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Tomgram: Michael Klare, The Look of a Badly Oiled Planet

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This article originally appeared at TomDispatch.com. To receive TomDispatch in your inbox three times a week, click here.

When it comes to news about Saudi Arabia, the execution of an oppositional Shiite cleric, Nimr al-Nimr, has topped the headlines recently -- and small wonder. Aging King Salman bin Abdulaziz al-Saud and his 30-year-old son, Deputy Crown Prince Mohammed bin Salman, the new defense minister who has already involved his country in a classic quagmire war in Yemen, clearly intended that death as a regional provocation. The new Saudi leadership even refused to return the cleric's body to his family for burial, but interred it with the many al-Qaeda terror suspects killed at the same time, some beheaded. After death, in other words, al-Nimr was left in uncomfortable company. Think of it as the ultimate beyond-the-grave insult. The provocative message embedded in the announcement of his execution was so obvious that, in Shia Iran, crowds supporting that country's religious hardliners (with their own hideous execution policies) promptly torched the Saudi embassy in Tehran. In the following days, as the Saudis broke diplomatic relations with Iran, ended a failing truce in Yemen (promptly bombing a home for the blind and also hitting the Iranian embassy in Sana'a), and rallied Sunni neighboring states to similarly break ties or at least downgrade relations, the whole, roiling region hit the news as war fears rose.

On September 10, 2001, had someone predicted that the oil heartlands of the planet would, within a decade and a half, become a roiling mix of failed states, fierce sectarian religious and ethnic struggles, spreading terror groups, and the first terror "caliphate" in history, if you had suggested that Saudi Arabia, one of the more stable countries on the planet, might someday begin to come unglued, that Libya would essentially collapse, Syria be no more, and Iraq be transformed into a riven tripartite land, you would surely have been laughed out of any room of pundits and experts. So the recent intensification of such a state of affairs, involving two countries in those heartlands with gigantic energy reserves, is big news indeed -- but not perhaps the biggest news in the region.

My own pick might be a story that passed largely unnoticed in our American world. Sitting atop some of the planet's great oil reserves and getting 73% of their revenues from oil sales (income that dropped by 23% last year), the Saudi royals just hiked the domestic price of gas at the pump by 40%. Though it still remains dirt cheap by global standards, that act -- which is like charging for salt water in the middle of the ocean -- is an indication that something startling is going on. And note that, in the years to come, that kingdom's rulers are planning to cut back on similar subsidies for "electricity, water, diesel, and kerosene." In other words, the world's largest oil producer and a country of striking wealth (and foreign reserves) no longer feels comfortable giving away gas to its own population, even though this is part of a bargain it struck long ago for peace in the kingdom.

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And the reason for this has little to do with Iran or Syria or Yemen or Iraq or the Islamic State. The problem is far more basic, as TomDispatch's resident energy expert Michael Klare points out today. It's the price of oil, which in the last 18 months has dropped through the floor. In a sense, the oil business -- with its constellation of giant energy firms, until recently among the most profitable companies in history, and its energy-producing states, until recently riding high -- may prove to be the natural-resource equivalent of a failed state, and, as Klare makes clear, the changing economics of oil will transform the political face of the planet. So keep your eye on Saudi Arabia. Things there could get ugly indeed. Tom

The Oil Pricequake
Political Turmoil in a Time of Low Energy Prices
By Michael T. Klare

As 2015 drew to a close, many in the global energy industry were praying that the price of oil would bounce back from the abyss, restoring the petroleum-centric world of the past half-century. All evidence, however, points to a continuing depression in oil prices in 2016 -- one that may, in fact, stretch into the 2020s and beyond. Given the centrality of oil (and oil revenues) in the global power equation, this is bound to translate into a profound shakeup in the political order, with petroleum-producing states from Saudi Arabia to Russia losing both prominence and geopolitical clout.

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To put things in perspective, it was not so long ago -- in June 2014, to be exact -- that Brent crude, the global benchmark for oil, was selling at $115 per barrel. Energy analysts then generally assumed that the price of oil would remain well over $100 deep into the future, and might gradually rise to even more stratospheric levels. Such predictions inspired the giant energy companies to invest hundreds of billions of dollars in what were then termed "unconventional" reserves: Arctic oil, Canadian tar sands, deep offshore reserves, and dense shale formations. It seemed obvious then that whatever the problems with, and the cost of extracting, such energy reserves, sooner or later handsome profits would be made. It mattered little that the cost of exploiting such reserves might reach $50 or more a barrel.

As of this moment, however, Brent crude is selling at $33 per barrel, one-third of its price 18 months ago and way below the break-even price for most unconventional "tough oil" endeavors. Worse yet, in one scenario recently offered by the International Energy Agency (IEA), prices might not again reach the $50 to $60 range until the 2020s, or make it back to $85 until 2040. Think of this as the energy equivalent of a monster earthquake -- a pricequake -- that will doom not just many "tough oil" projects now underway but some of the over-extended companies (and governments) that own them.

The current rout in oil prices has obvious implications for the giant oil firms and all the ancillary businesses -- equipment suppliers, drill-rig operators, shipping companies, caterers, and so on -- that depend on them for their existence. It also threatens a profound shift in the geopolitical fortunes of the major energy-producing countries. Many of them, including Nigeria, Saudi Arabia, Russia, and Venezuela, are already experiencing economic and political turmoil as a result. (Think of this, for instance, as a boon for the terrorist group Boko Haram as Nigeria shudders under the weight of those falling prices.) The longer such price levels persist, the more devastating the consequences are likely to be.

A Perfect Storm

Generally speaking, oil prices go up when the global economy is robust, world demand is rising, suppliers are pumping at maximum levels, and little stored or surplus capacity is on hand. They tend to fall when, as now, the global economy is stagnant or slipping, energy demand is tepid, key suppliers fail to rein in production in consonance with falling demand, surplus oil builds up, and future supplies appear assured.

During the go-go years of the housing boom, in the early part of this century, the world economy was thriving, demand was indeed soaring, and many analysts were predicting an imminent "peak" in world production followed by significant scarcities. Not surprisingly, Brent prices rose to stratospheric levels, reaching a record $143 per barrel in July 2008. With the failure of Lehman Brothers on September 15th of that year and the ensuing global economic meltdown, demand for oil evaporated, driving prices down to $34 that December.

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With factories idle and millions unemployed, most analysts assumed that prices would remain low for some time to come. So imagine the surprise in the oil business when, in October 2009, Brent crude rose to $77 per barrel. Barely more than two years later, in February 2011, it again crossed the $100 threshold, where it generally remained until June 2014.

Several factors account for this price recovery, none more important than what was happening in China, where the authorities decided to stimulate the economy by investing heavily in infrastructure, especially roads, bridges, and highways. Add in soaring automobile ownership among that country's urban middle class and the result was a sharp increase in energy demand. According to oil giant BP, between 2008 and 2013, petroleum consumption in China leaped 35%, from 8.0 million to 10.8 million barrels per day. And China was just leading the way. Rapidly developing countries like Brazil and India followed suit in a period when output at many existing, conventional oil fields had begun to decline; hence, that rush into those "unconventional" reserves.

This is more or less where things stood in early 2014, when the price pendulum suddenly began swinging in the other direction, as production from unconventional fields in the U.S. and Canada began to make its presence felt in a big way. Domestic U.S. crude production, which had dropped from 7.5 million barrels per day in January 1990 to a mere 5.5 million barrels in January 2010, suddenly headed upwards, reaching a stunning 9.6 million barrels in July 2015. Virtually all the added oil came from newly exploited shale formations in North Dakota and Texas. Canada experienced a similar sharp uptick in production, as heavy investment in tar sands began to pay off. According to BP, Canadian output jumped from 3.2 million barrels per day in 2008 to 4.3 million barrels in 2014. And don't forget that production was also ramping up in, among other places, deep-offshore fields in the Atlantic Ocean off both Brazil and West Africa, which were just then coming on line. At that very moment, to the surprise of many, war-torn Iraq succeeded in lifting its output by nearly one million barrels per day.

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Tom Engelhardt, who runs the Nation Institute's Tomdispatch.com ("a regular antidote to the mainstream media"), is the co-founder of the American Empire Project and, most recently, the author of Mission Unaccomplished: Tomdispatch (more...)
 

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