(OPE) Gulf oil--How important is it, anyway

From: rakeshb@STANFORD.EDU
Date: Fri Apr 18 2003 - 09:37:41 EDT

Yergin who is now an establishment thinker suggests that this war aimed
to eliminate weapons of mass destruction and to prevent Saddam from
manipulating the supply of oil, though Yergin himself shows here that
Saddam could have done no such thing.
I should mention here Mark Jones who articulated the oilism thesis on
which I challenged him (as well as Michael Klare) in private
correspondence  (Fred however seem to have been convinced by Mark's
argument). We disagreed strongly on almost everything...from oilism to
Stalinism. Yet I should like to mention one of his many memorable posts,
beautifully written though eminently controversial as was almost
anything which he posted; here he told the story of Marx, of how through
the sheer force of his personality he could lead even those born the
luckiest into the private hell of poverty for the sake of revolutionary
aspiration and how this same man became so disillusioned that his last
years were spent in anthropological reflection on societies far away
from that which he had sacrificed his life to overthrow.

Sunday, April 13, 2003 (SF Chronicle)
Gulf oil -- How important is it, anyway?
Daniel Yergin

   In the midst of the second world war, Franklin D. Roosevelt dispatched
America's most eminent geologist, Everette Lee DeGolyer, to the Middle
   DeGolyer spoke with unique authority. As a young man at the beginning of
the 20th century, he had discovered the huge well that inaugurated the
"golden age" of Mexican oil; in the 1920s, he had been such a relentless
promoter of the new seismic exploration technology that he was said to be
"crazy with dynamite."
   Roosevelt wanted DeGolyer to answer a fundamental question: "How
are Persian Gulf oil reserves to the future of the world?" That same
question is with us once again, starkly posed by the war in Iraq. It is
all the more important because of the widespread belief that the Iraq
crisis is not about weapons of mass destruction but, rather, in some murky
way, about oil. Yet such assertions are often made in isolation, without
an understanding of the overall world oil scene.
   The question may have been the same, but the starting point for
mission in 1943 was very different from today. It was only 16 years
earlier, in 1927, that oil had been discovered in Iraq. Found near Kirkuk,
in the Kurdish part of Iraq, it still counts as the first commercial find
of oil in any Arab country, and it opened up the Arab world to petroleum
development. It would take until 1938 for oil to be found in neighboring
Saudi Arabia and Kuwait.
   Then came the second world war. Exploration efforts were suspended and
wells were capped in fear of a Nazi advance. As it turned out, Field
Marshal Erwin Rommel and the Afrika Korps were stopped at the Battle of El
Alamein in late 1942.
   But the war left no doubt of the importance of oil. The U-boats had come
very close to cutting the tanker pipeline from the United States to
Europe. Hitler's forces almost made it to Baku, on the Caspian Sea, the
main source of Soviet oil. Japan, with its oil supplies dwindling, turned
to kamikaze attacks which, among other things, did not require fuel for a
return trip. Rommel had written what would prove to be the epitaph for the
German oil position during the war: "Shortage of petrol! It's enough to
make one weep."
   For his part, Roosevelt knew that the U.S. was sitting on a great arsenal
in the form of the nation's own oil supplies. The U.S. oil fields,
particularly along the Gulf Coast and in the Southwest, were mobilized for
the war effort, and they supplied six out of the seven billion barrels the
Allies were to use in the war.
   In the course of his 1943 trip, DeGolyer visited Saudi Arabia, Kuwait,
Iraq and Iran to analyze their respective potentials. The conclusion he
delivered when he returned to Washington was startling: "The center of
gravity of world oil production is shifting from the Gulf-Caribbean area
to the Middle East and the Persian Gulf area, is likely to continue to
shift until it is firmly established in that area." But even DeGolyer
could not have imagined by how much. Today, the Persian Gulf supplies more
than 20 million barrels a day -- more than three times what the United
States produces.
   That the Persian Gulf's resources, among the cheapest to produce in the
world, are of central importance to the health of the world economy can
hardly be doubted. Altogether, the region provides more than a quarter of
the world's oil, most of it flowing to Europe and, increasingly, Asia.
   Yet these resources exist in a much larger and more diverse network of
global oil production. Losing sight of that is to lose sight of the
   Some of today's highly charged rhetoric would have one believe that Iraq
is uniquely important to world oil supply. That simply is not true. It
amounts to just 3 percent of total world supply, and technology is making
available new supplies in ways that most people do not realize. Moreover,
in terms of consumption, there are major regional differences. The U.S.
gets 70 percent of its crude supplies either from its own production or
from neighboring countries in North and South America.
   In contrast to today's crisis, the 1990-91 Persian Gulf crisis was more
directly about oil and Iraq's drive to dominate the region. In 1990 Iraq
invaded Kuwait and sought to annihilate it as an independent nation.
Saddam's objective was, as it had been when he invaded Iran a decade
earlier, to control, directly or indirectly, a large part of Persian Gulf
supplies and bend them to his political and military purposes.
   The central focus this time is on weapons of mass destruction and Iraq's
failure to comply with 17 U.N. resolutions going back to 1991. There is an
oil dimension but it is not about "oil protectorates." It is about
geopolitics and the security and the stability of the Gulf's supplies.
Certainly, a Saddam Hussein regime equipped with these weapons would have
been in a position to intimidate the region and to manipulate supply and
threaten the security of the world economy.
   Such a threat would have become all the more critical when one realizes
that world demand continues to grow. A decade from now the world will
probably be consuming 20 percent more oil than today. What this means is
that today's 77 million barrels a day will become more than 90 million
barrels a day by 2013.
   The main growth will come from the developing world and, in particular,
China and India. As China continues on its remarkable course of economic
growth, so its oil consumption continues to increase. Today it uses twice
as much oil as it did a decade ago. It's the third largest consumer after
Japan, and soon will overtake Japan to become the second largest in the
   For decades, China, inspired by "the heroic spirit" of the workers in its
great oil field at Daqing, in Manchuria, was committed to
self-sufficiency. That changed in 1993 in what turns out, in oil terms, to
have been a very significant year. For that was the year that China -- no
matter how heroic the spirit -- simply could not do it on its own any
more, not with an economy that was growing 8 percent a year. It became a
net importer. And its imports have continued to grow.
   Walk into the headquarters in Beijing of any of China's three
national oil
companies and you will see how China is responding.
   In the lobbies of PetroChina, Sinopec and CNOOC -- three companies
to reform, make more efficient and partially privatize China's oil
industry -- there are flashing signs that tell you each company's share
price on the world stock market at that moment. This is not exactly what
you would expect to see in what used to be known as a centrally planned
economy. These scenes vividly capture the shift from state control to
markets. Breaking up the old state monopoly and subjecting the newly born
oil companies to the discipline of capital markets is one of the most
important ways that China has sought to cope with the country's growing
oil demand.
   But where will the new supplies come from?
   That brings us back to the Persian Gulf. After all, the region has been
credited with holding two-thirds of the world's total oil reserves. But
reserves are not necessarily a guide to production.
   Iran, hobbled by technological and organizational problems and by
political discord, has seen its production decline by 35 percent over the
past 25 years. Iraq's capacity has declined by 20 percent over the past 10
years, and it is now estimated that it will take two to three years, and
up to $5 billion, to get back to where Iraq was a decade ago and several
years more to begin to significantly ramp up production beyond that.
   This contrasts starkly with Saudi Arabia, which has kept itself at the
forefront of technology. It usually produces about 8 million barrels per
day. It also maintains at least an additional 2.5 million barrels per day
of "spare" capacity that it can bring into production as a stabilizer, as
it has been doing, first in the face of the disruption of Venezuelan
supply and now to meet the shut-down of Iraqi production.
   But what is striking is the diversification of supply sources on a global
basis. In 1975, the Persian Gulf produced 40 percent of world output of 52
million barrels per day. Today, world consumption is 77 million barrels
per day. Yet the Persian Gulf's output has grown only slightly, with the
result that its output has declined to less than 30 percent of total world
   Over the years, many new supply sources have come in, beginning with the
North Sea and the Alaskan North Slope after the 1973 oil crisis. It's
never easy. Every year, oil companies spend tens of billions of dollars to
find and develop new reserves to replace the barrels they have produced in
previous years.
   Much of this work is governed by the "law of long lead times"; it can
up to a decade to bring a major new oil field into operation. For the
companies, it always seems an uphill struggle.
   Right now, the most dramatic expansion is unfolding in the Russian oil
industry, in what my colleague Thane Gustafson calls "the miracle in the
Russian oil fields." Over the past three years, Russian output has
increased 25 percent. Today Russia is the world's second largest exporter,
exceeded only by Saudi Arabia.
   The 1990s collapse in output that resulted from the implosion of the
Soviet Union has been reversed. There are many reasons: a reformed
industry, largely privatized, working toward world standards, introducing
new technology. But the heart of the matter was summed up a few weeks ago
by Mikhail Khodorkovsky, CEO of the Russian oil major, Yukos: "We now
apply an economic test to every stage of what we do."
   A signal of the change was the announcement last month by BP and one of
the other Russian oil majors, TNK, that they are establishing a
multibillion dollar joint venture to accelerate development of Russian
production. The thing to look for over the next year or two is the firming
up of plans by Moscow for new pipelines that will carry Russian oil to
China or elsewhere in Asia and, even more dramatically, to Murmansk, the
ice-free port on the Arctic Ocean.
   During the second world war, Murmansk is where the American freighters
delivered the Lend-Lease goods that supported the Soviet battle against
   A half-dozen years from now, the tankers may be sailing in the other
   A similar resurgence is taking place to the south, in the Caspian Sea and
Central Asia. Output is increasing in Kazakstan and Azerbaijan. As with in
Russia, the key is transportation. Railway tank cars will not suffice for
the future volumes, and new pipelines are critical. Recently, Heidar
Aliyev, the president of Azerbaijan, stood up in the ballroom of a hotel
in Washington, D. C., to tell the story of how it has taken eight years to
get plans to gel for a pipeline to transport Azeri and possibly Kazak oil
to the world markets. But now one leg is built -- and the Japanese-made
pipe is being welded for the next segments of a huge pipeline that will
move almost a million barrels a day from Baku through Georgia, down
through Turkey to the Mediterranean port of Ceyhan, which is accessible to
super tankers. This new Baku-Ceyhan pipeline will be one of the linchpins
of world supply and energy security in the years ahead.
   Another growing source of oil will be West Africa, which by 2006 will
overtake the North Sea in terms of output. But the real competition for
market share looks to be between Russia and the Caspian on one side, and
the Middle East on the other. The race will be affected by everything from
governments' investment policies to local activism. At this point, it
looks as though Russia and the Caspian will be about even with the Middle
East, each adding 4 to 5 million barrels a day.
   People sometimes seem to think of "reserves" as a fixed amount of oil,
laid down by nature. In fact, "reserves" are a more elastic concept,
determined not only by geology, but also by the interaction of economics,
politics and technology.
   After the first world war, fear of an "oil famine" gripped the world. But
then fresh areas for exploration opened up, including the new nation of
Iraq, which was cobbled together at the Versailles conferences out of the
three eastern provinces of the old Ottoman Turkish Empire. During this
time, the industry applied new technology. Building upon techniques used
during the first world war for detecting enemy gun emplacements, it
developed the seismic exploration championed by DeGolyer. This quickly
became a critical tool for new oil exploration.
   Today, a major technological revolution is unfolding, known as "DOFF" --
the "digital oil field of the future." This brings together a panoply of
information and control technologies, remote sensing mechanisms,
"intelligent drilling" and highly accurate measurement tools to make
exploration and production far more exact and targeted. The consequence
will be to substantially lower costs.
   As a result, physical supplies that were previously too expensive or too
difficult to produce will now become economically feasible. The impact of
DOFF will be enormous. Over a decade, DOFF could expand world oil reserves
by 125 billion barrels -- more than the known proved reserves of Iraq.
   That is still in the future. In the meantime, although almost completely
overlooked, something very important has just happened to supply. This
past year saw the first major increase in world oil reserves since the
   The new increase is some 175 billion barrels. This is a lot of oil -- 50
percent more than Iraq's proven reserves and two-thirds that of Saudi
   These new reserves, however, are not in the Middle East but in Canada.
   Advances in the technology for handling the oil sand deposits in the
province of Alberta have, by cutting production costs almost in half,
moved this enormous volume of potential supply into the economically
recoverable "proven reserves" column. For the first time since Everette
DeGolyer's report to President Roosevelt, there has been a significant
decline in the Persian Gulf's share of total world oil reserves from 66 to
56 percent.
   The point here is that world oil supplies are not some finite constant
sum. Rather, the picture is dynamic and changing. The reserve picture will
continue to shift. It's altogether possible that if and when a "new" Iraq
sorts out its arrangements and reintegrates into the world economy, new
exploration will substantially increase its reserves, once again pushing
up the Persian Gulf's share of the total.
   What DeGolyer foresaw 60 years ago is true -- the resources of the
Gulf are a tremendous strategic asset for the world economy, one of the
foundations for the standard of living in the developed world and a
critical fuel for economic growth in the developing world. But what is
also true is that if one is looking for oil, there are lots of other
places to go.
   How much from where?
   That will be determined not just by nature's endowment, but also by
technology, economics and, more so than most recognize, by the political
choices that countries make about how they want to develop their resources
and what they want to earn from the world economy.
   Daniel Yergin is author of the 1992 Pulitzer Prize-winning, "The Prize:
The Epic Quest for Oil, Money, and Power." He is chairman of Cambridge
Energy Research Associates. His television series, "Commanding Heights:
the Battle for the World Economy," based on the book of the same name,
will air nationally on PBS in May. A version of this piece ran in the
Financial Times.
Copyright 2003 SF Chronicle

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