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Where will the world find all this energy? Oil, like water, is a finite
resource. However, unlike water, we have been reasonably successful in
finding more of it. Thanks to intensive exploration, the world’s proven
oil reserves grew from 660 billion barrels in 1980 to more than 1 trillion
in 1990. Despite consumption, oil reserves have hovered over 1
trillion barrels ever since. Technology makes it possible to stretch
existing oil fields further than ever before. While conventional drilling
techniques can leave up to 70 percent of oil in the ground, more sophisticated
drilling techniques can help lower this “leave rate” to below 30
percent. Deepwater drilling ships are extracting oil from the shores of
Texas, Brazil, and West Africa at ocean depths of 8000 feet. All told,
technologies that have already been developed could increase the
world’s recoverable oil supply by another 50 percent.
Although the world is not about to run out of oil, our continued
reliance on this fossil fuel carries several hidden costs. For starters,
there are the environmental effects. Oil use contributes to local air pollution
and climate change. Pipeline and roadway construction, seismic
testing, or the routine operation of oil facilities can disrupt sensitive
natural habitats. Oil spills are extremely damaging to rich marine environments,
harming fish, aquaculture, and marine mammals, as well as
polluting beaches and marinas. The journal Science reported in
December 2003 that the Exxon Valdez oil spill continues to have an
impact on the ecosystem in Alaska’s Prince William Sound, 15 years
after the disaster took place.
Second, while we have become more adept at finding and extracting
oil, most of the world’s proven crude oil reserves (67 percent) remain in
the politically volatile Middle East. The IEA estimates that
by 2030, 43 percent of the world’s oil will come from the region—a 50
percent increase from today. Saudi Arabia alone sits atop of 25 percent
of the world’s oil reserves and maintains a large amount of excess production
to manage sudden price shifts. It was the rapid release of excess Saudi
oil in 2003 that kept prices from rising exponentially in the aftermath of
the U.S. invasion of Iraq and political turmoil in Nigeria and Venezuela.54
That much oil concentrated in just one country has some analysts
worried. Saudi Arabia’s King Fahd is 81 years old and not in good health,
and his brother Abdullah, 80, is next in the line of succession, followed
by another brother, Sultan, who is 76. Beyond that, it’s anyone’s guess
who will be the next Saudi leader.
The uncertain succession of the monarchy is coupled with economic
malaise. While 12,000 Saudi princes live richly off the national output of
oil and taxes, the country has an unemployment rate of 20 percent. As a
result, Saudi Arabia, a conservative religious country, is full of young
people who don’t have enough to do, truly resent the dominance and
incursion of Americans into their society, and have learned from their
textbooks about the duty of Muslims to wage jihad.
Opinion is divided as to whether a reactionary, anti-Western
regime in Saudi Arabia would go so far as to refuse selling oil to the
United States or Europe again, as occurred during the oil embargo of
1973. It’s not outside the realm of possibility. Nor is it unthinkable in
the post-9/11 world that militants could strike at the heart of the
monarchy’s power by decimating the oil fields with weapons of mass
destruction.
Similar risks are at play in Central Asia, where conservative estimates
indicate there could be some 100 billion barrels of oil in the Caspian basin.
However, the oil wealth in the region could prove more of a curse than
blessing. The region is already home to a number of authoritarian
regimes. As we’ve seen elsewhere, oil brings with it the possibility of political
instability, corruption, environmental degradation, and civil wars.
Russia, which at 60 billion barrels has the largest oil reserves of any
country outside the Middle East, is the “X factor” in the great oil supply
equation. Russia’s daily oil output is comparable to that of Saudi
Arabia’s. However, to continue to be an oil power after 2010, Russia will
need to invest in new fields, which will require a huge influx of foreign
investment. Foreign investors, however, remain somewhat skittish about
pouring money into Russian oil development, owing to the country’s
endemic corruption, bureaucratic infighting, weak laws protecting property
rights, and economic volatility.
“The rule of law is not widespread; corruption is widespread,”
observes BP CEO John Browne.57 BP lost $200 million in what it claims
was a rigged Russian bankruptcy case in 1998. But Browne believes
that the risks of investing in Russia are still less than doing business in
the politically turbulent Middle East or West Africa. In February 2003,
the company announced it had returned to Russia in a $6.75 billion deal
to acquire a 50 percent stake in a newly merged company formed from
Tyumen Oil and Sidanco Oil. “Where everything is cut and dried there
is no opportunity,” Browne notes. Even if Russian oil production rises
to its full potential, it is far from clear that the country could be a surplus
swing producer like Saudi Arabia.
Given all of the volatility surrounding oil, it is fortunate that oil’s
share of the world energy pie continues to decline, from 50 percent in
1975 to 40 percent in 2003. This trend is due to consumers substituting
natural gas, coal, and other more efficient, stable, and cheaper fuels
for oil. For example, the Royal Dutch/Shell Group is likely to expand its
natural-gas operations to take advantage of rising demand in the United
States and the Asia-Pacific region. According to Shell’s former
Chairman, Sir Philip Watts, “demand for gas as a fuel may outstrip oil
in the next two decades, and Shell is moving aggressively to establish
positions in regions that are already experiencing that growth.”
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