Editor's Note 10/8/08: What is becoming clear from the current financial crisis and evident in the recent debates between presidential candidates John McCain and Barrack Obama, is that there is a single issue that is driving the unfolding world financial crisis, and that is oil. Both candidates cite the critical need for the U.S. to become energy independent, and do this quickly. GCN recognized that the growing lack of availability of oil and its costs were to have a profound affect on the world and more than a year ago GCN produced the following 4-part series, "All About Oil: Threat Assessment." This series outlines how the world's economy was changing as a result of competition for oil and the subsequent changes that would bring to our national economy. GCN is republishing this series in light of recent developments.
All About Oil...
From The War In Iraq To Venezuelan Dictator Hugo Chávez, Nearly Every Security Threat To The United States Can Be Resolved Down To Oil.
By Perry Hicks- Special to GulfCoastNews.com Filed 9/6/07
When President George W. Bush prepared to invade Iraq under what history may show was a pretext of Weapons of Mass Destruction, the anti-war left vehemently protested by shouting “No blood for oil!”
In the left’s overly simplistic view, the invasion was little more than a scheme to make money for Halliburton, the oil service company Vice President Dick Cheney once headed, and seize Iraq’s vast petroleum reserves for President Bush’s oil industry cronies.
Of course, the Bush Administration denied the war was over oil even as the military invasion was embarrassingly named Operation Iraqi Liberation, or O.I.L. The truth was that Mid-East crude and the west’s unrestricted access to two-thirds of the world’s proven reserves was precisely what the Iraq War, the subsequent occupation, and Al Qaeda’s response has been all about.
It is also been the driving force for Russia’s alliance with Iran and Russia’s recent joint military operations with China. Oil is also the reason why China has been quietly working to revive the oil field development deal they had made with Saddam Hussein in1997, and has even partnered with Cuba and India to develop oil fields in the Gulf of Mexico.
Ironically, U.S. military presence in Iraq may not guarantee American companies win access to Iraqi oil fields. Asian companies, particularly those from India and China, may well be the first to win contracts in the Iraqi oil sector.
Failure to secure these contracts may well be a consequence of the United States having lost the global economic dominance and prestige it was bequeathed as the ultimate victor over World War II.
As the war came to a close in 1945, the majority of the world’s investment capital and manufacturing capability was concentrated in the United States.
As a manufacturing, finance, and natural resource powerhouse, in 1945 the United States produced half the world’s coal, two-thirds of the world’s oil, and held 80 percent of the available gold reserves. The United States could not only project power with the most powerful army, navy, and air force in the world, it also was the sole possessor of the atomic bomb.
The situation today is so different it is no wonder that the title of Bush 41’s speech to both houses of congress in September 1990 during Operation Desert Storm was titled, “Toward a New World Order.”
The United States is no longer a mercantile power with a mighty industrial base and commercial fleet to transport American goods to her customers around the world. Just as America’s once powerful merchant marine of 2480 vessels has been reduced to only 465 (placing the United States 23rd in rank behind Cambodia, and Saint Vincent and the Grenadines) American factories have also been shuttered as their production has been outsourced overseas, principally to China.
From the end of the ten year long Chinese Cultural Revolution in 1976, China has endeavored to expand its manufacturing capacity as well as its merchant marine. Today, China is responsible for nearly half of the world’s manufacturing output and its combined commercial operations have extended its influence around the world.
Accordingly, China’s demand for energy has been increasing at the dramatic rate of 7.5 percent per year. Once a small oil exporter, China found it necessary to begin importing oil in 1993. Since then China’s ever growing demand has grown until now a full 32 percent of its domestic oil consumption is provided by imports. China’s consumption is projected to match the United States by 2030.
A similar situation exists with China’s immediate southern neighbor, India. That economy is also rapidly expanding and the demand for oil is also increasing at a rate of about 5.5 percent per year.
Unfortunately, this new demand for oil by 2.4 billion people, or about a third of the world’s population, comes at precisely the same time when global oil supply is believed to have reached its peak and is expected to enter decline over the next few years.
Even the most optimistic projections are for new discoveries to be outstripped by the demand an industrializing China and India will have for oil. Furthermore, regardless of the claims made about “alternative” energy, or new, cleaner and more efficient energy using technologies, as we will see in a later part to this series, the stark reality is that our modern technological economy is totally dependent on oil and at this time there are no viable substitutes.
Zero Sum Game
Marion K. Hubbert, a geologist at Shell Oil Company, developed a bell curve model for oil field production called the “Hubbert Peak Theory.” Hubbert’s theory can be applied to a single oil field or the total production of the entire planet earth. When it is applied globally, it is referred to as simply “Peak Oil.”
In 1974, Hubbert predicted peak global oil production would top out in 1995 at about 12GB/yr. Attempts to peg the peak oil date by the Association for the Study of Peak Oil and Gas (ASPO,) U.S. Energy Information Administration (EIA,) Cambridge Energy Research Associates (CERA,) and a number of individual petroleum analysts, industry journalists, and insiders, have been all varied widely ranging in dates from 1998 to 2035 and beyond.
While the variance in dates and volume has lead some to scoff at any notion of an end to oil, there is still ample evidence that the peak, if it has not topped out now, could still happen soon. Both non-OPEC and OPEC fields are currently pumping at near full capacity and other major reserves, such as the North Sea and Mexico’s Cantarell are both in decline.
Even if current supply could be maintained indefinitely, there remains the specter of a dramatic rise in demand for oil from China and India. Arguably then, the world’s present oil supply situation then is a zero sum game. For every additional barrel of oil the emerging Asian industrial powers receive from the supply chain the Western nations will have to receive one less.
The limitations of this all precious resource is what drives Russia to claim the artic sea floor, and Venezuela to nationalize its oil resources, just as the Saudi Arabia and Mexico did before them.
Surprisingly, only a small shortfall in the supply of oil is necessary to ignite a bidding war whose inflationary impact will send the global economy spiraling downward. Of course, the massive trade imbalances generated by China’s manufacturing and shipping enterprises will make price no obstacle to acquiring all the oil they will need.
Economies Have High Sensitivity to Oil Supply
The 1973 Arab Oil Embargo exacerbated the U.S. dollar’s depreciation originally set off in 1971 by Nixon’s twin moves of abandoning the gold standard and pulling out of the World War II era Bretton Woods international monetary system.
At that time, Arab suppliers only provided about 17 percent of American oil imports. Still, the disruption of Arab oil caused gasoline prices to spike about 45 percent over the course of one year with a true decline in oil consumption being only on the order of five percent. With consumer money being diverted to pay for more expensive gasoline, there was far less money to pay for other goods and services which were seeing prices increases of about 10 to 12 percent. Accordingly, the Dow-Jones Industrial Average dropped 45 percent from 1973 to 1974.
The paradox of falling demand with rising prices was called “stagflation” and it was the economic hallmark for much of the 1970s. Had alternative oil sources not have been found and the oil supply had fallen short by 10 to 15 percent, the American economy would not merely have gone through a period of inflationary recession, but would have plumbed the depths of the 1930s Great Depression.
This GCN series will assess the multiple threats to Unites States security today as all being driven by the world’s scramble to secure reliable sources of crude oil:
America has not passively stood by while these threats have increased in severity. As we will explore in a later part to this series, the invasion and occupation of Iraq and Washington’s efforts to establish a western friendly government there is an effort to contain Iran’s ambitions and keep Middle East oil open for Western consumption.
However, not all threats directed at the U.S. are external even though on face value they appear to be. What has been described as an invasion of the U.S. by illegal aliens is actually Washington’s refusal to control its Southern border with Mexico along with Congress’s willful abandonment of protectionist tariffs that make it economically attractive to outsource jobs overseas.
Over the course of this series GCN will explore the argument that Washington’s willful replacement of American workers with foreign workers both legal and illegal, including the recent admission of Mexican trucking companies onto U.S. highways, is actually an inflation fighting tactic designed to maintain international confidence in the U.S. economy (and therefore U.S. dollar.)
Those international doubts, of course, are raised by the specter of an oil thirsty and debt ridden America, having to compete for the ever diminishing supplies of oil with a cash rich China.
About the Author.....
Perry Hicks is a former Mississippi Coast resident and was a correspondent for the old Gulfport Star Journal. He has appeared on Fox News Channel. Perry has also hosted his own radio talk show on the auto industry with a mix of politics. Perry is a former college professor and is a senior writer for GCN on stories of national importance with local interests. His articles can be found in the GCN Archive
Contact the Author: email@example.com