James Kunstler -- Clusterfuck Nation
Jan. 15, 2006 -- The
American public is understandably happy to see the bottom fall out of
the oil futures market. But temporary circumstances are only sending
them another false signal that everything is perfectly okay on the oil
scene. And it only reinforces the foolish belief that when prices go up
it is solely because corporate finaglers tweak them up on purpose. In
fact, these days it's the other way around: often prices go down
because corporate finaglers are tweaking the markets, dumping
positions, playing shorts rather than acting like real oil users
bidding on real contracts for delivery for real purposes like making
gasoline. When oil goes up, as it certainly will again, it is primarily
because of geology -- what's left in the ground -- and secondarily
because of geopolitics -- where it's left in the ground (and what's
happening there).
The
supernaturally warm winter temperatures have also played a part,
keeping inventories high while the home furnaces idle. (Last week it
was 70 degrees in Albany, NY.) There is surely some demand destruction
in the background. Third World nations are increasingly dropping out of
the bidding (meaning their generators quit making electricity and their
trucks stop running). And a contracting U.S. economy may also play a
part. But even these circumstances may not overcome the supply problems
in the real oil world. Here's what's going on:
As
a baseline, it helps to understand that the four largest super-giant
oil fields of the world are now in decline. They have been responsible
for producing 14 percent of the world's oil supply. They are now old
and tired (thirty years is old in the oil world) and they are in
depletion. These are The Cantarell field of Mexico, the Burgan field of
Kuwait, the Daqing field of China, and the granddaddy of them all, the
Ghawar field of Saudi Arabia.
The
Cantarell field is a horror story. Pemex, the Mexican national oil
company, tried to conceal the dire developments, because Cantarell
alone is practically the whole Mexican oil industry. But it is now
self-evident that Cantarell is crashing, with a 40 percent annual
decline rate projected ahead, meaning a couple of years and it's out.
Mexico is America's second largest source of oil imports (after No. 1
Canada and before No. 3 Saudi Arabia). When Cantarell crashes, the
Mexican oil industry will crash and the United States will be out a major source
of imported oil. The United States will also be out of imports that were so
conveniently close they could be shipped by pipeline rather than tanker
ships. For its part, Mexico will be out of a major source of export
hard currency revenue and as its economy crashes will probably become
even more politically unstable -- meaning more Mexican citizens
desperately seeking to get out. Guess where to.
Burgan
is is in decline. The Kuwaitis announced it themselves last year.
Daqing has been the major source of China's domestic oil, which is
otherwise paltry, meaning Daqing's decline will only make China more
desperate for imports. Ghawar remains shrouded in mystery, since Saudi
Aramco does not welcome outside audits. But at 50 years old it is well
past the mean age of peak production for oil fields and that alone
probably tells the story. Beyond that, we know that Ghawar is producing
with a (best case) 35 percent "water cut" (and perhaps much higher).
They have to pump seawater into the field (a standard practice) to keep
the oil coming out under pressure. The trouble is that they are getting
this substantial water cut after redeploying their equipment for
horizontal drilling -- an ominous sign. Saudi Arabia declared last year
that it would increase production to 12 million barrels a day by 2009.
By close of 2006, it appeared to have trouble producing 9 million, with
prospects for a 4 percent annual decline rate in the years just ahead.
Elsewhere,
Iran is not only past peak, but its domestic demand is so high that it
cannot maintain its export levels. The North Sea, which saved the
West's ass through the 1990s, is now crapping out at a steep decline
rate. Iraq is on track to Palookaville, despite substantial reserves,
and even if, by some miracle, its tired old oil infrastructure survives
the war, the United States may lose access to future production for geopolitical
reasons that should be obvious.
Venezuela
is past peak for conventional liquid crude and hurting badly for
technical expertise to work its oil fields since Hugo Chavez purged the
state oil company's management. Last year, Venezuela had to import
Russian oil to avoid defaulting on contracts. Whatever the true
condition of Venezuela's industry, Chavez is not disposed favorably
toward the United States -- he hosted Iran's president Ahmadinejad last week to
signal that both of them were on the same page where the United States was
concerned.
The
situation in U.S. production is grim. We peaked in 1970. East Texas is
near total depletion, with a 99 percent water cut (it produces
"oil-stained water). Prudhoe Bay in Alaska now has a 75 percent water
cut. We're on track to produce under 5 million barrels a day in 2007
(down from a 1970 high of about 10 million), and heading relentlessly
further down year-on-year. We burn through more than 20 million barrels
a day. Do the math and see above (re: potential imports) for our
prospects.
So,
for now the U.S. public (here in the East, anyway) is enjoying both a
winter-of-no-winter and a season of comfortably lower oil prices. The
financial markets are doing a triumphal dance in expectation of soaring
equity values. And the news media is lumbering along with its head up
its ass.
Last
week, however, the U.S. Senate Committee on Energy and Natural Resources,
in an extraordinary session, heard testimony that the nation is in
grave danger of a permanent oil crisis. Some of these senators affected
to be shocked and surprised. What planet have they been living on? What
is the nation getting for the hundreds of million of dollars paid to
their staffers? Outgoing Republican chair, Senator Pete Domenici
(R-NM), said to the witnesses that “what you told us today is
absolutely startling with reference to the future.” Is it too early for
a dumbfuck of the year award?
Perhaps
the most valuable message the committee got came from Dr. Flynt
Leverett from the New America Foundation, who said: “… there is no
economically plausible scenario for a strategically meaningful
reduction in the dependence of the United States and its allies on
imported hydrocarbons during the next quarter century.” That's the
straight dope and we'd better stop pretending otherwise.
We'd
also better stop pretending that alt.fuels such as ethanol, bio-diesel,
coal liquids, or hydrogen will allow us to keep up the happy motoring.
We have to make other arrangements for daily life. We don't have a
moment to lose. Our "to do" list is very long. If we waste our time in
recrimination or hand wringing we are going to lose the things we value
most, including an orderly society. So, don't be fooled by the
temporary fall in oil prices. We're in the zone of the long emergency.
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