Playing with Fire

Scientists base their conclusions on facts and well-documented observations and experiments, while historians can turn the pages of past records even if they cannot always penetrate the hidden motives of the powers behind the throne. But no one can forecast the future with confidence, and even evaluating the current political climate is assailed by many uncertainties. The mainstream media are under the control of a few enterprises having vested interests on what they report and how they present it. The Internet has opened new doors providing a wealth of insight but again it is difficult to be sure of the validity of what is revealed.

This brief paper will take a look at the unfolding situation, but can only speculate on many of the facets.

The British Empire at its prime controlled much of the world. It seems to have evolved into a fairly benign institution as its distinguished colonial administrators respected the indigenous people of their territories and provided at least minimal services and justice. Independence did not succeed in bringing better government in most cases. The greatest benefit to Britain may have been the use of the pound sterling for world trade that delivered a handsome unseen reward to the banks of London, controlled by a few well-known names.

This empire was extinguished by the Second World War when the United States emerged as the dominant power. It was a different empire insofar as it did not administer many overseas territories as such, which gives a sense of responsibility, but built a commercial and financial empire under the principles of globalism whereby the resources of any country belong to the highest bidder. This led, so-to-speak, to the climax of the Industrial Age. It had been fuelled primarily by a growing supply of cheap energy from coal, followed by oil and gas, which allowed the population to expand ten-fold. Oil plays a dominant role, especially for transport and agriculture, but is subject to depletion, having been formed under exceptional conditions in the geological past. More than fifty countries are now producing less than at some date in the past, some being long into decline. Although the data are unreliable, being subject to lax reporting and ambiguous definitions, it seems that the world peak of Regular Conventional Oil production was passed around 2005, and that the peak of all categories has followed or is about to do so. A debate rages as to the precise date, but misses the point when what matters is the vision of the long decline on the other side of it.

The United States was one of the oil pioneers but its discovery peaked in the 1930s, delivering a corresponding peak of production in 1970. While its production has declined, it is far from running out as it turns to unconventional sources, including those derived by artificially fracturing unsatisfactory reservoirs to tap the last remaining drops which are slow and costly to extract. Much of the World’s remaining Conventional oil lies in the Middle East, which was richly endowed with the essential source-rocks. It currently supplies about one-third of the World’s needs. It still costs these countries $10-20 to produce a barrel, so when they sell it for over $100 that amounts to inflationary profiteering. Much of this flood of money directly and indirectly makes its way back to the international banks, many based in New York, and perhaps contributed to the financial collapse of recent years. In essence, money has to reflect work, which requires an energy supply, so in a certain sense a rise in oil price effectively means a devaluation of the currency in which it is traded.

Another issue is the State of Israel which established itself in Palestine in 1948, causing much hardship and resentment to the indigenous people, who won the sympathy of their Arab neighbours. It was a somewhat anomalous construction, but attracts support reflecting a sense of guilt for the past oppression of Jewish people in Russia and Europe.

The first oil in the Middle East was found in Iran in 1908 by the predecessor of BP. In 1925, Reza Khan became the leader, or Shah, but was forced to hand over to his son in 1941, who was bent on westernizing the country and suppressing any opposition. The country did receive an oil revenue but it was less than that taken by the shareholders of the foreign oil companies. This was perceived as unfair, although consistent with the principles of globalism, and led to the nationalisation of BP’s Iranian assets in 1950. In June 1953, the US Secret Service orchestrated a coup, known as Operation Ajax. It led to the creation of a national oil company, which promptly made a deal with the so-called Consortium, in which American companies took about half of what had been BP’s exclusive position.

The Shah finally fell from power in 1979 to be replaced by the Ayatollah Khomeini, a cleric of the Shi’ia faith, who to some extent invoked divine authority. A group of Islamist students thereupon occupied the American Embassy, taking its staff hostage, with a demand for the return of the Shah to face trial. Although the matter was settled by negotiation in 1981 after a failed US military mission, relations were permanently soured. The present President, Mahmoud Ahmadinejad was elected in 2005, representing a coalition of conservative Islamic groups. He has sought to reduce the country’s petroleum consumption : rationing gas in 2007 and building a nuclear power station. It sounds as if he may appreciate the importance of depletion, wanting to conserve as much as possible of what is left for the future of his own people.

Whereas Iran is an established country with a long history, its neighbour Iraq was a somewhat artificial construction put together by Britain at the end of the First World War out of segments of Turkey’s Ottoman Empire. In 1979, Saddam Hussein, who belonged to the Sunni branch of Islam and represented the socialist Ba’athist Party, came to power. He faced pressure from the rival Shi’a majority in his country, with its ties to Iran. Skirmishes broke out and led to war. He enjoyed the support of the United States, which remained opposed to Iran, and received military intelligence, weapons and finance. But when the war came to an end in 1988, he overstepped his mandate by heading south to take Kuwait, which had been cheating on its OPEC oil production quota to the disadvantage of Iraq, and extracting more than its fair share of oil from the South Rumaila Field that straddles the border. He lost American support and soon faced a successful American counter-attack, known as the First Gulf War, although he succeeded in remaining in power.

The end of the Cold War left the United States as a somewhat lonely super-power, losing justification for its military bases around the world. But that was resolved by the so-called 9/11 events in New York and Washington, attributed to Muslim fanatics. It allowed President Bush to announce a new war, described as The War on Terror. Afghanistan, which lies on a proposed export pipeline route from the Caspian, and later Iraq in the heart of the oil-rich Middle East were invaded. President Bush at a press conference justified the latter attack with the words : our energy supply was at risk. But both engagements have now almost come to an end with the actual and planned withdrawal of foreign troops. Iraq remains devastated having lost more than a million lives. Saddam Hussein was executed in 2006, and the new Prime Minister, Nouri al-Maliki, belongs to the Shi’ia sect, which means that he may be closer to Iran than to some of his own people.

Oil prices surged to almost $150 a barrel in 2008, reflecting the earlier peak of Regular Conventional production. The high prices prompted a world economic recession and financial collapse that cut demand, taking pressure off oil prices, but at the same time gave rise to riots, demonstrations and revolutions around the world as people expressed their resentment at the harsher conditions they faced. This reaction included the so-called Arab Spring in 2011 that spread throughout North Africa and the Middle East, leading to the fall of established governments. In the case of Libya, with its rich oil endowment, it was facilitated by military intervention by Britain and France, backed by the United States, which led to the murder of its long-established leader, Muammar Gaddafi. The strife continues in Syria between the Shi’ia government and the Sunni community, but so far has not triggered external intervention. It is noteworthy that Syria maintains the only overseas Russian military base. These disturbances have had some adverse impact on oil production, especially in Libya, and prices have now rebounded to about $120 a barrel.

Pressures are again mounting against Iran, which, like Libya, had decided to trade its oil in national currency rather than the dollar. They are depicted as a response to Iran’s construction of a nuclear facility, and have led Europe and the United States to impose an embargo on Iranian oil imports, effective from July this year. Since these countries face the need for growing imports, it is on the face of it a strange reaction. Iran has countered by threatening to close the Gulf of Hormuz through which tankers leaving the Persian Gulf have to pass. The United States has deployed an ancient nuclear-powered aircraft carrier, the Enterprise, in the area. If it were sunk, that would provide an excuse for opening hostilities, and also save the cost of decommissioning.

Exactly the motives for these moves against Iran are hard to understand, but it might well be described as the last throw of the dice by US and European powers hoping to maintain their hegemony, including the critical role of the dollar and euro as world currencies. Iran has already understandably reacted by banning exports to Britain and France. If a new war should open, it would probably herald a major conflagration in the area between the Sunni and Shi’ia factions, leading to the disintegration of Iraq and some of the other oil producing countries. That would not be an environment conducive to stepping up oil production. Such a development might be welcomed by the State of Israel, which seems to exert a major influence on US foreign policy. It has even been suggested that Israel, which is already well equipped with nuclear weapons, might itself launch the strike, but its government probably fears a major reaction on its own land, preferring to see the United States lead the attack. Its influence in Washington is considerable, reflected for example by the fact that Rahm Emanuel, who helped fund the President’s election and became his Chief of Staff, is no less than the son of a member of an Israeli terrorist group, which blew up the King David Hotel in Jerusalem in 1946, prompting Britain’s withdrawal that paved the way for the establishment of the new state.

The following graph shows an assessment of Middle East oil production in a world context, assuming that the decline in each country sets in at the midpoint of its depletion. The Nonconventional category comprises Heavy oils and tarsands (<17.5o API), Deepwater oil (>500m), Polar oil, Natural Gas Liquids, and the new yields from artificially fracturing unsatisfactory reservoirs. The rapid expansion of overall production the last half-century is remarkable, but it will be matched by an equally remarkable corresponding decline in the future, notwithstanding the entry of costly Nonconventional supply. The latter is not viable at prices much below $100 a barrel, and extraction has a low net energy yield.

The graph also illustrates the devastating consequences of a politically inspired interruption of Middle East exports. It is difficult to avoid the conclusion that the collapse of such an important source of energy, fuelling the modern economy, would make the current bad economic situation much worse.

Europe’s situation is somewhat complicated because Norway, which is a major producer of oil and gas, is not a member of the European Union. If we include it for this purpose, we find that the region currently requires annual imports of 3.8 Gb (billion barrels) of oil and 6.7 Tcf (trillion cubic feet) of gas. Its production is in decline from natural depletion meaning that imports would have to rise to about 4.8 Mb of oil and 16 Tcf of gas by 2030, in order to meet current consumption levels. To cut consumption to match the lower level of imports available by then is a major challenge. But there are precedents for such radical changes: for example, Ireland’s population halved when the potato crop, on which its people depended, was struck by a blight in the 1850s.

It seems that the Governments responsible for moves affecting the current petroleum crop, on which the world population so heavily depends, are by all means playing with fire.

Source: Local Campus