The price of crude can only rise in the long term while supplies dwindle worldwide
By Mathew Maavak
Crude oil has reached a point where the skeptics of yore have become the proselytes of tomorrow, readying the world when crude tops $100 per barrel.
That day is not far away though few saw it coming.
Only six years back, crude was being hawked away for as low as $10 per barrel, when producers pumped out whatever they could for hard currency in the aftermath of a serpentine financial crisis that slithered its way from Mexico to East Asia, emptying national coffers in the process.
The barrel has steadily risen from its Davy Jones Locker to reach the $75 average today. At every stage of the climb -- $40, $50, $60 and $70 -- threshold limits were tested and passed, industries kept firing on all cylinders, and the global economy remained resilient.
The global economy will still stand if oil reaches $80 next week. We are ready for it; for the climb has been steady and soft, preparing us for the day as if tomorrow never comes.
Tomorrow, however, does come, at an expense of a finite resource that took aeons to form.
Oil can only climb up as the planet has already consumed more than half of its available reserves, and incremental demands by the day will result in higher prices and a supply crunch. This is phenomenon known as Peak Oil or "Hubbert's Peak."
In 1956, Shell geologist Dr Marion King Hubbert announced a starling prediction: US domestic oil production would peak in 1970 and global production would peak in 1995. The latter would have transpired if the oil shocks of the 70s -- and the subsequent energy efficiency innovations that followed -- had not delayed a supply crunch for 10 to 15 years.
The planet is now sitting atop an oil plateau and the only way forward is a steady downward slide.
In the United States alone, those famed Texan derricks, immortalized by the "Dallas" series, have already run dry and oil majors are now digging deeper, below inhospitable surfaces they once shunned. The final frontiers lie below the permafrost of Russia's Sakha Republic or beneath the choppy seas and blazing winds of New Zealand's Great South Basin.
If technology can surmount nature's challenges, these geographical extremes will provide a stable supply of crude for a period. For everything in between, the curse of volatility has been matched by unreliability.
One such place is home to the world's largest oil field. It is impossible to gauge how much of oil is left in Saudi Arabia's Gharwar field; the statistics are heatedly contested while the crude shipped out carries a greater content of the immiscible water. It's a metaphor, if one needs, of an unnatural state of cohabitations in this world.
Whatever remains of this 70-year-old field is being forced to the surface by an energy-intensive and expensive water injection process.
Quality crude is becoming harder to come by.
Traditionally, crude oil has been classified as light, medium and heavy by the American Petroleum Institute's gravity scale. An API gravity reading defines the density, quality and subsequently, the ease with which crude can be broken down into derivative products.
Light crude would have a gravity value beyond 31.1 degrees API, while heavy crude's gravity value would be below 22.3 degrees API.
With the world running out of light, medium and heavy crudes, oil is being sought from tar sands endowed with API values of between 7 and 12 degrees. They reportedly represent more than 60 percent of global oil reserves and are mainly concentrated in Orinoco, Venezuela and Alberta, Canada.
In the old days, Native Americans would flick out the earthy bitumen with their fingers to waterproof canoes. Now, they are supposed to keep the rest of us afloat, but only at $40 plus per barrel. Only then would oil extraction from tar sands be cost-effective.
But whatever the source, the extracting and production of oil cannot be done overnight. In the event of a supply disruption, refineries which process lighter crude will need significant technical tweaking before breaking down the heavier blend. Refineries throughout the world have been purpose-built to process its preferred "blendwidth" of crude as no major supply disruption has occurred in recent times to warrant otherwise.
Of the 661 major refineries worldwide, there are only 31 capable of processing the heavy sour crude, which has a larger proportion of the pollutant sulfur. Heavy sour is not sold at discount. It is sells for just $6 cheaper than a corresponding barrel of light crude.
Even if a new "light sweet" Gharwar is discovered somewhere today, it might take up to a decade to build the right facilities and infrastructure before the oil therein fills our tanks.
And no major oil field has been discovered of late. The ones still online lie in the most volatile regions in the world. This brings up the subject of energy geopolitics, energy warfare and terrorism.
Oil is a fungible commodity. Variations to the supply-demand equation anywhere will precipitate a systemic effect everywhere, right down to the cost of basic consumer necessities.
According to the United States Energy Information Administration, global surplus crude production currently stands at just 1.0 to 1.3 million barrels per day. Compared to the daily global demand of 85 mbpd, such a razor thin "cushion" can barb markets into a concentration of nerves.
And it only takes a 200-gallon spill in the right place at the right time to set those synapses jangling. This happened less than two weeks ago when the 250-square-mile Prudhoe Bay oil field in Alaska was shut down, warranting extensive repairs to its pipelines. The field accounted for just 8 percent, or 400 thousand barrels per day, of domestic U.S. crude production.
If a magnified shutdown had happened in say Nigeria, or Iraq, the market reaction would have been more tempered.
That's why the generically-termed "volatile oil-producing regions" can be misleading; they in fact stretch as far as pipelines that traverse continents, bifurcating or conjoining with immense implication along the way.
The epicenter, from which major oil shocks ripple through the earth, lie in the oil and gas vault of the Persian Gulf.
Herein lies the Gordian Knot of mayhem, collusion and terror.
Saudi Arabia is the world's top producer of oil (10mbpd), but it is Iran (3.8mbpd) which effectively controls the narrow Straits of Hormuz, through which tankers carry 20 percent (15 to 16mbpd) of the world's oil. (Approximates vary)
Despite their overt Islamic solidarity, Saudi Arabia which follows the Sunni branch of Islam is a sworn enemy of Iran, guardian of the Shi'ite branch. Militants from both branches are engaged in a low-intensity civil war in Iraq, and this kept under controlled conditions -- at gunpoint -- by 140,000-odd U.S. soldiers.
Despite having its soldiers pinned down by Sunni militants, Washington plans to overthrow the regime in Tehran, purportedly over the latter's nuclear enrichment program.
An outright invasion would be catastrophic to the global economy, not when the 1.0 to 1.3 million barrels of oil cushion is expected from Saudi Arabia. Iran has the capacity to take out 10-20 million barrels per day by destroying oil infrastructures in the Gulf Arab states, and sink enough tonnage to make the Straits of Hormuz impassable.
An Iranian response has to be quick, brutal and bloody as paradoxically, it is net importer of gasoline. Years of U.S.-led sanctions have left the Iranian oil complex in a decrepit state.
But this does not stop each party from laying a snare for each other. The proxy war fought in Lebanon recently was yet another manifestation of this game. If Washington thinks it has knocked a pawn or two from Tehran's game plan through the proposed deployment of 15,000 U.N. troops in Southern Lebanon, it should think again.
Then of course, there is China which supplies the finest weaponry in Iran's arsenal. The world's fastest growing economy has already locked and secured oil and other raw materials from some of the most despotic regimes on earth.
Beijing will not tolerate any disruptions to its precarious oil supplies. And neither would those who can be regularly spotted buying discounted Chinese products when they are not crying foul over Tiananmen Square.
China alone accounts for 40 percent of global oil demand growth. The ratio between China's GDP growth and demand growth for crude oil is an alarming 10:9 at the time of publication. On a worldwide basis, the ratio is 10: 4.
If there is any disruption to oil supplies, China would be the first to reel, and that would be dangerous.
The emerging economies of Asia that satiate global consumer gluttony are perhaps the primary cause behind soaring oil prices.
Peace can be sought over conflicts, alternative energy sources can be introduced to replace oil one day, but the need for more has never been tackled by mankind.
The modern lifestyle has resulted in compartmentalized accouterments. Separate watches are worn to work, leisure and sports. Amateurs who need to sweat out pick separate shoes for tennis, badminton and jogging, instead of a multipurpose cross-trainer. The family car is now split for each member.
The production process thus needs to be energy efficient, to produce more goods for more consumers. This is called Jevon's Paradox. Increased efficiencies, meant to curtail demand for expensive raw materials, ironically end up ballooning demand.
At the end of the day, even when renewable sources replace fossil fuels for most our energy needs, oil would still be needed for basic chemicals, fertilizers and plastics. These products underpin the entire food chain, along a conveyor belt that carries basic commodities, transportation and ultimately high finance.
There is hardly a modern human endeavor untouched by oil. The day will come when we will seek ingenious ways to live without it.
The sooner we seek solutions, the better.
Published in the Korea Herald on Aug 16, 2006. This commentary was the cover story for the Asia News magazine's Aug 25-31 edition.
Most of Mathew Maavak's commentaries can be read here or visit the Panoptic World homepage.