The end of the world as we know it

As fuel prices rocket, a new world energy order is emerging. It will bring with it a fierce international competition for dwindling stocks of oil, natural gas, coal and uranium, and also an epochal shift in power and wealth from energy-deficit states such as the US, Japan and the newly-industrialising China to energy-surplus states such as Russia, Venezuela and the oil producers of the Middle East. Michael Klare examines the likely consequences of the growing competition for the soon-to-be diminishing supply of energy

August 4, 2008
17 min read

Oil at $150 a barrel, up sevenfold in six years. Unleaded touching £1.20 per gallon, diesel at more than £1.30 at even the cheapest UK pumps. Gasoline at $4.50-plus – an undreamt-of height – in the US, with diesel topping $5, forcing many truckers off the road. Home heating oil at prices that many cannot afford. Jet fuel so expensive that the major carriers have cut back on routes and some low-cost airlines have ceased flying altogether.

This is just a taste of the latest energy-related news, signalling a profound change in how all of us, in the United Kingdom, the United States and around the world, are going to live – trends that, so far as anyone can predict, will become more pronounced as energy supplies dwindle and the struggle over their allocation intensifies.

Energy of all sorts was once abundant, making possible the worldwide economic expansion of the past six decades. This expansion benefited the US most of all, along with its ‘first world’ allies in Europe and the Pacific. Recently, however, a select group of former ‘third world’ countries – China and India in particular – have sought to participate in this energy bonanza by industrialising their economies and selling a wide range of goods to international markets. This, in turn, has created an unprecedented spurt in global energy consumption – an increase of 47 per cent in the past 20 years alone, according to the US Department of Energy.

A new world energy order

An increase this huge would not be a matter of deep anxiety if the world’s energy suppliers were capable of producing all the additional fuels needed. Instead, we face the frightening reality of a marked slowdown in the development of global energy supplies just as demand is rising precipitously. These supplies are not actually running out – although that will occur sooner or later – but they are not growing fast enough to satisfy soaring demand. The combination of rising demand, powerful new consumers and the contraction of supply is demolishing the energy-abundant world most of us are familiar with and in its place creating a new world energy order.

This new order will be characterised not only by fierce competition for dwindling stocks of oil, natural gas, coal and uranium, but also by a tidal shift in power and wealth from energy-deficit states such as China, Japan, and the United States to energy-surplus states such as Russia, Saudi Arabia and Venezuela. In the process, the lives of everyone on the planet will be affected in one way or another – with poor and middle-class consumers in the energy-deficit states experiencing the harshest effects.

There are five key trends in this new world order that will alter life on this planet.

1. Intense competition between older and newer economic powers for the available supplies of energy

Until very recently, the mature industrial powers of Europe, Asia and North America consumed the lion’s share of world energy supply, leaving the dregs for the developing world. As recently as 1990, the members of the Organisation of Economic Cooperation and Development (OECD), the club of the world’s richest nations, consumed approximately 57 per cent of world energy, and the Soviet bloc 14 per cent. Only 29 per cent was left for the entire developing world, which has about three-quarters of the world’s population.

But that ratio is now changing. With strong economic growth in the developing countries, they are consuming a greater proportion of the world’s energy output. By 2010, the developing nations’ share of global energy use is expected to reach 40 per cent; and if current trends persist their share will reach 47 per cent by 2030.

China, where a quarter of the world’s population lives, plays a critical role in all this. Although China accounted for only 8 per cent of world energy consumption in 1990, its rate of demand is rising so rapidly that it is expected to consume 17 per cent of world energy by 2015 and 20 per cent by 2025 – by which time, if current trends continue, it will have overtaken the US as the world’s leading consumer. India, which in 2004 accounted for 3.4 per cent of world energy use, is projected to reach 4.4 per cent by 2025. Consumption in other rapidly industrialising nations, such as Brazil, Indonesia, Malaysia, Thailand, and Turkey, is expected to climb as well.

To satisfy their growing requirements, these rising economic dynamos will have to compete with the mature powers for access to the world’s remaining untapped reserves of exportable energy. In many cases, these were acquired long ago by the private energy firms of the mature powers – companies such as Exxon Mobil, Chevron, BP, Total and Royal Dutch Shell – and are now controlled by the national oil companies (NOCs) of the major supplying nations. Of necessity, the new contenders for energy have developed a potent strategy for competing with the western ‘majors’: they have created state-owned companies of their own and made strategic alliances with the NOCs that now control vast oil and gas reserves in key producing nations.

China’s Sinopec, for example, has established a strategic alliance with Saudi Aramco, the nationalised giant that was once owned by Chevron and Exxon Mobil, to explore for natural gas in eastern Saudi Arabia and market Saudi crude oil in China. Likewise, the China National Petroleum Corporation (CNPC) will collaborate with Gazprom, the mammoth Russian state-controlled natural gas behemoth, to build pipelines and deliver Russian gas to China. Several of these state-owned firms, including CNPC and India’s Oil and Natural Gas Corporation, will collaborate with Petróleos de Venezuela SA (PdVSA) to develop the extra-heavy crude of the Orinoco belt that was once produced by Chevron. Many other such alliances have been formed or are under discussion, suggesting a new stage of energy competition in which the advantage long enjoyed by the western majors has been eroded by vigorous, state-backed upstarts from the developing world.

2. The insufficiency of primary energy supplies

The capacity of the global energy industry to satisfy demand is shrinking. By all accounts, the global supply of oil will expand for another half-decade before reaching a peak level of output and beginning to decline, while supplies of natural gas, coal and uranium will probably continue to grow for another decade or two before reaching their peak and commencing their own inevitable declines. In the meantime, global supplies will prove incapable of reaching the levels needed to meet demand.

Take oil. The US Department of Energy claims that world oil demand, expected to reach 117.6 million barrels per day in 2030, will be matched by a global supply that – miracle of miracles – will hit exactly 117.7 million barrels (including liquids derived from allied substances such as natural gas and Canadian tar sands) at the same time. Most energy professionals, however, consider this supply estimate highly unrealistic.

‘One hundred million barrels [per day] is now in my view an optimistic case,’ the CEO of Total, Christophe de Margerie, told a London oil conference in October 2007. ‘It is not my view; it is the industry view, or the view of those who like to speak clearly, honestly, and [are] not just trying to please people.’

Similarly, the authors of the Medium-Term Oil Market Report for 2008-2012, published in July 2007 by the International Energy Agency, an affiliate of the OECD, concluded that world oil output might rise as high as 96 million barrels per day by 2012, but was unlikely to go much beyond that level as older fields went into decline and a dearth of new discoveries made future growth impossible.

Daily business-page headlines point to a matrix of clashing trends: demand will continue to grow as hundred of millions of newly-affluent Chinese and Indian consumers line up to purchase their first automobiles; key older fields such as Ghawar in Saudi Arabia and Canterell in Mexico are in decline or expected to be so soon; the rate of new oilfield discoveries proves disappointing year after year. We can expect that oil shortages and high prices will prove a constant source of economic hardship.

The picture for other fuels is slightly better – but only just. Even if global output of natural gas, coal and uranium will continue to grow after the peaking of oil, the inevitable contraction of petroleum supplies will produce a corresponding increase in demand for these fuels, and so they will be depleted at an ever-increasing rate – moving their own peak closer and increasing their cost.

3. The painfully slow development of alternatives

It has long been evident that new sources of energy are needed to compensate for the disappearance of existing fuels, and to slow the buildup of climate-changing ‘greenhouse gases’. Wind and solar power have gained a foothold in some areas and ethanol provides a small but growing percentage of the world’s transportation fuel. Moreover, a number of other innovative energy solutions have been developed and tested in university and corporate laboratories. But these alternatives, which contribute only a tiny proportion of the world’s fuel supply, are simply not being developed fast enough to avert the multifaceted global energy catastrophe that lies ahead.

According to the US Department of Energy, renewable fuels, including wind, solar, biofuels, and hydropower, along with ‘traditional’ fuels such as firewood and animal dung, accounted for just 7.4 per cent of world energy use in 2004; biofuels added another 0.3 per cent. Meanwhile, fossil fuels – oil, coal, and natural gas – supplied 86 per cent of world energy, nuclear power another 6 per cent. Based on current rates of development and investment, the department offers the dismal projection that fossil fuels will still account for exactly the same share of world energy in 2030 as in 2004: 86 per cent. The expected increase in the share claimed by renewables and biofuels is so tiny as to be meaningless.

For global warming, the implications are nothing short of catastrophic. Increasing reliance on coal (especially in China, India and the US) means that global emissions of carbon dioxide are projected to rise by 59 per cent over the next quarter-century, from 26.9 billion metric tons in 2004 to 42.9 billion in 2030. The meaning of this is simple: if these figures hold, there is no hope of averting the worst effects of climate change.

When it comes to global energy supplies, the implications are nearly as dire. To meet soaring energy demand, we would need a massive influx of alternative fuels, which in turn would require investment in the trillions of dollars to ensure that the most promising options move from the laboratory to full-scale commercial production. But that is not on the cards. Instead, the major energy firms (backed by lavish US government subsidies and tax breaks) are putting most of their profits from rising energy prices into share buy-back schemes and vastly expensive (and environmentally questionable) schemes to drill for oil and gas in Alaska and the deep, dangerous waters of the Gulf of Mexico, the Arctic and the Atlantic. The result? A little more oil and gas at exorbitant prices – with accompanying ecological damage – while non-petroleum alternatives limp along at a snail’s pace.

4. A steady migration of power and wealth from the energy-deficit to the energy-surplus nations

There are a few countries – perhaps a dozen altogether – that possess enough oil, gas, coal and uranium (or some combination thereof) to meet their own energy needs and provide a significant surplus for export. These few privileged states will be able to extract increasingly beneficial terms from the much wider pool of energy-deficit nations dependent on them for vital supplies of energy. This will result in growing mountains of petrodollars being accumulated by the leading oil producers, and increasingly it will mean political and military concessions.

In the case of oil and natural gas, the number of major energy-surplus states can be counted on two hands. Ten states possess 82.2 per cent of the world’s proven oil reserves. In order of importance, they are: Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates (UAE), Venezuela, Russia, Libya, Kazakhstan and Nigeria. The possession of natural gas is even more concentrated. Three countries – Russia, Iran, and Qatar – harbour an astonishing 55.8 per cent of the world supply. All of these countries export more oil and gas than they consume, and so are in the enviable position of being able to cash in on the dramatic rise in energy prices and extract from potential customers whatever political concessions they deem essential.

The transfer of wealth is already mind-boggling. The oil-exporting countries collected an estimated $970 billion from the importing countries in 2006; the take for 2007, when finally calculated, is expected to be far greater. A substantial fraction of these dollars, yen and euros have been deposited in sovereign-wealth funds (SWFs), the giant investment accounts established by the oil states and deployed for the acquisition of valuable assets around the world. In recent months, the Persian Gulf SWFs have been taking advantage of the financial crisis in the US to purchase large stakes in strategic sectors of its economy.

In November 2007, for example, the Abu Dhabi Investment Authority (ADIA) acquired a $7.5 billion stake in Citigroup, America’s largest bank holding company. In January 2008, Citigroup sold an even larger share, worth $12.5 billion, to the Kuwait Investment Authority (KIA) and several other Middle Eastern investors, including Prince Walid bin Talal of Saudi Arabia. The managers of ADIA and KIA insist that they do not intend to use their newly-acquired stakes in Citigroup and other US banks and corporations to influence US economic or foreign policy, but it is hard to imagine that a shift of this magnitude – which can only gain momentum in the years ahead – will not translate into political leverage.

In the case of Russia – which has risen from the ashes of the former Soviet Union as the world’s first energy superpower – it already has. Russia is now the world’s leading supplier of natural gas, its second largest supplier of oil and is a major producer of coal and uranium. Though many of these assets were briefly privatised during the reign of Boris Yeltsin, most were brought back under state control during the presidency of Vladimir Putin (in some cases, by questionable legal means). Putin then used these assets in efforts to extract political and economic concessions from former Soviet republics that were reliant on Russia for the bulk of their oil and gas supplies. The EU countries sometimes expressed dismay at these tactics – but they, too, are significantly dependent on Russian oil and gas, and so have learned to mute their protests and otherwise accommodate to growing Russian control over Eurasian energy flows.

In extending Russia’s energy power throughout Eurasia, Putin usually relied on Gazprom, the state-controlled natural gas behemoth that provides about a quarter of OECD Europe’s gas supply. Gazprom is also Russia’s leading source of foreign earnings and its top source of government income. For years, the chairman of Gazprom was a close political ally of Putin’s from St Petersburg, Dmitri Medvedev. When obliged to step down as president under a constitutional ban on serving more than two consecutive terms, Putin picked Medvedev to succeed him. In a sense, Gazprom and the Russian state have become one and the same, and Russia itself has emerged as a model for the new energy world order.

5. A growing risk of conflict

Throughout human history, major shifts in economic and political power on this scale have normally been accompanied by violence – in some cases, protracted violent upheavals. Either the states at the pinnacle of power have fought to prevent the loss of their privileged status to others, or challengers have fought to topple those at the top of the heap.

Will this happen now? Will energy-deficit nations launch campaigns to wrest the oil and gas reserves of the surplus states from their control – the Bush administration’s war in Iraq might already be thought of one such attempt – or to eliminate competitors among their deficit-state rivals?

Certainly there are many reasons to argue against such scenarios. The high costs and risks of modern warfare are well known, and there is a widespread perception that energy problems can best be solved through economic means. Nevertheless, the major powers are employing military means in their efforts to gain advantage in the global struggle over energy, and no one should be deluded on the subject. These endeavours could easily lead to unintended escalation and conflict.

One conspicuous use of military means in the pursuit of energy is the regular transfer of arms and military support services by the major energy-importing states to their principal suppliers. Both the US and China, for example, have stepped up their deliveries of arms and equipment to oil-producing states such as Angola, Nigeria and Sudan, and, in the Caspian Sea basin, Azerbaijan, Kazakhstan and Kyrgyzstan. The US has placed particular emphasis on suppressing the armed insurgency in the vital Niger Delta region of Nigeria, where most of the country’s onshore oil is produced. Beijing has emphasised arms aid to Sudan, where Chinese-led oil operations are threatened by insurgencies in both the south and Darfur.

Russia is also using arms transfers as a instrument in its efforts to gain influence in the major oil and gas producing regions, especially the Caspian Sea basin and the Persian Gulf. Its urge is not is not to procure energy for its own domestic use, but rather to dominate the flow of energy to others. In particular, Moscow seeks a monopoly on the transportation of central Asian gas to Europe via Gazprom’s vast pipeline network; it also wants to tap into Iran’s mammoth gas fields, further cementing Russia’s control over the trade in natural gas.

The danger, of course, is that such endeavours, multiplied over time, will provoke local arms races in these areas, exacerbate regional tensions, and increase the danger of great-power involvement in any local conflicts that do erupt. History has all too many examples of such miscalculations leading to wars that spiral out of control: think of the years leading up to the first world war.

What this adds up to is simple and sobering: the end of the world as we’ve known it. In the new, energy-centric world we have all now entered, the price of oil will dominate our lives and power will reside in the hands of those who control its global distribution.

In this new world, energy will govern our lives on a daily basis. It will determine when, and for what purposes, we use our cars; how high (or low) to turn our thermostats; when, where, or even if, to travel; what foods to eat (given that the price of producing and distributing many meats and vegetables is profoundly affected by the cost of oil and the allure of growing crops for ethanol); for some, where to live; for others, what business to engage in; and, for all of us, when and under what circumstances to go to war or to avoid foreign entanglements that could end in war.

This leads to a final observation: The most pressing decision facing the next president of the United States (along with the leaders of other major energy-consuming nations) may be how best to accelerate the transition from a fossil-fuel-based energy system to a system based on climate-friendly energy alternatives.

Michael Klare is a professor of peace and world security studies at Hampshire College in Amherst, Massachusetts. He is the author of several books, including Resource Wars, Blood and Oil, and, most recently, Rising Powers, Shrinking Planet: the new geopolitics of energy (Oneworld, £16.99)

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