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Oil: In Perpetuity No More

An offshore drilling rig. (Photo: L.C.Nøttaasen)

Oil touches nearly every single aspect of the lives of those in the industrialised world. Most of our food, clothing, electronics, hygiene products and transportation simply would not exist without this resource.

There is a reason why oil giants such as ExxonMobil, BP, Total and Royal Dutch Shell, year in and year out, generate more profit than most other companies on the planet.

Our current global economy is based on continual growth, and that growth depends on cheap energy.

“Fossil fuels are roughly 84 per cent of what we use, and oil is 35 per cent of the world's primary consumption energy,” says David Hughes, a geoscientist who studied Canada's energy resources for nearly four decades.

Given that oil plays such a critical role in the world's economy, one would deduce it would be important to know how much is left. Otherwise, the world's stock markets would be exposed to fossil fuels, which would pose a grave risk to investors facing down a so-called carbon bubble, which could potentially dwarf the housing bubble and current debt crisis.

But acquiring accurate figures on the oil reserves of many of the member states of the Organisation of the Petroleum Exporting Countries (OPEC) is currently impossible, as this remains one of their most highly guarded state secrets.

OPEC, which currently has 12 member countries, established a quota system 25 years ago, so that the size of a country's oil production quota was based on the size of its reserves.

This caused most Gulf countries to announce that their reserves were much larger than previously, and other OPEC members followed suit, according to Tom Whipple, an energy expert and former CIA analyst.

“Most outside observers believe that the 'official' reserves of OPEC members are way overstated,” Whipple, who is also a Post Carbon Institute fellow, told Al Jazeera. “Remember the last increase was in response to the OPEC quota agreement which allowed members to sell oil in proportion to their reserves – the bigger your reserves, the bigger your quota.”

“There have been many scandals over the years from people overstating reserves to make them look richer and more important than they are,” added Whipple.

“The biggest fuss I can recall was in Kuwait about five years ago, when somebody leaked a secret government study that said Kuwait's reserves were less than half what they had been saying. After much fuss, the government made the whole issue even more secret and refused to answer further questions about the report.”

Oil giant BP produces an annual statistical review containing a spreadsheet that has reported world oil reserves back to 1980.

“I've tracked that review for the world and for specific OPEC countries,” geoscientist Hughes told Al Jazeera. “Six countries account for more than 80 per cent of OPEC oil; Saudi [Arabia], Kuwait, Iraq, Iran, United Arab Emirates, and Venezuela, and all six of them jacked up their reserves by nearly 100 per cent between 1984 and 1988.”

According to Hughes, this occurred at roughly the same time these countries changed how they set their production quotas.

“Since then, using Saudi [Arabia] as an example, their reported reserves have been flatlined since 1988, so they've not changed their reserves at all, but they produced 96 billion barrels of oil between 1980 and 2010.”

Both Hughes and Whipple, along with other energy experts, believe several OPEC countries are intentionally underreporting their reserves – a situation that will, sooner or later, lead to an economic crash.

State secrets

According to OPEC, “more than 80 per cent of the world's proven oil reserves are located in OPEC member countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 65 per cent of the OPEC total”.

The group's website states:

“According to current estimates, OPEC member countries have made significant additions to their oil reserves in recent years … As a result, OPEC's proven oil reserves currently stand at well above 1,190 billion barrels.”

According to OPEC, its member countries have added 347.2 billion barrels to their total proven crude oil reserves.

OPEC claims to maintain the ability to meet forecasted demand growth “for decades to come” and estimates their “ultimately recoverable reserves (URR)” have increased over time due to technological advances, enhanced recovery methods and new reservoir development.

But according to Hughes, key OPEC oil producers such as Iraq, Kuwait, UAE, and Iran have all likely hit their production peaks, and have been producing at the same levels ever since.

“Iraq['s production] is nearly flatline since 1988, and its peak production year was 1979. Kuwait has largely flatlined since 1988 and its peak production was 1972,” he said.

Hughes said that UAE had largely maintained the same level of production since 1988, while having a recent peak in 2006. Iran had a flat production level from 1988 to 2000, with just a slight increase in their reserves, albeit having reached peak production in 1974.

Venezuela, in contrast, nearly doubled its reserves in 2008, and increased them further in 2009, but, like the aforementioned, reached a production peak in 1970 that has not been attained since.

Hence, the leading OPEC countries, which account for two-thirds of the world's oil reserves, have all passed their peak production points.

“Even Saudi [Arabia] peaked in 2005,” added Hughes, “What that tells you is their rate of production is a lot more important than what they report as their reserves. How can you produce nearly 100bn barrels, like Saudi, and your reserves don't change at all?”

Hughes then added what he feels is the bottom-line.

“It's likely those reserves are far lower than they are reporting.”

Dr Ali Samsam Bahktiari, a former official at the National Iranian Oil Company, said in 2006 – just a year before his death – that all the countries in the Middle East vastly overestimated or overstated their reserves.

Complicating matters, demand for oil is forecast to increase dramatically in coming decades.

Dr Fatih Birol, Chief Economist of the International Energy Agency, told The Independent on August 3, 2009:

“Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030. It's a big challenge in terms of the geology, in terms of the investment and in terms of the geopolitics “

Furthermore, Whipple believes OPEC quotas are no longer relevant.

“Everybody just produces as much oil as they can or [that] is prudent to extract without damaging their oil fields,” he said. “The Saudi and Iranian fields are getting really old and should start to decline in the next decade. The Saudis just announced that they will not be increasing their capacity, except for natural gas. A lot of people are starting to lump in their natural gas production along with their conventional oil. It is called ‘barrels of oil equivalent'. Exxon has been doing this for years, as they pretend their output is increasing.”

Like Whipple, Hughes believes the true oil reserve totals for many OPEC members “are state secrets”.

The mirage of unconventional oil

OPEC also claims: “Technology continues to blur the distinction between conventional and non-conventional oil, of which there is also abundance, as well as with other fossil fuels. We expect the world's URR [ultimately recoverable resources] to continue to increase in the future. Therefore, the real issue is not reserve availability, but timely deliverability.”

BP refers to URR as “an estimate of the total amount of oil that will ever be recovered and produced”, hence the Canadian tar sands are included.

The tar sands have become infamous due to how dirty the oil is and how energy-intensive it is to extract, along with the massive environmental devastation required in the process of extraction.

Scientific and environmental critics of tar sand extraction also argue that oil companies' glowing forecasts of how much oil is there, along with how long it will take to extract are fantastic, in a literal sense of the term.

Hughes, whose expertise includes 32 years with the Geological Survey of Canada as both a scientist and research manager, calls the forecasts “exuberant”.

“They were at 1.5 million barrels per day (bpd) in 2010. Industry has tripled the forecasts in 25 years, which would put them at about 4.5mbpd. It's taken 40 years to get the tar sands to 1.5 million bpd and the surface scar is incredible. I can't imagine what that would look like if you tripled it.”

Hughes explained the government of Alberta reports 143bn barrels of oil, but “90 per cent of those are too deep to be surface minable. Huge energy inputs are required to get to that. So energy return on investment is going to go down a lot as the tar sands progress. I'll believe they triple it when I see it … frankly I don't think it's possible. This is industry hype they are talking to their shareholders.”

The oil in the tar sands also requires time-consuming construction of more infrastructure to support its extraction and delivery, which, along with the aforementioned factors, lead Hughes to believe the tar sands “can't be ramped up enough to offset declines of conventional oil”.

Iraq an exception?

One OPEC member that is an exception to all of this is Iraq, since the country has never been fully surveyed for oil. According to new geological surveys, Iraq is likely the only place left on Earth where a large amount of “cheap” oil is left to extract.

The country officially claims to have 143.1bn barrels of oil reserves, and holds potential for increasing its production capacity. But according to Ben Lando, an energy expert and bureau chief of the Iraq Oil Report publication, ongoing political instability continues to be a very large roadblock.

“Security forces have been prioritising oil sector security,” Lando told Al Jazeera. “But key issues have yet to be answered, such as the role of the central government and local governments, the role of foreigners, and how to properly manage – let alone share – the oil revenues. This creates problems within the political leadership circles, and thus creates animosity and stalls legislation and governance.”

Iraq, one of the founding countries of OPEC and currently the president of the organisation for this year, continues to struggle to boost its oil infrastructure after devastating wars with Iran, the 1990-91 Gulf War with the US, years of crippling sanctions, then the 2003 US invasion and occupation, from which the country continues to reel.

“So Iraq finds itself in a position where it has growing production, contracts with foreign oil companies to boost production drastically in less than a decade, unsettled relationships with Saudi Arabia and others, who have unsettled relationships with Iran,” Lando added. “Saudi and Iran want to maintain their roles – though Iran is struggling for many reasons to keep up oil production. And Iraq is trying to assert itself as a newly sovereign nation. All of this makes for interesting oil politics.”

Whipple, like Lando, points to Iraq's internal struggles as a huge roadblock to exploiting its oil.

“[Iraq has] a multitude of problems – political, ethnic, tribal, religious etc – that have prevented them from exploiting it [oil] as well or as quickly as the Saudis. Someday it may turn out the Iraq has more oil underground than Saudi Arabia.”

While Iraq has managed to increase production recently, Whipple says the most challenging times lay ahead.

“Now it gets much more expensive and complicated. They must build new pipelines, ports and water flooding facilities in the midst of suicide bombers blowing people up all over the place. We have no idea of what the Syrian uprising or the Iranian nuclear standoff will lead to, but there is much room for more trouble in Iraq.”

Peak oil

This comes alongside the phenomenon often referred to as “peak oil”, something that energy experts often explain as a point in history when the maximum production capacity for oil is reached.

“Peak oil is the time when the world's production reaches the highest point, then starts back down again,” Whipple said. “Oil is a finite resource, and [it] someday will go down, and that is what the peak oil discussion is all about.”

There are signs that peak oil may have already arrived.

The International Energy Agency (IEA) had to increase its forecast for average global oil consumption in 2011 to 89.5 million barrels per day, an increase of 1.2 million bpd over the previous year.

For 2012, the IEA is expecting another increase of 1.5 million bpd for a total global oil consumption of 91million bpd, leaving analysts such as Whipple to question how production will be able to keep up with increasing consumption. Whipple's analysis matches IEA data, which shows world oil production levels have been relatively flat for six years.

“This is getting very close to the figure that some observers believe is the highest the world will ever produce,” Whipple has written. He told Al Jazeera that peak oil could be reached at some point in the next month, or at the latest, within “a few years”.

The global economic crisis is now another factor in the peak oil equation, as many nations that import oil can no longer afford to do so at previous rates.

Whipple sees the world possibly going into an economic depression that will cut oil demand.

“Peak oil production may come soon because nobody, outside of the oil exporting countries which subsidise the stuff, can afford what they are using now,” he explained. “It may not be geological constraints that causes peak oil, but economic constraints.”

With economic growth being highly correlated with energy consumption, Hughes sees this as an indicator that “some nasty geopolitical things are shaping up”.

For example, Iran's oil minister, Rostam Qasemi, told Al Jazeera's Teymour Nabili that, if pushed, Iran would be willing to use oil as a political tool.

“We don't consider crude oil as a political tool. However, if necessary, we'll use it any way we need,” Qasemi said in the televised interview. He also said, “A disruption in Iran's oil can certainly have an effect on the global market.”

'An ugly situation'

Despite the global economic downturn, countries such as China and India continue to see an increasing demand for oil.

China, for example, saw their 2011 oil consumption increase 10.4 per cent, and India's also increased during the past year.

The US, by comparison, continues to be the global oil hog, as it imports more oil than China's total energy consumption.

Per capita, China consumes just over two barrels per person per year, while US consumption is 23 barrels per person, a fact indicative of the industrialised world consuming vast amounts compared with the rest of the planet.

The US consumes five times the world's average consumption, and 66 per cent of the world consumes lower than the world's mean per capita average, a situation that creates a huge inequity that raises many important geopolitical issues.

While people around the world are consuming more oil than ever, and demand increases daily, the infinite growth paradigm of economic growth is over – coupled with the fact that oil production by the industrial world has largely reached a plateau, the dual spectres of “peak oil” and economic stagnation are being raised.

“That's an ugly situation,” says Hughes. “What you're going to see now are volatile oil prices. Spikes that will impact the economy, then demand will fall like it did in 2008 in the US, and the price will drop for a while. But eventually it will become a matter of physical supply, and that's when things get really serious. And the US, as a superpower with global bases, is also importing 60 per cent of its oil, so I think it's going to be very difficult to secure a supply with ugly geopolitical things happening.”

Hughes says he sees increasing oil wars and economic crises stemming from them, with the oil supply and production crisis “playing out this decade”.

When Libya's oil production was out of operation, the world burned more oil each day than it was producing, thereby pulling down world oil stocks.

Now the EU debt crisis and the Iranian standoff are the top concerns.

“My guess would be the EU will not be able to rewrite the agreement, meaning that we should have a worldwide depression in the next year or so sending [oil] prices down,” said Whipple. “Then we have Iran – nobody in their right mind wants a war, but there is a huge amount of room for miscalculation in this situation. If anybody starts shooting, prices will go way up and demand will go way down. It is going to be an interesting year ahead.”

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