I posted a piece in February called Have We Just Gone Over the Oil Hump? that looked not at markets or research but rather at the behaviour, principally of the Saudis, and what it might mean. Back then their behaviour was erratic and unfathomable unless there was something going on with supply. Back then the price was around $36 a barrel. We'll be lucky to se that again.
This time however, I want to look at risk taking and what it says about underlying drivers. What we have seen throughout the Bush administration in the US, is a series of massive, cosmically massive risks being taken; I'll look at the details in a moment, and then, a few months ago, someone took another massive risk. They sent a plane load of mercenaries to stage a coup in Equatorial Guinea. They touched down in Harare on the way and Robert Mugabe busted them. But the real risk appears to be that the son of a former British PM and a peer of the British Real may have been involved.
What the hell is going on?
Some people take stupid risks, they don't understand the danger they are in and, while often it doesn't matter, sometimes they get killed. That's not what I'm talking about. I'm talking about people who have plenty of time and the resources to think through a course of action, weigh its risks, and make their decisions based on those rational evaluations.
There has been a large amount of speculation that the US and UK war on Iraq "was all about oil" and the assumption has been that a bunch of greedy oil people just fancied illegally invading a sovereign nation on trumped up charges in the face of international opposition. The default argument is, there were no WMD or missiles and there is a huge lake of oil under Iraq and the US needs the oil so it must have been the reason. Not impossible, but it requires a level of cynicism that even I can't manage, and I'm a world class cynic.
On the other hand, there must have been a reason to take that appalling level of risk. To whit:
1. The Bush administration has successfully, and despite significant constitutional risk, refused to supply to the congress even the names of the people who were consulted by the Vice-Presidential task force on energy.
2. The war on Iraq was instigated on information that, under any other circumstances, would not get you convicted of shoplifting. Documents like the plainly fake uranium buys from Niger and the British government plagiarism of a 10 year old doctoral thesis, the breach of every precautionary rule of intelligence, especially the ones about getting multiple sources without a vested interest who are already on your payroll and the semantic sin of removing qualifications like "may", "might" and "could possibly" to leave bald assertions that the speakers know they can't justify with facts. You have to ask what might justify this massive level of risk.
3. The abortive attempt to gain the support of the United Nations which led to a Presidential assertion that the security Council would be forced to "put its cards on the table" in a final vote, that the US then failed to press home. Apart from showing the weakness of the case and the level of resistance it in essence threw away the fig leaf of legitimacy along with an enormous trove of goodwill. Again, how do you equate what is to be gained with this level of risk for the US?
4. In the process, the US chose to dispense with the global coalition that supported the first gulf war and went with a very thin group where the vast majority of participants had fewer than 500 people involved. The risk here was not so much the nations that joined, although the Uzbek Government is at least as corrupt and violent as the Iraqi, but rather the power and influence of those who were left out. China, Russia, Germany and France being the biggest, but the fact that of Iraq's neighbours only Kuwait really contributed anything meant that huge risks were being run. The extent of that risk came home to roost when the Turkish government nearly blew the military plan to bits by refusing at the past minute to allow an assault from its territory.
5. The massive military risk of trying to occupy a country with 150,000 troops, on the assumption that within 3 months that could be reduced to about 30,000. The US military had good reason to fight this all the way. General Eric Shinseki said, before the invasion started, that "hundreds of thousands of troops" would be needed to occupy Iraq successfully. He was shouted down and sidelined for his outspokenness. But I find it incredible that the Department of Defense did not understand that he was right, what interests me is what could possibly justify taking that risk, and adding it to all the others.
6. The economic and financial risk is equally staggering. Of course there were predictions that "Iraqi oil would be able to pay for the reconstruction" and that American economic exposure would be minimal, a few tens of billions at most. As the cost now passes $130 billion with no sign of slowing down, again, we have to ask what would justify a risk of that magnitude? I don't buy incompetence, malfeasance or simple greed, I think there is a very good chance that the US had no option but to accept those risks, because the risk of not acting at that moment, and in that way, were even higher.
Now what could that be? I think the answer lies in the Energy Task Force. Not the policy outcome, but the ingoing information.
Then comes the news this week that Mark Thatcher, the son of former British PM Margaret Thatcher has been arrested in South Africa on charges that he helped fund or organise an attempted coup on Equatorial Guinea and that the trail has led back to the UK and Jeffrey Archer. Now Mark Thatcher is not the sharpest knife in the draw, but involvement in an attempted coup in Africa can hardly be called an accident. The Independent has more about the network here.
Simon Mann, an Old Etonian former SAS officer, and heir to the Watney brewing empire, [was] arrested while allegedly on their way to Equatorial Guinea to join an organised uprising. [...] Mr Mann had Christmas lunch with Sir Mark and his wife, Diane, last year when Baroness Thatcher, 78, was there. The former prime minister, who is in frail health, is on holiday in the United States and did not comment on her son's arrest.
Other names linked with the alleged plot include Ely Calil, a London-based oil trader who made his fortune in Nigerian oil but was questioned by police in 2002 in connection with commission paid by the French oil company Elf Aquitaine to Sani Abacha, the former dictator of Nigeria. Mr Calil is a former financial adviser to Jeffrey Archer, the disgraced former Tory deputy chairman. Lord Archer allegedly paid Mr Mann £80,000 but he denies knowledge of any coup plot.
And why, we ask, might it be worth the very substantial risk of being anywhere near a coup in Equatorial Guinea? Try this for size. Including this gem.
Equatorial Guinea currently holds the record (alongside Angola) for oil prospecting permits. Over the next 20 years it could become Africa’s third largest producer (ahead of Congo and Gabon) with 740,000 barrels a day.
Many people, with very high level connections appear to be taking very significant risks in countries that have oil.
The only possible fact that could justify such extravagant risks, that is also associated with oil, is peak production. The implications of that fact are very severe if they were to arrive without adequate preparation and there is frankly zero preparation being conducted in the general population right now. The concept that there is no longer a tap we can open a bit more every time we need more oil, is never addressed for a moment in mainstream media, but when someone suggests that the available amounts of oil are now shrinking, and will never again reach current levels; that will start a major panic. And yesterday I came across First signs of a global decline in oil. Now, although it is reported on Al Jazeera, it refers to British trade journal Petroleum Review which has reviewed the 2003 Statistical Review of World Energy, put together by British Petroleum, to look for signs of depletion.
Its study claims that a large group of producer countries are now in decline - putting even more pressure on those countries who have spare production capacity. There are several worrying aspects to this decline. The first is that added to the current increase in global demand, it means other countries must produce more just for the market to stay still. Secondly, as those countries are forced to produce to their capacity, it only hastens the day when they too will have declining output.
Depletion speeding up
"What surprised me was the rate of decline among the 18 countries whose production is going down," Petroleum Review editor and oil analyst Chris Skrebowski told Aljazeera. "For fourteen out of the eighteen countries the rate of depletion is speeding up. This has confounded a long held view that decline was a slow, gradual process.
And just to sharpen your sense of where we might be right now, comes this gloomy piece from George Monbiot, quoting US Oil Magnate T Boon Pickens.
Never again," the Texas oil baron and corporate raider T Boone Pickens announced this month, "will we pump more than 82m barrels."
As we are pumping 82m barrels of oil a day at the moment, what Pickens is saying is that global production has peaked. If he is right, then the oil geologist Kenneth Deffeyes, who announced to general ridicule last year that he was "99% confident" it would happen in 2004, has been vindicated. Rather more importantly, industrial civilisation is over.
Not immediately, of course. But unless another source of energy, just as cheap, with just as high a ratio of "energy return on energy invested" (Eroei) is discovered or developed, there will be a gradual decline in our ability to generate the growth required to keep the debt-based financial system from collapsing.
The problem is leverage. While the gross amount of oil needed to produce each $ of GDP has fallen signirficantly since the Oil Shock of the 70's, and even the first Gulf war, that can be accounted for by many factors, including the huge growth in financial services as a component of GDP, and the shift to electronic services such as help desks, the Internet, entertainment and media. All of these have added hugely to the GDP, have low and falling marginal costs and require very few assets. Throw in travel and tourism which has grown massively in the last 30 years and you have a vaery large slice of GDP that didn't exist back then and every part of it crucially dependent on energy and, in the case of travel and tourism, dependent on the cheap and plentiful resources that have been the case since 1972.
In other words, the economy is now much bigger, and much more lopsidedly dependent on energy than ever. Spike the price of that energy or slam a lid on its supply, or both, and you have a recipe for damage that reaches rapidly and deeply into every corner of our lives.
Subtract those flash new industries from the mix and you have another problem. How much more energy efficient are the fundamentals of food, shelter and clothing production than they were 30 years ago?
Last year I had a new floor put on my house. It could easily have been built by my grandfather, there were very few materials that he would not have recognised or understood. But instead of a hammer, a handsaw and a set of screwdrivers that he would have used, tools with a relatively low energy cost that last several lifetimes if handled properly, the builders used nail guns, screw guns and electric saws that saw the job done in maybe a tenth the time. But the energy cost of those tools is also many times higher. The guns cost energy to build and replace muscle, so do the gas cartridges that power them and the nail cartridges that replace a box of loose nails that the carpenter holds in his mouth and drives in with his muscles.
Because paying people is more expensive than buying and using a gun, the whole process is not only faster, but more profitable. As long as the energy costs are trivial. Start paying the real cost of spending non-renewable resources in that way, and the equations change massively. And I saw a suggestion the other day that a realistiv proice for a barrel of oil would currently be $185.
Now imagine you are the President and your energy task force comes to tell you the effect of oil at a realistic price and the fact that within your term of office, oil production will fall, not rise, and keep on falling forever. The age of busines sgrowth is over, the security implications for the west in being dependent on a resource that is in the hands of people who are not necessarily well disposed, and in some cases outright hostile, and you have, in the words of Apollo 13, a problem.
As terrorism increases, as more and more Americans are killed and wounded in Iraq, the opposition in the US scoffs loudly at George Bush's claims that after invading Iraq, the country is more secure. What happens if he is right, but that he is not talking about terrorists? What if he's talking about the Oil, which may very well be the reason for Iraq, but in ways that most people haven't even begun to contemplate yet?
Oh, and the other thing about taking multiple, massive, concurrent risks is this, the chances of success fall exponentially.
For 50 years the people who thought M. King Hubbert made sense have been telling the world that the oil would not last, that it was a finite gift and that when we had used half of it, the remainder would be produced in ever shrinking quantities until we reached the final insoluble problem where to get a barrel of oil would require more than a barrel of oil to pump it out. At that stage it will no longer matter how much there is left in the ground, it will be beyond our reach; it might as well be on the moon.
As I flew back from Sweden a couple of weeks ago, we passed through the terminator over Kazakhstan, the first thing I saw in the dark were the lights of gas flares in the oil fields of central Asia. A bit further on I sat and stared out the window as India passed below me in the night. It’s always a pleasure to see, the density of the lights and the patterns they make around the human habitation of the most populous nation on earth. And it occurred to me then that some day soon that possibility will disappear, maybe forever. The planes will no longer fly over India in the night, because the cost of the fuel will be prohibitive and it will be needed for more important things than lugging me back and forth. And anyway, we will no longer be able to see Diwali every night, because we won’t be able to waste energy lighting streets that are empty.
UpdateFollow Ton's trackback for more.
On the subject of which, I didn't want it to sound conspiratorial, I'd rather leave that for the ones who espouse the greed and imperialism theme.
What I'm actually trying to hint at is that the US might have had no choice because to acknowledge a present reality of Peak Oil would be to invite immediate economic and social disaster and that the only throw of the dice left was to attempt to capture a significant source of oil and THEN tell the nation that the game has to change and fast.
The fundamental issue being that it didn't matter what risks the US took, the alternative was even worse and that, by acting, maybe one chance in a million was still on the board, while not acting took away even that one.