the world off oil without a radical change in our life style, there are already technologies which can help reduce our addiction to oil. Major investments should therefore be channelled towards enhancing energy efficiency globally and the further development of electric cars and ultimately hydrogen motor technology. * Dr Mamdouh G. Salameh is an international oil economist, a consultant to the World Bank in Washington DC and a technical expert of the United Nations Industrial

Development Organization (UNIDO) in Vienna. Dr Salameh is Director of the Oil Market Consultancy Service in the UK and a member of both the International Institute for Strategic Studies (IISS) in London and the Royal Institute of International Affairs. He is also a member of the Energy Institute in London.

Footnotes 1 I was the first among oil experts to calculate and prove that OPEC proven oil reserves are inflated by at least 300 bb. This figure has become a world reference quoted by energy experts and energy Institutes and organizations worldwide. I presented the results of my research in a paper entitled: “OPEC Proven Reserves: How Realistic?” at the 24th USAEE/IAEE North American Conference, July 8-10, 2004, Washington DC, pp.3-4. 2 Mamdouh G Salameh, “ Peak Oil & the Global Economy” (a paper given at the invitation of the All Party Parliamentary Group on Peak Oil at the House of Commons in London, 29 April 2008. 3 Mamdouh G Salameh, “ Saudi Proven Crude Oil Reserves: The Myth & the Reality Revisited” (a paper given at the 10th IAEE European Conference, 7-10, September 2009, Vienna, Austria), p. 4. 4 Mamdouh G Salameh, “Oil & Iran’s Nuclear Programme” (A USAEE Working Series Paper No: 09-036, published on 28 December, 2009) pp. 5-6. 5 The US Joint Operating Environment (JOE) – 2010 (published by the United States Joint Forces Command, 18 February 2010), pp.24-29. 6 Ibid., p. 29. 7 Mamdouh G Salameh, “ Conventional & Unconventional Oil Resources Shouldn’t Be Classified Equally as Crude Reserves” (a paper given at the 11th IAEE European Conference, 25-28 August, 2010, Vilnius, Lithuania), pp.3-4. 8 Mamdouh G Salameh, “ Oil & the Global Financial & Economic Crises & Their Impact on the Economies of the Arab Countries” (a lecture given at the invitation of the Economics Department at the American University of Beirut, 18 May 2010, Beirut, Lebanon), p. 10. 9 Ibid., p. 11. 10 Babak Dehghanpisheh, “China’s Middle East Oil Lust”, Newsweek, May 17, 2010, p. 8. (for further details on China’s oil thirst, refer to Mamdouh G Salameh’s paper entitled: “China’s Global Oil Diplomacy: Benign or Hostile?” given at the 31st IAEE International Conference in Instanbul, Turkey, 18-20 June, 2008. 11 The US Joint Operating Environment (JOE) – 2010, p. 26. 12 Mamdouh G Salameh, “Over a Barrel” (London, UK: Salameh, June 2004), pp. 191-192; also Mamdouh G Salameh “The 21st Century’s First Oil War: The War on Iraq & Its Impact on the Oil Price (a paper given at the 2nd Latin American Energy Conference, 22-24 March 2009, Santiago, Chile).