The current downturn in the price of oil is only temporary. Price hikes will return with a vengeance before a global alternative energy system can be put in place. In the absence of short term, economical multinational adjustments which will reallocate investment, oil shortages could result into severe instability by 2030. It would be a mistake to consider oil as just another commodity. Oil is a strategic resource and dramatic shortages will have strategic implications, especially for China and India.
Here are some key points identified by the IEA in the recent World Energy Outlook 2008:
- OPEC will provide a greater share of world's oil production but many OPEC countries fail to anticipate future developments.
- Depletion threatens old super-giant and giant oil fields ending the supply of cheap oil.
- New oil sources are not likely to be found.
- National oil companies dominate the oil marker and have different objectives compared to old international companies.
- Depressed oil prices are causing projects to be cancelled or postponed.
Saudi Arabian reserves will continue to grow in importance as conventional non-OPEC supplies decrease in the next few decades. Saudi Arabia faces some criticism, for example due to the size of its reserves. On the contrary other OPEC members have not dedicated the same resources to maintaining their shares of production. Oil reserves in Iran and Iraq have already been damaged by economic embargoes and short-sighted production techniques. While Iran produced six mb/d in 1974, its production has declined since then. In Iraq, Kirkuk and southern Iraq oil fields have been damaged by seeping water and over-pumping during the Saddam Hussein regime. Many current producing OPEC fields have reached their peak production or will reach their maximum before 2030. OPEC nations will need new capital to better manage their oil fields before it is too late.
Global oil production has become a more difficult task as non-OPEC sources come under strain. Production has already peaked at Mexico's super-giant Cantarell oil field, the world's second largest field, and Mexico has had to accept a 17% drop in oil exports this year. Russian production is falling and investment is lagging. Russian output, now close to 10 million barrels of crude oil a day (mb/d), was expected to fall by 1 percent this year and by around 2 percent in 2009. The IEA predicts that decline rates are likely to accelerate in the long term in every major world region.
It is difficult to see where the new capacity will emerge from and meet future demands when key OPEC members are already struggling to offset impeding declines. There are some hopeful prospects in places like Canada and Venezuela, if funding can be found for exploiting non-conventional resources and technologies. However, it must be noted that these areas have experienced some of the biggest world investment cutbacks. Projects in such areas will usually be more sensitive to price fluctuations because their extraction costs are higher compare to the Middle East.
Although IEA estimates that 1.2 to 1.3 trillion barrels of proven oil and natural gas liquids are still available (including .2 trillion barrels of non-conventional oil), investment will not sufficiently cover extraction costs. A greater recognition of this problem may provide the impetus to bring together OPEC producer nations, IEA consumer nations, and key developing nations (China, India, Brazil). Further, parallel to the consideration of global climate change strategies in Copenhagen and other forums, multinational solutions should also be created. A common sense approach could also involve the IMF and the World Bank to ensure that investment plans consider the implications for other issues. A good initial step would be for world leaders to recognize that the current investment structure is inadequate and thus, the work of the IEA should be strengthened. They should realize that the oil industry must be better managed to ensure that radical swings do not further jeopardize the international economic system.
James Cricks is an instructor at the U.S. Army Command and General Staff College.
Related Materials from the Atlantic Community:
- Thomas Straubhaar: The $100 Barrel is a Blessing
- Marek Swierczynski: Gas Security Puts Energy Security et Top of EU Agenda
- Energy Watch Group: Steep Decline in Oil Production Coming
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