THINKERS UNDERGROUND

Laurie David, ExxonMobil's Inconvenient Truth

2006-12-03T09:56:00.000-08:00

Laurie David, ExxonMobil's Inconvenient Truth
http://www.mercurynews.com/mld/mercurynews/news/editorial/16154788.htm

At hundreds of screenings this year of ``An Inconvenient Truth,'' the first thing many viewers said after the lights came up was that every student in every school in the United States needed to see this movie.

The producers of former Vice President Al Gore's film about global warming, myself included, certainly agreed. So the company that made the documentary decided to offer 50,000 free DVDs to the National Science Teachers Association (NSTA) for educators to use in their classrooms. It seemed like a no-brainer.

The teachers had a different idea: Thanks but no thanks, they said.

In their e-mail rejection, they expressed concern that other ``special interests'' might ask to distribute materials, too; they said they didn't want to offer ``political'' endorsement of the film; and they saw ``little, if any, benefit to NSTA or its members'' in accepting the free DVDs.

Gore, however, is not running for office, and the film's theatrical run is long since over. As for classroom benefits, the movie has been enthusiastically endorsed by leading climate scientists worldwide, and is required viewing for all students in Norway and Sweden.

Still, maybe the NSTA is just being extra cautious. But there was one more curious argument in the e-mail: Accepting the DVDs, they wrote, would place ``unnecessary risk upon the [NSTA] capital campaign, especially certain targeted supporters.'' One of those supporters, it turns out, is the ExxonMobil Corp.

That's the same ExxonMobil that for more than a decade has done everything possible to muddle public understanding of global warming and stifle any serious effort to solve it. It has run ads in leading newspapers questioning the role of human-made emissions in global warming, and financed the work of a small band of scientific skeptics who have tried to challenge the consensus that heat-trapping pollution is drastically altering our atmosphere. The company spends millions to support groups such as the Competitive Enterprise Institute that aggressively pressure lawmakers to oppose emission limits.

It's bad enough when a company tries to sell junk science to a bunch of grown-ups. But, like a tobacco company using cartoons to peddle cigarettes, ExxonMobil is going after our kids, too.

And it has been doing so for longer than you may think. NSTA says it has received $6 million from the company since 1996, mostly for the association's ``Building a Presence for Science'' program, an electronic networking initiative intended to ``bring standards-based teaching and learning'' into schools, according to the NSTA Web site. ExxonMobil has a representative on the group's corporate advisory board. And in 2003, NSTA gave the company an award for its commitment to science education.

So much for special interests and implicit endorsements.

In the past year alone, according to its Web site, ExxonMobil's foundation gave $42 million to key organizations that influence the way children learn about science, from kindergarten until they graduate from high school.

And ExxonMobil isn't the only one getting in on the action. The oil industry, the coal industry and other corporate interests are exploiting shortfalls in education funding by using a small slice of their record profits to buy themselves a classroom soapbox, through textbooks, classroom posters and teacher seminars.

NSTA's list of corporate donors also includes Shell Oil and the American Petroleum Institute (API), which funds NSTA's Web site on the science of energy. There, students can find a section called ``Running on Oil'' and read a page that touts the industry's environmental track record -- citing improvements mostly attributable to laws that the companies have fought tooth and nail, by the way -- but makes only vague references to spills or pollution. NSTA has distributed a video produced by API called ``You Can't Be Cool Without Fuel,'' a shameless pitch for oil dependence.

The education organization also hosts an annual convention, described on ExxonMobil's Web site as featuring ``more than 450 companies and organizations displaying the most current textbooks, lab equipment, computer hardware and software, and teaching enhancements.'' The company ``regularly displays'' its ``many . . . education materials'' at the exhibition.

John Borowski, a science teacher at North Salem High School in Salem, Ore., was dismayed by NSTA's partnerships with industrial polluters when he attended the association's annual convention this year and witnessed hundreds of teachers and school administrators walk away with armloads of free corporate lesson plans.

Along with propaganda challenging global warming from ExxonMobil, the curricular offerings included lessons on forestry provided by Weyerhaeuser and International Paper, Borowski says, and the benefits of genetic engineering courtesy of biotech giant Monsanto.

``The materials from the American Petroleum Institute and the other corporate interests are the worst form of a lie: omission,'' Borowski says. ``The oil and coal guys won't address global warming, and the timber industry papers over clear-cuts.''

An API memo leaked to the media as long ago as 1998 succinctly explains why the association is angling to infiltrate the classroom: ``Informing teachers/students about uncertainties in climate science will begin to erect barriers against further efforts to impose Kyoto-like measures in the future.''

So, how is any of this different from showing Gore's movie in the classroom? The answer is that neither Gore nor Participant Productions, which made the movie, stands to profit a nickel from giving away DVDs, and we aren't facing millions of dollars in lost business from limits on global-warming pollution and a shift to cleaner, renewable energy.

It's hard to say whether NSTA is a bad guy here or just a sorry victim of tight education budgets. And we don't pretend that a two-hour movie is a substitute for a rigorous science curriculum. Students should expect, and parents should demand, that educators present an honest and unbiased look at the true state of knowledge about the challenges of the day.

As for ExxonMobil -- which just began a fuzzy advertising campaign that trumpets clean energy and low emissions -- this story shows that slapping green stripes on a corporate tiger doesn't change the beast within. The company is still playing the same cynical game it has for years.

While NSTA and ExxonMobil ponder the moral lesson they're teaching with all this, 50,000 DVDs are sitting in a Los Angeles warehouse, waiting to be distributed. In the meantime, Mom and Dad may want to keep a sharp eye on their kids' science homework.

Laurie David, ExxonMobil's Inconvenient Truth

2006-12-03T09:51:00.000-08:00

Laurie David, ExxonMobil's Inconvenient Truth
http://www.mercurynews.com/mld/mercurynews/news/editorial/16154788.htm

The teachers had a different idea: Thanks but no thanks, they said.

It's bad enough when a company tries to sell junk science to a bunch of grown-ups. But, like a tobacco company using cartoons to peddle cigarettes, ExxonMobil is going after our kids, too.

So much for special interests and implicit endorsements.

The Iraq Oil Bonanza: Estimating Future Profits - James A Paul

2006-04-02T16:29:00.000-07:00

The Iraq Oil Bonanza: Estimating Future Profits

By James A. Paul

Global Policy Forum
January 28, 2004

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Iraq: the Struggle for Oil (August, 2002)
Oil in Iraq: the Heart of the Crisis (December, 2002)

After the Iraq War of 2003, United States and United Kingdom oil giants are certain to gain privileged access to Iraq’s oil resources. Excluded from control over Iraqi oil since the nationalization of 1972, Exxon, BP, Shell and Chevron will now gain the lion’s share of the world’s most profitable oil fields. Few outside the industry understand the huge stakes in Iraq, which amount to tens of billions of dollars in total potential profits per year.

The following tables estimate the magnitude of potential profits in Iraq, using four key variables. They aim to show the possible long-term Iraq profits for all private oil companies, assuming that one or more companies will be involved in all the country’s producing fields. The exact legal status of Iraqi oil is not at issue here, since the same results could accrue for the companies whether the new government: (1) eventually privatizes the industry (which seems unlikely) or (2) maintains a national company which enters into production sharing agreements that offer the companies favorable terms.

The analysis uses four key variables, each of which is independent of the others. These variables are illustrated in Table 1 below, which shows four possible outcomes for each of the four variables. Note that there is no necessary relationship between the variables in each row, so that (for example) reserves might be 400 billion barrels but the recovery rate might be 65% and the oil rent average $30:

Table 1

The “oil reserves” estimates follow estimates given by industry experts and those published on the US Department of Energy website. The “oil rent average” refers to the very large spread between the cost of production (estimated at $1 per barrel) and the price of a barrel of oil on the international markets. The international price estimate is a fifty-year average, in real (inflation adjusted) terms, based on oil prices for 2004. Thus the lowest estimate assumes a very low average price of $21 per barrel, while the highest estimate assumes a high price of $41 per barrel under conditions of increasing future scarcity. The “recovery rate” is the percentage of reserves actually brought to the surface, a percentage that is generally believed to be high in Iraq compared to industry norms because of the very good quality of Iraq’s oil reservoirs. The “rent appropriated by private companies” estimates the share of the total rent (profit) taken by the companies after government taxes, fees, production-sharing agreements and other deductions. Though companies have taken much lower shares since the 1970s, the current trend is moving towards higher shares in the range of the estimates shown here.

Table 2 below uses the four variables to estimate potential profits for the oil companies in Iraq. In order to understand the magnitude of these profits, it is useful to know that the worldwide profits of the world’s five largest oil companies in 2002 were $35 billion. Our estimate of the “most probable” annual profits in Iraq are $95 billion, three times this sum! Total company profits in Iraq, over time, would be an enormously large sum – ranging from a low of about $600 billion to a high of about $9 trillion.

Table 2

Our “most probable” estimate of corporate profits assumes the following:

1. 350 billion barrels of oil reserves;

2. $30 oil rent average over 50 years;

3. Recovery rate of 75%; and

4. Percentage of rent appropriated by private companies at 60%.

Iraq: the Struggle for Oil - James Paul

2006-04-02T16:28:00.000-07:00

Iraq: the Struggle for Oil

By James A. Paul

Executive Director, Global Policy Forum

August, 2002 (revised December, 2002)

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Oil in Iraq: the Heart of the Crisis (December, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

Iraq possesses the world’s second largest proven oil reserves, currently estimated at 112.5 billion barrels, about 11% of the world total and its gas fields are immense as well. Many experts believe that Iraq has additional undiscovered oil reserves, which might raise the total well beyond 250 billion barrels when serious prospecting resumes, putting Iraq closer to Saudi Arabia and far above all other oil producing countries. Iraq’s oil is of high quality and it is very inexpensive to produce, making it one of the world’s most profitable oil sources. Oil companies hope to gain production rights over these rich fields of Iraqi oil, worth hundreds of billions of dollars. In the view of an industry source it is “a boom waiting to happen.”(1) As rising world demand depletes reserves in most world regions over the next 10-15 years, Iraq’s oil will gain increasing importance in global energy supplies. According to the industry expert: “There is not an oil company in the world that doesn’t have its eye on Iraq.”(2) Geopolitical rivalry among major nations throughout the past century has often turned on control of such key oil resources.(3)

Five companies dominate the world oil industry, two US-based, two primarily UK-based, and one primarily based in France.(4) US-based Exxon Mobil looms largest among the world’s oil companies and by some yardsticks measures as the world’s biggest company.(5) The United States consequently ranks first in the corporate oil sector, with the UK second and France trailing as a distant third. Considering that the US and the UK act almost alone as sanctions enforcers (and as advocates of war against Iraq), and that they are the headquarters of the world’s four largest oil companies, we cannot ignore the possible relationship of their policy with this powerful corporate interest.

US and UK companies long held a three-quarter share in Iraq’s oil production, but they lost their position with the 1972 nationalization of the Iraq Petroleum Company.(6) The nationalization, following ten years of increasingly rancorous relations between the companies and the government, rocked the international oil industry, as Iraq sought to gain greater control of its oil resources. After the nationalization, Iraq turned to French companies and the Russian (Soviet) government for funds and partnerships.(7) Today, the US and UK companies are very keen to regain their former position, which they see as critical to their future leading role in the world oil industry. The US and the UK governments also see control over Iraqi and Gulf oil as essential to their broader military, geo-strategic and economic interests. At the same time, though, other states and oil companies hope to gain a large or even dominant position in Iraq. As de-nationalization sweeps through the oil sector, international companies see Iraq as an extremely attractive potential field of expansion. France and Russia, the longstanding insiders, pose the biggest challenge to future Anglo-American domination, but serious competitors from China, Germany and Japan also play in the Iraq sweepstakes.(8)

During the 1990s, Russia’s Lukoil, China National Petroleum Corporation and France’s TotalFinaElf held contract talks with the government of Iraq over plans to develop Iraqi fields as soon as sanctions are lifted. Lukoil reached an agreement in 1997 to develop Iraq’s West Qurna field, while China National signed an agreement for the North Rumailah field in the same year (China’s oil import needs from the Persian Gulf will grow from 0.5 million barrels per day in 1997 to 5.5 million barrels per day in 2020, making China one of the region’s most important customers).(9) France’s Total at the same time held talks for future development of the fabulous Majnun field.

US and UK companies have been very concerned that their rivals might gain a major long-term advantage in the global oil business. “Iraq possesses huge reserves of oil and gas – reserves I’d love Chevron to have access to,” enthused Chevron CEO Kenneth T. Derr in a 1998 speech at the Commonwealth Club of San Francisco, in which he pronounced his strong support for sanctions.(10) Sanctions have kept the rivals at bay, a clear advantage. US-UK companies hope that the regime will eventually collapse, giving them a strong edge over their competitors with a post-Saddam government. As the embargo weakened and Saddam held onto power, however, stakes in the rivalry rose, for US-UK companies worried that they might eventually be shouldered aside. Direct military intervention by the US-UK, then, offers a tempting but dangerous gamble that might put Exxon, Shell, BP and Chevron in immediate control of the Iraqi oil boom, but at the risk of backlash from a regional political explosion.

In testimony to Congress in 1999, General Anthony C.Zinni, commander in chief of the US Central Command, testified that the Gulf Region, with its huge oil reserves, is a “vital interest” of “long standing” for the United States and that the US “must have free access to the region’s resources.”(11) “Free access,” it seems, means both military and economic control of these resources. This has been a major goal of US strategic doctrine ever since the end of World War II. Prior to 1971, Britain (the former colonial power) policed the region and its oil riches. Since then, the United States has deployed ever-larger military forces to assure “free access” through overwhelming armed might.(12)

A looming US war against Iraq is only comprehensible in this light. For all the talk about terrorism, weapons of mass destruction and human rights violations by Saddam Hussein, these are not the core issues driving US policy. Rather, it is “free access” to Iraqi oil and the ultimate control over that oil by US and UK companies that raises the stakes high enough to set US forces on the move and risk the stakes of global empire.

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Oil in Iraq: the Heart of the Crisis (December, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

(1) Conversation with the author, June 5, 2002.
(2) Ibid.
(3) See, for example, Daniel Yergin, The Prize: the epic quest for oil, money and power (New York, 1991).
(4) In order of size these firms are: Exxon Mobil, Royal Dutch-Shell, British Petroleum-Amoco, Chevron-Texaco, and TotalFinaElf. Royal Dutch Shell is often described as a British-Dutch company, while TotalElfFina is sometimes described as a French-Italian company.
(5) ExxonMobil was ranked as the number one company worldwide in 2001 as measured by profits, which stood at over $15 billion. In that year, the company was ranked number two worldwide in terms of revenues, which totalled $192 billion, behind the far-less-profitable retail company Walmart, that had revenues of $220 billion.
(6) Major shareholders in IPC were: Shell, BP, Esso (later Exxon), Mobil, and CFP, the French national company.
(7) For an account of this period, see Joe Stork, Middle East Oil and the Energy Crisis (New York, 1975), 188-194. Since 1918, France had considered Iraq to be its main source of international oil reserves and its main means to gain parity with the Anglo-American companies (see Yergin, op. cit., 188-191).
(8) See Michael Tanzer, “Oil and Military Power in the Middle East and the Crimean Sea Region, The Black World Today (web site), two parts, February 28 and Mar 6, 2002.
(9)From US Department of Energy, International Energy Outlook, Table 13.
(10) Text as posted at www.chevrontexaco.com/news/archive/chevron_speech/1998/98-11-05.asp At the time, Condoleeza Rice, currently US National Security Advisor, was a board member of Chevron and one of the company’s supertankers was named after her. Though it is tempting to insist on the many oil and energy industry connections of the Bush administration, including the President and Vice President Cheney, oil issues have consistently had a heavy influence on US foreign policy, regardless of party or personalities.
(11) Testimony to the Senate Armed Services Committee, April 13, 1999.
(12) See Michael T. Klare, Resource Wars: the new landscape of global conflict (New York, 2001), esp. ch. 3, “Oil Conflict in the Persian Gulf.”

Oil Companies in Iraq: - James A Paul

2006-04-02T16:24:00.000-07:00

Oil Companies in Iraq:
A Century of Rivalry and War

By James A. Paul

Global Policy Forum
November 2003

Conference in Berlin on Corporate Accountability – November 25-26, 2003

Iraq: the Struggle for Oil (August 2002)
Oil in Iraq: the Heart of the Crisis (December 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

The United States and the United Kingdom did not wage war on Iraq for the officially stated reasons. That much is obvious. The world’s superpower and its key ally were not acting because they feared the Iraqi government’s weapons of mass destruction or its ties with the terrorist group al-Qaeda. Nor were they fighting to bring democracy to the Middle East, a region where the two governments had long supported reactionary monarchs and odious dictators, including Iraqi president Saddam Hussein himself.

It is time, then, to set aside the sterile discussions about “intelligence failures” and to consider a deeper reason for the conflict. This paper will argue that the war was primarily a “war for oil” in which large, multinational oil companies and their host governments acted in secret concert to gain control of Iraq's fabulous oil reserves and to gain leverage over other national oil producers. In arguing for the primacy of oil, we do not imply that other factors were not at play. The imperial dreams of the neo-con advisors in Washington contributed to the final outcome, as did the re-election strategies of the political operatives in the White House. But the Iraq war did not emerge solely from the Bush administration. As we shall see, it involved both London and Washington, through the course of many governments. And it emerged from a decades-long effort by the world's largest companies to appropriate the planet's most lucrative natural resource deposits.

Several elements contribute to make the case for an oil war: the enormous, long-term political influence of the oil companies, the close personal ties between the companies and their host governments, the long history of prior conflicts and wars over Iraqi oil, and the enormous potential profitability of the Iraqi fields. To consider the evidence, and answer the questions of skeptics, we must begin by reviewing the companies’ power and influence over a period of many decades. Later, we will turn to the immediate events leading up to the 2003 war itself.

Companies’ Great Size & Global Presence

By the early 20th Century, when most business firms were relatively small by modern standards and purely national in scope, Standard Oil and Royal Dutch Shell were already global companies that controlled a worldwide network of production and distribution. By 1911, they held rich production fields in the Dutch East Indies (today’s Indonesia), Romania, Russia, the United States, Venezuela and Mexico, as well as refineries, pipelines, rail cars, tankers, storage depots and other facilities in dozens of countries. Standard Oil alone had a fleet of nearly 100 ships.¹

Large as they were a century ago, the oil companies have since grown mightily, due to worldwide collusion in production and pricing and to fierce backing by their host governments. For decades, the so-called “Seven Sisters,” all of them firms based in the US or the UK, dominated the industry and ruled the global oil market through a tightly-knit cartel. Though nationalizations by producer countries in the 1970s dealt a serious blow to these firms, they continued to dominate the oil industry through control over the"downstream" end of the business -- transport, refining, petrochemicals, and marketing -- while building new production facilities in more friendly locations.²

Today, a wave of mergers has given the successor companies a new and unprecedented scale, reducing the major firms to just five. In 2003, annual revenues of the leader, ExxonMobil, were an astonishing $247 billion.³ By way of comparison, Exxon’s revenue is vastly greater than such well-known international companies as Walt Disney ($25 billion) and Coca Cola ($19 billion) and it is larger than the revenues of 185 national governments, including Brazil, Canada, Spain, Sweden and the Netherlands. Only the world’s six richest countries – the US, Japan, Germany, France, Italy and the UK – had revenues above this level. ⁴

Among the world’s fifteen largest corporations listed in the 2002 “Fortune Global 500,” five were oil companies. After US-based Exxon came the UK giants Shell and British Petroleum (BP), the mammoth French firm Total, and the huge US-based Chevron. Compared to the large automakers, with their anemic profits, the oil companies stand out among the world’s biggest corporations for their high profitability. In 2001 (and again in 2003), Exxon earned the world’s highest profits. In 2003, its earnings reached a record $22 billion, more than General Motors, Ford, DaimlerChrysler and Toyota taken together.⁵

Oil, Economy & Warfare

To understand the special “national security” status enjoyed by the oil companies, we must first consider oil’s economic importance and then its central role in war. Oil provides nearly all the energy for transportation (cars, trucks, buses airplanes, and many railroad engines). Oil also has an important share of other energy inputs – it heats many buildings and fuels industrial and farm equipment, for example. Overall, oil has a 40% share in the US national energy budget. Beyond energy, oil provides lubrication and it is an essential feedstock for plastics, paint, fertilizers and pharmaceuticals. Sometime in the future, the world may switch to renewable energy and other non-oil inputs, but oil now reigns as the indispensable ingredient of the modern economy. For this reason, governments are nervous about their national oil supply.⁶

Modern warfare particularly depends on oil, because virtually all weapons systems rely on oil-based fuel – tanks, trucks, armored vehicles, self-propelled artillery pieces, airplanes, and naval ships. For this reason, the governments and general staffs of powerful nations seek to ensure a steady supply of oil during wartime, to fuel oil-hungry military forces in far-flung operational theaters. Such governments view their companies’ global interests as synonymous with the national interest and they readily support their companies’ efforts to control new production sources, to overwhelm foreign rivals, and to gain the most favorable pipeline routes and other transportation and distribution channels. “One of our greatest helpers has been the State Department,” mused John D. Rockefeller, founder of Standard Oil in his 1909 book, Random Reminiscences of Men and Events. “Our ambassadors and ministers and consuls have aided to push our way into new markets in the utmost corners of the world.”⁷

The oil industry gained its crucial role in military affairs during World War I. In the run-up to the war, the world’s navies converted from coal to oil-fired ships, because of significant advantages in speed and range of operation. The war also marked the first military uses of the automobile, truck, tank and airplane. Belligerents on both sides faced severe oil shortages, but the Allies eventually gained the upper hand with vastly greater supplies. Lord Curzon, a member of the British War Cabinet, concluded that “the Allied cause has floated to victory upon a wave of oil.”⁸

Government policy makers give the highest priority to oil matters during wartime, as many historical studies show. Japanese and German officials made desperate efforts to gain oil sources during World War II while US and British leaders did their utmost to deny them this resource. But even allies could be bitter oil rivals. In many wartime meetings and cables, President Franklin Roosevelt and Prime Minister Winston Churchill wrangled over their countries’ respective post-war shares of Middle East oil reserves.⁹ After the war, George Kennan, Director of the US State Department’s Policy Planning Division, reacted with unbridled enthusiasm at US oil companies’ primacy (to the exclusion of Britain) in the newly-discovered Saudi Arabia fields. The United States, he wrote, had just acquired “the greatest material prize in world history.”¹⁰

Oil Rents, Corruption & Conflict

Just as governments like the US and the UK need oil companies to secure fuel for their global war-making capacity, so the oil companies need their governments’ military power to secure control over global oilfields and transportation routes. It is no accident, then, that the world’s largest oil companies are located in the world’s most powerful countries.

Power has primacy in the oil business, because of the incomparable value of key fields. Production costs vary widely from one place to another, leading to intense competition for the lowest-cost locations. The difference between cost and sales price is so large that economists sometimes refer to the gap as a “rent” – an extraordinary profit advantage enjoyed by the low-cost producer.¹¹

All producer companies want to gain control of such lucrative profits, by fair means or foul. Company rivalry typically leads beyond ordinary market-based competition. As many studies show, companies and their sponsor governments do not shrink from backing dictatorial governments, using bribery and corruption, promoting civil violence and even resorting to war, to meet their commercial goals and best their competitors.¹² The modern history of the Middle East bears witness to this process. In one notorious example, US intelligence services recruited in 1959 a young Iraqi thug named Saddam Hussein to take part in the assassination of Iraqi Prime Minister Abd el-Karim Qasim. Washington feared that the nationalist Qasim might act independently and alter the favorable terms under which their oil companies operated.¹³ A few years earlier, in 1953, the CIA engineered a coup in Iran, overthrowing the democratic government of Mohammed Mossadegh and installing the autocratic Shah, in order to gain control over Iranian oil and redistribute British production shares to US companies.¹⁴

A recent court case in France, involving high officials of the national oil company Elf Aquitaine, provides a glimpse of more recent operations in this world of oil intrigue and covert competition between the giant companies. The case revealed bribes, espionage, sexual favors, arms smuggling, civil strife and plots to overthrow governments, all with the complicity of French military and intelligence services as well as politicians at the highest levels. These actions had a terrible effect on a number of oil-producing countries, mostly in Africa. They spread malfeasance, corruption and anti-democratic practices in France as well. ¹⁵

Special Government Favors and “National Security”

Those who deny oil company complicity in the Iraq War always insist that the companies have little political influence, that they are “out of the loop” in Washington, that they are just one industry group among many others. These arguments are utterly false. The oil companies have always enjoyed “insider” privileges with the US and UK governments, resulting in many unique favors in the name of “national security.”

The United States government offers the companies extremely favorable tax treatment, including the “oil depletion allowance” and “intangible drilling costs” – far more than the ordinary capital depreciation available to other companies. In 1960, at the behest of the National Security Council, the international companies obtained the lucrative “foreign tax credit,” enabling deductions for taxes or royalties paid to foreign governments. In 1974, while the US corporate tax rate was 48%, the nineteen largest oil companies paid a tax rate of only 7.6%.¹⁶

The companies have also enjoyed unofficial immunity from anti-trust or anti-monopoly laws. Though the US government knew for decades about the international oil cartel, federal authorities took no enforcement action until 1952, when President Harry Truman ordered a criminal anti-trust suit. The companies mobilized all their legal and political muscle to quash the case. General Omar Bradley, Chairman of the Joint Chiefs of Staff, reportedly approached the President and successfully urged that the “national security” required a softening of the government’s legal stance. Shortly afterwards, the National Security Council decided on various limitations to the suit that further weakened the government’s case. Though the judicial process lumbered on for fifteen years, the oil companies had nothing to fear and remained safely protected by the national security umbrella. Today, after a decade of mega-mergers, the companies still escape anti-trust scrutiny.¹⁷

US military/security policy has served the oil companies as comprehensively as have the tax and legal rulings. Virtually every US presidential security doctrine since World War II has aimed at protecting company interests in the oil-rich Persian Gulf. The Truman Doctrine, the Eisenhower Doctrine, and the Nixon, Carter, and Reagan Doctrines all asserted Washington’s special concerns in the Gulf and arrogated to the United States special rights to “protect” or “defend” the area. Recently-released secret papers show that during the oil crisis and Arab oil embargo of 1973, Washington seriously considered sending a military strike force to seize some of the region’s richest fields – in Saudi Arabia, Kuwait and Abu Dhabi.¹⁸

In 1979, President Jimmy Carter set up the US Central Command, a permanent military force designed to intervene in the Middle East on short notice. Presidents have expanded and strengthened this force several times since. Headquartered in Florida, but with a number of bases in the Middle East, the command maintains pre-positioned supplies and heavy weapons at Diego Garcia in the Indian Ocean and it can call on strike aircraft units, global satellite intelligence, cruise missiles, rapidly deployable ground troops and carrier-based naval fleets.¹⁹

In testimony to Congress in 1999, General Anthony C. Zinni, commanding officer of the Central Command, affirmed the importance of the Persian Gulf region, with its huge oil reserves. It is a “vital interest” of “long standing,” he said, and the United States “must have free access to the region’s resources.”²⁰

Close Personal Ties between Companies and Governments

Given the close political relations between the oil companies and their governments, it should be no surprise to find close ties at the personal level binding companies and governments together. The career of Allen Dulles serves as a case in point. He began as a US diplomat in the Middle East and rose to be chief of the Near East section of the State Department. In the early 1920s, he led the campaign to win US oil firms’ participation in Iraq. Later he served as a corporate lawyer at Sullivan and Cromwell, New York’s leading counsel for the oil industry. After wartime intelligence service, he was named head of the CIA by President Eisenhower. As CIA chief, he arranged for the overthrow of Mossadegh, winning a place in Iran’s rich oil fields for US firms. In every assignment he consistently served company interests.²¹

Max Thornberg came to the US State Department as senior petroleum advisor in 1941, directly from Bahrein Petroleum, a joint venture of Standard Oil of California. Thornberg operated nearly independently of his government superiors. He continued to receive his company salary, informed company executives of private government meetings and actively promoted company proposals. He apparently could not conceive of a conflict of interest. Having worked in the industry his whole life, he thought of industry goals and those of the US government as being identical.²²

The administration of President George W. Bush represents an especially close set of personal ties between the oil companies and the government – at the very highest level. The president and his father were both longtime industry insiders from Texas and chief executives of their own oil companies. Other oil figures at the top of the administration include Vice President Dick Cheney, former CEO of Halliburton, the nation’s largest oil-services company, and National Security Advisor Condolezza Rice, a former director of Chevron Texaco, after whom the company named one of its supertankers. These very visible figures give the administration its peculiarly strong oil flavor. In the earliest days of the administration, they promoted a number of striking industry-favorable policy decisions, such as the rejection of the Kyoto Treaty on global warming, the ouster of the head of the Intergovernmental Panel on Climate Change, and the elaboration of a strongly pro-oil national energy plan.

In the UK, close ties likewise bind companies and successive governments together, The government even held a majority stake in BP, with seats on the board, until 1987. By contrast to the United States, where the oil companies are first among such peers as General Motors, Walmart and Citigroup, in the UK, oil giants Shell and BP tower far above the next tier firms like British Telecom, Unilever and ICI.²³ From such heights, UK oil executives speak almost as unofficial members of government. In recent years, a number of personal ties stand out, especially the close friendship between Prime Minister Tony Blair and BP CEO John Browne (Lord Browne of Maddingley). The Blair-Browne relationship was so close that wags in the press called the company “Blair Petroleum,” though it would have been more accurate to say that Blair was the BP Prime Minister. At least a dozen BP executives held government posts or sat on official advisory committees, including Browne’s immediate predecessor David Simon (Lord Simon of Highbury). Simon had stepped down as BP CEO to serve as Blair’s unelected Minister for European Trade and Competitiveness from May 1997 to July 1999.²⁴ Later on, Tony Blair’s longtime friend and personal assistant Anjl Hunter, director of government relations and known as “the gatekeeper” in Downing Street, joined BP as head of public relations in the summer of 2002, just as the war was actively brewing.²⁵

After a century of closely-combined action on the global stage, company chieftans and government leaders see their relationship as cooperative and thoroughly complementary. In April, 2003, shortly after the war in Iraq, Lord Browne responded tartly to critics by saying: “It is quite ethical and appropriate for a global company, based in the UK, to be supported by the British government.”²⁶ He did not, of course, go into the details.

Seven Oil Wars to Control Iraq

Before coming to the Iraq war of 2003, we will review the modern history of conflicts over Iraq. There have been a total of seven wars in the past ninety years, all closely related to oil. What follows is a thumbnail sketch of those conflicts, to suggest the constant military struggle over this oil-rich territory.

1. Colonial Conquest (1914-18). The first conflict took place during World War I, when the British captured the area from the Ottoman Empire during a bloody four-year campaign. Lord Curzon, a member of the War cabinet who became Foreign Minister immediately after the war, famously stated that the influence of oil over British policy in Iraq was “nil.” “Oil,” said Curzon, “had not the remotest connection with my attitude over Mosul,” the major city in Iraq’s northern oil-bearing region.²⁷ Studies by a number of historians have shown that Curzon was lying and that oil was indeed the major factor shaping British policy towards Iraq.²⁸ Sir Maurice Hankey, Secretary of the War Cabinet, even insisted enthusiastically in a private cabinet letter that oil was a “first class war aim.”²⁹ London had ordered its forces to continue fighting after the Mudros Armistice was signed, so as to gain control of Iraq’s main oil-producing region. Fifteen days later, the British army seized Mosul, capital of the oil region, blocking the aspirations of the French, to whom the area had been promised earlier in the secret Sykes-Picot agreement.³⁰

2. War of Pacification (1918-1930). To defend its oil interests, Britain fought a long war of pacification in Iraq, lasting from 1918 throughout the next decade. The British crushed a country-wide insurrection in 1920 and continued to strike at insurgents with poison gas, airplanes, incendiary bombs, and mobile armored cars, using an occupation force drawn largely from the Indian Army. This carnage killed or wounded thousands of Iraqis, burning villages and extracting colonial taxes by brutal means. Winston Churchill, as Colonial Secretary, saw the defense of Iraq’s lucrative oil deposits as a test of modern weaponry and military-colonial use of force, enabling Britain to hold the oil fields at the lowest possible cost.³¹

3. Re-Occupation (1941). Though Britain granted nominal independence to Iraq in 1932, it maintained a sizeable military force and a large air base in the country and continued to rule “indirectly.” In 1941, fearful that Iraq might fall into the hands of the Axis, London again decided to seize direct control of the country through military force. Broad geo-strategic wartime goals drove this campaign, but not least was British concern to protect the Iraqi oil fields and keep them in British hands, free not only from German but also from US challenge.³²

4. Iran-Iraq War (1980-88). In 1980, Iraq attacked its neighbor, Iran. A long war ensued through 1988, a savage conflict causing hundreds of thousands of casualties on both sides, costing tens of billions of dollars and destroying much of both countries’ oilfields and vital infrastructure. Foreign governments, interested in gaining geo-strategic advantage over both nations’ oil resources, promoted, encouraged and sustained the war, some arming both sides. The US and the UK supplied Iraq with arms, chemical and biological weapon precursors, military training, satellite targeting and naval support. Other powers participated as well, notably France, Germany and Russia.³³ The big oil companies profited mightily, as war conditions kept Iraqi and Iranian oil off the market, driving worldwide prices substantially higher. By bankrupting the two governments and ruining their oil infrastructure, the war also potentially opened the way for the return of the companies through privatization in the not-too-distant future. But after the war, when Iraq and Iran turned to Japanese oil companies for new private investments, including a Japanese role in Iraq’s super-giant Majnoun field, the stage was set for yet another conflict.

5. Gulf War (1991). Following the Iraqi invasion of Kuwait in August 1990, the US decided to intervene militarily and Washington assembled a number of secondary military partners, including the UK and France. As US President George Bush summed up the oil-centered threat posed by Saddam Hussein at the time: “Our jobs, our way of life, our own freedom and the freedom of friendly countries around the world would all suffer if control of the world’s great oil reserves fell into the hands of Saddam Hussein.”³⁴ US forces heavily bombed Iraqi cities and military installations and then launched a short and decisive ground war, ending the Iraqi occupation of its neighbor. The war badly battered Iraq, destroying much of its electricity and water purification systems and claiming 50-100,000 casualties.

6. Low Intensity Conflict During the Sanction Period (1991-2003). After the armistice, the UN’s pre-war embargo continued, because the US-UK used their Security Council vetoes to block its lifting. The sanctions imposed a choke-hold on Iraq’s economy, restricted oil sales and kept the country’s oil industry in a shambles. By blocking foreign investment and preventing reconstruction, the sanctions further ruined the country’s economic base. At the same time, with Iraqi supplies largely off the market, international oil prices were supported and company profits benefited. The US and the UK declared their goal to oust Saddam and their intelligence services made many efforts to assassinate him or to overthrow his government by military coup. The US-UK also established “no-fly” zones in much of Iraqi airspace, using air patrols to launch periodic attacks on Iraqi military targets. Four times, the US-UK launched major attacks, using scores of strike aircraft and cruise missiles – in January 1993, January 1996, June 1996 and December 1998. Though oil companies from a number of other countries negotiated with the Iraqi government for production deals, none dared to challenge the sanctions (and the Anglo-American companies) by beginning production under such risky circumstances.

7. Iraq War (2003). This war, launched by the US in spite of strong opposition at the UN, overthrew the government of Saddam Hussein and brought the US-UK coalition into direct rule over Iraq and in direct control of the oil fields. The war caused further deterioration of Iraq’s infrastructure, many casualties, and a chaotic and dysfunctional economy. Though the coalition rules Iraq, it has faced a tough armed resistance during many months following the main conflict. War number eight, the coalition’s war of pacification, has already begun.

The Exceptional Lure of Iraqi Oil

Constant wars hint at the exceptional lure of Iraq’s oil fields. Iraq’s oil is of good quality, it exists in great quantity, and it is very cheap to produce, offering the world’s most extraordinary and profitable oil rents.

Officially, Iraq’s reserves are stated as 112 billion barrels, the world’s second largest after Saudi Arabia. According to the US Department of Energy, Iraq’s real reserves may be far greater – as much as 3-400 billion barrels after further prospecting.³⁵ Iraq’s Senior Deputy Oil Minister confirmed high estimates on May 22, 2002, in an interview with Platts, a leading industry information source. He said: “we will exceed 300 billion barrels when all Iraq’s regions are explored,” and he went on to affirm that “Iraq will [then] be the number one holder of oil reserves in the world.”³⁶

Iraq’s oil is the world’s cheapest to produce, at a cost of only about $1 per barrel. The gigantic “rent” on Iraq’s oil, during decades of production, could yield company profits in the range of $4-5 trillion dollars – that is, $4-5 million, millions. Assuming fifty years of production and 40% royalties, Iraq could yield annual profits of $80-90 billion per year – more than the total annual profits of the top five companies, even in the banner year of 2003.³⁷

As the world’s other oilfields seriously deplete during the next two decades, global production will increasingly depend on the enormous reserves of the Persian Gulf region. Iraq will then represent a large and increasing percentage of the world’s supplies – perhaps over thirty percent. An international company must hold a serious stake in Iraq if it is to retain its status as a major player in the world’s oil industry. The Anglo-American giants know they must gain the lion’s share in Iraq or decline irrevocably.

Shortly before the war, industry experts described Iraq as a future “gold rush,” where the companies would battle to gain control of key reserves.³⁸ At that time, a well-informed diplomat at the UN commented bluntly: “Exxon wants Majnoun and they are determined to get it.”³⁹ And a longtime industry observer said: “There is not an oil company in the world that doesn‘t have its eye on Iraq.”⁴⁰

Control of Reserves

Oil companies’ future profits – and their current share prices and market capitalization – depend to a large degree on their control of reserves. The 1972 oil nationalizations in Iraq pushed the US and UK companies completely out of the country. Before that date, they held a three-quarter share of the Iraq Petroleum Company, including Iraq’s entire national reserves. After 1972, all that oil disappeared from their balance sheets.

In the 1980s and 90s, their rivals in France, Russia and even Japan and China began to make deals that led towards lucrative production sharing agreements, allowing those competitors to gain a large potential share of Iraq’s oil reserves. The sanctions regime, enforced under the United Nations and maintained at the insistence of the US and UK from 1990 to 2003, prevented these deals from coming to fruition, thus protecting the future stake of the US-UK companies.

In recent years, as older fields worldwide have dwindled, the companies have faced rising replacement costs for their reserves. According to a 2002 report by energy consultants John S. Herold, “finding costs” for new reserves rose 61% in 2001, pushing replacement costs to $5.31 a barrel.⁴¹ “Finding new sources of oil has become the industry’s main challenge, as old fields in North America and Europe are being tapped out,” commented the Wall Street Journal in early 2003.⁴² Imagine, then, the lure of the vast Iraqi fields, offering nearly free acquisition and a huge addition to total reserves. As Fadel Gheit of Fahnstock & Co. in New York concluded, Iraq “would be a logical place in the future for oil companies to replace their reserves.”⁴³

New Iraq Contracts and Moves toward War

The big US-UK companies made no secret of their strong desire for Iraqi oil. BP and Shell conducted secret negotiations with Saddam Hussein, while Exxon and Chevron took a harder line and waited for Washington to eliminate Saddam covertly. In 1997, as the sanctions lost international support, Russia’s Lukoil, France’s Total, China National and other companies struck deals with the government of Iraq for production sharing in some of Iraq’s biggest and most lucrative fields. Lukoil reached an agreement for West Qurna, Total got Majnoun, while China National signed on for North Rumaila, near the Kuwaiti border.⁴⁴ Paris, Moscow and Beijing, as Permanent Members in the UN Security Council pressed for an easing of the sanctions, with support from a growing number of other countries. Grassroots movements, concerned about Iraq’s humanitarian crisis, called on the UN Security Council to end the sanctions forthwith.

In 1997-98, the US companies saw the writing on the wall. With Iranian fields already slipping into the hands of competitors, such losses in Iraq threatened to reduce them to second rank and confront them with fierce international competition and downward profit pressure. The companies stepped up their lobbying in Washington and made their wishes for Iraq oil crystal clear. “Iraq possesses huge reserves of oil and gas – reserves I’d love Chevron to have access to,” enthused Chevron CEO Kenneth T. Derr in a speech at the Commonwealth Club of San Francisco.⁴⁵

Almost as soon as Iraq signed the new oil agreements, Washington began to deploy military forces near the country’s borders in a very threatening forward posture. Operation Phoenix Scorpion and Operation Desert Thunder in various phases lasted almost continuously from November 1997 through December 1998. In Washington, the rhetoric grew increasingly hard-line and threatening. On January 26, 1998 members of the right-wing Project for a New American Century sent a letter to President Bill Clinton warning that the containment policy “has been steadily eroding over the past several month” and calling for “removing Saddam Hussein from power.”⁴⁶ CIA sources told journalists and members of Congress that Saddam was hiding large stocks of deadly weapons. Congress held hearings and began drafting legislation. The President asked the Pentagon to plan a variety of military options, ranging from limited strikes (later designated Operation Desert Fox) to full-scale war (Operation Desert Lion).

On May 1, President Clinton signed a law that provided $5 million in funding for the Iraqi opposition and set up “Radio Free Iraq.” That was only the beginning. On May 29, the Project for a New American Century sent an open letter to Congress on Iraq, insisting that the US government was not sufficiently firm with Saddam, attacking what it called the President’s “capitulation” and warning of severe “consequence” to US interests. Among the signatories of this high-profile letter were Donald Rumsfeld, Paul Wolfowitz, Richard Perle, Elliot Abrams, John Bolton and others who would later take high posts in the Bush administration.⁴⁷ The Clinton White House was ready to oblige. On August 14, the President signed another law (PL 105-235) that accused Iraq of building weapons of mass destruction and failing to cooperate with UN inspectors, declaring ominously: “Iraq is in material and unacceptable breach of its international obligations.” Finally, on October 31, the President signed the “Iraq Liberation Act of 1998” (PL 105-338), a text still more bellicose. “It should be the policy of the United States to support efforts to remove the regime headed by Saddam Hussein from power in Iraq,” read the key sentence. In London, government leaders made similar expressions of determination and a UK Strategic Defence Review of July 1998 affirmed readiness to use force. “Outside Europe,” the Review concluded, “the greatest risks to our national economic and political interests . . . will remain in the Gulf.”⁴⁸

On December 16-19, 1998, the US-UK launched Operation Desert Fox. Hundreds of strike aircraft and cruise missiles hit Baghdad and other major Iraqi targets, including an oil refinery. The attacks ended the UN arms inspection program, pre-empting any declaration that Iraq was nearly free of mass destruction weapons. Following Desert Fox, US-UK air forces patrolled the “no-fly” zones with new, more aggressive rules of engagement and regular attacks on Iraqi targets.

This increasingly aggressive policy towards Iraq expressed a hardening conviction among leaders in the US and the UK that Saddam Hussein could not be ousted by covert means, and that invasion and direct control over Iraq’s oil would now be required.

The Bush Administration Heads for War

The new Bush administration came into office in January 2001 at this critical juncture. Revelations by former Secretary of the Treasury Paul O’Neill inform us that the new administration started planning for an invasion of Iraq almost immediately. According to O’Neill, Iraq was “Topic A” at the very first meeting of the Bush National Security Council, just ten days after the inauguration. “It was about finding a way to do it,” reports O’Neill, “That was the tone of the President, saying ‘Go find me a way to do this.’”⁴⁹ Meanwhile, the President ordered stepped-up overflights and provocative attacks on Iraqi targets under a plan, evidently known as Operation Desert Badger. On February 16, US aircraft bombed Iraqi radar installations north of the no-fly zone and very close to southern limits of Baghdad. Readily audible from the Iraqi capital, this attack drew wide media comment.

Just a few weeks later, the hastily-organized National Energy Policy Development Group, chaired by Vice President Cheney, studied the challenge posed by French, Russian and other companies. One of the documents produced by the Cheney group, made public after a long court case, is a map of Iraq showing its major oil fields and a two-page list of “Foreign Suitors for Iraqi Oilfield Contracts.” The list showed more than 40 companies from 30 countries with projects agreed or under discussion, but not a single US or UK deal.⁵⁰ The list included agreements or discussions with companies from Germany, India, Italy, Canada, Indonesia, Japan and other nations, along with the well-known French, Russian and Chinese deals. The Cheney Group’s report, released in May, warned ominously of US oil shortfalls that might “undermine our economy, our standard of living, our national security.”

The Bush administration seems to have reached a near-decision on war with Iraq in the late spring of 2001. The events of September 11, 2001 and the US war on Afghanistan, postponed the timetable of operations, but may have helped solidify the support of the UK ally. According to Sir Christoper Meyer, the British ambassador in Washington at the time, President Bush raised the issue of Iraq with UK Prime Minister Tony Blair at a private dinner at the White House just nine days after September 11. Bush asked for British support for removal of Saddam Hussein from power, a clear reference to a military operation. According to Meyer's account, Blair gave his silent assent to the proposal. 52 As the wheels of policy began to turn in the Pentagon and the While House, oil industry publications like Platts and Oil and Gas Journal reflected the growing sense of urgency within the industry that the time for action had arrived. Early in 2002, more than a year before the conflict, Bush and Blair affirmed their plans for war and (while keeping their decision secret) stepped up efforts to prepare their governments and their publics for the use of force.

As war talk increased in Washington and at the UN, oil issues came into the open. The influential Heritage Foundation published in September a report on “The Future of a Post-Saddam Iraq” which called for the privatization of Iraq’s national company and warned that competitor companies would lose their Saddam-era contracts. The companies, the Bush administration and the Iraqi opposition held many meetings over post-war oil. The Washington Post reported in September that the big companies were “maneuvering for a stake” in postwar Iraq and that the war could cause major “reshuffling” of world petroleum markets. Former CIA Director James Woolsey told the Post that the US would use access to post-war oil as a bargaining chip to win French and Russian support for the war.⁵¹ Also at this time, Iraqi exile leaders said publicly that a post-Saddam government would “review” all the foreign oil agreements. Ahmad Chalabi, leader of the Iraqi National Congress, US favorite as heir to the Iraqi leadership, was quoted as saying: “American companies will have a big shot at Iraqi oil.”⁵³

Russian officials told the London-based Observer newspaper that they feared a post-war nullification of the large Russian contracts, with the most lucrative deals given over to US companies. The Observer quoted one official in Moscow as saying that the impending conflict could be called “an oil grab by Washington.” In France, it was reported that Total was actually in negotiations with the US government “about redistribution of the oil regions between the world’s major companies.”⁵⁴

On October 21, Deutsche Bank added to the war-for-oil speculation by publishing a major investor-research study entitled: “Baghdad Bazaar: Big Oil in Iraq?” The report, which noted that “war drums are beating in Washington” and “Big Oil is positioning for post-sanctions Iraq,” analyzed the upward stock market potential of the oil industry in light of declining world reserves and Iraq’s post-war potential. On November 1, Youssef Ibrahim of the Council on Foreign Relations, warned in the International Herald Tribune that the coming war was “bound to backfire,” calling it a “a misguided temptation to get more oil out of the Middle East by turning a ‘friendly’ Iraq into a private American oil pumping station.”⁵⁵

Meetings continued all fall and into the new year in Washington, London, Houston and elsewhere, between government officials, oil executives and Iraqi opposition leaders in various combinations. US envoys held private talks on oil in Moscow, Paris, Beijing and other capitals. In December, there was a meeting of oil company figures at a resort near Sandringham in Scotland, featuring a talk by the former head of Iraq’s Military Intelligence Agency. Topics on the agenda included Iraq’s future oil potential and whether post-Saddam Iraq might pull out of OPEC.⁵⁶ In the Pentagon, war planners were considering how to seize Iraq’s oil fields in the first hours and days of the impending conflict.

The War and After

US-UK forces invaded Iraq on March 20, 2003, seizing the major oilfields and refineries almost immediately. When coalition forces later entered Baghdad, they set a protective cordon around the Oil Ministry, while leaving all other institutions unguarded, allowing looting and burning of other government ministries, hospitals and cultural institutions. Looters sacked the National Museum and burned a wing of the National Library, but the Oil Ministry stood relatively unscathed, with its thousands of valuable seismic maps safe for future oil exploration.

President Bush quickly appointed Phil Carroll, a former high-ranking US oil executive, to assume control of Iraq’s oil industry and on May 22, Bush issued Executive Order 13303 giving immunity to oil companies for all activities in Iraq and deals involving Iraqi oil. On the same day, under pressure from the US and the UK, the UN Security Council passed Resolution 1483 which lifted the former sanctions and allowed the occupation authorities to sell Iraqi oil and put the proceeds in an account they controlled. Every step in the early post-war period confirmed the centrality of oil, not as an Iraqi national resource to be protected, but as a spoil of war to be controlled. Now, many months after the war, the picture remains the same.

Company Bonanza or Greedy Overreach?

Was the war a bold and successful calculation or a major error, resulting from official hubris and company greed? The war’s authors hoped to affirm a New American Century and company pre-eminence, but the conflict instead could limit US global ambitions and set back oil company aspirations. It is too early to be certain of the outcome, but we can make a few preliminary conclusions.

The companies hoped that the Iraq war would allow them to take over Iraq’s oil reserves with only a minimum of difficulty. Self-confident assurances by pro-war ideologues in Washington reinforced the widely-held conviction that the sole superpower could easily mobilize international support and that the people of Iraq would welcome the invaders and applaud the “liberation” offered by a US occupation government. The hawks expected that they could rapidly set up a pliant government and privatize the Iraqi industry or distribute production agreements speedily to US firms. But these ideas proved illusory. Instead, Bush and Blair faced enormous worldwide opposition to the war. And in spite of US forces’ rapid seizure of the country, they now grapple with economic chaos and an intense and lethal resistance movement.

The companies, it should be said, are not in a great hurry. They plan and act on decades-long time horizons. They can wait out the insecurity of the present if the precious Iraqi oil fields fall dependably into their hands sometime in the next few years. But it is by no means certain that the Anglo-American giants will get their way as easily in Iraq as they did in Washington. As they wait, the violence of pacification and resistance engulfs the country. War number eight gets under way.

Iraq: the Struggle for Oil (August 2002)
Oil in Iraq: the Heart of the Crisis (December 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

Notes

¹See, for example, Daniel Yergin, The Prize (New York: Simon & Schuster, 1991).

²The Seven Sister companies arose after the federal anti-monopoly breakup of the Standard Oil Trust in 1911. They included three Standard Oil spinoffs, Standard Oil Company of New Jersey, Standard Oil Company of New York , and Standard Oil Company of California, as well as Texaco, Gulf, and the UK giants Royal Dutch Shell and British Petroleum. See Anthony Sampson, The Seven Sisters: the great oil companies and the world they made (London: Hodder & Staughton, 1988)

³Data from ExxonMobil web site, announcement of 2003 earnings, January 29, 2004, http://www.exxonmobil.com/corporate/files/corporate/earnings_4q03.pdf.

⁴Data from CIA World Factbook web site (www.cia.gov/cia/publications/factbook) and Fortune Global 500 (www.fortune.com/fortune/fortune500). Note that we are comparing company revenue with government revenue, not with national GNP. The seventh richest government, the Netherlands, had a revenue in 2001 of $134 billion, far below Exxon’s figure.

⁵See tables posted on the Global Policy Forum web site, based on information from Fortune and the CIA Factbook – www.globalpolicy.org/socecon/tncs/oiltable.htm - www.globalpolicy.org/socecon/tncs/oiltncs2002.htm - www.globalpolicy.org/socecon/tncs/tncstat2.htm

⁶Ordinary citizens worry about having a plentiful supply of gas for their automobiles, too. On this basis, the US government has often mobilized its people around aggressive Middle East military policies.

⁷John D. Rockefeller, Random Reminiscences of Men and Events (New York: Doubleday, 1909)

⁸Yergin,183.

⁹Michael B. Stoff, Oil, War and American Security: the search for a national policy on foreign oil 1941-1947 (New Haven: Yale University Press, 1980), 147-50.

¹⁰Wilson D. Muscamble, George F. Kennan and the Making of American Foreign Policy (Princeton: Princeton University Press, 1992)

¹¹Rents sometimes result from technical advances, patents, copyrights, and the like, advantages that normally disappear after a period of time. Oil rents are long-lasting and can yield far higher spreads between the normal profit rate and the rate expressed by the rent.

¹²Virtually all historical studies of the industry provide evidence of this kind. See Yergin (1991) and Sampson (1988) See also: Joe Stork, Middle East Oil and the Energy Crisis (New York: Monthly Review, 1976) and Fiona Benn, Oil Diplomacy in the Twentieth Century (New York: St. Martin’s Press, 1986).

¹³Richard Sale, “Saddam Key in Early CIA Plot,” United Press International, April 10, 2003. Sale quotes a US operative who knew Saddam at that time saying: “He was a thug – a cutthroat.” Saddam was 22 years old at the time of the botched assassination.

¹⁴See Kermit Roosevelt, Countercoup, the struggle for the contol of Iran (New York: McGraw-Hill, 1979), a book written by the CIA’s coup-maker in Tehran, and Ervand Abrahamian, Iran Between Two Revolutions (Princeton: Princeton University Press, 1982).

¹⁵See, for example, Joseph Fitchett and David Ignatius, “Lengthy Elf Inquiry Nears Explosive Finish,” International Herald Tribune,” February 1, 2002 and Nicholas Shaxon, "The Elf Trial: political corruption and the oil industry," in Transparency International, Global Corruption Report 2004 (London: Pluto Press, 2004), pp. 67-71. Almost all the world’s oil-producing countries have suffered from abusive, corrupt and undemocratic governments and an absence of durable development. Indonesia, Saudi Arabia, Libya, Iraq, Iran, Angola, Colombia, Venezuela, Kuwait, Mexico, Algeria – these and many other oil producers have a sad record, which includes dictatorships installed from abroad, bloody coups engineered by foreign intelligence services, militarization of government and intolerant right-wing nationalism. On poverty and war in oil-producing countries see Christian Aid, Fueling Poverty: Oil, War and Corruption (London, 2003) and Michael Ross, Extractive Sectors and the Poor (Oxfam America, 2001).

¹⁶For a lengthy discussion of the special tax treatment of the companies see John M. Blair, The Control of Oil (New York: Random House, 1976), 187-203.

¹⁷Blair (1976), 71-76.

¹⁸New York Times, January 2, 2004.

¹⁹For a discussion of the Central Command as a force designed for oil-related intervention, see Michael T.Klare, Resource Wars: the new landscape of global conflict (New York: publisher, 2001)

²⁰Testimony of the senate Armed Services Committee, April 13, 1999.

²¹See Peter Grose, Gentleman Spy: the life of Allen Dulles (Boston: Houghton Mifflin, 1994)

²²Stoff (1980), 64-68.

²³In 2003, for example, while BP had revenues of $233 billion, British Telecom had revenues of $29 billion, Barclays $26 billion, Lloyds $22 billion, Unilever $20 billion, BAT $18 billion and ICI only $10 billion.

²⁴In recent decades in the UK, government ministers have nearly always been drawn from elected members of parliament, sitting in the House of Commons. Simon had just been named to the unelected House of Lords and had no parliamentary experience or popular constituency.

²⁵On Hunter, see New York Times, August 30, 2003.

²⁶As quoted in Guardian, April 6, 2003.

²⁷Curzon was responding to fierce criticism in parliament and the press. T. Johnson, MP, had said, for example, that “The trail of oil was all over the question of Mosul and Iraq.” Curzon wrote three articles in The Times (London) on August 2, 9 and 16, 1924 in which he set forth his denials.

²⁸See Helmut Mejcher, Imperial Quest for Oil: Iraq 1910-1928 (London: Ithaca Press, 1976) and Peter Sluglett, Britain in Iraq 1914-1932 (London: Ithaca Press, 1976)

²⁹A note the Foreign Secretary Arthur Balfour, as quoted in Yergin, 188.

³⁰On the seizure of Mosul, see Mechjer (1976), 42. Merchjer notes that the British also postponed the signing of the armistice to enable their forces to make more progress towards Mosul. See also Sluglett (1976).

³¹See, for example, David E. Omissi, British Air Power and Colonial Control in Iraq: 1920-1925 (Manchester: Manchester University Press, 1990), Sluglett, V.G. Kiernan, Colonial Empires and Armies: 1815-1960 (Stroud: Sutton, 1998).

³²Raghid Solh, Britain’s 2 Wars with Iraq, 1941-1991 (Reading: Ithaca Press, 1996)

³³Dilip Hiro, The Longest War: the Iran-Iraq military conflict (New York: Routledge, 1991)

³⁴As quoted by the New York Times, August 16, 1990

³⁵See US Department of Energy, Energy Information Administration website at http://www.eia.doe.gov/emeu/cabs/iraq.html

³⁶Platts website.

³⁷I have arrived at this figure based on assumptions about four variables. I assume 350 billion barrels of reserves, $30 oil rent average in real terms, 75% recovery rate and 60% company share of the rent (the remainder going to the government). Different assumptions would yield different final estimates. For example, assumptions based on worldwide oil scarcity would drive the number up, while assumptions based on rapid conversion to sustainable energy sources would drive the number down. World Energy Outlook of 2001, published by the International Energy Agency, estimated that the total value of foreign contracts signed by the Iraqi government of Saddam Hussein might reach $1.1 trillion, a. number consistent with mine, since the contracts covered only a fraction of Iraq’s total oil potential. See “Scramble to care up Iraqi oil reserves lies behind US diplomacy,” Observer, October 6, 2002.

³⁸Author’s Interview with an expert, November, 2002.

³⁹Author’s Interview with a UN diplomat, November, 2002.

⁴⁰Interview with a US-based industry observer, November, 2002

⁴¹Platts website –www.platts.com/Oil/Resources/

⁴²Susan Warren, “Exxon’s Profit Surged in 4th Quarter,” Wall Street Journal, February 12, 2004.

⁴³Platt’s website, www.platts.com/Oil/Resources/f.. A recent example, not dealing with Iraq, shows the great importance of company reserves. On January 9, 2004, Shell announced that it had revaluated its worldwide reserves downward by 20%. The firm’s stock immediately declined by 7%. Shell had reduced its estimated reserves by 3.9 billion barrels, bringing the company’s total to 15.4 billion barrels (Exxon’s reserves were 22 billion barrels at that time). By contrast, Iraq’s single super-giant Majnoun field (promised pre-war to Total) has estimated reserves of 10- 30 billion barrels, while the super-giant West Qurna field (promised to Lukoil) has estimated reserves of 15-18 billion barrels. If Shell could get control of such a field in Iraq, it could more than double its total company reserves and enjoy an enormous lift in its share prices. This demonstrates clearly what is at stake in Iraq, since share valuation brings fifty years or more of future production immediately into the market capitalization of the firm.

⁴⁴China had become a major player in the Middle East oil game because of its rapid economic growth and huge future oil needs, with Persian Gulf imports estimated to rise from 0.5 million barrels per day in 1997 to 5.5 million barrels per day in 2020.

⁴⁵As posted on the company web site at www.cherontexaco.com/news/archive/chevron_speech/1998/98-11-05.asp

⁴⁶Project for a New American Century web site – www.newamericancentury.org/iraqclintonletter.htm

⁴⁷www.newamericancentury.org/iraqletter.htm

⁴⁸UK Ministry of Defence website, White Paper, July 18, 2002 – www.mod.uk/issues/sdr/newchapter.htm

⁴⁹Ron Suskind, The Price of Loyalty: George W. Bush, the White House and the Education of Paul O’Neill (New York, Simon & Schuster, 2004) 174-75

⁵⁰The Cheney documents were curiously made public in response to a law suit by a conservative organization called Judicial Watch. The administration fought the Judicial Watch case in court, but eventually lost. The “Foreign Suitors” list includes Shell, but lists no contract results with the company. Exxon, Chevron and BP are not on the list at all. Two small UK firms, Branch Energy and Pacific Resources are also to be found on the list.

⁵¹Dan Morgan and David B. Ottaway, “In Iraqi War Scenario, Oil is Key Issue as U.S. Drillers Eye Huge Petroleum Pool,” Washington Post, September 15, 2002.

⁵²David Rose, "Bush and Blair Made Secret Pact for Iraq War," The Observer, April 4, 2004

⁵³Morgan and Ottaway (2002)

⁵⁴Ed Vulliamy, Paul Webster and Nick Paton Walsh, “Scramble to Carve up Iraqi oil reserves lies behind US diplomacy,” The Observer, October 6, 2002.

⁵⁵Youssef Ibrahim, “Bush’s Iraq adventure is bound to backfire,” International Herald Tribune, November 1, 2002.

⁵⁶Peter Beaumont and Faisal Islam, “Carve-Up of Oil Riches Begins,” Observer, November 3, 2002.

Oil in Iraq: the heart of the Crisis - James A Paul

2006-04-02T16:22:00.000-07:00

Oil in Iraq: the heart of the Crisis

James A. Paul

Global Policy Forum
December, 2002

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Iraq: the Struggle for Oil (August, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

Oil is at the heart of the crisis that leads towards a US war against Iraq. For more than a hundred years, major powers have battled to control this enormous source of wealth and strategic power. The major international oil companies, headquartered in the United States and the United Kingdom, are keen to regain control over Iraq’s oil, lost with the nationalization in 1972. Few outside the industry understand just how high the stakes in Iraq really are and how much the history of the world oil industry is a history of power, national rivalry and military force.

Why Iraq’s Oil is so coveted by the big companies

Oil in Iraq is especially attractive to the big international oil companies because of three factors:

(1)high quality/high value product
Iraq’s oil is generally of high quality because it has attractive chemical properties, notably high carbon content, lightness and low sulfur content, that make it especially suitable for refining into the high-value products. For these reasons, Iraqi oil commands a premium on the world market.

(2)huge supplies
Iraq’s oil is very plentiful. The country’s proven reserves in 2002 were listed at 112.5 billion barrels, about 11% of the world total. With little exploration since the nationalization of the industry in 1972, many promising areas remain unexplored. Experts believe that Iraq has potential reserves substantially above 200 billion barrels. The Energy Information Administration of the US Department of Energy has estimated that Iraqi reserves could possibly total over 400 billion barrels. If new exploration fulfills such high-end predictions, Iraq’s reserves could prove close to those of Saudi Arabia, now listed at 260 billion barrels but likely also to go considerably higher as well. The Department of Energy assessment says that:

“Iraq contains 112 billion barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia) along with roughly 220 billion barrels of probable and possible resources. Iraq’s true potential may be far greater than this, however, as the country is relatively unexplored due to years of war and sanctions. Deep oil-bearing formations located mainly in the vast Western Desert region, for instance, could yield large additional oil resources (possibly another 100 billion barrels), but have not been explored.” (http://www.eia.doe.gov/emeu/cabs/iraq.html)

On May 22, 2002, Iraqi Senior Deputy Oil Minister gave an interview to Platts, a leading industry information source. Discussing Iraq’s estimates of its potential reserves, he told Platts that "The figure we reached and which is widely known, is that we could discover 214 billion barrels of oil in addition to the present proven reserve [of 112 billion]. We are sure of this figure as all available indications and scientific standards say. This means that we will exceed the 300 billion barrels when all Iraq's regions are explored."

Hamud indicated that more reserves were probably to be found. "We have also said on many occasions that we have indications of oil structures--these are only primary indications--estimated to be more than 560 reservoirs that could be oil fields that need digging, appraisal and which we believe have a high potential oil presence. We believe that when we prove all this, Iraq will be the number one holder of oil reserves in the world. We are highly confident of this."

According to Iraq oil expert Mohammad Al-Gallani at British-based GeoDesign Ltd, Iraq has 526 prospective drilling sites, of which only 125 have been drilled. Of those, 90 have proven potential as oil fields, but only 30 have been partially developed and just 12 are on stream. “You can imagine the huge potential that lies there for the future,” Al-Gallani told Canadian Press in a story datelined December 14, 2002.

As world demand for oil increases and as oil reserves in other areas decline at a fast rate, oil in Iraq will represent a steadily-larger proportion of the world’s total. If Iraq’s fields meet high-end estimates in the 3-400 billon barrel range, Iraq’s reserves could reach over 30% of total global reserves by mid-century or even before.

(3)exceptionally low production costs, yielding a high per barrel profit
The US Department of Energy states that “Iraq’s oil production costs are amongst the lowest in the world, making it a highly attractive oil prospect.” This is because Iraq’s oil comes in enormous fields that can be tapped by relatively shallow wells, producing a high “flow rate.” Iraq’s oil rises rapidly to the surface, because of high pressure on the oil reservoir from water and from associated natural gas deposits.

More than a third of Iraq’s current reserves lie just 600 meters (1800 feet) below the earth’s surface and some of Iraq’s fields are among the world’s largest. The fabulous Majnoun Field, not yet in production, is said to hold at least 25 billion barrels. According to Oil and Gas Journal, Western oil companies estimate that they can produce a barrel of Iraqi oil for less than $1.50 and possibly as little as $1, including all exploration, oilfield development and production costs and including a 15% return. This is similar to production costs in Saudi Arabia and lower than virtually any other country.

By way of comparison, a barrel of oil costs $5 to produce in other relatively low-cost areas like Malaysia and Oman. Production costs in Mexico and Russia might potentially be as low as $6-8 per barrel (higher under current production arrangements by local companies).

Offshore production areas like the North Sea, with expensive platforms, can run to $12-16 a barrel. In Texas and other US and Canadian fields, where deep wells and small reservoirs make production especially expensive, costs can run above $20 a barrel. When world market prices dip below $20 a barrel, the North American fields yield no profit at all, and many are capped, while production in an area like Iraq proves extremely profitable in all market conditions.

Oil companies' future profits (and share prices) depend on their control of reserves. In recent years, as older fields have begun to run out, the companies have faced rising “replacement” costs. According to a 2002 report by energy consultants John S. Herold, finding costs for new reserves rose 60% in 2001, pushing replacement costs to $5.31 a barrel. ExxonMobil, BP and Shell are facing this difficulty. Imagine the lure of the vast Iraqi fields, with little prospecting required, offering nearly free acquisition. As Fadel Gheit of Fahnstock & Co. in New York commented in an article in Dawn, Iraq “would be a logical place in the future for oil companies to replace their reserves.” http://www.dawn.com/2002/12/15/ebr12.htm Another expert called Iraq an “El Dorado” for the oil industry.

Estimating Profits in Iraq

Oil prices fluctuate widely, so any discussion of financial yield must be based on a long term average price estimate. For this discussion, we will use an average prices of $25 a barrel in real (inflation-adjusted) terms. This average is higher than the average price in recent years, but as oil becomes scarcer, the price should rise steadily and might well reach a far high level than $25. (During 2002, by way of reference, the price of oil has fluctuated between $20 and $30).

We will assume the level of Iraqi reserves at 250 billion barrels (a very conservative estimate) and recovery rates at 50% (also a very conservative estimate). Under those conditions, recoverable Iraqi oil would be worth altogether about $3.125 trillion. Assuming production costs of $1.50 a barrel (a high-end figure), total costs would be $188 billion, leaving a balance of $2.937 trillion as the difference between costs and sales revenues. Assuming a 50/50 split with the government and further assuming a production period of 50 years, the company profits per year would run to $29 billion. That huge sum is two-thirds of the $44 billion total profits earned by the world’s five major oil companies combined in 2001. If higher assumptions are used, annual profits might soar to as much as $50 billion per year.

Though such numbers are highly speculative, the oil companies themselves engage in similar exercises, as they develop their global strategies and plan for a flow of profits many years into the future. For instance, two Russian companies, Zarubeshneft and Rosneft, told journalists in 2002 that that they were preparing to develop Iraq’s Nahr Umr field that they estimated was worth about $570 billion. This estimate appears too high, based on our assumptions, but they suggest the order of magnitude. Reliable estimates for the value of the fabulous Majnoun field go up to $400 billion and beyond.

If diminishing supplies drive future prices steadily higher or if Iraq’s oil reserves prove to be much larger than 250 billion barrels, the profit yield might be considerably greater. On the other hand, a nationalist government in Baghdad that would demand a higher percentage split would reduce the profit potential, as would the development of major alternative energy sources and taxes on carbon-based fuels in response to global warming. Whatever the exact results, and assuming a U.S.-friendly government, it is clear that Iraq is a goldmine that is literally “worth fighting for” in the view of the big companies.

Iraqi Gas Reserves and Pipeline Routes

The same multinational companies that rule the oil industry are also in the natural gas business. Gas is increasingly popular because it burns with less particulate and has a lower carbon content per unit of energy output. Large gas reserves have been discovered in fields in northern Iraq and other gas fields may be found elsewhere in the country. Though Iraq’s gas may not prove to be as lucrative as its oil, this resource is also coveted by the companies and could be a source of additional multi-billion dollar profits. In December, 1996, Gaz de France and ENI of Italy formed a consortium to build a pipeline from the Iraqi fields to Turkey, a project that could eventually link up with the European gas grid. But because of the UN sanctions against Iraq, this project could not proceed. In post-war Iraq, the big US-UK companies will seek gas production and transport deals along with oil deals, in hopes of snatching these lucrative prospects away from continental European competitors. Other pipeline projects, to bring gas from Qatar and other Gulf states through Iraq to the European market, are also under study and offer huge profits to whichever companies get permission to build them.

New Oil Company Strategy Aims to Regain Dominance in Production

After the nationalizations that swept the oil producing countries, beginning with Iraq’s nationalization in 1972, the oil multinationals lost much of their role in production, known in the oil business as “upstream.” Forced to abandon the cornucopia of profits in the Middle East (and to buy Middle East oil on the world market), they developed alternative production in such areas as the North Sea and the West Coast of Africa where production costs were higher and profits lower. They had to shift much of their profit-making to “downstream” activities such as transportation (tankers and pipelines), refining, petrochemicals and retailing. Major national oil companies (such as Kuwait and Venezuela) pursued downstream strategies as well, however, leading to overcapacity and falling rates of return.

By the mid-1990s, the companies began to revise their strategy towards a return to upstream, crude-oil production, pressing oil producing governments to offer production-related arrangements that could give the multinationals a direct share in crude reserves. Such ideas proved controversial and contrary to nationalist public sentiment in the producing countries.

By the end of the 1990s, however, oil-producing governments were mired in political crises, due to corruption, wars, and civil unrest. In Venezuela, Iraq, Algeria, Iran, and other producer countries, the US government appeared to be involved in destabilization measures, deepening existing social instability and what some scholars call “the crisis of the rentier state." Facing domestic unrest and oil production problems, the nationalized companies confront the need for large new investments to preserve production in older fields and to prospect for new reserves. But corrupt and instable governments want to take all the oil revenue stream, leaving little left over for investments. The multinationals argue that their enormous finances, greater technical competence and lower production costs could benefit producer governments, but behind these technocratic arguments lies the threat of further foreign destabilization and even direct military intervention. Clearly, the companies hope to roll the clock back to the “good old days” when they ruled the oil business and gave producer governments only a very small share.

Effects of US-Dominated Iraq on Other Oil Producer Governments

A U.S. client government in Baghdad – or a U.S. military occupation government – would doubtless hand out upstream production concessions to US-UK companies that would set an important precedent in the world oil industry, tipping the balance of power in favor of the companies and away from the producer states. In this way, the war against Iraq would have an effect on the oil industry that would go far beyond the borders of Iraq.

Oil analysts believe that a US-controlled Iraqi government would quickly make deals with the companies for privatized production. Such deals, though possibly agreed-to in advance of the war, would be justified by the new government on the basis that only the companies would be able to quickly resume post-war production, in order to resume exports and buy critical food, medicines, and other humanitarian goods. Further, Iraq’s huge needs to rebuild its post-war infrastructure would lead towards high production.

Even before Iraq had reached its full production potential of 8 million barrels or more per day, the companies would gain huge leverage over the international oil system. OPEC would be weakened by the withdrawal of one of its key producers from the OPEC quota system. Indeed, OPEC might face the paradox that a US military government of occupation in Iraq would be an OPEC member! Alternatively, such a government might pull out of the producers’ cartel.

This would put pressure on all major oil producers like Kuwait, Iran, Saudi Arabia and Venezuela to de-nationalize their oil companies and offer US-UK companies new concessions or production-sharing agreements that could lead to far higher company profits in these areas. Iran has already made some deals based on a 50/50 split and Saudi Arabia has returned to production sharing in its emerging gas business. US military presence in the Gulf and US clandestine operations to overthrow nationalist governments such as Chavez in Venzuela would increase the pressure. Privatization, even if incomplete, could yield additional tens of billions of profits to the oil companies and would weaken and even destabilize the major oil-producing states. Oil prices might be lowered temporarily to achieve this purpose, then raised later on when a new company-friendly order had been established.

Competition among the Multinational Oil Companies

Five companies dominate the international oil industry, four of them based in the US and the UK. The largest, US-based Exxon Mobil, was the world’s most profitable company in 2001 ($15 billion in profits) and the largest industrial company in terms of revenue. The three other companies in order of size are: BP Amoco (UK), Royal Dutch Shell (UK), and Chevron Texaco (US). France’s TotalElfFina ranks in fifth place. Predecessors of these firms controlled nearly all of the Iraq Petroleum Company from the discovery of oil in the late 1920s until nationalization in 1972. The British firms held half of the company, reflecting the dominant colonial position of the UK at that time in the region.

After nationalization, the Iraqis sought to gain greater control of their oil resources. They shunned the UK and US companies, while developing working relationships with French companies and the (Soviet) Russian government.. Just before the Gulf War (1990-91), Japanese companies negotiated for production-sharing contracts in Iraq and were said to have concluded a deal for the Majnoun field, but that deal collapsed due to the US-led war and the subsequent sanctions. During the 1990s, various firms negotiated with the Iraqis in hopes of gaining access to Iraqi oil once the sanctions were lifted. Shell, and possibly other US-UK companies held secret talks that did not succeed. In 1997 TotalFinaElf, China National Oil Company, and Lukoil of Russia signed agreements with the Iraqis for deals worth hundreds of billions of dollars. Lukoil’s deal concerned development of the West Qurna field, while TotalFinaElf obtained rights to Majnoun and China Nations to North Rumailah (the latter is the huge field that lies astride the border with Kuwait). A number of smaller companies, mostly Russian but also from Malaysia and other countries, got contracts at about this time.

The US-UK companies, keen to regain their former dominance in Iraq, fear that they would lose their leading role in the world oil industry if these contracts with their competitors come to fruition. France and Russia pose the biggest threat, but serious competitors from China, Germany, Italy and Japan also are players in this sweepstakes. China is especially keen to gain a stake in the region’s oil reserves because its rapid economic growth is pushing up its oil consumption. Chinese economists estimate that China may have to import as much as 5.5 million barrels a day from the Gulf by 2020.

The US-UK companies strongly favored the sanctions, as a means to hold their competitors at bay (and hold down excess production on the world market), but weakening sanctions in the late 1990s threatened their future prosperity. The companies are nervous but enthusiastic about Washington’s war option, for it seems to be the only means left to oust their rivals and establish a dominant presence in the fabulously profitable future of Iraq oil production.

It appears that the Washington has used its post-war control over Iraqi oil to win over opposition in the UN Security Council. Discussions over access to future oil production in Iraq have apparently been going on between Washington, London, Moscow, Paris and Beijing and also between the companies directly. Many news stories have suggested that these parleys have taken place and statements by government leaders have underscored the importance of the oil issue.

"We will review all these agreements, definitely," said Faisal Qaragholi to a Washington Post reporter in September. Quaragholi is a petroleum engineer who directs the London office of the Iraqi National Congress (INC), an umbrella organization of opposition groups that is backed by the United States. "Our oil policies should be decided by a government in Iraq elected by the people."

Ahmed Chalabi, the INC leader, went even further, saying he favored the creation of a U.S.-led consortium to develop Iraq's oil fields, which have deteriorated under more than a decade of sanctions. "American companies will have a big shot at Iraqi oil," Chalabi said. Such statements have deepened the fears of the non-US-UK companies and pressured them to go along with the US war plans in order to get a share of the post-war concessions.

Business news agency Reuters, in a story datelined December 15, 2002, put the matter bluntly when it wrote “Iraq's crude reserves, the world's second largest after Saudi Arabia, are at the center of a tug-of-war between countries hoping to grab a share of Baghdad's oil wealth once United Nations sanctions are lifted.”

Free Market Forces vs. Government Intervention and Military Might

The specially high rate of profit (or “rent” as it is sometimes called by economists who study the oil sector) results from the unusual monopolistic structure of the oil industry and its unusual pricing system. From the earliest days in the 1870s, when John D. Rockeller built the Standard Oil Trust, a relatively small number of major companies have controlled world production and prices. These companies have tried to keep prices and production at a controlled level – to maximize their profits. The industry has always relied on close ties to governments. Governments have helped to maintain favorable market conditions, to promote managed pricing and to help the companies gain new sources of supply in foreign lands.

In the early decades, the Standard Oil Trust completely dominated the international oil markets, and US production represented a very large share of the world’s total. During World War I, US oil supplied an estimated 80% of the Allies’ needs. But by the end of the war, the British had built alternative companies – the Anglo-Persian Oil Company (later BP) and Royal Dutch Shell, which together controlled more than half of the world’s oil reserves. US companies feared that the British, through exclusionary policies in their empire, were going to dominate the world’s oil industry. British government purchase of the Anglo-Persian Oil Company (now BP) in 1914 confirmed these fears. And British firms’ leading role in Venezuela brought the competition right into the backyard of the American companies.

Throughout the inter-war period and up to the present the US and the UK have dominated the international oil industry, always in rivalry but also in collusion. The companies in these two countries have towered above those of all other nations. Bids by Japan, Germany, Italy, Russia and France to gain a major stake in the industry have largely failed, though a single large French company remains the sole challenger today to Anglo-American domination.

The Anglo-American companies have always sought to manage global oil output, though collusive agreements. In 1928, they reached the famous “Red Line Agreement” on joint action in the Middle East and the “Achanarry Agreement” to divide up (and avoid competition in) international markets. These agreements have maintained the extraordinary “rent” of Middle East producers, while supporting continued high-cost production in the United States and Canada. If oil markets functioned “normally,” production would increase in the low-cost areas like Saudi Arabia, Kuwait, Iran and Iraq, driving out of business the low-cost producers in North America, but this has not been the case.

Because of the enormous value of oil concessions and the high “rent” that results from low-cost fields, oil concessions are rarely allocated on a purely “market” basis. The companies typically win the most lucrative concessions through their host governments’ political and military power.

Imperial Control and Local Opposition: Will the US Iraq Plan Succeed?

The long, bitter experience of oil producing countries with the US-UK companies has left behind an anger and militancy in local politics that hinders the companies’ efforts to re-organize the “upstream” system. Such feelings run deep in Iraqi politics, going back to British seizure of Iraq after World War I and the bloody repression (including the use of poison gas) that crushed the nationalist revolt of 1920. British leaders fulminated against "Turkish misrule" in Iraq, but their own rule proved equally odious to Iraqis seeking independence and democracy.

Iraqis also remember the way the companies treated the country after it gained its independence and how the companies held Iraqi production down, to manage international supply and price levels. Iraqi’s also remember the fierce company resistance to Iraqi proposals for new exploration contracts in the 1960s. Such sentiments would doubtless not change after the ouster of Saddam Hussein.

These feelings are magnified by US support for Israel and by the long, punishing US-UK-UN sanctions. The US-UK would thus find it very politically difficult to create an indigenous post-Saddam government that would agree to a sweetheart deal for the US-UK companies. For this reason, the US-UK have announced that they are planning a military government that will “purge” Iraqi politics of its Baathist and nationalist elements and remain in power more than a year or as long as necessary. Though the US-UK official announcements speak about “human rights” and “democracy,” it would appear that the main goal of the war and “regime change” is to carry out the oil deals and re-fashion Iraqi politics on a new and more conciliatory and pro-US basis. Scenarios circulating in Washington talk about rapid military seizure of the oil fields, rebuilding oil infrastructure and protecting the oil production system from the negative effects of local politics.

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Iraq: the Struggle for Oil (August, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

Iraq and the Problem of Peak Oil - F. William Engdahl

2006-04-02T16:19:00.000-07:00

Current Concerns, No 1, 2004
www.globalresearch.ca 6 August 2004

The URL of this article is: http://globalresearch.ca/articles/ENG408A.html

Today, much of the world is convinced the Bush Administration did not wage war against Iraq and Saddam Hussein because of threat from weapons of mass destruction, nor from terror dangers. Still a puzzle, however, is why Washington would risk so much in terms of relations with its allies and the entire world, to occupy Iraq. There is compelling evidence that oil and geopolitics lie at the heart of the still-hidden reasons for the military action in Iraq.

It is increasingly clear that the US occupation of Iraq is about control of global oil resources. Control, however, in a situation where world oil supplies are far more limited than most of the world has been led to believe. If the following is accurate, the Iraq war is but the first in a major battle over global energy resources, a battle which will be more intense than any oil war to date. The stakes are highest. It is about fixing who will get how much oil for their economy at what price and who not. Never has such a choke-hold on the world economy been in the hands of one power. After occupation of Iraq it appears it is.

The era of cheap, abundant oil, which has supported world economic growth for more than three quarters of a century, is most probably at or past its absolute peak, according to leading independent oil geologists. If this analysis is accurate, the economic and social consequences will be staggering. This reality is being hidden from general discussion by the oil multinationals and major government agencies, above all by the United States government. Oil companies have a vested interest in hiding the truth in order to keep the price of getting new oil as low as possible. The US government has a strategic interest in keeping the rest of the world from realising how critical the problem has become.

According to the best estimates of a number of respected international geologists, including the French Petroleum Institute, Colorado School of Mines, Uppsala University and Petroconsultants in Geneva, the world will likely feel the impact of the peaking of most of the present large oil fields and the dramatic fall in supply by the end of this decade, 2010, or possibly even several years sooner. At that point, the world economy will face shocks which will make the oil price rises of the 1970's pale by contrast. In other words, we face a major global energy shortage for the prime fuel of our entire economy within about seven years.

Peak oil

The problem in oil production is not how much reserves are underground. There the numbers are more encouraging. The problem comes when large oilfields such as Prudhoe Bay Alaska or the fields of the North Sea pass their peak output. Much like a bell curve, oil fields rise to a maximum output or peak. The peak is the point when half the oil has been extracted. In terms of reserves remaining it may seem there is still ample oil. But it is not as rosy as it seems. The oil production may hold at the peak output for a number of years before beginning a slow decline. Once the peak is past however, the decline can become very rapid. Past the peak, there is still oil, but each barrel becomes more difficult to exploit, and more costly, as internal well pressures decline or other problems make recovery more expensive for each barrel. The oil is there but not at all easy to extract. The cost of each barrel past peak is increasingly higher as artificial means are employed to extract it. After a certain point it becomes uneconomical to continue to try to extract this peak oil.

Because most oil companies and agencies such as the US Department of Energy speak not of peak oil, but of total reserves, the world has a false sense of energy supply security. The truth is anything but secure.

Case studies

Some recent cases make the point. In 1991 the largest discovery in the Western Hemisphere since the 1970's, was found at Cruz Beana in Columbia. But its production went from 500,000 barrels a day to 200,000 barrels in 2002. In the mid-1980's the Forty Field in North Sea produced 500,000 barrels a day. Today it yields 50,000 barrels. One of the largest discoveries of the past 40 years, Prudhoe Bay, produced some 1.5 million barrels a day for almost 12 years. In 1989 it peaked, and today gives only 350,000 barrels daily. The giant Russian Samotlor field produced a peak of 3,500,000 barrels a day. It has now dropped to 325,000 a day. In each of these fields, production has been kept up by spending more and more to inject gas or water to maintain field pressures, or other means to pump the quantity of oil. The world's largest oil field, Ghawar in Saudi Arabia, produces near 60% of all Saudi oil, some 4.5 million barrels per day. To achieve this, geologists report that the Saudis must inject 7 million barrels a day of salt water to keep up oil well pressure, an alarming signal of near collapse of output in the world's largest oil kingdom.

The growing problem of peak oil has been known among oil industry insiders since the mid-1990's. In 1995, the leading oil consulting firm, Petroconsultants in Geneva, published a global study, 'The World Oil Supply.' The report cost $35,000, written for the oil industry. Its author was petroleum geologist, Dr. Colin Campbell. In 1999 Campbell testified to the British House of Commons, 'Discovery of (new oil reserves) peaked in the 1960's. We now find one barrel for every four we consume ...'

No new giant discoveries

After OPEC raised oil prices in the 1970's, non-OPEC oil projects began to be profitable in the North Sea, Alaska, Venezuela and other places. Oil production increased markedly. At the same time, in response to the higher oil price, many industrial countries like France, Germany USA, Japan dramatically increased the energy from nuclear power plants. The combination gave the illusion that the oil problem had vanished. It has not, far from it.

If in fact many of today's major sources of oil have peaked, and are about to fall off drastically, and at the same time, if world energy demand continues to grow, and not enough oil is found even to replace existing depletion, the global economy faces a crisis of staggering dimension. This would also begin to explain the shift of US foreign policy in the direction of a crude neo-imperial military presence globally, from Kosovo to Afghanistan, from West Africa to Baghdad and beyond.

Obviously, the easiest, most economical solution is to find new giant or super giant oilfields where large volumes of oil can be extracted and brought to world markets at low cost. That is just what is not the case today. According to a recent report from the Colorado School of Mines, 'The World's Giant Oilfields,' the world's '120 largest oilfields produce close to 33 million barrels a day, almost 50% of the world's crude oil supply. The fourteen largest account for over 20%. The average age of these 14 largest fields is 43.5 years.' 1

The above study concludes that 'most of the world's true giants were found decades ago.' Over the past 20 years despite investment of hundreds of billions dollars by major oil companies, results have been alarmingly disappointing.

The world's major oil companies - Exxon-Mobil, Shell, ChevronTexaco, BP, ElfTotal and others - have invested hundreds of billions of dollars in finding enough oil to replace the existing oil supply sources. Between 1996 and 1999, some 145 companies spent $410 billion to find enough oil only to keep their daily production stable at 30 million barrels a day. From 1999 to 2002, the five largest companies spent another $150 billion and their production grew only from 16 million barrels a day to 16.6 million barrels, a tiny increase. With the collapse of the Soviet Union in the early 1990's, western oil companies placed high hopes on the oil potentials of the Caspian Sea in Central Asia.

Disappointing Caspian results

In December 2002, just after US troops took Afghanistan, BP, a major oil company announced disappointing Caspian drilling results which suggested that the 'oil find of the century' was little more than a drop in the ocean. Instead of earlier predictions of oil reserves above 200 billion barrels, a new Saudi Arabia outside the Middle East, the US State Department announced, 'Caspian oil represents 4% of world reserves. It will never dominate the world's markets.' PetroStrategies published a study estimating that the Caspian Basin contained a mere 39 billion barrels of oil, and of a poor quality. Soon after this news, BP and other western oil companies began reducing investment plans in the region.

Interest in West Africa

One of the most active areas of new exploration is in the offshore region of West Africa from Nigeria to Angola. President Bush made a high profile trip to the region earlier in the year, and the US Pentagon has signed military basing agreements with two small strategic islands, Principe and San Tome, insuring a military presence should anything threaten the flow of oil across the Atlantic. Yet, while the volume of oil is important, it also is hardly a new Saudi Arabia. Geologist Campbell estimates that if all deepwater oil, perhaps 85 billion barrels, were produced from fields off Brazil, Angola and Nigeria, it would meet global demand for 3-4 years.

Growing energy demand

Against the prospect that many of the largest oil fields today are in a marked decline in output, world demand for oil is rising ruthlessly, marked by the growing economies of China, India and Asia. Even at today's weak GDP growth rates, economists estimate that world demand for oil at today's prices will rise by some 2% per year.

Ten years ago, China was not a factor in world import of oil. It produced most of its limited needs domestically. Beginning 1993 however, China began to import oil to meet its economic needs. By end 2003 China has surpassed Japan to be the second largest oil importer next to the USA. China now consumes 20% of total OECD industrial country energy. China oil imports are rising now by 9% a year and this is predicted to rise significantly in the coming decade, as China emerges as the world's largest industrial nation. China currently is growing at 7-8% a year. India has recently emerged as a rapidly growing economy as well. Combined they account for some 2.5 billion of the world population. Little wonder that China vehemently opposed the US unilateral war against Iraq in the UN Security Council. The China National Petroleum Company had long sought to secure major oil supply from Iraq.

What Cheney knew in 1999

In a speech to the International Petroleum Institute in London in late1999, Dick Cheney, then chairman of the world's largest oil services company, Halliburton, presented the picture of world oil supply and demand to industry insiders. 'By some estimates,' Cheney stated, 'there will be an average of two percent annual growth in global oil demand over the years ahead, along with, conservatively, a three percent natural decline in production from existing reserves.' Cheney ended on an alarming note: 'That means by 2010 we will need on the order of an additional fifty million barrels a day.' This is equivalent to more than six Saudi Arabia's of today's size.

Perhaps it was no coincidence that Cheney, as Vice President, was given as his first major assignment the head of a Presidential Task Force on Energy. He knew the dimension of the energy problem facing not only the United States, but the rest of the world.

Cheney is also well identified as the leading Iraq warhawk in the Bush Administration, together with Defense Secretary Rumsfeld. Repeatedly it was Cheney pushing for military action against Iraq, regardless of which allies support it.

When we examine what is known about global oil reserves, and where they are, in light of the above 'peak oil' analysis of much of today's existing oil production, it becomes clearer why Cheney would be willing to risk so much in terms of America's standing among allies and others, to occupy the oilfields of Iraq. Cheney knows exactly what the global oil reserve situation is as former CEO of Halliburton Corporation, the world's largest oil services company.

The Achilles heel of the US?

The burning question is where will we get such a huge increase of oil? In the decade from 1990 to 2000, a total of 42 billion barrels of new oil reserves were discovered worldwide. In the same period, the world consumed 250 billion barrels. In the past two decades only three giant fields with more than one billion barrels each have been discovered. One in Norway, in Columbia and Brazil. None of these produce more than 200,000 barrels a day. This is far from 50 million barrels a day which the world will need.

Is the era of cheap, abundant oil to fuel the world economy about to end? One most important issue in the entire debate over why Washington went to war in Iraq is the question of how much oil remains to be found in the world at today's prices. The debate has been remarkably little over an economic issue of enormous consequences.

According to the estimates of Colin Campbell and K. Aleklett of Uppsala University, five countries hold the overwhelming bulk of the world's remaining oil and could potentially make up the difference as other areas pass their peak. 'The five major producers of the Middle East, namely Abu Dhabi, Iraq, Iran, Kuwait and Saudi Arabia (including the Neutral Zone), with about half the world's remaining oil, are treated as swing producers making up the difference between world demand and what other countries can produce...'2.

These five countries - Iraq, Iran, Saudi Arabia, Kuwait and the UAE - through circumstances of geology, contain the oil and gas reserves vital to the future economic growth of the world. In an article in the January 7, 2002 issue of Oil and Gas Journal by A. S. Bakhtiari of the National Iranian Oil Company, noted, 'The Middle East (is) simultaneously the most geostrategic area on the globe and the ultimate energy prize: Two-thirds of global crude oil reserves are concentrated in five countries bordering the Persian Gulf.'3

In a paper published in November 2001, eminent Princeton geologist, Kenneth Deffeyes wrote, 'The biggest single question is the year when world oil production reaches a Hubbert peak and then declines forever. Both the graphical and the computer fits identify 2004 as the probable year. The largest single uncertainty is the enormous reserves of Saudi Arabia.'4

If the peak oil analysis is accurate, it suggests why Washington may be willing to risk so much to control Iraq and through its bases there, the five oil-rich countries. It suggests Washington is acting from a fundamental strategic weakness, not from absolute strength as is often thought. A full and open debate on the problem of peak energy is urgently needed.

Footnotes:

1 'The World`s Giant Oilfields', Matthew R. Simmons, M. King Hubbert Center for Petroleum Supply Studies, Colorado School of Mines, January 2002.

2 Aleklett, K. and Campbell, C.J., 'The Peak and Decline of World Oil and Gas Production,' published by the Association for the Study of Peak Oil and Gas, www.asponews.org .

3 Bakhtiari, A.M. Samsam, '2002 to see birth of New World Energy Order,' Oil and Gas Journal, January 7, 2002.

4 Deffeyes, Kenneth S, 'Peak of world oil production,' Paper no. 83-0,Geological Society of America Annual Meeting, November 2001. gsa.confex.com .

An Energy Pearl Harbor?

2006-03-05T08:31:00.000-08:00

An Energy Pearl Harbor?

A Near Miss in Saudi Arabia Hints at Future Shocks

By Gal Luft

Sunday, March 5, 2006; Page B02
http://www.washingtonpost.com/wp-dyn/content/article/2006/03/03/AR2006030302046.html

"We call our brothers in the battlefields to direct some of their great efforts towards the oil wells and pipelines. . . . The killing of 10 American soldiers is nothing compared to the impact of the rise in oil prices on America and the disruption that it causes in the international economy." -- A jihadist Web site

The two cars that exploded a week ago outside the inner perimeter of Abqaiq, an oil processing facility in Saudi Arabia that is the world's largest, could have caused more loss of life and economic devastation than the two planes that crashed into the World Trade Center on Sept. 11, 2001.

Had the terrorists succeeded in penetrating the guarded facility and detonating their bombs inside, they might have turned the complex into an inferno, releasing toxic chemicals that could have killed and sickened thousands of locals and expatriates, including many Americans, who work and live nearby.

The damage to the world economy also would have been severe because the oil market today resembles a car without shock absorbers: The tiniest bump on the road could send consumers and prices bouncing off the ceiling.

That wasn't always the case. Once there was enough wiggle room in the oil market to deal with occasional supply disruptions. As recently as 2002, some oil producers, chiefly Saudi Arabia, had the spare production capacity to provide liquidity to oil markets. But due to the sudden growth in demand in developing countries in Asia and continuing profligacy in industrialized nations such as the United States, oil output is largely spoken for. In 2002, there were about 7 million barrels a day of spare production capacity, or about 10 percent of world consumption. Today, spare capacity amounts to about 1 million barrels a day, less than 2 percent of world consumption.

That's a lot less than what would have been lost if the car bombers had succeeded at Abqaiq. The attack would have removed 4 million to 6 million barrels a day of supply from an already tight oil market. That loss would have exceeded all of the oil taken off the market by the Organization of Petroleum Exporting Countries during the 1973 Arab oil embargo. Depending on the extent of damage to the site, it could have taken months or even years to fix the facility, where two-thirds of Saudi crude oil is processed. Without extra supplies, the only mechanism left to restore the market to equilibrium would be a rapid and uncontrolled increase in prices.

This vulnerability isn't lost on radical Islamic terrorists. They have identified the world energy system as the Achilles' heel of the West and have made attacking it a central part of their plan.

Osama bin Laden's strategy is based on the conviction that the way to bring down a superpower is to weaken its economy. We "bled Russia for 10 years until it went bankrupt and was forced to withdraw [from Afghanistan] in defeat," bin Laden boasted in his October 2004 videotape. "We are continuing in the same policy to make America bleed profusely to the point of bankruptcy." His logic, feasibility aside, is simple: Bring the United States to a point where it can no longer afford to preserve both its military and economic dominance. Then, as the United States loses standing in the Middle East, the jihadists can gain ground and topple regimes they view as corrupt and illegitimate, while defeating other infidels who inhabit the land of Islam.

Striking oil, which jihadists call "the provision line and the feeding to the artery of the life of the crusader's nation," is relatively easy and effective. Terrorists no longer need to come to the United States to wreak havoc here. They can hit our energy supply near the source, where they enjoy strong support on the ground.

Politically motivated attacks on oil pipelines in Iraq have kept more than 1 million barrels per day off the global oil market. Had this oil been in the market, the price per barrel would have been $10 to $15 lower, according to most energy analysts. For the United States, an importer of more than 11 million barrels a day, the terrorist premium alone costs $40 billion to $60 billion a year. Higher oil prices mean a transfer of wealth of historical proportions from oil-consuming countries -- primarily the United States -- to the Muslim world, where 70 percent of global oil reserves are concentrated. The windfall also benefits jihadists as petrodollars trickle their way through charities and government handouts to madrassas and mosques.

How vulnerable is the Saudi oil industry to kamikazes bent on sacrificing their lives for the sake of disrupting the world economy? Despite Saudi assurances that their facilities have the best protection in the world, the terrorists were still able to penetrate the outer perimeter of Abqaiq before they were killed.

And what about an air attack? A suicide terrorist hijacking an airplane in Kuwait or Dubai in an attempt to crash it into one of the facilities would leave the Saudis very little time to respond. Al-Qaeda's statement following the Abqaiq attack that "we shall not cease our attacks until our territories are liberated" must be taken seriously.

To compensate for the erosion in OPEC's spare capacity, major oil-consuming countries need to create new cushions against possible oil shocks. At its current capacity of 700 million barrels, the Strategic Petroleum Reserve (SPR) can mitigate supply disruption to the U.S. market, but it isn't big enough to tide over the global economy if there were a severe disruption of oil supplies. If, however, the SPR were expanded and Europe and Asia encouraged to establish similarly large oil banks, the oil-consuming nations could withstand a catastrophic failure of the Saudi system. It would make the oil weapon less effective, and less alluring to terrorists.

Reducing petroleum consumption, especially in the transportation sector, where two-thirds of U.S. oil is consumed, could also help restore some wiggle room to oil markets. By shifting to domestically produced transportation fuels like ethanol and methanol, or by driving more efficient hybrid vehicles, Americans can reduce their vulnerability to supply disruptions. Plug-in hybrid electric vehicles could tap into the grid and use made-in-America electricity; unlike in the 1970s, today only 2 percent of U.S. electricity is generated from oil. In many cases of national security, the best defense against foreign foes begins at home. Technology may not be able to wean us from oil altogether, but it can reduce U.S. vulnerability to an energy Pearl Harbor.

Gal Luft is the executive director of the Institute for the Analysis of Global Security and co-chair of the Set America Free Coalition, an alliance of national security, environmental, labor and religious groups promoting ways to reduce America's dependence on foreign oil.

The New 'Sputnik' Challenges: They All Run on Oil

2006-01-20T09:20:00.000-08:00

The New 'Sputnik' Challenges: They All Run on Oil, Thomas Friedman
http://select.nytimes.com/2006/01/20/opinion/20friedman.html

Detroit

I came to Detroit looking for the hottest new American cars. Instead, I found Sputnik.

You remember Sputnik - the little satellite the Soviets launched in 1957. The Eisenhower administration was so stunned it put the U.S. into a crash program to train more scientists and engineers so America could catch up with the Russians in the space race.

Well, for anyone paying attention, our generation's Sputnik showed up at the annual Detroit auto show this week. It's not a satellite. It's a car. It's called the Geely 7151 CK sedan. It seats a family of five, gets good mileage and will cost around $10,000 when it goes on sale in 2008.

It's made in China.

That doesn't get your attention? Well, there's another Sputnik that just went up: Iran. It's going to make a nuclear bomb, no matter what the U.N. or U.S. says, because at $60-a-barrel oil, Tehran's mullahs are rich enough to buy off or tell off the rest of the world. That doesn't worry you? Well, there's a quieter Sputnik orbiting Earth. It's called climate change - a k a Katrina and melting glaciers.

What am I saying here? I am saying that our era doesn't have a single Sputnik to grab our attention and crystallize the threat to our security and way of life in one little steel ball - the way our parents' era did. But that doesn't mean such threats don't exist. They do, and they have a single common denominator: the way we use and consume energy today, particularly oil.

Friends, we are in the midst of an energy crisis - but this is not your grandfather's energy crisis. No, this is something so much bigger, for four reasons.

First, we are in a war against a radical, violent stream of Islam that is fueled and funded by our own energy purchases. We are financing both sides in the war on terrorism: the U.S. Army with our tax dollars, and Islamist charities, madrasas and terrorist organizations through our oil purchases.

Second, the world has gotten flat, and three billion new players from India, China and the former Soviet Union just walked onto the field with their version of the American dream: a house, a car, a toaster and a refrigerator. If we don't quickly move to renewable alternatives to fossil fuels, we will warm up, smoke up and choke up this planet far faster than at any time in the history of the world. Katrina will look like a day at the beach.

Third, because of the above, green energy-saving technologies and designs - for cars, planes, homes, appliances or office buildings - will be one of the biggest industries of the 21st century. Tell your kids. China is already rushing down this path because it can't breathe and can't grow if it doesn't reduce its energy consumption. Will we dominate the green industry, or will we all be driving cars from China, Japan and Europe?

Finally, if we continue to depend on oil, we are going to undermine the whole democratic trend that was unleashed by the fall of the Berlin Wall. Because oil will remain at $60 a barrel and will fuel the worst regimes in the world - like Iran - to do the worst things for the world. Indeed, this $60-a-barrel boom in the hands of criminal regimes, and just plain criminals, will, if sustained, pose a bigger threat to democracies than communism or Islamism. It will be a black tide that turns back the democratic wave everywhere, including in Iraq.

The one thing we can do now to cope with all four of these trends is to create a tax that fixes the pump price at $3.50 to $4 a gallon - no matter where the OPEC price goes. Because if consumers know that the price of oil is never coming down, they will change their behavior. And when consumers change their behavior in a big way, G.M., Ford and DaimlerChrysler will change their cars in a big way, and it is cars and trucks that consume a vast majority of the world's oil.

The more Detroit goes green, the faster it will be propelled down the innovation curve, making it more likely that Detroit - and not Toyota or Honda or the Chinese - will dominate the green technologies of the 21st century. A permanent gasoline tax will also make solar, wind and biofuels so competitive with oil that it will drive their innovations as well.

George Bush may think he is preserving the American way of life by rejecting a gasoline tax. But if he does not act now - starting with his State of the Union speech - he will be seen as the man who presided over the decline of our way of life. He will be the American president who ignored the Sputniks of our day.

The New Red White and Blue, Thomas Friedman

2006-01-06T20:37:00.000-08:00

(Link:http://select.nytimes.com/2006/01/06/opinion/06friedman.html?n=Top%2fOpinion%2fEditorials%20and%20Op%2dEd%2fOp%2dEd%2fColumnists)

As we enter 2006, we find ourselves in trouble, at home and abroad. We are in trouble because we are led by defeatists - wimps, actually.

What's so disturbing about President Bush and Dick Cheney is that they talk tough about the necessity of invading Iraq, torturing terror suspects and engaging in domestic spying - all to defend our way of life and promote democracy around the globe.

But when it comes to what is actually the most important issue in U.S. foreign and domestic policy today - making ourselves energy efficient and independent, and environmentally green - they ridicule it as something only liberals, tree-huggers and sissies believe is possible or necessary.

Sorry, but being green, focusing the nation on greater energy efficiency and conservation, is not some girlie-man issue. It is actually the most tough-minded, geostrategic, pro-growth and patriotic thing we can do. Living green is not for sissies. Sticking with oil, and basically saying that a country that can double the speed of microchips every 18 months is somehow incapable of innovating its way to energy independence - that is for sissies, defeatists and people who are ready to see American values eroded at home and abroad.

Living green is not just a "personal virtue," as Mr. Cheney says. It's a national security imperative.

The biggest threat to America and its values today is not communism, authoritarianism or Islamism. It's petrolism. Petrolism is my term for the corrupting, antidemocratic governing practices - in oil states from Russia to Nigeria and Iran - that result from a long run of $60-a-barrel oil. Petrolism is the politics of using oil income to buy off one's citizens with subsidies and government jobs, using oil and gas exports to intimidate or buy off one's enemies, and using oil profits to build up one's internal security forces and army to keep oneself ensconced in power, without any transparency or checks and balances.

When a nation's leaders can practice petrolism, they never have to tap their people's energy and creativity; they simply have to tap an oil well. And therefore politics in a petrolist state is not about building a society or an educational system that maximizes its people's ability to innovate, export and compete. It is simply about who controls the oil tap.

In petrolist states like Russia, Iran, Venezuela and Sudan, people get rich by being in government and sucking the treasury dry - so they never want to cede power. In non-petrolist states, like Taiwan, Singapore and Korea, people get rich by staying outside government and building real businesses.

Our energy gluttony fosters and strengthens various kinds of petrolist regimes. It emboldens authoritarian petrolism in Russia, Venezuela, Nigeria, Sudan and Central Asia. It empowers Islamist petrolism in Sudan, Iran and Saudi Arabia. It even helps sustain communism in Castro's Cuba, which survives today in part thanks to cheap oil from Venezuela. Most of these petrolist regimes would have collapsed long ago, having proved utterly incapable of delivering a modern future for their people, but they have been saved by our energy excesses.

No matter what happens in Iraq, we cannot dry up the swamps of authoritarianism and violent Islamism in the Middle East without also drying up our consumption of oil - thereby bringing down the price of crude. A democratization policy in the Middle East without a different energy policy at home is a waste of time, money and, most important, the lives of our young people.

That's because there is a huge difference in what these bad regimes can do with $20-a-barrel oil compared with the current $60-a-barrel oil. It is no accident that the reform era in Russia under Boris Yeltsin, and in Iran under Mohammad Khatami, coincided with low oil prices. When prices soared again, petrolist authoritarians in both societies reasserted themselves.

We need a president and a Congress with the guts not just to invade Iraq, but to also impose a gasoline tax and inspire conservation at home. That takes a real energy policy with long-term incentives for renewable energy - wind, solar, biofuels - rather than the welfare-for-oil-companies-and-special-interests that masqueraded last year as an energy bill.

Enough of this Bush-Cheney nonsense that conservation, energy efficiency and environmentalism are some hobby we can't afford. I can't think of anything more cowardly or un-American. Real patriots, real advocates of spreading democracy around the world, live green.

Green is the new red, white and blue.

War Footing: 10 Steps America Must Take to Prevail in the War for the Free World

2005-12-08T13:38:00.000-08:00

War Footing: 10 Steps America Must Take to Prevail in the War for the Free World by Frank Gaffney and colleagues, foreword by James Woolsey, published Nov. 24 by Naval Institute Press.

Let us be clear: We will always need oil. What we must do is reduce the strategic importance of oil to the global economy. We must shift oil from being a strategic commodity-one whose disruption can hold our economy hostage-to a commodity that is interchangeable with other energy resources.

Because two-thirds of the oil we use is consumed in the transportation sector (mostly in cars and trucks), long term security and economic prosperity require diversifying our energy sources in that sector. This can be done via a technological shift to an economy based on nonpetroleum, next generation fuels and vehicles designed to use them.

It is worth noting that diversification away from imported oil to domestic energy sources has already been accomplished in another sector of the economy-the generation of electricity. In the 1970s, nearly a third of U.S. electricity was produced by burning oil. Today, this figure is down to just 2 percent.

A number of public policy institutes, trade unions, and other organizations have joined forces under the banner of the Set America Free Coalition to advance a blueprint for effecting a similar change in the U.S. transportation sector. (The Coalition's blueprint can be viewed in full at Appendix III.) This plan offers ways in which the nation's oil imports can be cut in half within two decades through the widespread use in our cars and other vehicles of a variety of currently available technologies.

A Program for Energy Security

The main ingredients of the Set America Free blueprint are as follows.

1. Fuel Choice

One of the highest virtues of the American way of life is freedom of choice. Think of any consumer good-from a cup of coffee to a carpet-and consider the range of choices we have. But when it comes to transportation fuel, Americans have essentially no choice. Driving into a gas station, oil based products like gasoline and diesel are the only substances with which we can fill our tanks.

The fact that a single liquid fuels virtually our entire society is a formula for disaster. If for whatever reason petroleum supplies are disrupted, we currently do not have a fallback option.

The first step to enabling fuel choice is to ensure that all new cars are flexible fuel vehicles (FFVs). FFVs look and perform just like "regular" vehicles, with one difference: instead of running solely on gasoline, they are designed to burn alcohol based fuels (ethanol and methanol), gasoline, or any mixture of the two.

This is not a new technology. Henry Ford's 1908 Model T was an FFV. And some 4 million FFVs have been manufactured in the United States since 1996, including such popular models as Ford Taurus, Chevy Silverado, and Dodge Caravan. Because FFVs can also run on gasoline, drivers can refuel even in places where pumps have not yet been modified to dispense alcohol based fuels.

The only difference between a gasoline only car and an FFV is that the FFV engine is equipped with a modified control chip and some different fittings in the fuel line to accommodate the characteristics of alcohol. The marginal additional cost associated with the production of a flexible fuel vehicle is currently under $150-less than the cost of a typical CD player.

That cost would be reduced further as the volume of production of such cars increases. That would be particularly true if flexible fuel designs were to become the industry standard-as they should, effective immediately.

Ethanol. Also known as grain alcohol, ethanol is a liquid that can be produced domestically from fermented agricultural products, including (but not exclusively) from corn. The U.S. industry currently has a capacity of 3.4 billion gallons a year and has increased production by an average of 25 percent per year over the past three years.

The main barrier preventing ethanol from becoming a massively used transportation fuel in the United States is its cost and the limited supply of corn. Ethanol benefits from federal subsidies amounting to 51 cents per gallon.

Fortunately, there are feedstocks other than corn that can be converted to ethanol without the need for such massive government assistance. For example, a great deal of effort is being expended to develop processes for the economic conversion of cellulosic biomass into ethanol. Such processes will allow production of fuel from switch grass and other dedicated energy crops.

Until such technology becomes economical, however, there is another source of ethanol that makes economic sense and that does not require a government subsidy: sugar cane. In Brazil, at least 25 percent of the fuel sold in gas stations is sugar based ethanol. In addition to Brazil, Latin American and Caribbean countries like Guatemala, Panama, Trinidad and Tobago, Costa Rica, El Salvador, and Jamaica are all low cost sugar cane producers. These nations could become key to U.S. energy security if large numbers of American vehicles were FFVs-and if imported ethanol could be freed from the current, heavy U.S. tariffs on sugar.

Expanding U.S. fuel choice to include biofuels imported from our neighbors in the Western Hemisphere would not only help increase our energy independence from Islamofascist Middle Eastern suppliers. It would also have clear geopolitical benefits. By encouraging these countries to increase their output and become major fuel suppliers, we could greatly enhance the U.S. posture in the Western Hemisphere. As we shall see in Step 9, such a change is increasingly urgent in light of the oil bankrolled subversion practiced by Venezuela's Chavez and his mentor, Cuban dictator Fidel Castro, as well as China's growing activity in the region.

To put it bluntly, we cannot hope to enjoy energy security through renewable fuels unless we are also willing to open the U.S. ethanol market to imports. It defies common sense to tax ethanol coming in from our neighbors when we do not tax oil imported from Saudi Arabia.

Methanol. Another alcohol that can be used in flexible fuel vehicles is well known to Indianapolis 500 fans: wood alcohol, or methanol. Today, this liquid fuel is produced mostly from natural gas. Greatly expanded domestic production can be achieved, however, by producing methanol from coal, a resource the United States has in abundance. The commercial feasibility of coal to methanol technology has been demonstrated as part of the Department of Energy's "clean coal" technology effort. Currently, methanol is being cleanly produced from coal on a commercial scale for around 50 cents a gallon. Methanol can also be produced from agricultural waste.

2. Electrify Transportation

As the price of gasoline has mounted, there has been growing consumer demand for so called hybrid vehicles. Hybrids combine a traditional internal combustion engine with an electric motor to improve gas mileage. The motor is powered by a battery, continuously recharged by capturing braking energy that would otherwise be wasted.

Hybrids get anywhere from 20 percent to more than twice the mileage of conventional gasoline engines, without compromising performance. However, their only external fuel source is gasoline. Increasing fuel choice calls for taking hybrids one step further.

Plug in hybrids. For many years, electricity has been the source of power for all our home appliances. Why not use electricity to power our cars as well? Because less than 2 percent of U.S. electricity is generated from oil, using electricity as a transportation fuel would greatly reduce our dependence on imported petroleum. Vehicles that meet consumer needs could tap America's electrical grid to supply energy for transportation, allowing more efficient use of such domestic sources of electricity as coal, solar, wind, geothermal, hydroelectric, and nuclear power.

During the 1980s, some auto companies put battery operated electric vehicles on the road. While these cars were generally clean, quiet, and highly efficient, they failed to achieve large scale penetration of the market. Among the stumbling blocks were the limited range (driving distance) and the reduced performance of electric only vehicles.

Plug in hybrid electric vehicles (PHEVs) offer the benefits of electric vehicles without the range and performance penalties. PHEVs are souped up hybrids that can optionally be plugged in. Like first generation hybrids, plug ins have a liquid fuel tank and internal combustion engine, so they have the same driving range as a standard car. Although they look and perform much like regular hybrid cars, they can in addition be plugged into a 120 volt outlet at home (or in a parking garage) and recharged.

Plug ins can run on their batteries' stored energy for much of a typical day's driving. Depending on the size of the battery, that might be up to 60 miles per charge-far beyond the daily commute of an average American. And, when the charge is used up, the PHEV automatically switches over to run on the engine powered by its fuel tank. Someone who drives a distance shorter every day than the car's electric range could do so exclusively by recharging the battery and never having to dip into the fuel tank.

PHEVs can reach fuel economy levels of a hundred miles per gallon of gasoline consumed. Because 50 percent of cars on the road in the United States are driven twenty miles a day or less, a plug in with a twenty-mile-range battery would reduce gasoline consumption by, on average, 85 percent.

Five hundred miles per gallon of gasoline performance. If, moreover, a plug-in vehicle were designed as an FFV, fueled with 80 percent alcohol and 20 percent gasoline, fuel economy could reach five hundred miles per gallon of gasoline. Notice we say "per gallon of gasoline" and not "per gallon." The object of expanding fuel choice is not to reduce the energy consumption of a vehicle. Rather, it is to shift the balance in the transportation sector away from oil to more secure energy resources, by stretching each gallon of gasoline further by substituting alcohol fuels and electricity.

Ideally, plug in hybrid vehicles would be charged in home or apartment garages at night, when electric utilities have significant excess capacity. The Electric Power Research Institute estimates that up to 30 percent of the U.S. vehicle market could shift to PHEVs with a twenty mile electric range, without any additional electricity generating capacity.

At present, the estimated retail price of a plug in hybrid would be higher than that of corresponding conventional vehicles, because of the cost of extra batteries to extend the range in electric mode. The exact difference in price depends on the size of the battery, but, roughly speaking, every additional 10 miles of vehicle range adds about $1,000 to the cost.

This price difference is partly offset, however, by the lower operating costs of plug ins. At current gas prices, it costs well over 10 cents per mile to refuel a conventional car with gasoline, whereas refueling a plug in with electricity is only 3 cents per mile. That means that the lifetime overall cost of mass produced plug in hybrid vehicles would be equivalent to that of gasoline only vehicles.

In light of the national and energy security benefits of achieving such a dramatic reduction in demand for gasoline, the president and other officials should be doing everything possible to encourage the widest and fastest possible penetration of plug in hybrid vehicles into the market. One way of doing that would be for the difference in the up front price of PHEVs to be covered by federal and state tax credits and by rebates designed to reward consumers for reducing consumption of petroleum based fuels and emissions. This strategy is proving very effective in getting hybrid electric vehicles past the early adopter hump and into the mainstream.

3. Stretch a Gallon Still Further

The Bush administration describes conservation as one of the important elements of a sound energy policy. It notes that in the past three decades, the American economy has grown nearly five times faster than energy use-proof positive that conservation can go hand in hand with increases in productivity.

Indeed, the last time the United States made a concerted effort to improve energy efficiency-between 1979 and 1985, in response to OPEC's oil embargo-its oil consumption decreased by 15 percent. Conservation does not necessarily entail compromising our lifestyles, or settling for smaller, slower, or less comfortable cars. And, given the benefits for our energy security, encouraging conservation must be a central ingredient in our War Footing strategy.

Individual initiatives. The most immediate measures to improve the efficiency of America's automobile fleet are in the hands of individual motorists:

" properly inflating tires " tuning the engine " maintaining air filters " removing excess weight from the trunk " driving at a steady pace " consolidating trips " choosing to take the "broadband highway" to work, using the Internet to telecommute from a home office.

Better materials. At least two-thirds of fuel use by a typical consumer vehicle is caused by its weight. Reducing the weight and drag of a vehicle need not require reducing its size or safety, but it can greatly increase gas mileage. Today, we can achieve this objective thanks to advances in both metals and plastics. Cars made from advanced composites and next generation steels can be affordably manufactured with current technologies. They can roughly halve fuel consumption without compromising size, safety, performance, or cost-effectiveness.

In fact, crash tests and race car experience have shown that these vehicles are actually safer. As a report commissioned by the Pentagon notes, "Ultra strong carbon fiber composite auto bodies can save oil and lives at the same time, and by greatly simplifying manufacturing, can give automakers a decisive competitive advantage."21

Modern diesels. Significant progress toward better efficiency can also be reached in the realm of diesel engines. Modern diesel vehicles are becoming increasingly popular in Europe, which is one major reason why average fleet mileage there is so much higher than in the United States. Hybrid diesel engines can combine the benefits of both technologies to reach even higher efficiency gains.

Diesel fuels currently account for almost 20 percent of U.S. oil consumption. New technologies are available to use nonfossil sources for its production. For example, diesel fuel can be made from waste, such as garbage, tires, and animal by-products. In fact, it is currently being commercially produced from turkey carcasses and other offal.

An innovative biodiesel fuel can be commercially produced from soybeans and other vegetable oils. Such fuels are compatible with the current distribution infrastructure, and blends of up to 20 percent can be used in existing vehicles.

Needed: A New National Initiative

There is no shortage of other longer-term technological solutions to our energy problem. Although many of them hold great promise, it is not clear that they will be available by the time we need them.

After all, the average lifetime of a vehicle in the United States is more than sixteen years. Thus, the technological transformation of the transportation sector will take roughly fifteen to twenty years, as new vehicles replace old ones.

That is why it is imperative to begin the process without delay. Every day we wait is one more day that America will struggle under the yoke of a dangerous and ruinously expensive oil dependence, with all its national security implications.

We have no time to wait for commercialization of promising but immature technologies, such as hydrogen fuel cells, which still face significant technological barriers. Nor do we have time to wait for expensive and time consuming infrastructure change. The focus should be on using alternative approaches-like fuel choice and plug in hybrids-that can be implemented relatively quickly and that permit the maximum possible use of existing refueling facilities and automotive assembly lines.

In 1942, President Roosevelt mobilized the nation's scientific and financial resources to launch the Manhattan Project-a top priority effort to build an atomic weapon in response to threats to America's survival. The outcome was an end to the war with Japan, followed by the development of a wide new array of nuclear based technologies in energy, medical treatment, and other fields.

In 1962, President Kennedy launched the Apollo Man to the Moon Project, driven in part by mounting threats to U.S. and international security posed by Soviet space dominance. The outcome was an extraordinary strategic and technological success for the United States. It engendered a wide array of spin offs that improved virtually every aspect of modern life.

In 1983, President Reagan responded to the danger of Soviet ballistic missiles by unveiling the Strategic Defense Initiative (SDI), a major program to develop the means to destroy such missiles in flight. We now know that SDI played an important part in the success of Mr. Reagan's strategy for destroying the Soviet Union. It compounded the Kremlin's already acute economic problems and contributed to the breakup of the USSR, creating unprecedented potential for a more peaceful and prosperous world.

In all three of these historic cases, a U.S. president called upon America's ingenuity and the power of technology to address a global threat. In each case, that threat came from an enemy determined to change the existing world order and to extinguish the Western values and way of life we cherish. Today, the security of the United States and, indeed, that of the world, is no less threatened. This time, the threat comes from another totalitarian ideology, Islamofascism, fueled by petrodollars. Fortunately, we do not need an expensive new Manhattan Project to conduct groundbreaking research into new and exotic technologies and fuels that will, over many years, enhance energy efficiency and cut our dependence on foreign oil from the Islamists and their friends.

The truth is that the technologies that will allow us to make the leap into the post oil era are already with us. All that is needed now is leadership and the support of the American people for a national commitment to energy security. Putting the nation on a War Footing is the opportunity to bring these assets to bear and to begin weaning our country from its oil dependency and the associated vulnerabilities.

Today, the United States imports 11 million barrels per day (mbd), and it is projected to import almost 20 mbd by 2025. According to the Set America Free blueprint, if all cars on the road by 2025 are hybrids and half are plug in hybrid vehicles, U.S. oil imports would drop by 8 mbd. If all of these cars were also flexible fuel vehicles, U.S. oil imports would drop by as much as 12 mbd.

Such a leap toward energy security is a big idea-but the American people have never shied away from big ideas. During World War II, Winston Churchill observed that "Americans' national psychology is such that the bigger the idea, the more wholeheartedly and obstinately do they throw themselves into making it a success. It is an admirable characteristic, provided the idea is good."22

Breaking the hold of Middle East autocracies over the global economy is a good idea whose time has come. For more than two centuries, the United States has been the harbinger of freedom and democracy in the world, to the benefit of millions of people. Now it is time for America to lead the Free World in an effort to liberate us all from our current dependence on those that would do us harm.

Bush gives new reason for Iraq war, Boston Globe, August 31, 2005

2005-09-01T03:13:00.000-07:00

http://www.boston.com/news/nation/articles/2005/08/31/bush_gives_new_reason_for_iraq_war/

Bush gives new reason for Iraq war

Says US must prevent oil fields from falling into hands of terrorists

By Jennifer Loven, Associated Press | August 31, 2005

CORONADO, Calif. -- President Bush answered growing antiwar protests yesterday with a fresh reason for US troops to continue fighting in Iraq: protection of the country's vast oil fields, which he said would otherwise fall under the control of terrorist extremists.

The president, standing against a backdrop of the USS Ronald Reagan, the newest aircraft carrier in the Navy's fleet, said terrorists would be denied their goal of making Iraq a base from which to recruit followers, train them, and finance attacks.

''We will defeat the terrorists," Bush said. ''We will build a free Iraq that will fight terrorists instead of giving them aid and sanctuary."

Appearing at Naval Air Station North Island to commemorate the anniversary of the Allies' World War II victory over Japan, Bush compared his resolve to President Franklin D. Roosevelt's in the 1940s and said America's mission in Iraq is to turn it into a democratic ally just as the United States did with Japan after its 1945 surrender. Bush's V-J Day ceremony did not fall on the actual anniversary. Japan announced its surrender on Aug. 15, 1945 -- Aug. 14 in the United States because of the time difference.

Democrats said Bush's leadership falls far short of Roosevelt's.

''Democratic Presidents Roosevelt and Truman led America to victory in World War II because they laid out a clear plan for success to the American people, America's allies, and America's troops," said Howard Dean, Democratic Party chairman. ''President Bush has failed to put together a plan, so despite the bravery and sacrifice of our troops, we are not making the progress that we should be in Iraq. The troops, our allies, and the American people deserve better leadership from our commander in chief."

The speech was Bush's third in just over a week defending his Iraq policies, as the White House scrambles to counter growing public concern about the war. But the devastation wrought by Hurricane Katrina in the Gulf Coast drew attention away; the White House announced during the president's remarks that he was cutting his August vacation short to return to Washington, D.C., to oversee the federal response effort.

After the speech, Bush hurried back to Texas ahead of schedule to prepare to fly back to the nation's capital today. He was to return to the White House on Friday, after spending more than four weeks operating from his ranch in Crawford.

Bush's August break has been marked by problems in Iraq.

It has been an especially deadly month there for US troops, with the number of those who have died since the invasion of Iraq in March 2003 now nearing 1,900.

The growing death toll has become a regular feature of the slightly larger protests that Bush now encounters everywhere he goes -- a movement boosted by a vigil set up in a field down the road from the president's ranch by a mother grieving the loss of her soldier son in Iraq.

Cindy Sheehan arrived in Crawford only days after Bush did, asking for a meeting so he could explain why her son and others are dying in Iraq. The White House refused, and Sheehan's camp turned into a hub of activity for hundreds of activists around the country demanding that troops be brought home.

This week, the administration also had to defend the proposed constitution produced in Iraq at US urging. Critics fear the impact of its rejection by many Sunnis, and say it fails to protect religious freedom and women's rights.

At the naval base, Bush declared, ''We will not rest until victory is America's and our freedom is secure" from Al Qaeda and its forces in Iraq led by Abu Musab alZarqawi.

''If Zarqawi and [Osama] bin Laden gain control of Iraq, they would create a new training ground for future terrorist attacks," Bush said. ''They'd seize oil fields to fund their ambitions. They could recruit more terrorists by claiming a historic victory over the United States and our coalition."

Even in Summer, Americans Dread Winter Heating Bills

2005-08-26T07:09:00.000-07:00

August 26, 2005

Even in Summer, Americans Dread Winter Heating Bills

By JAD MOUAWAD

It might still be 80 degrees outside, but, four months before the first days of winter, many Americans are already facing the prospect of keeping warm while having to stay within their budgets. Instead of the short spike in energy prices that most expected, it now appears that a variety of high energy bills - for heating oil, propane, natural gas and electricity, as well as gasoline - will be around for a long while.

Near Chicago, a health care administrator expects her natural gas bill to double and has cut back on her cable TV subscription. A school district in Maine will lower the thermostats in classrooms. And the treasurer of the Union Church of Proctor, a small community near Rutland, Vt., faces a $10,000 shortage this winter because of soaring fuel oil costs.

"You can turn the heat down a little and wear an extra sweater," said Gary Fay, the church treasurer, "but in the end you really need to heat yourself."

With energy costs rising substantially for a second year, and reaching another record on oil markets yesterday, how consumers and businesses respond this winter - whether they curb their energy consumption or not, whether they keep spending on other goods or not - will be critical as higher energy prices slowly ripple through the $11.7 trillion American economy.

"This is going to hit on every side," said Davis Bookhart, a researcher at the Consumer Energy Council of America. "On just about everything that is energy-intensive, you're going to feel higher costs. People are more concerned about their bills, and realize that this winter will be more expensive."

Economists generally seem convinced that the higher energy prices will not derail the economy. But they may cause it to wobble a bit: Americans will spend $600 billion this year on oil purchases - everything from gasoline and diesel to jet fuel and heating oil. In two years, the national oil bill has jumped by $210 billion, or 54 percent, according to Larry Goldstein, the president of the Petroleum Industry Research Foundation. In addition, the nation spent $120 billion on natural gas in 2004, according to the American Gas Association. That is expected to increase to about $167 billion this year.

"High energy prices act like a consumption tax and consumption taxes eventually hurt the economy," Mr. Goldstein said.

That extra burden has already shaved three-quarters of a percentage point off American growth, he estimated, but has not put much of a dent in the expanding economy.

The cost of oil is stirring larger waves in the economy now.

As a direct share of the gross domestic product, oil accounted for 8.5 percent of the economy in 1980. As energy conservation measures took hold, and as Americans grew wealthier, that fell to a low of 3.1 percent in the mid-1990's.

Last year, it was up to 4.2 percent. This year, oil is expected to account for 4.8 percent of the economy, according to Mr. Goldstein.

"We've insulated ourselves from higher oil prices, but we're not immune to them," Mr. Goldstein said.

Americans are not completely helpless, Mr. Bookhart said. "Most homes are very energy-inefficient. There are many small things that can be done that will lead to pretty significant cost savings."

Sheryl Andersen, who lives in Crete, Ill., has followed that advice. She has been weatherproofing her new house in expectation of paying higher heating bills: fixing leaks, putting weather stripping around doors, tuck-pointing the chimney and fixing cracks in the fireplace. Last year, she paid $150 a month on her heating bill. This year, she expects to spend twice that.

Ms. Andersen, 57, a senior administrative assistant for a health care provider, said she and her husband had cut back on television channels and now subscribe only to basic cable service. They have not taken out their 18-foot fishing boat this summer because of the higher fuel costs. She does not know yet what other expenses may have to be eliminated or reduced.

"We don't know how bad it's going to be this winter," Ms. Andersen said.

The most visible signs of higher energy costs have been gasoline prices, which have touched $3 a gallon in some parts of the country - and have led to a spate of fuel thefts at service stations.

On Wednesday, Hawaii, with the highest prices in the nation, said it would limit wholesale prices of gasoline in an effort to restrict further increases. Critics say the measure may backfire because it fails to address a cause of higher prices: higher demand.

Crude oil prices, lifted by strong growth in the United States and in China, have risen 54 percent on the New York Mercantile Exchange over the last year. Yesterday, the next-month futures contract settled at $67.49 a barrel, up 17 cents, after touching $67.70 midway in the trading session.

These highs are causing concern around the world. The International Monetary Fund said that Asia's rapid economic growth was at risk from the energy prices.

Still, according to the I.M.F.'s managing director, Rodrigo Rato: "There is very strong demand, and we don't see that demand receding. Prices are not going back to the levels seen at the beginning of 2004."

This may be little comfort for people like Stan Sawyer, a school district superintendent in Westbrook, Me.

Mr. Sawyer said that the district had rerouted its buses over the last months, condensed runs, and is now considering curbing field trips for the year and extending the walking distance to and from school.

In addition to trying to curb gasoline consumption, Mr. Sawyer faces another problem: His district budgeted heating oil purchases at only $1.60 a gallon - well below even the current commodity market price for delivery next month, which is above $1.80 and climbing.

"There isn't any wiggle room," Mr. Sawyer said. "Something like this, we're going to try to do cost estimates about how much it will cost and make it up somewhere else in the budget. It's not only a hardship in Westbrook. It's a hardship in schools throughout the country."

One thing the school will probably do is turn the thermostat down a couple of degrees. "We were around 67 or 68 last year," he said, "and we'll probably turn it down two more degrees and encourage students to wear sweatshirts and sweaters."

The Energy Information Administration, a branch of the Energy Department, projected that retail heating oil prices would be, on average, 17 percent higher this winter than last year, at about $2.20 a gallon.

Natural gas, used by more than half of all households for heating, is expected to rise 16.5 percent, to $12.97 for each thousand cubic feet, while the price of propane, a liquid gas, is forecast to jump by 16 percent, according to Dave Costello, an analyst at the energy administration.

And these estimates may prove low. Last year, heating oil and natural gas prices increased by about a third over the winter. This year, heating oil contracts are up 51 percent while natural gas has risen 55 percent.

"We are going to have to look into more creative solutions," said H. E. Broadbent, vice president for institutional advancement at Dowling College, in Oakdale, N.Y., which mainly uses natural gas for its heating. "We might be looking at alternative energies, or solar energy. But this year is going to be very hard on our budget. We might have to postpone renovations, or buying new equipment. The whole process of deciding what to give up is going to be very, very difficult."

Many analysts predict more increases in prices through the end of the year, as well as into 2006.

"Heating is a visceral necessity; you've got to heat your home," said John Felmy, senior economist at the American Petroleum Institute, the industry's main trade group. "This is when we might expect more of a sticker-shock reaction than with gasoline prices. I'm holding my breath for when I have to fill up my own propane tank."

So far, American consumers have proved surprisingly resilient to the higher energy prices. Despite the rise in gasoline costs, in recent weeks they have still been buying Detroit's gas-guzzling sport utility vehicles, in large part because of deep discounts offered by American automakers. Consumers have not visibly reduced spending, the housing boom has slowed only somewhat and interest rates, while rising, are still relatively low.

According to Goldman Sachs commodity analysts, there is little chance that crude oil prices will drop quickly. The firm now expects oil to average $68 a barrel and does not see it dropping below $60 a barrel for years. Many others on Wall Street are looking for oil around $50 a barrel in 2006.

There is also little relief to expect on natural gas markets. While the use of fuel oil is mostly concentrated in the Northeast, natural gas is the heating source of choice for some 61 million households across the country.

While much of the attention has been focused on crude oil and gasoline, natural gas markets have boomed as well in recent years. Through the 1990's, prices remained fairly stable, averaging about $2 a thousand cubic feet for the benchmark spot price in the United States.

But in early 2000, prices began to rise, averaging $5 a thousand cubic feet from 2000 to 2005. Yesterday, natural gas futures settled at $9.77 in New York after briefly trading above $10 on Wednesday.

"A lot will depend on consumer behavior and whether they will be overwhelmed by the higher prices and cut on their consumption," said David N. Parker, president of the American Gas Association. "We don't see any reduction in the heating costs in the next two to three years. Beyond that, there will be a flow of additional supplies. But we will never go back to $2 gas. We might settle between $5 and $5.50."

Higher costs have also translated into higher electricity prices. In Miami, Juan Pablo Constain, a 26-year-old business administration major at Florida International University, said his last electric bill was $216, up 45 percent from the previous month. He rides his bike to school more often to save on gasoline, has stopped attending soccer games, and has cut back on social activities.

"I don't get together with my friends for happy hour at the bar," Mr. Constain said. "I'm trying to save as much as I can on everything."

Katie Zezima, in Boston; Gretchen Ruethling, in Chicago; and Vivian Medina, in Miami, contributed reporting for this article.

http://www.nytimes.com/2005/08/26/business/26energy.html?pagewanted=all

THE BREAKING POINT

2005-08-21T11:11:00.000-07:00

http://www.nytimes.com/2005/08/21/magazine/21OIL.html?hp

August 21, 2005

The Breaking Point

By PETER MAASS

The largest oil terminal in the world, Ras Tanura, is located on the eastern coast of Saudi Arabia, along the Persian Gulf. From Ras Tanura's control tower, you can see the classic totems of oil's dominion -- supertankers coming and going, row upon row of storage tanks and miles and miles of pipes. Ras Tanura, which I visited in June, is the funnel through which nearly 10 percent of the world's daily supply of petroleum flows. Standing in the control tower, you are surrounded by more than 50 million barrels of oil, yet not a drop can be seen.

The oil is there, of course. In a technological sleight of hand, oil can be extracted from the deserts of Arabia, processed to get rid of water and gas, sent through pipelines to a terminal on the gulf, loaded onto a supertanker and shipped to a port thousands of miles away, then run through a refinery and poured into a tanker truck that delivers it to a suburban gas station, where it is pumped into an S.U.V. -- all without anyone's actually glimpsing the stuff. So long as there is enough oil to fuel the global economy, it is not only out of sight but also out of mind, at least for consumers.

I visited Ras Tanura because oil is no longer out of mind, thanks to record prices caused by refinery shortages and surging demand -- most notably in the United States and China -- which has strained the capacity of oil producers and especially Saudi Arabia, the largest exporter of all. Unlike the 1973 crisis, when the embargo by the Arab members of the Organization of Petroleum Exporting Countries created an artificial shortfall, today's shortage, or near-shortage, is real. If demand surges even more, or if a producer goes offline because of unrest or terrorism, there may suddenly not be enough oil to go around.

As Aref al-Ali, my escort from Saudi Aramco, the giant state-owned oil company, pointed out, ''One mistake at Ras Tanura today, and the price of oil will go up.'' This has turned the port into a fortress; its entrances have an array of gates and bomb barriers to prevent terrorists from cutting off the black oxygen that the modern world depends on. Yet the problem is far greater than the brief havoc that could be wrought by a speeding zealot with 50 pounds of TNT in the trunk of his car. Concerns are being voiced by some oil experts that Saudi Arabia and other producers may, in the near future, be unable to meet rising world demand. The producers are not running out of oil, not yet, but their decades-old reservoirs are not as full and geologically spry as they used to be, and they may be incapable of producing, on a daily basis, the increasing volumes of oil that the world requires. ''One thing is clear,'' warns Chevron, the second-largest American oil company, in a series of new advertisements, ''the era of easy oil is over.''

In the past several years, the gap between demand and supply, once considerable, has steadily narrowed, and today is almost negligible. The consequences of an actual shortfall of supply would be immense. If consumption begins to exceed production by even a small amount, the price of a barrel of oil could soar to triple-digit levels. This, in turn, could bring on a global recession, a result of exorbitant prices for transport fuels and for products that rely on petrochemicals -- which is to say, almost every product on the market. The impact on the American way of life would be profound: cars cannot be propelled by roof-borne windmills. The suburban and exurban lifestyles, hinged to two-car families and constant trips to work, school and Wal-Mart, might become unaffordable or, if gas rationing is imposed, impossible. Carpools would be the least imposing of many inconveniences; the cost of home heating would soar -- assuming, of course, that climate-controlled habitats do not become just a fond memory.

But will such a situation really come to pass? That depends on Saudi Arabia. To know the answer, you need to know whether the Saudis, who possess 22 percent of the world's oil reserves, can increase their country's output beyond its current limit of 10.5 million barrels a day, and even beyond the 12.5-million-barrel target it has set for 2009. (World consumption is about 84 million barrels a day.) Saudi Arabia is the sole oil superpower. No other producer possesses reserves close to its 263 billion barrels, which is almost twice as much as the runner-up, Iran, with 133 billion barrels. New fields in other countries are discovered now and then, but they tend to offer only small increments. For example, the much-contested and as-yet-unexploited reserves in the Alaska National Wildlife Refuge are believed to amount to about 10 billion barrels, or just a fraction of what the Saudis possess.

But the truth about Saudi oil is hard to figure out. Oil reservoirs cannot be inventoried like wood in a wilderness: the oil is underground, unseen by geologists and engineers, who can, at best, make highly educated guesses about how much is underfoot and how much can be extracted in the future. And there is a further obstacle: the Saudis will not let outsiders audit their confidential data on reserves and production. Oil is an industry in which not only is the product hidden from sight but so is reliable information about it. And because we do not know when a supply-demand shortfall might arrive, we do not know when to begin preparing for it, so as to soften its impact; the economic blow may come as a sledgehammer from the darkness.

Of course the Saudis do have something to say about this prospect. Before journeying to the kingdom, I went to Washington to hear the Saudi oil minister, Ali al-Naimi, speak at an energy conference in the mammoth Ronald Reagan Building and International Trade Center, not far from the White House. Naimi was the star attraction at a gathering of the American petro-political nexus. Samuel Bodman, the U.S. energy secretary, was on the dais next to him. David O'Reilly, chairman and C.E.O. of Chevron, was waiting in the wings. The moderator was an éminence grise of the oil world, James Schlesinger, a former energy secretary, defense secretary and C.I.A. director.

''I want to assure you here today that Saudi Arabia's reserves are plentiful, and we stand ready to increase output as the market dictates,'' said Naimi, dressed in a gray business suit and speaking with only a slight Arabic accent. He addressed skeptics who contend that Saudi reservoirs cannot be tapped for larger amounts of oil. ''I am quite bullish on technology as the key to our energy future,'' he said. ''Technological innovation will allow us to find and extract more oil around the world.'' He described the task of increasing output as just ''a question of investment'' in new wells and pipelines, and he noted that consuming nations urgently need to build new refineries to process increased supplies of crude. ''There is absolutely no lack of resources worldwide,'' he repeated.

His assurances did not assure. A barrel of oil cost $55 at the time of his speech; less than three months later, the price had jumped by 20 percent. The truth of the matter -- whether the world will really have enough petroleum in the years ahead -- was as well concealed as the millions of barrels of oil I couldn't see at Ras Tanura.

or 31 years, Matthew Simmons has prospered as the head of his own firm, Simmons & Company International, which advises energy companies on mergers and acquisitions. A member of the Council on Foreign Relations, a graduate of the Harvard Business School and an unpaid adviser on energy policy to the 2000 presidential campaign of George W. Bush, he would be a card-carrying member of the global oil nomenclatura, if cards were issued for such things. Yet he is one of the principal reasons the oil world is beginning to ask hard questions of itself.

Two years ago, Simmons went to Saudi Arabia on a government tour for business executives. The group was presented with the usual dog-and-pony show, but instead of being impressed, as most visitors tend to be, with the size and expertise of the Saudi oil industry, Simmons became perplexed. As he recalls in his somewhat heretical new book, ''Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,'' a senior manager at Aramco told the visitors that ''fuzzy logic'' would be used to estimate the amount of oil that could be recovered. Simmons had never heard of fuzzy logic. What could be fuzzy about an oil reservoir? He suspected that Aramco, despite its promises of endless supplies, might in fact not know how much oil remained to be recovered.

Simmons returned home with an itch to scratch. Saudi Arabia was one of the charter members of OPEC, founded in 1960 in Baghdad to coordinate the policies of oil producers. Like every OPEC country, Saudi Arabia provides only general numbers about its output and reserves; it does not release details about how much oil is extracted from each reservoir and what methods are used to extract that oil, and it does not permit audits by outsiders. The condition of Saudi fields, and those of other OPEC nations, is a closely guarded secret. That's largely because OPEC quotas, which were first imposed in 1983 to limit the output of member countries, were based on overall reserves; the higher an OPEC member's reserves, the higher its quota. It is widely believed that most, if not all, OPEC members exaggerated the sizes of their reserves in order to have the largest possible quota -- and thus the largest possible revenue stream.

In the days of excess supply, bankers like Simmons did not know, or care, about the fudging; whether or not reserves were hyped, there was plenty of oil coming out of the ground. Through the 1970's, 80's and 90's, the capacity of OPEC and non-OPEC countries exceeded demand, and that's why OPEC imposed a quota system -- to keep some product off the market (although many OPEC members, seeking as much revenue as possible, quietly sold more oil than they were supposed to). Until quite recently, the only reason to fear a shortage was if a boycott, war or strike were to halt supplies. Few people imagined a time when supply would dry up because of demand alone. But a steady surge in demand in recent years -- led by China's emergence as a voracious importer of oil -- has changed that.

This demand-driven scarcity has prompted the emergence of a cottage industry of experts who predict an impending crisis that will dwarf anything seen before. Their point is not that we are running out of oil, per se; although as much as half of the world's recoverable reserves are estimated to have been consumed, about a trillion barrels remain underground. Rather, they are concerned with what is called ''capacity'' -- the amount of oil that can be pumped to the surface on a daily basis. These experts -- still a minority in the oil world -- contend that because of the peculiarities of geology and the limits of modern technology, it will soon be impossible for the world's reservoirs to surrender enough oil to meet daily demand.

One of the starkest warnings came in a February report commissioned by the United States Department of Energy's National Energy Technology Laboratory. ''Because oil prices have been relatively high for the past decade, oil companies have conducted extensive exploration over that period, but their results have been disappointing,'' stated the report, assembled by Science Applications International, a research company that works on security and energy issues. ''If recent trends hold, there is little reason to expect that exploration success will dramatically improve in the future. . . . The image is one of a world moving from a long period in which reserves additions were much greater than consumption to an era in which annual additions are falling increasingly short of annual consumption. This is but one of a number of trends that suggest the world is fast approaching the inevitable peaking of conventional world oil production.''

The reference to ''peaking'' is not a haphazard word choice -- ''peaking'' is a term used in oil geology to define the critical point at which reservoirs can no longer produce increasing amounts of oil. (This tends to happen when reservoirs are about half-empty.) ''Peak oil'' is the point at which maximum production is reached; afterward, no matter how many wells are drilled in a country, production begins to decline. Saudi Arabia and other OPEC members may have enough oil to last for generations, but that is no longer the issue. The eventual and painful shift to different sources of energy -- the start of the post-oil age -- does not begin when the last drop of oil is sucked from under the Arabian desert. It begins when producers are unable to continue increasing their output to meet rising demand. Crunch time comes long before the last drop.

''The world has never faced a problem like this,'' the report for the Energy Department concluded. ''Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.''

Most experts do not share Simmons's concerns about the imminence of peak oil. One of the industry's most prominent consultants, Daniel Yergin, author of a Pulitzer Prize-winning book about petroleum, dismisses the doomsday visions. ''This is not the first time that the world has 'run out of oil,''' he wrote in a recent Washington Post opinion essay. ''It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry.'' Yergin says that a number of oil projects that are under construction will increase the supply by 20 percent in five years and that technological advances will increase the amount of oil that can be recovered from existing reservoirs. (Typically, with today's technology, only about 40 percent of a reservoir's oil can be pumped to the surface.)

Yergin's bullish view has something in common with the views of the pessimists -- it rests on unknowns. Will the new projects that are under way yield as much oil as their financial backers hope? Will new technologies increase recovery rates as much as he expects? These questions are next to impossible to answer because coaxing oil out of the ground is an extraordinarily complex undertaking. The popular notion of reservoirs as underground lakes, from which wells extract oil like straws sucking a milkshake from a glass, is incorrect. Oil exists in drops between and inside porous rocks. A new reservoir may contain sufficient pressure to make these drops of oil flow to the surface in a gusher, but after a while -- usually within a few years and often sooner than that -- natural pressure lets up and is no longer sufficient to push oil to the surface. At that point, ''secondary'' recovery efforts are begun, like pumping water or gas into the reservoirs to increase the pressure.

This process is unpredictable; reservoirs are extremely temperamental. If too much oil is extracted too quickly or if the wrong types or amounts of secondary efforts are employed, the amount of oil that can be recovered from a field can be greatly reduced; this is known in the oil world as ''damaging a reservoir.'' A widely cited example is Oman: in 2001, its daily production reached more than 960,000 barrels, but then suddenly declined, despite the use of advanced technologies. Today, Oman produces 785,000 barrels of oil a day. Herman Franssen, a consultant who worked in Oman for a decade, sees that country's experience as a possible lesson in the limits of technology for other producers that try to increase or maintain high levels of output. ''They reached a million barrels a day, and then a few years later production collapsed,'' Franssen said in a phone interview. ''They used all these new technologies, but they haven't been able to stop the decline yet.''

The vague production and reserve data that gets published does not begin to tell the whole story of an oil field's health, production potential or even its size. For a clear-as-possible picture of a country's oil situation, you need to know what is happening in each field -- how many wells it has, how much oil each well is producing, what recovery methods are being used and how long they've been used and the trend line since the field went into production. Data of that sort are typically not released by state-owned companies like Saudi Aramco.

As Matthew Simmons searched for clues to the truth of the Saudi situation, he immersed himself in the minutiae of oil geology. He realized that data about Saudi fields might be found in the files of the Society of Petroleum Engineers. Oil engineers, like most professional groups, have regular conferences at which they discuss papers that delve into the work they do. The papers, which focus on particular wells that highlight a problem or a solution to a problem, are presented and debated at the conferences and published by the S.P.E. -- and then forgotten.

Before Simmons poked around, no one had taken the time to pull together the S.P.E. papers that involved Saudi oil fields and review them en masse. Simmons found more than 200 such papers and studied them carefully. Although the papers cover only a portion of the kingdom's wells and date back, in some cases, several decades, they constitute perhaps the best public data about the condition and prospects of Saudi reservoirs.

Ghawar is the treasure of the Saudi treasure chest. It is the largest oil field in the world and has produced, in the past 50 years, about 55 billion barrels of oil, which amounts to more than half of Saudi production in that period. The field currently produces more than five million barrels a day, which is about half of the kingdom's output. If Ghawar is facing problems, then so is Saudi Arabia and, indeed, the entire world.

Simmons found that the Saudis are using increasingly large amounts of water to force oil out of Ghawar. Most of the wells are concentrated in the northern portion of the 174-mile-long field. That might seem like good news -- when the north runs low, the Saudis need only to drill wells in the south. But in fact it is bad news, Simmons concluded, because the southern portions of Ghawar are geologically more difficult to draw oil from. ''Someday (and perhaps that day will be soon), the remarkably high well flow rates at Ghawar's northern end will fade, as reservoir pressures finally plummet,'' Simmons writes in his book. ''Then, Saudi Arabian oil output will clearly have peaked. The death of this great king'' -- meaning Ghawar -- ''leaves no field of vaguely comparable stature in the line of succession. Twilight at Ghawar is fast approaching.'' He goes on: ''The geological phenomena and natural driving forces that created the Saudi oil miracle are conspiring now in normal and predictable ways to bring it to its conclusion, in a time frame potentially far shorter than officialdom would have us believe.'' Simmons concludes, ''Saudi Arabia clearly seems to be nearing or at its peak output and cannot materially grow its oil production.''

Saudi officials belittle Simmons's work. Nansen Saleri, a senior Aramco official, has described Simmons as a banker ''trying to come across as a scientist.'' In a speech last year, Saleri wryly said, ''I can read 200 papers on neurology, but you wouldn't want me to operate on your relatives.'' I caught up with Simmons in June, during a trip he made to Manhattan to talk with a group of oil-shipping executives. The impression he gives is of an enthusiastic inventor sharing a discovery that took him by surprise. He has a certain wide-eyed wonder in his regard, as if a bit of mystery can be found in everything that catches his eye. And he has a rumpled aspect -- thinning hair slightly askew, shirt sleeves a fraction too long. Though he delivers a bracing message, his discourse can wander. He is a successful businessman, and it is clear that he did not achieve his position by being a man of impeccable convention. He certainly has not lost sight of the rule that people who shout ''the end is nigh'' do not tend to be favorably reviewed by historians, let alone by their peers. He notes in his book that way back in 1979, The New York Times published an investigative story by Seymour Hersh under the headline ''Saudi Oil Capacity Questioned.'' He knows that in past decades the Cassandras failed to foresee new technologies, like deep-water and horizontal drilling, that provided new sources of oil and raised the amount of oil that can be recovered from reservoirs.

But Simmons says that there are only so many rabbits technology can pull out of its petro-hat. He impishly notes that if the Saudis really wanted to, they could easily prove him wrong. ''If they want to satisfy people, they should issue field-by-field production reports and reserve data and have it audited,'' he told me. ''It would then take anybody less than a week to say, 'Gosh, Matt is totally wrong,' or 'Matt actually might be too optimistic.'''

Simmons has a lot riding on his campaign -- not only his name but also his business, which would not be rewarded if he is proved to be a fool. What, I asked, if the data show that the Saudis will be able to sustain production of not only 12.5 million barrels a day -- their target for 2009 -- but 15 million barrels, which global demand is expected to require of them in the not-too-distant future? ''The odds of them sustaining 12 million barrels a day is very low,'' Simmons replied. ''The odds of them getting to 15 million for 50 years -- there's a better chance of me having Bill Gates's net worth, and I wouldn't bet a dime on that forecast.''

The gathering of executives took place in a restaurant at Chelsea Piers; about 35 men sat around a set of tables as the host introduced Simmons. He rambled a bit but hit his talking points, and the executives listened raptly; at one point, the man on my right broke into a soft whistle, of the sort that means ''Holy cow.''

Simmons didn't let up. ''We're going to look back at history and say $55 a barrel was cheap,'' he said, recalling a TV interview in which he predicted that a barrel might hit triple digits.

He said that the anchor scoffed, in disbelief, ''A hundred dollars?''

Simmons replied, ''I wasn't talking about low triple digits.''

he onset of triple-digit prices might seem a blessing for the Saudis -- they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis -- and about OPEC in general -- is that high prices, no matter how high, are to their benefit.

Although oil costing more than $60 a barrel hasn't caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything -- from gasoline to jet fuel to plastics and fertilizers -- and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash. Saudi Arabia and the other members of OPEC entered crisis mode back then; adjusted for inflation, oil was at its lowest price since the cartel's creation, threatening to feed unrest among the ranks of jobless citizens in OPEC states.

''The Saudis are very happy with oil at $55 per barrel, but they're also nervous,'' a Western diplomat in Riyadh told me in May, referring to the price that prevailed then. (Like all the diplomats I spoke to, he insisted on speaking anonymously because of the sensitivities of relations with Saudi Arabia.) ''They don't know where this magic line has moved to. Is it now $65? Is it $75? Is it $80? They don't want to find out, because if you did have oil move that far north . . . the chain reaction can come back to a price collapse again.''

High prices can have another unfortunate effect for producers. When crude costs $10 a barrel or even $30 a barrel, alternative fuels are prohibitively expensive. For example, Canada has vast amounts of tar sands that can be rendered into heavy oil, but the cost of doing so is quite high. Yet those tar sands and other alternatives, like bioethanol, hydrogen fuel cells and liquid fuel from natural gas or coal, become economically viable as the going rate for a barrel rises past, say, $40 or more, especially if consuming governments choose to offer their own incentives or subsidies. So even if high prices don't cause a recession, the Saudis risk losing market share to rivals into whose nonfundamentalist hands Americans would much prefer to channel their energy dollars. A concerted push for greater energy conservation in the United States, which consumes one-quarter of the world's oil (mostly to fuel our cars, as gasoline), would hurt producing nations, too. Basically, any significant reduction in the demand for oil would be ruinous for OPEC members, who have little to offer the world but oil; if a substitute can be found, their future is bleak. Another Western diplomat explained the problem facing the Saudis: ''You want to have the price as high as possible without sending the consuming nations into a recession and at the same time not have the price so high that it encourages alternative technologies.''

From the American standpoint, one argument in favor of conservation and a switch to alternative fuels is that by limiting oil imports, the United States and its Western allies would reduce their dependence on a potentially unstable region. (In fact, in an effort to offset the risks of relying on the Saudis, America's top oil suppliers are Canada and Mexico.) In addition, sending less money to Saudi Arabia would mean less money in the hands of a regime that has spent the past few decades doling out huge amounts of its oil revenue to mosques, madrassas and other institutions that have fanned the fires of Islamic radicalism. The oil money has been dispensed not just by the Saudi royal family but by private individuals who benefited from the oil boom -- like Osama bin Laden, whose ample funds, probably eroded now, came from his father, a construction magnate. Without its oil windfall, Saudi Arabia would have had a hard time financing radical Islamists across the globe.

For the Saudis, the political ramifications of reduced demand for its oil would not be negligible. The royal family has amassed vast personal wealth from the country's oil revenues. If, suddenly, Saudis became aware that the royal family had also failed to protect the value of the country's treasured resource, the response could be severe. The mere admission that Saudi reserves are not as impressively inexhaustible as the royal family has claimed could lead to hard questions about why the country, and the world, had been misled. With the death earlier this month of the long-ailing King Fahd, the royal family is undergoing another period of scrutiny; the new king, Abdullah, is in his 80's, and the crown prince, his half-brother Sultan, is in his 70's, so the issue of generational change remains to be settled. As long as the country is swimming in petro-dollars -- even as it is paying off debt accrued during its lean years -- everyone is relatively happy, but that can change. One diplomat I spoke to recalled a comment from Sheik Ahmed Zaki Yamani, the larger-than-life Saudi oil minister during the 1970's: ''The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.''

Until now, the Saudis had an excess of production capacity that allowed them, when necessary, to flood the market to drive prices down. They did that in 1990, when the Iraqi invasion of Kuwait eliminated not only Kuwait's supply of oil but also Iraq's. The Saudis functioned, as they always had, as the central bank of oil, releasing supply to the market when it was needed and withdrawing supply to keep prices from going lower than the cartel would have liked. In other words, they controlled not only the price of oil but their own destiny as well.

''That is what the world has called on them to do before -- turn on the taps to produce more and get prices down,'' a senior Western diplomat in Riyadh told me recently. ''Decreasing prices used to keep out alternative fuels. I don't see how they're able to do that anymore. This is a huge change, and it is a big step in the move to whatever is coming next. That's what's really happening.''

Without the ability to flood the markets with oil, the Saudis are resorting to flooding the market with promises; it is a sort of petro-jawboning. That's why Ali al-Naimi, the oil minister, told his Washington audience that Saudi Arabia has embarked on a crash program to raise its capacity to 12.5 million barrels a day by 2009 and even higher in the years after that. Naimi is not unlike a factory manager who needs to promise the moon to his valuable clients, for fear of losing or alarming them. He has no choice. The moment he says anything bracing, the touchy energy markets will probably panic, pushing prices even higher and thereby hastening the onset of recession, a switch to alternative fuels or new conservation efforts -- or all three. Just a few words of honest caution could move the markets; Naimi's speeches are followed nearly as closely in the financial world as those of Alan Greenspan.

I journeyed to Saudi Arabia to interview Naimi and other senior officials, to get as far beyond their prepared remarks as might be possible. Although I was allowed to see Ras Tanura, my interview requests were denied. I was invited to visit Aramco's oil museum in Dhahran, but that is something a Saudi schoolchild can do on a field trip. It was a ''show but don't tell'' policy. I was able to speak about production issues only with Ibrahim al-Muhanna, the oil ministry spokesman, who reluctantly met me over coffee in the lobby of my hotel in Riyadh. He defended Saudi Arabia's refusal to share more data, noting that the Saudis are no different from most oil producers.

''They will not tell you,'' he said. ''Nobody will. And that is not going to change.'' Referring to the fact that Saudi Arabia is often called the central bank of oil, he added: ''If an outsider goes to the Fed and asks, 'How much money do you have?' they will tell you. If you say, 'Can I come and count it?' they will not let you. This applies to oil companies and oil countries.'' I mentioned to Muhanna that many people think his government's ''trust us'' stance is not convincing in light of the cheating that has gone on within OPEC and in the industry as a whole; even Royal Dutch/Shell, a publicly listed oil company that undergoes regular audits, has admitted that it overstated its 2002 reserves by 23 percent.

''There is no reason for any country or company to lie,'' Muhanna replied. ''There is a lot of oil around.'' I didn't need to ask about Simmons and his peak-oil theory; when I met Muhanna at the conference in Washington, he nearly broke off our conversation at the mention of Simmons's name. ''He does not know anything,'' Muhanna said. ''The only thing he has is a big mouth. We should not pay attention to him. Either you believe us or you don't.''

o whom to believe? Before leaving New York for Saudi Arabia, I was advised by several oil experts to try to interview Sadad al-Husseini, who retired last year after serving as Aramco's top executive for exploration and production. I faxed him in Dhahran and received a surprisingly quick reply; he agreed to meet me. A week later, after I arrived in Riyadh, Husseini e-mailed me, asking when I would come to Dhahran; in a follow-up phone call, he offered to pick me up at the airport. He was, it seemed, eager to talk.

It can be argued that in a nation devoted to oil, Husseini knows more about it than anyone else. Born in Syria, Husseini was raised in Saudi Arabia, where his father was a government official whose family took on Saudi citizenship. Husseini earned a Ph.D. in geological sciences from Brown University in 1973 and went to work in Aramco's exploration department, eventually rising to the highest position. Until his retirement last year -- said to have been caused by a top-level dispute, the nature of which is the source of many rumors -- Husseini was a member of the company's board and its management committee. He is one of the most respected and accomplished oilmen in the world.

After meeting me at the cavernous airport that serves Dhahran, he drove me in his luxury sedan to the villa that houses his private office. As we entered, he pointed to an armoire that displayed a dozen or so vials of black liquid. ''These are samples from oil fields I discovered,'' he explained. Upstairs, there were even more vials, and he would have possessed more than that except, as he said, laughing, ''I didn't start collecting early enough.''

We spoke for several hours. The message he delivered was clear: the world is heading for an oil shortage. His warning is quite different from the calming speeches that Naimi and other Saudis, along with senior American officials, deliver on an almost daily basis. Husseini explained that the need to produce more oil is coming from two directions. Most obviously, demand is rising; in recent years, global demand has increased by two million barrels a day. (Current daily consumption, remember, is about 84 million barrels a day.) Less obviously, oil producers deplete their reserves every time they pump out a barrel of oil. This means that merely to maintain their reserve base, they have to replace the oil they extract from declining fields. It's the geological equivalent of running to stay in place. Husseini acknowledged that new fields are coming online, like offshore West Africa and the Caspian basin, but he said that their output isn't big enough to offset this growing need.

''You look at the globe and ask, 'Where are the big increments?' and there's hardly anything but Saudi Arabia,'' he said. ''The kingdom and Ghawar field are not the problem. That misses the whole point. The problem is that you go from 79 million barrels a day in 2002 to 82.5 in 2003 to 84.5 in 2004. You're leaping by two million to three million a year, and if you have to cover declines, that's another four to five million.'' In other words, if demand and depletion patterns continue, every year the world will need to open enough fields or wells to pump an additional six to eight million barrels a day -- at least two million new barrels a day to meet the rising demand and at least four million to compensate for the declining production of existing fields. ''That's like a whole new Saudi Arabia every couple of years,'' Husseini said. ''It can't be done indefinitely. It's not sustainable.''

Husseini speaks patiently, like a teacher who hopes someone is listening. He is in the enviable position of knowing what he talks about while having the freedom to speak openly about it. He did not disclose precise information about Saudi reserves or production -- which remain the equivalent of state secrets -- but he felt free to speak in generalities that were forthright, even when they conflicted with the reassuring statements of current Aramco officials. When I asked why he was willing to be so frank, he said it was because he sees a shortage ahead and wants to do what he can to avert it. I assumed that he would not be particularly distressed if his rivals in the Saudi oil establishment were embarrassed by his frankness.

Although Matthew Simmons says it is unlikely that the Saudis will be able to produce 12.5 million barrels a day or sustain output at that level for a significant period of time, Husseini says the target is realistic; he says that Simmons is wrong to state that Saudi Arabia has reached its peak. But 12.5 million is just an interim marker, as far as consuming nations are concerned, on the way to 15 million barrels a day and beyond -- and that is the point at which Husseini says problems will arise.

At the conference in Washington in May, James Schlesinger, the moderator, conducted a question-and-answer session with Naimi at the conclusion of the minister's speech. One of the first questions involved peak oil: might it be true that Saudi Arabia, which has relied on the same reservoirs, and especially Ghawar, for more than five decades, is nearing the geological limit of its output?

Naimi wouldn't hear of it.

''I can assure you that we haven't peaked,'' he responded. ''If we peaked, we would not be going to 12.5 and we would not be visualizing a 15-million-barrel-per-day production capacity. . . . We can maintain 12.5 or 15 million for the next 30 to 50 years.''

Experts like Husseini are very concerned by the prospect of trying to produce 15 million barrels a day. Even if production can be ramped up that high, geology may not be forgiving. Fields that are overproduced can drop off, in terms of output, quite sharply and suddenly, leaving behind large amounts of oil that cannot be coaxed out with existing technology. This is called trapped oil, because the rocks or sediment around it prevent it from escaping to the surface. Unless new technologies are developed, that oil will never be extracted. In other words, the haste to recover oil can lead to less oil being recovered.

''You could go to 15, but that's when the questions of depletion rate, reservoir management and damaging the fields come into play,'' says Nawaf Obaid, a Saudi oil and security analyst who is regarded as being exceptionally well connected to key Saudi leaders. ''There is an understanding across the board within the kingdom, in the highest spheres, that if you're going to 15, you'll hit 15, but there will be considerable risks . . . of a steep decline curve that Aramco will not be able to do anything about.''

Even if the Saudis are willing to risk damaging their fields, or even if the risk is overstated, Husseini points out a practical problem. To produce and sustain 15 million barrels a day, Saudi Arabia will have to drill a lot more wells and build a lot more pipelines and processing facilities. Currently, the global oil industry suffers a deficit of qualified engineers to oversee such projects and the equipment and the raw materials -- for example, rigs and steel -- to build them. These things cannot be wished from thin air or developed quickly enough to meet the demand.

''If we had two dozen Texas A&M's producing a thousand new engineers a year and the industrial infrastructure in the kingdom, with the drilling rigs and power plants, we would have a better chance, but you cannot put that into place overnight,'' Husseini said. ''Capacity is not just a function of reserves. It is a function of reserves plus know-how plus a commercial economic system that is designed to increase the resource exploitation. For example, in the U.S. you have infrastructure -- there must be tens of thousands of miles of pipelines. If we, in Saudi Arabia, evolve to that level of commercial maturity, we could probably produce a heck of a lot more oil. But to get there is a very tedious, slow process.''

He worries that the rising global demand for oil will lead to the petroleum equivalent of running an engine at ever-increasing speeds without stopping to cool it down or change the oil. Husseini does not want to see the fragile and irreplaceable reservoirs of the Middle East become damaged through wanton overproduction.

''If you are ramping up production so fast and jump from high to higher to highest, and you're not having enough time to do what needs to be done, to understand what needs to be done, then you can damage reservoirs,'' he said. ''Systematic development is not just a matter of money. It's a matter of reservoir dynamics, understanding what's there, analyzing and understanding information. That's where people come in, experience comes in. These are not universally available resources.''

The most worrisome part of the crisis ahead revolves around a set of statistics from the Energy Information Administration, which is part of the U.S. Department of Energy. The E.I.A. forecast in 2004 that by 2020 Saudi Arabia would produce 18.2 million barrels of oil a day, and that by 2025 it would produce 22.5 million barrels a day. Those estimates were unusual, though. They were not based on secret information about Saudi capacity, but on the projected needs of energy consumers. The figures simply assumed that Saudi Arabia would be able to produce whatever the United States needed it to produce. Just last month, the E.I.A. suddenly revised those figures downward -- not because of startling new information about world demand or Saudi supply but because the figures had given so much ammunition to critics. Husseini, for example, described the 2004 forecast as unrealistic.

''That's not how you would manage a national, let alone an international, economy,'' he explained. ''That's the part that is scary. You draw some assumptions and then say, 'O.K., based on these assumptions, let's go forward and consume like hell and burn like hell.''' When I asked whether the kingdom could produce 20 million barrels a day -- about twice what it is producing today from fields that may be past their prime -- Husseini paused for a second or two. It wasn't clear if he was taking a moment to figure out the answer or if he needed a moment to decide if he should utter it. He finally replied with a single word: No.

''It's becoming unrealistic,'' he said. ''The expectations are beyond what is achievable. This is a global problem . . . that is not going to be solved by tinkering with the Saudi industry.''

It would be unfair to blame the Saudis alone for failing to warn of whatever shortages or catastrophes might lie ahead.

In the political and corporate realms of the oil world, there are few incentives to be forthright. Executives of major oil companies have been reluctant to raise alarms; the mere mention of scarce supplies could alienate the governments that hand out lucrative exploration contracts and also send a message to investors that oil companies, though wildly profitable at the moment, have a Malthusian long-term future. Fortunately, that attitude seems to be beginning to change. Chevron's ''easy oil is over'' advertising campaign is an indication that even the boosters of an oil-drenched future are not as bullish as they once were.

Politicians remain in the dark. During the 2004 presidential campaign, which occurred as gas prices were rising to record levels, the debate on energy policy was all but nonexistent. The Bush campaign produced an advertisement that concluded: ''Some people have wacky ideas. Like taxing gasoline more so people drive less. That's John Kerry.'' Although many environmentalists would have been delighted if Kerry had proposed that during the campaign, in fact the ad was referring to a 50-cents-a-gallon tax that Kerry supported 11 years ago as part of a package of measures to reduce the deficit. (The gas tax never made it to a vote in the Senate.) Kerry made no mention of taxing gasoline during the campaign; his proposal for doing something about high gas prices was to pressure OPEC to increase supplies.

Husseini, for one, doesn't buy that approach. ''Everybody is looking at the producers to pull the chestnuts out of the fire, as if it's our job to fix everybody's problems,'' he told me. ''It's not our problem to tell a democratically elected government that you have to do something about your runaway consumers. If your government can't do the job, you can't expect other governments to do it for them.'' Back in the 70's, President Carter called for the moral equivalent of war to reduce our dependence on foreign oil; he was not re-elected. Since then, few politicians have spoken of an energy crisis or suggested that major policy changes are necessary to avert one. The energy bill signed earlier this month by President Bush did not even raise fuel-efficiency standards for passenger cars. When a crisis comes -- whether in a year or 2 or 10 -- it will be all the more painful because we will have done little or nothing to prepare for it.

Peter Maass is a contributing writer. He is writing a book about oil.

HOW INDIA RECONCILES HINDU VALUES AND BIOTECH

2005-08-21T11:09:00.000-07:00

http://www.nytimes.com/2005/08/21/weekinreview/21mishra.html

August 21, 2005

How India Reconciles Hindu Values and Biotech

By PANKAJ MISHRA

LONDON — In 2001, President Bush restricted federal financing for stem cell research. The decision, which was shaped at least partly by the Republican Party's evangelical Christian base, and which disappointed many American scientists and businessmen, provoked joy in India. The weekly newsmagazine India Today, read mostly by the country's ambitious middle class, spoke of a "new pot of gold" for Indian science and businesses. "If Indians are smart," the magazine said, American qualms about stem cell research "can open an opportunity to march ahead."

Just four years later, this seems to have occurred. According to Ernst & Young's Global Biotechnology Report in 2004, Indian biotechnology companies are expected to grow tenfold in the next five years, creating more than a million jobs. With more than 10,000 highly trained and cheaply available scientists, the country is one of the leading biotechnology powers along with Korea, Singapore, China, Japan, Sweden, Britain and Israel.

A top Indian corporation, the Reliance Group, owns Reliance Life Sciences, which is trying to devise new treatments for diabetes and Parkinson's and Alzheimer's diseases, and create human skin, blood and replacement organs genetically matched to their intended recipients. Some scientists have even more ambitious ideas. Encouraged by the cloning of a sheep by British scientists in 1996, they plan to do the same with endangered species of Indian lions and cheetahs.

American scientists and businessmen note enviously that religious and moral considerations do not seem to inhibit Indian biotechnologists. But this indifference to ethical issues would have certainly appalled Gandhi, father of the Indian nation. Gandhi accused Western medicine, along with much of modern science and technology, of inflicting violence upon human nature. His vegetarianism and belief in nonviolence were derived from Indian traditions, mainly Hinduism, which is also the faith, though loosely defined, of most Indian scientists and businessmen.

Indeed, most evangelical Christians, who believe that the embryo is a person, may find more support in ancient Hindu texts than in the Bible. Many Hindus see the soul - the true Self (or atman) - as the spiritual and imperishable component of human personality. After death destroys the body, the soul soon finds a new temporal home. Thus, for Hindus as much as for Catholics, life begins at conception.

The ancient system of Indian medicine known as Ayurveda assumes that fetuses are alive and conscious when it prescribes a particular mental and spiritual regimen to pregnant women. This same assumption is implicit in "The Mahabharata," the Hindu epic about a fratricidal war apparently fought in the first millennium B.C. In one of its famous stories, the warrior Arjuna describes to his pregnant wife a seven-stage military strategy. His yet-to-born son Abhimanyu is listening, too. But as Arjuna describes the seventh and last stage, his wife falls asleep, presumably out of boredom. Years later, while fighting his father's cousins, the hundred Kaurava brothers, Abhimanyu uses well the military training he has learned in his mother's womb, until the seventh stage, where he falters and is killed.

But the religions and traditions we know as Hinduism are less monolithic and more diverse than Islam and Christianity; they can yield contradictory arguments. Early in "The Mahabharata," there is a story about how the hundred Kaurava brothers came into being. Their mother had produced a mass of flesh after two years of pregnancy. But then a sage divided the flesh into 100 parts, which were treated with herbs and ghee, and kept in pots for two years - from which the Kaurava brothers emerged.

Indian proponents of stem-cell research often offer this story as an early instance of human cloning through stem cells extracted from human embryos. They do not mention that "The Mahabharata" presents the birth of the hundred Kaurava brothers as an ominous event.

Other Asian scientists have also pressed myth and tradition into the service of modern science and nationalism. In South Korea, where a third of the population is Buddhist, a scientist who cloned human embryonic stem cell lines claimed that he was "recycling" life just as reincarnation does.

But spiritual tradition cannot solve all the ethical issues raised by science's progress through the third world. Ultrasound scans help many women in India to abort female fetuses; a girl child is still considered a burden among Indians. The trade in human organs, especially kidneys, remains a big business, despite growing scrutiny by the police. It is not hard to imagine that, as stem cell research grows in India, and remains unregulated, a small industry devoted to the creation of human embryos would soon develop.

In any case, biotechnology may offer only pseudo-answers to many of India's urgent problems. For one thing, if and when lions and cheetahs emerge from biotechnology labs, the steadily deforested Indian countryside may not have a place for them. Stem cell research is also expensive, and seems glaringly so in a country which does not provide basic health care for most of its people. The advanced treatments promised by biotechnology are likely to benefit the rich, at least for the first few years.

In the meantime, the poor may be asked to offer themselves as guinea pigs. In an article on biotechnology last year, India Today asserted: "India has another gold mine - the world's largest population of 'naïve' sick patients, on whom no medicine has ever been tried. India's distinct communities and large families are ideal subjects for genetic and clinical research."

Scientism has few detractors in India; and the elites find it easy to propose technological rather than political and moral solutions to the problems of poverty, inequality and environmental damage. Obsessed with imitating Western consumer lifestyles, most middle-class Indians are unlikely to have much time for Gandhi's belief that "civilization consists not in the multiplication of wants but in the deliberate and voluntary reduction of wants." They subscribe to a worldly form of Hinduism - one that now proves to be infinitely adjustable to the modern era, endorsing nuclear bombs and biotechnology as well as India's claim to be taken seriously as an emerging economic and scientific superpower.

Pankaj Mishra, an Indian novelist and journalist, is the author, most recently, of "An End to Suffering: The Buddha in the World." He lives in London and India.

The Oil Effect, New York Times, Saturday, August 20, 2005

2005-08-20T08:44:00.000-07:00

The Oil Effect

Just when it was starting to seem as if consumers were really shaking off high energy prices, Wal-Mart announced this week that its profits stumbled in the second quarter, rising at their slowest rate in four years. Forced to choose between their closets and their gasoline tanks, Americans unsurprisingly chose their tanks. Wal-Mart warned that future sales would be curtailed as well, and no wonder: gasoline is now averaging $2.60 a gallon nationwide, nearly a 39 percent increase from last year. At the same time, natural gas prices are up 60 percent to 90 percent around the country, presaging steep home-heating bills in the months ahead on top of high prices at the pump.

With most other prices relatively tame, consumers could weather the energy squeeze if they had a cushion. They don't.

Wage gains for most Americans are barely keeping up with inflation. And according to a recent Commerce Department report, Americans, on average, are now saving nothing each month, so they obviously cannot pay higher energy bills by reducing the amount they save.

That leaves rising home values to cover growing energy costs. According to a recent report by John Makin, a visiting scholar at the American Enterprise Institute in Washington, the housing boom has offset the economic drag of higher oil prices by enabling homeowners to get cash through refinancing or selling at a profit, and by creating a "wealth effect": as their houses appreciate, homeowners feel rich and thus spend freely, even as they neglect to save.

Mr. Makin estimates that a mere leveling off of housing prices would be sufficient to remove the economic boost from real estate. That would slow consumer spending and, with it, the economy.

No one knows when that leveling off will occur. But homes are already becoming increasingly unaffordable, and refinancings are slowing down. There are early signs that banks are beginning to tighten their lending standards. And the Federal Reserve, which has been trying for more than a year to push up mortgage rates, will probably succeed in that endeavor at some point.

The pain that now seems imminent might have been avoided. Conservation could have reduced energy demand and prices, while properly targeted job growth and savings incentives - not tax cuts for the rich - could have built a stronger job recovery, helping to foster higher wages and new savings. Maybe next time around.

http://www.nytimes.com/2005/08/20/opinion/20sat2.html

Get Serious About Energy Before Oil Output Dwindles - Steve Yetiv

2005-08-18T08:32:00.000-07:00

Budget deficits explode. Inflation rules. Stock markets plunge. Houses foreclose. Great powers clash. This may be our future if we do not take more serious steps on energy than those offered in the energy bill that President Bush recently signed.

With oil prices hitting all-time highs and war raging in Iraq, serious concerns about ``peak oil'' slowly have appeared on the public radar screen. Simply put, peak oil refers to a key turning point when global oil production peaks and then begins to decline, signaling a future of dwindling supplies.

Analysts predict that the peak will occur between 2006 and 2011, that global oil reserves are far more limited than believed, partly because leading producers such as Saudi Arabia overestimate or obfuscate their oil reserves, and that we are headed for a massive energy crunch.

Such concerns may be exaggerated, but we still need to plan ahead more zealously. This is because whenever peak oil does arrive, it will most likely produce three effects for which we are not prepared.

First, in the absence of serious alternatives to oil, oil prices will spike possibly to more than $100 a barrel in anticipation that demand for oil will slowly outrun supply. That could trigger a global recession or worse. Even if rising prices spur research into affordable alternatives, it will take many years, perhaps decades, for the global economy to shift to them because oil penetrates all walks of life. We can't switch away from it overnight. Even if peak oil comes in 2020 or 2025, we are still behind in the race.

Second, the Middle East will become increasingly important as a supplier, making the world more vulnerable to its vagaries. It now accounts for about one-third of global oil production. Yet it holds two-thirds of the world's oil reserves. They will be the last left as oil dries up around the world.

Third, fears about peak oil may trigger conflicts among great powers. China-controlled CNOOC withdrew its bid for the American oil company Unocal, but this case is a harbinger of the future. It underscores China's obsessive concern about energy and Washington's growing concern about China. Imagine how tense U.S.-China relations could become against the backdrop of dwindling oil supplies.

Such conflicts will not be limited to great powers. Osama bin Laden repeatedly and mistakenly has claimed that Americans have been stealing Arab oil. Oil is seen as an Arab resource by millions of Muslims who view America's invasion of Iraq as an oil grab. Fears about diminishing supplies could push the United States and other great powers to secure oil supplies in ways that would ignite a broader conflict with the Muslim world.

Studies show that we can take three actions of particular importance to try to avoid this future.

First, we must view the current energy plan as a starting point rather than as a finished product. It makes some advances but fails to address a key fact: 70 percent of oil is used in the transportation sector. To deal with that reality, we will need to increase taxes on oil consumption. A study by the Organization for Economic Cooperation and Development has suggested that doing so would reduce oil use and carbon emissions by more than 10 percent.

We must also pass rigorous fuel standards, which the current energy bill fails to do. A recent report from the Environmental Protection Agency said cars and trucks sold today are much less fuel-efficient than they were in the late 1980s.

The energy bill makes available $14.6 billion in subsidies and tax credits, but $9.2 billion goes toward electricity generation, where only 3 percent of oil is used, and an additional $2.6 billion goes to oil and gas companies. Very little goes to decreasing oil consumption in transportation or creating and employing alternative energies.

Second, we must publicize the possibility that the United States and the world economy are woefully unprepared for peak oil. This is vital because Americans, in particular, still see oil as an entitlement. America uses 25 percent of the world's energy and has only 5 percent of its population.

Third, we need to establish a set of norms that can help great powers -- and civilizations, for that matter -- avoid conflicts over oil. Otherwise, we will increasingly see oil as a zero-sum game as we anticipate dwindling supplies. The United States and China do have a bilateral working group on energy at lower governmental levels, but it deserves higher-level attention and needs to be expanded to include other countries.

Technology may still save us from our oil addiction. But just as we buy insurance to protect our lives, we should have an insurance policy to protect the energy security of future generations.

STEVE A. YETIV is professor of political science and international studies at Old Dominion University and author of "Explaining Foreign Policy.'' He wrote this article for the Baltimore Sun.

http://www.mercurynews.com/mld/mercurynews/news/opinion/12412916.htm

Our failed ME policy is our crack cocaine dependence on Saudi Oil.

2005-08-17T14:09:00.000-07:00

We had a wake up call - and Reagan ignored it (after all, it was "Morning In America"), and oil man George H. Bush just drew us closer to the House of Saud, and Clinton couldn't fight the American petroleum Institute, the North American Automobile Manufacturers Association, and the UAW, and George W. Bush - forget it.

Our over dependence on the Riyadh Oil Cartel is as disastrous as our dependence on the Cali Drug Cartel - or our wink and nod on the Kabul Heroin Cartel.

What is particularly dangerous about the Riyadh Oil Cartel is that at $67+/bbl, the "monopoly rents" are not going to starving Muslims in Niger (except for mere pennies) or to establishing an entrepreneurial infrastructure in Gaza (once you get past Prince Talal's King Holdings Ltd - that's it from the Riyadh Oil Cartel, and Talal is on the outs with the Riyadh Oil Cartel). The "monopoly rents" are going to Wahabi Madrassas, to terrorists, and the terrorist associated "charities" - but not to Seeds of peace or Kingdom Holdings.

Even worse, the Riyadh Oil Cartel is stealing the mineral birth right of the Saudi proletariat - and spending it on bordellos, race horses, casinos, and "extravagances" - but not on "the people" (Saudi proletariat). That is Marie Antoinette and Czar Nicholas II style thinking. And that is who we support in the ME -- and that is who AlQaida is trying to unseat.

Oil and the Riyadh Oil Cartel constitute our failed ME policy.

The absence of an energy policy beyond "drill, drill, drill" and "tax cut, tax cut, tax cut" and "kiss King Abdullah's butt" is our failed ME policy.

On a relative scale, compared to the Riyadh Oil Cartel (and our support) - israel wouldn't (to use an old Coast Guard expression) make a good pimple on a Bosun's Mate's left butt cheek.

Is The Oil Industry Behind PNAC?

2005-08-15T18:39:00.000-07:00

A Likud-Sharon-AIPAC basis for PNAC has currency in the Progressive Community. This is just plain wrong.

The AIPAC-Israel-Sharon-Likud model is a little bit of an obsolete conspiracy theory. The real backers of the NeoCon Agenda are Big Oil, the armaments makers, and Carlyle.Now that oil is over $67/bbl, and gas is hitting $3.00/gallon, I would propose this more transparent conspiracy theory.

If you want conspiracy theories, I tie the whole Iraq War into a small group of "Big Money" players with "dogs in the fight" ("big Oil" - "Armaments - Carlyle) - not a bunch of right wing psuedo intellectuals with Straussian PhD dissertations from the University of Chicago or Johns Hopkins University - but real "big money" skinny on the table-

Now, let's "connect the dots"

Let's push the "PNAC = Likud" and "PNAC = Big Three + Big Oil" Models

Ask yourself two questions (this is called "engineering sensitivity analysis" - you push one variable to zero or infinitely and tweak the others)

We have passed the "Peak" of "Peak Oil"

2005-08-12T20:29:00.000-07:00

We have passed the "Peak" of "Peak Oil" -

We are burning oil faster then we are finding it.

1) The Long Emergency: Surviving the End of the Oil Age, Climate Change, and Other Converging Catastrophes of the Twenty-first Century by James Howard Kunstler

PEAK OIL AND 9/11

Ancient History of Petroleum Politics

Sykes Picot Agreement

http://en.wikipedia.org/wiki/Sykes-Picot_Agreement

The Sykes-Picot Agreement - which was by its explicit terms and conditions contrary to the "Balfour Declaration"

Matthew Simmons Interview of August 6, 2005

2005-08-11T19:47:00.000-07:00

Link: http://www.financialsense.com/transcriptions/Simmons.html

Frequent reference is made t Matthew Simmon's book "Twilight In the Desert: The Coming Saudi Oil Shock and the World Economy" -a bargain at twice the price. I highly recommend it.

=================

JIM PUPLAVA: Joining me on the program is Matthew Simmons. He’s Chairman and Chief Executive Officer of Simmons & Company International, a Houston-based investment bank that specializes in the energy industry. Mr. Simmons serves on the boards of Brown-Forman Corporation, The Atlantic Council of The United States, he’s also a member of the National Petroleum Council and The Council of Foreign Relations. He has an MBA from Harvard University. And he’s here to discuss his new book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

Matt, I want to start out the discussion from the back of your book in Appendix B. Several years ago you did a study of the world’s major oil fields. What did you find?

MATTHEW SIMMONS: It was really an incredible exercise of trying to collect the data no one had ever actually thought of doing before, and that’s, what are the top oil fields in the world – field by field. And the background for me doing this is that I’ve participated 2 years in a row in an energy supply workshop, conducted by the energy analysts of the CIA in Washington, where they got about 10 of the best oil experts together, and we’d spend a day doing a discussion of all the key countries, and how much oil capacity they had in place over the course of the coming 3 years. I sat there listening aghast at all of these experts with their laptops that kept looking at their supply models, and it’s how China will be producing 3,217,000 barrels/day this year, and 3,281,000 barrels/day. And I basically said: “how do you all even know that. What are the 3 or 4 top fields in China?” And no one had any answers.

So I decided it would be interesting and educational to see if you could actually put together a list of the top 20 oil fields by name. And I thought somebody must have done this before, and the more I dug the more I realized that no one ever had. So I basically decided – arbitrarily – 100,000 barrels per day [bpd] production was my cutoff of what constituted a giant oil field and all Fall of 2000, I believe this was, I basically took data from various areas and kept trying to hone in on the total list, and I decided once I got it done, I would circulate it widely to the 4 or 5 or 6 hundred people who really ought to know the areas a lot better, and that would flush out the real data. What I came up with was finding that there are about 120 oil fields in the world that still produced over 100,000 bpd, and that they collectively were 49% of the world’s oil supply. What I also found is that the top 14 fields that still produce over 500,000 bpd each, were 20% of the world’s oil supply, and on average they were 53 years old. The next thing I found was that in the Middle East you had basically, somewhere between 3-5 oil fields in each of the major Middle East oil producers that made up about 90% of their supply – and until I did that I had just assumed the Middle East had hundreds of oil fields – and all these oil fields were old. And then what I found was – because we made it clear that anyone who wanted a copy could get one, but the caveat was that if you have any better information, let me know – I probably shipped over a thousand of these copies out to people and I had about 5 responses of “here’s a field you missed, here’s a field you misspelled or here’s a field you said it was producing X, and I believe it’s probably producing Y.” Only about 5 responses, out of over a thousand people who got this. What I got from hundreds of people was “this is amazing, I’ve never thought about this before.” And these aren’t just sort of random people, these are people that are all passionate energy analysts. So that gave me the background, when I finally had my only trip I’ve ever taken to Saudi Arabia. I knew ahead of time that they had these 5 key fields that must still be producing 90% of their oil, and it was that knowledge and data that allowed me to just peer into presentations we were having, so that I came away saying, “you know I really wonder whether in fact we’re sitting on an illusion that Saudia Arabia has all this vast amount of producible oil.” And I also then had an idea of what issues I should start trying to research, and within months I had discovered this phenomenal database of technical papers at the Society of Petroleum Engineers, that I spent all Summer, two years ago in Maine, plowing through, and it was at the end of that exercise that I decided I was going to write a book. [5:24]

JIM: It’s incredible, because every energy supply model starts with the assumption that Saudi oil is plentiful. It’s inexpensive to produce and supply can expand to meet demand. I mean, whether you’re looking at the IEA or the USGS, that’s not necessarily the case.

MATT: Yes. What’s interesting is that we’ve based all of this assumption on no data. [5:46]

JIM: That is amazing!

MATT: I mean, it would be like someone assuming General Electric could basically grow by 30% per annum, and that by 20 years from now they’d have a company that was bigger than the economy of the United States, because they needed to do that to support their stock price, and no one ever saying, “Wait a sec, how could a single company ever grow beyond the economy of the United States.” But this is far more important in the unforeseen consequences: that we’ve effectively built a world economy on the illusion that Middle East oil would last forever at inexpensive cost. [6:22]

JIM: You know last year, Matt, the Saudi Oil Minister announced they could expand their oil reserves by 77% to 461 billion barrels. Is that a political statement, because their doesn’t seem to be – from looking at your data in terms of how their reserves were compiled – where do they get that number?

MATT: They assume it! What’s really astonishing is that I had a suspicion 2 years ago, when I’d finished going through 150 of these technical papers, that I might well have done an exercise no one in the world had ever done before, and that’s piece together these individual study-area problems and put them together until you had basically done a forensic pathology of their oil system. And I wondered whether anyone in Saudi Arabia had ever actually done the same amount of research. And now it turns out, I was apparently the first person in the world to ever actually challenge the assumptions of the unlimited amount of their oil supplies. And it hit a nerve I would never ever have expected because I wasn’t a household name – I think I am today in Saudi Arabia – I was just an investment banker in Houston. It was the same sort of reaction if someone went to the Vatican and said, “I hate to tell you all this, but there really isn’t a God, and there isn’t a Pope.” And out of that came a massive public relations campaign by the senior management of Saudi Aramco, the state oil company, and the Petroleum Ministry that effectively has said, “we can produce 10 million or 12 million or 15 million barrels a day for 50 to 100 years. Our 260 billion barrels of proven reserves, there’s this conservative number we can easily add another 200 billion, and we can still add another 200 billion we have yet to discover”. And I actually think that they believe that, which is far more dangerous than “it’s just a political statement.” [8:18]

JIM: Now the thesis of your book is Saudi production is very near its peak...

MATT: I decided that this book was going to be so controversial that I really tried my darnedest to avoid a bunch of very specific conclusions that people could shoot holes in them: “how would you know that?” But I’ve had enough time now to reflect on everything I wrote about, and also feedback from lots of technical people that said, “you know what, what you triggered in the memory of what was going on in the 70s”, and etc, etc. I think it’s highly likely that they’ve actually exceeded sustainable peak production already. And I think at the current rates they are producing these old fields, each of the fields risks entering into a rapid production collapse.[9:03]

JIM: If this is indeed the case then, by assumption, we have to assume global peak is at hand then.

MATT: Absolutely. Once it’s clear that Saudi Arabia cannot sustain increases in its production on a sustained basis, then in my opinion, with a certainty of 99.9% the world has actually passed sustainable peak production. Because one of the reasons all of these supply models always have Saudi Arabia producing 25 million bpd by 2025 is that there isn’t another country on earth that has the potential to raise their production more than 1 or 2 million bpd at best. [9:41]

JIM: Why is it, do you think, there’s only been 2 groups that have been concerned with this: you have the oil company executives, because they are obviously looking around the globe and they’re not finding major elephants on a yearly basis; and then we’ve had environmentalists who have also been concerned about this. Those have been the main 2 groups, but aside from that, you have a third group, the economists, who basically just say, “as the prices of oil goes up the production goes up to meet it.”

MATT: Yes, and they say it with a passion and a vengeance. What I’ve also found so interesting is that the concept of peak oil which is finally getting some serious traction as a discussion item gets scorned by economists – energy economists. What they hear is the world is running out of oil, they don’t understand the concept of peak oil. And I continue to remind people that the difference between oil supply peaking and running out of oil is as profound as someone saying, “I’m getting a little bit hungry,” and someone saying, “I have about 2 more minutes to live before I starve to death.” And we will never run out of oil, in our lifetime, our children’s lifetime, our grandchildren’s lifetime. But by 2030 we could easily have a world that can only produce 10 or 15 or 20 million barrels per day, and the shortfall from what we thought we were going to produce is only a modest 100 million barrels per day. So this is really a major, major, major global issue. [11:10]

JIM: It’s not only a major issue, but if you look at Wall Street, the day you and I are speaking, oil is over $62/barrel and the standard response is – in fact, one of the questions given to one of the analysts this morning is “when is it coming down?”...

MATT: “Why is it so high and when is it coming down?” [11:31]

JIM: You gave an analogy in terms of how cheap oil is at $60/barrel, I wonder if you might share that with our listeners?

MATT: Sure. Because every time I get into a discussion now about the future of oil I always get asked, “well, where will oil prices be?” And my response is, “I don’t have any idea where they’re going to be, other than the fact I think on a secular move, we are still at a very, very cheap level of oil prices.” And that immediately gets a response, “Cheap?! Oil’s at $60 a barrel!” And one of the things I’ve observed is that people don’t really understand what a barrel is. They can kind of conceive what a barrel might look like. But when you put it in terms people can understand, I say “what $60 per barrel is, is 18 cents a pint.”

And then I get a response, “How did you do that?!”

“Well, you divide 60 by 42, to get a gallon of oil, and you divide a gallon by 8 to get a pint of oil, and that just happens to be 18 cents a pint.”

And then they say, “ Oh, that’s really cheap, isn’t it?”

And obviously it’s cheap. I don’t know what’s the next cheapest liquid we actually sell in any bulk is, that has any value. I suspect there are places around the United States where municipal water costs more than 18 cents a pint. And yet for some reason, we created a society that was built on a belief that oil prices in a normal range were some place in the $15-20 level. It turns out $15/barrel, which is the average price of oil – in 2004 dollars – it sold for, for the last 140 years, is less than 4 cents a pint. So we’ve basically used up the vast majority of the world’s high flow rate, high quality sweet oil at prices that were effectively so cheap, you basically couldn’t sustain an industry. And now we’re left with lots of oil. But it’s heavy, gunky, dirty, sour, contaminated with various things oil, it doesn’t come out of the ground very fast, is very energy intensive to get out of the ground and we’re going to pay a fortune for it. [13:42]

JIM: Why don’t you take us back, as we talk about this peak in oil in Saudi Arabia, to when oil was first discovered. Give us a little bit of background about Saudi Arabia, because up until 1930 there really wasn’t an issue in Saudi Arabia. How did they emerge as a global energy power?

MATT: First of all, just a real quick history of oil because I think it’s actually interesting to put into present context.

A year before the Civil War, Col. Drake effectively was the ‘Thomas Edison’ of discovering oil in Western Pennsylvania. But the oil fields there were tiny oil fields, and the stuff didn’t come out of the ground very fast, but it was fabulously high quality. You know, Quaker State motor gasoline oil quality. So simple refining processes could make it usable. And over the course of the next 40 years oil was effectively a substitute for kerosene and coal gas as a way to create lamp oil. And then in 1901, we discovered the great Spindletop field in Beaumont, Texas, and that was the world’s first giant oil field that could produce vast amounts of oil; and after that and a few years later we discovered the Golden Alley in Mexico; we discovered oil in Iran. And by 1930 we had a concept – we had just discovered the great oil field in Kirkuk, in Iraq, ironically about 2700 yards from the burning oil fires that were mentioned in the Bible, in the time of Nebuchadnezzar – and in 1934 Abdul Azziz, who had just finally consolidated the kingdom that became known in 32 as Saudi Arabia, who’s the father of King Fahd who was buried yesterday, granted a concession to Standard Oil Company of California to begin looking for oil in Saudi Arabia. And in 1938, when the world economy was so fragile that we were still closing banks, they were just about to shut down their efforts after a very disappointing series of dry holes, when they hit discovery of Prosperity Well #7, and ushered in the oil kingdom of Saudi Arabia. By 1970, Saudi Arabia was producing 3 million bpd; by 1974 they were producing 8 million bpd; by 1980 – because of Iran collapsing and then the Iran-Iraq war – they hit their peak at 10 ½ million bpd and by then they were terrified they were producing oil at rates that couldn’t be sustained, and were going to destroy these great fields, because it was coming from 4-5 fields. And yesterday was not just the day we buried King Fahd. Yesterday was also, ironically, the 15^th anniversary of when Saddam Hussein invaded Kuwait. Did you all remember that? [16:38]

JIM: Sure do.

MATT: And it was that event that actually started to profoundly change the world, because within a week of that invasion – and the Republican Guard poised on the Saudi Arabian border to hit the South and to do the same thing to Saudi Arabia they’d just done to Kuwait – President Bush and his chief advisors decided to embargo Iraq and Kuwait, and they convinced King Fahd to station troops in Saudi Arabia to prevent the Republican Guard from taking over Saudi Arabia. Because had that happened, by the end of August, 15 years ago, Saddam Hussein would have controlled 15 million barrels of oil per day and would have been the emperor of the world. So this was really a profound series of changes. And then everyone in the world had to ramp their oil supplies up. And Saudi Arabia took great pride, as they saw, in 90 days, they could go from five back to eight million bpd, and stabilize the world oil markets to keep oil prices from going to $100.

And out of that decision came an accidental move back into a concept that they had no rate-sensitive production, and that is when all of the water problems that were starting to worry them so profoundly in the 70s started coming back. And they’ve effectively spent the last 15 years trying to fight these problems, and figure out how to get out of this box, while they were pretending to each other that their oil fields had no rate-sensitivity of how they were being produced, and what they did for 70 years they could do for another 70 years. So I thought the irony of burying the King yesterday, on the 15^th anniversary of Saddam’s move into Kuwait happening at the same time, was really unbelievable. [18:17]

JIM: As we take a look at some of the facts as we know them today, the Arabian Peninsula – as you pointed out in your book – has been very heavily explored, contrary to opinions otherwise.

MATT: Using the very best technology known to man. [18:32]

JIM: We’ve got 5 fields that are super giants that account for 90% of the oil. Of these fields, many of them have been in production 50 years or more, and there’s been very few fields discovered since 1980 that produce more than 250-300,000 bpd.

MATT: In fact, the record actually is, that in 1967 they discovered the last great field that has ever been discovered in Saudi Arabia. And the only field of any significance since then, has been in 1989 the Hawtah field – the Hawtah field and 5 satellite fields – peaked at 200,000 bpd. Now, some of the people that are skeptical of my views say, “how could you say 200,000 bpd isn’t a great oil field?” Well, 200,000 bpd in Saudi Arabia, as the best you’ve done in 35 years, is a very scary number.[19:23]

JIM: Why don’t you give us a bit of a history, because I don’t think most people realize we may be driving around here in Southern California with a gallon of gasoline in our tank that came from one of these fields.

MATT: Of the 10-11 million bpd that we import into the United States, 1.5 of that is Saudi Arabian oil, so statistically there is probably a pretty good likelihood that 1 out of 10 motorists in California have Saudi Arabian oil in their tank. [19:52]

JIM: Matt, give us a bit of a history, because most people know oil wells don’t last forever, but some of these in Saudi Arabia have been around for 50 years. I like the analogy that you use of the chess board and I wonder if we might start with that analogy, as we get to the Saudi fields.

MATT: Yes. The French Petroleum Institute did a major study a couple of decades ago, about the distribution of oil fields by basin. And what they found was that what seems to happen with phenomenal regularity is that within about 5-7 years of moving into a new area of prospective hydrocarbon, you tend to find the queen first, which is the second largest field you’re going to find; you then calibrate in on the knowledge of how you found that and within a handful of years you find the king; and then over the next decade, you find there too, the next 8-10 lords. And once you’ve found the royal family, the rest of everything you’ll ever find are basically peons in size.

And if you then say, “how did that work in Saudi Arabia?” In 1940 they basically found Abqaiq which was the best, in reservoir quality and quality of oil, field they’ve ever found, and Abqaiq peaked at about 1.2 million bpd in 1972. And then they had a hiatus during World War II when they really weren’t exploring. So had they not had a hiatus, they would probably have fast-forwarded this 4 years. In 1948 they discovered Ghawar which is the world’s largest oil field. In 1951, Ghawar came on production. In 1951 they discovered Safaniya which is basically the largest offshore oil field ever, and in terms of output was bigger than Abqaiq, but basically 40% of Ghawar. And then over the course of the next 15 years they found the rest of the royal family. And from 1967-2005 they’ve actually found an accumulation of little deposits they’ve never produced, even though they were always worried about too little diversification of supply. But for some reason or other they just couldn’t produce these fields. Now they’re going back and trying to rehabilitate a bunch of fields that were crummy fields in the 60s and 70s, that couldn’t ever sustain much production, and they’re claiming these fields can easily get up to 500,000 bpd and last 30-50 years. There is no technical support that that can be possible. You can’t say it’s impossible, but the fact that these fields couldn’t produce in the 70s gives rise to real caution that basically they’re deluding themselves that through the use of modern oil field technology they will be able to do something no one in the world has been able to do. [22:42]

JIM: In the history of Saudi oil exploration there’s certainly been a great effort, they’ve used great technologies – state-of-the-art technologies – but simply the oil hasn’t been there to the extent they were discovering it in the 40s, 50s and maybe early 60s.

MATT: All the great fields, ironically too, were discovered by eyesight, as opposed to seismic.[23:04]

JIM: Now, if we take a look at Saudi oil production at 3 million at the time that US oil production peaked in 1971 – you know, Matt, as I look at energy over the centuries we’ve been very lucky as a human race: we’ve had wood as a source of energy; that was replaced by coal; then we had oil that replaced coal and gave us our industrial society – but more importantly, as US oil production peaked in 1971 Saudi Arabian oil production was able to take off and take our place. There’s nothing out there!

MATT: With fabulous ease too. Also ironically in the last 3 years of the 1960s, we discovered the last 3 great provinces of brand new oil when we found oil in Alaska in 1967,68; we found oil in Siberia about the same period of time; and we found oil in the North Sea in 1969. And Siberian, Alaskan, and North Sea oil, effectively combined to produce: the North Sea peaked in 1999 at a little over 6 million bpd, it’s already down 25%; Alaskan oil peaked in the 1990s at 2 million bpd it’s now at about 900,000 bpd; Siberian oil peaked at about 9 million bpd and it’s about 5 million bpd. And we haven’t basically found another province since the late 60s. [24:31]

JIM: How are we able to keep production up, because if you take a look at the increase in demand now coming from emerging countries such as China and India, oil production has increased for decades? How are we able to do that with many of these fields going into decline?

MATT: Well, we continue to pull more and more out of the North Sea, and then we found deep water which was a fabulous last shot from the basins we already had shallow water production. And we took the Middle East oil back up to unsustainably high levels of production. So probably, we’re sweeping the cupboard bare. People looked at the way we were able to do this and thought, “wow! this is actually easy,” without realizing what we were actually doing was totally non-sustainable. [25:23]

JIM: If I was to use the analogy to advances in technology, were we just using bigger straws in effect to get the oil out?

MATT: Absolutely. But so many oil experts got giddy, by seeing the return to high flow rates, they started believing that we were actually now finally getting a vastly higher amount more oil out of these fields than we could produce before, and therefore we were headed to an era of unbelievably plentiful oil, at unbelievably low prices. And I’ll tell you, as we speak right now, ironically the same week that Twilight in the Desert began shipping, Cambridge Energy Research Associates, Daniel Yergin, who, I think, a lot of people think is one of the more respected – or maybe most respected – oil analysts on Earth, began producing a report saying effectively – and there was a big editorial piece in the Washington Post this Sunday – that the world, between now and 2010 – which is not very long away – is going to add 16.4 million bpd more oil, and create a massive oil glut, and collapse the price again. Now, I’ve read carefully through Daniel Yergin’s detailed field-by-field bottom-up report, and basically, it is a really flawed piece of analysis in my opinion. But the fact that they obviously believe it’s correct – they’re doing talk shows – shows you the depth of limitation of people that really understand how serious this is. Cambridge Energy Research Associates also, in 2001, were unbelievably pooh-poohing the idea that the United States had now entered a major natural gas crisis. But by 2004 they got the religion. I expect by 2009 they’ll issue a magnificent tome saying, “gosh! it looks like the world is now past sustainable peak oil supply.”

But what’s dangerous is how many of the optimists really believe we won’t ever have any oil problems. I hope I’m actually wrong in my dire predictions, but I hope people actually take them seriously and figure out a way to prepare for them, since if we do that we win either way. [27:24]

JIM: Let’s talk about this, especially the downside of Saudi oil production which is increased to meet some of the demands in this new century. How is it achieved, and then, I’d like you to address the dangers of over production in terms of what they’re doing today?

MATT: What Saudi Aramco effectively pioneered in the 60s was a method of injecting water into the flanks of these highly pressurized reservoirs, so that every time you produced a barrel of water you injected a barrel plus. So you never had reservoir pressure declines. And what they were effectively doing, if you could visualize this on a sort of 3D screen, is that the injected water was basically a giant battering ram, squeezing the oil column up higher and higher, preventing the reservoir pressure from ebbing, and also secondarily, sweeping the oil from the flanks of the field to the center. So the water was basically creating the drive to get the oil out, at very high flow rates, without having to resort to artificial lift. And over the years the amount of water injection has risen to where today – this is again one of those numbers that’s a state secret but you can backend to the fact where, now – to get 8-9 million bpd out of the ground, they’re injecting somewhere between 14 and 18 million barrels of highly salinic water into the oil fields to maintain that rate.

Once the sweep is finished, and they get all of the easily recoverable oil out, the reservoir pressures will collapse just like clockwork – you just don’t know when they’re going to collapse – and once oil pressures collapse, the production of fluids might stay the same, but the vast amounts of fluid will be water as opposed to oil. And then they’ll go into the era of the relentless challenge of pulling oil that is still there out of the ground through artificial lift, just like the United States had to do once we peaked. And the majority of what they will be lifting out of the well bores will be water, not oil. And that statement is just as basic as a doctor saying, “you know, these 70 year old people, twenty years from now, will be a lot older, and most of them will be way, way slower in their physical movements and the quality of life will have diminished, and the cost of life will have risen, but we’ll still have them alive.” [29:58]

JIM: Talking about the dangers of over production, there was this Senate hearing in 1974 with various Aramco executives, later Seymour Hirsch at the Washington Times talked about the significance of this. I wonder if you might explain the smoking gun?

MATT: It is a really interesting footnote of history, that almost nobody knows anything about. And I actually had a little bit of understanding, and the book was already at John Wiley & Sons as a finished manuscript, when I finally got the reference points to go back and find that these Senate hearings, and all that’s been in papers, has been residing in the Library of Congress for the last 35 years.

What happened was right at the height of the 73 oil crisis, in early January 74 – when we had gas lines, people were just panicked – Jack Anderson, one of the leading muckrakers of the day published in the Washington Post three back to back articles, saying that he was in possession of secret papers from someone within the Aramco companies, that they had made the conscious decision to convince Saudi Arabia that the fields could be produced at any rate, so that they could get every saleable drop of oil out; and at the rates they were now producing, they had such massive problems that they were going to have to throttle back their oil, and the embargo let them off the hook.

And the Washington Post articles caused enough of a sensation in Washington that the Senate Committee on Foreign Relations, who had a subcommittee they had just recently created, called the Subcommittee on Multinational Corporations and Their Influence on US Foreign Policy, decided to ask Jack Anderson to come in on closed hearings and describe what this was all about. So, on January 28^th 1974, the hearings commenced and Jack Anderson asked to be sworn in, and then he begins his hearings by saying, “I want to tell you all that I asked to be sworn in so that everything I tell you is under oath, because Aramco is already saying I am just making this stuff up.” He tells the stunning story about the whistleblowers who have given these papers because they think the Aramco companies are now operating against the best interests of the United States of America. And because he won’t disclose who his sources are - déjà vu the sort of current reporters’ confidentiality - they decide to go ahead – they being five key senators: Frank Church, Ed Muskie, Stuart Symington, Chuck Percy, and Clifford Case – and subpoena all four of the Aramco companies – this is Exxon, Chevron, Texaco, and Mobil – and out of that come a sheaf of papers and memos, that if you know how to properly analyze this stuff effectively said this was a true story. But because the hearings go on – there are 4 hearings, the last hearings on June 20^th, where they have 7 or 8 of the senior executives of the oil companies come in. And only one guy, Bill Messick [phon.] who’s the chief reservoir engineer at Chevron, who under oath says: “absolutely we were over producing these fields. We could never have sustained these rates. And yes, we were damaging the reservoirs.”

The rest all disagree with him, “No, there weren’t any problems. No, this is unbelievable. No, we didn’t worry about getting nationalized.”

And what’s amazing when you read through the memos these people were sending to each other, they either didn’t understand what they were writing, or they were fibbing to the United States Senate. Then, in 1979, an event happened. And this is where it gets into more hearsay, because of the fact that the only documentation out of the 1979 subpoenas is a very odd staff report from the same Senate subcommittee, that’s 33 pages long, that effectively documents that Aramco has just lowered their production targets from what used to be 20-25 million bpd, then it was 16 million bpd, then it was 12 million bpd, because they’ve lopped off 70 billion barrels of proven reserves as unrealistic. They said, “if we produce 9.8 million bpd for the next decade and a half, in the early 90s, North Ghawar, Abqaiq and Berri, the finest oil Saudi Arabia has ever produced, it’s 75% of the oil production, will go into irreversible decline.” And what’s interesting is that this 33 page staff report is very garbled. You have to really almost take notes and piece this stuff together. The subpoenaed papers they got from these were basically, for some reason or other, deemed to be so sensitive they were put under lock and seal for a 50 year period of time. And there was a debate about what material to disclose, and so they decided to produce this staff report and dummy it down. Had that gotten the attention it deserved, the world would have known 30 years ago, or 35 years ago, that the Middle East didn’t have unlimited amounts of oil, and we would have had a totally different long term energy plan in place today. And instead, we operated for the next three decades under the illusion that was intentionally created in the early 70s, that the Saudi Arabian oil fields would last forever.[35:16]

JIM: Speaking of that period of time, you have a different take on the oil crisis in 1974. You believe that the brief oil embargo was not the problem. It was the lack of spare oil capacity while demand was a runaway freight train between, let’s say, 69 and 78, where we went from demand of 45 million bpd to 65 million bpd – that’s a 44% increase.

MATT: Yes. We ran out of capacity, and when we started creating shortages then motorists in particular hoarded, and that creates a run on the bank – and if you ever have a run on the bank, banks can’t keep money or cash on hand to equal the deposits they hold – and so the shortages begat more shortages, and that’s what created the 73 crisis and the 79 crisis. [36:09]

JIM: Isn’t that where we are, in effect, today. Demand has gone up once again, it has increased, even since the beginning of the new century. There aren’t any notable new sources of supply.

MATT: Let me give you some really interesting déjà vu numbers that I pulled out earlier this morning while I was thinking about the irony of the 15^th anniversary of Kuwait’s invasion by Iraq. I had just produced a paper called the Coming Domestic Oil Embargo – and it got enough notoriety that Forbes magazine was in preparation for doing a major article that came out a week after Saddam’s invasion, called the Coming Domestic Oil Embargo, and they had a fabulous illustration of Uncle Sam filling up his car at a gas station and accidentally stepping on the hose – and what the story was all about was my concern that unless we started a totally different energy policy of using less energy, or a policy of expanding our oil supply through removing the drilling bans in the inner Continental Shelf, and finding a way to jumpstart creating more drilling rigs, and bringing more people back in, we’d wake up some day – and I never thought it would be that day, or anytime in the 90s, but I knew it would take 10 years to make this happen – we would find we had actually embargoed ourselves.

Let me tell you what the numbers were all about, because I had not thought about this until yesterday and today. In 1990 the United States was still producing 7.3 million bpd of crude oil, today it’s 5.1; the 7.3 was after a drop over the previous 5 years of 1.6 million bpd; our refineries only needed to run at 13 ½ million bpd; and we only needed to import 5.8 million bpd of crude oil imports to balance our system. Today we have to run our refineries at 100% or we have major product shocks; today, we have to import 10-11 million bpd, or we lose crude oil stocks; we have to basically create almost 3 million bpd of finished product imports; we have to run the system on a 24-7, all Summer long. And we still liquidate stocks.

So we have actually now created a pending domestic embargo, and we’re going to be lucky to get through the Summer without some periodic shortages. We probably will, but the odds are probably as high we will have some shortages, and then if we get through the Summer we have a fabulous respite from Labor Day to Thanksgiving, until we hunker to try to figure out how the world gets through the Winter of 2005 and 2006 because oil demand globally could easily go to 86-88 million bpd during the Winter, and that could easily exceed supply by 2-5 million bpd.[38:53]

JIM: If that was to happen we would almost be looking at $75-80 oil, I suspect.

MATT: No, no, no. Oil prices could easily go up 5-10 times.

JIM: Wow! Matt, let’s take people on a sort of trip to the past, and I want you to explain Aramco. What was Aramco, how did it start? And then from Aramco becoming the Saudi Aramco, explain how reserves increased substantially without oil discoveries, and they remained there the same.

MATT: First of all, Aramco used to be called Casco, when it was 100% owned by Chevron, and then they brought in Texaco as a partner, and that’s actually when they changed the name to the Arabian American Oil Company – Aramco – and Texaco came in as a partner as more of a marketing arm, to help them get rid of this Saudi Arabian oil because Saudi Arabia didn’t need any oil. And then after World War II they invited Exxon and Mobil to come in as partners. And so those were the four owners of Aramco, with Saudi Arabia being the host government getting production sharing payments – sort of rents – for this oil. Then in the early 70s the Saudi Arabians took over 25% ownership, even though everyone said, “No, they’ll never take us over.” But by the end of 1979 they had bought out the four owners. And that’s when they kept the name Aramco until, I think, 1988-89. But from 1980 on, Aramco was basically run by the Saudi Arabian petroleum ministry.

In 1979, when these Senate hearings were being held and under subpoena, what the last year Aramco was being managed by the best technicians within Exxon, Texaco, Mobil, they told the Senate investigators that under proven reserve methodologies required by the SEC, Saudi Arabia had 110 billion barrels of proven reserves, but interestingly enough they said 61% of those, say 65 billion barrels, were coming from the 4 fields that created 87% of the production. And the other 39% were the other 13% of production, which raises in my mind how valid the 110 even was. Probably overstated. They said that if you add proven and probable together you get to 177 billion barrels. And if you take proven, probable and possible you get till 246 billion barrels.

By 1987 those same fields’ proven reserves had escalated to 260 billion barrels and they’ve stayed there ever since, and they found only one other significant field. Now, what I found amazing is, there are quite a few people that basically tell me with some conviction that they really believe the 260 billion barrels is a real number – conservative – and they real believe somehow or other, regardless of how much oil Saudi Arabia has produced over that period of time, they’ve found a way to just continue to add because these fields are so big. I happen to think there is very, very good, solid evidence, to say that the guys doing reserve estimation in 1979 were far more knowledgeable about how the art-form is needed to do that analysis, than the new generation of computer jocks who just enter assumptions into a computer and the computer does the thinking for them. So, I would suspect that the real, easily recoverable high quality proven reserves were probably about 70 billion barrels in 1979, and that they’ve now produced 55 billion of those, which gives rise to one more triangulation of the fact that we should be prepared for, and not totally surprised when the five key fields of Saudi Arabia go into irreversible collapse. And they could fall over a 30 month period of time by 50-70%. Hopefully, that’s a draconian estimate but the fact that that has at least a 35-40% probability shows you how unbelievably dangerous it became to have no data and such strong beliefs. [43:09]

JIM: One of the things that struck me about reading your book is once the Saudi government took over Aramco they immediately increased the reserves, without any oil discovery to back that. And then in 1988 – I believe this was all done politically – there was another significant increase in reserves so...

MATT: They jumped from 110 to 160, from 1979-1980, and then at the end of 87, starting with the number they reported in 88, the 160 became 260. They were called paper barrels at the time. [43:42]

JIM: And wasn’t that the case with a lot of OPEC countries, that all of a sudden, overnight, everybody increased their reserves.

MATT: They all got into arguing that they should have production quotas based on the number of proven reserves. And so Kuwait, and Iraq, and the UAE went from 30 billion each to 90 billion, and actually, to give Saudi Arabia credit, they were the last to fall in line of the Middle East producers and also triple their reserves. But why anyone ever believed it is what I find so amazing. Any time you see a static number for twenty years, people should obviously start saying, “that obviously isn’t a real number.” [44:20]

JIM: This is surprising too, because what does OPEC produce, anywhere from 22 million to what, 27 or 28 million?

MATT: If you include all of OPEC today they basically produce somewhere between 27 and 31. And the fact that we don’t actually know that is scary.

JIM: And yet they’re producing 27-31 million bpd...

MATT: Of the world’s 85.

JIM: And there reserves never go down. And nobody questions it?

MATT: And knowledgeable people! I was on Canadian broadcasting Corporation’s morning radio program yesterday and they quoted a friend of mine that they’d interviewed the day before, Professor Michael Economides of the University of Houston, and Michael said something to the tune of, “I have a high degree of admiration for Matt, but he is totally wrong on his views of Saudi Arabian oil. I’ve done the numbers and the 260 billion barrels is very conservative, and they can easily add another 200 billion barrels, and adding 5 or 6 million bpd for the next 50 years is very easy for them.” And I thought to myself, “How does a person actually say, ‘I’ve done the numbers’, when there are no numbers to do.” But he obviously believes them, otherwise he wouldn’t have been quoted on Canadian Broadcasting Corporation. He’s written a book called the Color of Oil, and he was a Schlumberger technician before he became a Professor at Texas A&M, and then U of H. So you know he’s not a shoeshine guy or a novice, he obviously believes that it’s a conservative number. I don’t have any idea how he comes up with that concept. [45:50]

JIM: Well, the same is true, is it not, of Daniel Yergin, where they came up with the same kind of story?

MATT: The presumption I have is, if you actually ask them the pregnant question, “tell me, within your top 5 clients, does Saudi Aramco happen to be one of them. I think you’d have both of them, if they were telling the truth, say ‘Oh, yes’.” [46:08]

JIM: Now in your view and study of these oil fields, you believe – and we need to emphasize again that many of these fields have been around 45,50 years producing oil – that a lot of these major fields are close to tipping points.

MATT: Yes. And I also believe that – Ghawar, for instance, which is really the whole 9 yards, because that is 60% of their production – that North Ghawar, which is the top 20% of the field, has a productivity index that is about 25 times the productivity index of the rest of Ghawar, and that’s the area that is almost depleted now. And when that drops, you could basically see Ghawar go from 5 million down to 2 million bpd in a very short period of time. [46:55]

JIM: So, based on your study – and in fact you state this in your book – you believe there is no way that Saudi Arabia is going to be able to produce 20-25 million barrels.

MATT: No, that’s impossible. What’s interesting is that now there are a number of people within Saudi Arabia that are starting to say publicly, “No, that’s impossible.” Dr. Sadad Al-Husseini who was eased out of being Executive Vice-President of Saudi Aramco a year ago February, because I’m told, he was actually starting to scold people for being naive about how much they could produce, has been on record in several different places as saying that Saudi Arabia could never produce over 12 million bpd. It is just not in the cards. And he was known by everyone who counted as the brains of Saudi Aramco. So we should be listening carefully, and I’m going to be very curious to see in the new regime change whether there’s some jobs that start to change, because I have a sneaking suspicion that my book is going to educate some people in Saudi Arabia to what the real issues were. And maybe some heads were going to roll – not literally – of people that have been promoting this concept of ‘don’t worry about our oil’. And we’re going to go back to a return to the conservationists within Saudi Arabia, and see them lower their rates of production, so they can sustain it for a longer period of time. And if that happens, I think I’ve done Saudi Arabia a great favor because I’ve given them grounds to do that, without the world thinking, “these crazy people in the Middle East are trying to blackmail us.” [48:30]

JIM: Let me throw something that typically comes out – and maybe this is just a natural phenomenon being an American – is our great belief in technology, Matt, and anytime you talk about oil shortages, or higher oil prices, the technology factor comes to the forefront and, “Hey, we’ve got all this great technology, we have better technology today than we had a decade ago and this technology is going to save us.” But you don’t believe that’s the case.

MATT: I know it’s not the case. The one thing our firm is really good at is understanding the oil services industry, that’s the one part of the oil energy investment business we’ve really had a dominant investment banking position. During the 80s, when the industry was under such duress and struggling to survive, we got involved in so many of the rescue projects of these companies, that it really effectively ended up saving the day for horizontal drilling, multilateral well completion, 3D seismic, subsea completion systems, and I know that stuff inside out, as to what it really actually does, because we had to, to get our jobs done. I watched with utter amazement in the decade of the 90s, one oil company after another, starting to go to conferences and say, “the rig of today is like 8 rigs of the past, because it’s new technology. 3D seismic has eliminated the need to drill dry holes. We are now recovering twice as much oil as we used to get out.” These guys are hallucinating. They have no idea what they’re talking about. In 1995-96, I started talking about giving speeches in Aberdeen and Stavanger at the North Sea Oil Show saying, the North Sea is just about to peak and go into irreversible decline and I get these astonished looks by senior executives of the major oil companies saying, “Matt, you don’t understand technology.” Well, it turned out that I didn’t ever say 1999, I said in the next two or three years. 1999 was the high water mark for the North Sea, and it is already down 25%. So it turned out everybody that started using these tools got mesmerized by the high flow rates that got created at the well head, and thinking that they had discovered the fountain of youth. And that’s just what’s going on inside of Saudi Arabia today. They are going through the same hallucinatory process that all our major oil companies did 5 years ago. [50:46]

JIM: Based on reading your book, and the extensive studies – as you said many of these major oil wells are now at tipping points – we’re likely to wake up one day and find out that oil is over $100/barrel, we can’t meet...

Matt: It’s still cheap at $100!

JIM: Yeah, at $120 it’s 36 cents a pint, which is still cheap.

MATT: What the economists ought to be trying to figure out is: what constitutes a fair price for oil versus their belief that oil prices are really expensive today. I would argue that probably a number in the $5-10/gallon is a real bargain. [51:24]

JIM: Matt, what comes afterwards? One day, as I mentioned, we’re going to wake up and find out that peak oil is here, we’re going to be dealing with it. Do we go to oil rationing? Do we go to a major, national conservation program? And I guess even more importantly than that, given the high demand on oil today – not only just from the United States and Europe, but India and China – how do we ration oil without going to war?

MATT: We have to figure out a way to do that because if we go to war, it will actually be the worst war we’ve ever fought. And if we don’t address the problem, we will be in an energy war. What I find interesting is I actually think we can solve this problem, but I also think if we ignore it, you can’t create a scenario that is too awful. What we have to do is first of all, long term, create some new forms of energy that don’t exist today. That might or might not be possible. I suspect that actually it will be possible because we haven’t worked on it for a hundred years. While we’re doing that though, we have to figure out a way that allows the world to prosper and not shrivel up while we’re using a lot less oil per capita. And figure this out quickly enough so we educate the China and India’s of the world on how to create a sustainable society so they don’t build a society like ours. Because it’s going to be easier for them to do some of these things than it is for us.

And I’ll give you just a quick shopping-list of some of the things that we are actually going to need to do. In the shipment of goods, we use worldwide about as much, or a little bit more, diesel fuel than we do motor gasoline, and most of the diesel fuel is used by the truck fleets moving goods. If you could wave a magic wand and in a 5 year period of time and get all of the goods off the highway system going long distances by trucks, and put them on either railbeds or water transportation: on the railbeds – railroads – as long as you have long distance transportation, and long trains versus short trains, and short distances, you can get an energy efficiency savings of somewhere between 3 and 10 times – that’s not 3 and 10%, that’s 3 and 10 times; if you can get them on boats versus trains, it has an additional energy efficiency savings of another 2 to 5 times. So by getting trucks off our highway system we have a major impact on removing traffic congestion. And traffic congestion is public enemy number 1 through 5 on passenger car fuel efficiency. So it’s a real win, win, win.

At the same time we have to alter our distribution of food. You know, the average thing we eat today comes from, I believe, an average of 1500-2000 miles. But there are a lot of items, like the first time I ever heard of this concept of food miles was a speaker in London, last Spring, who pointed out that in the Summer in the UK ,almost all the apples come from New Zealand, and they have embedded in them 22,000 miles of travel of a vessel, half coming from New Zealand, and the others going back. When they’re onboard the vessel they’re refrigerated. So it’s a very energy intensive process. We actually can grow stuff close to home in most parts of the world. We just got lazy and thought it was really fun to just go into a grocery store and see all this produce: it doesn’t taste very good, but it looks nice.

And then finally we can basically go to distributed work. Because I found being in Maine in the Summer is a lot more pleasant than being in Houston, I taught myself 10 years ago how to be up here and be more efficient than when I’m in Houston. I think there are lots of corporations that have a thousand people working together; there’s no need for a thousand people to be working together, other than the fact it was just a historical coincidence. We now have the technology that people can actually either work at home or work in their village, and by saving 2-4 hours of commuting they will be far more productive. And then we basically end globalization as we know it today, which is effectively a really flawed plan of breaking manufacturing components down into their smallest parts, and finding the cheapest place in the world to manufacture the parts, and then zinging them around the world to be assembled into bigger, and bigger units, until they finally arrive on the showroom as a piece. If you make stuff close to home, you can have a major savings in fuel efficiency. That sort of a plan put in place over 5-7 years would take a lot of coordination; not a single one of those things are impossible to do. We could literally end up cutting oil consumption by 20-40%, by doing all of those. [56:04]

JIM: You know, the only problem with that, Matt, as we speak right now, with $62 oil, we have, as you say in your book, no plan B.

MATT: Nope. While we’re doing Plan B by the way, we jumpstart the largest energy R&D program ever envisioned, and just pray that over 5-7 years it has the same impact as when people got serious about developing radar, and developing nuclear power, so that we could actually win World War II. But if we don’t do these things, then this really ends up being a very dark world – no pun intended. [56:40]

JIM: The problem is, even as you and I are speaking today, we still have, you know, Economides saying there is plenty of oil that Saudi Arabia can produce...

MATT: Yup, Dan Yergin says we are going to have an oil flood. But you know what, I really love the study of history, I think you can learn so much about history, and on August 3^rd 1939, we were down to 28 days left before we officially entered World War II. Basically, Hitler had conquered a whole bunch of places, and yet there was still one loud voice in the world, Winston Churchill, saying, “this is madness!” 99% of the other people that observed were basically saying, “You know, I’m so glad we never ever going to have a war again because war is so awful that we should just never have another war again.” And we got a rude awakening on September 1^st 1939, that in fact we were at war. And in a 6 year period of time – 5 ½ year period of time – England, Canada, the United States, Australia and New Zealand built a war machine that was so powerful we destroyed Europe and Japan. And I think if we take this as seriously, when we have a wake-up call, that we can actually end up with not having to basically destroy the world as we know it today before we rebuild it, but doing it before it gets destroyed. [58:02]

JIM: What is it going to take to get us to that point? Is it $100 oil, gas lines...

MATT: A shortage. I hate to say it, but I just think if we are where we are today – where things are so unbelievably crystal clear for me – there was a program in Washington, DC where 5 of us spoke at the Hart Senate Office Building for 2 ½ hours, from 2:30 to 5:00 in the afternoon on peak oil. And of the 5 of us, I was the only one who didn’t have a Phd. And the first one who spoke was Roscoe Bartlett from Maryland, who has his Phd in science, became a Congressman when he was 66 years old, has 40 or 50 patents to his name, and he gave the most impassioned speech I ever heard anyone give on peak oil being the biggest risk the world has ever faced. And you know, this conversation should have happened a decade ago, but thank heavens it’s happening today. But I also think we’re going to have to have a shortage before we realize that this was effectively Poland being invaded by Hitler. [59:05]

JIM: Matt, what has been the response to your book – not only in Congress, but also let’s say in the White House – because it’s going to take leadership from the top down to get this country moving in that direction?

MATT: First of all, I don’t know and I haven’t tried to call people and say, “How did you like the book!” I know from being in Washington twice last week, a lot of people in government are in the middle of reading the book. It’s not a hard book to read, but it’s not a book you sit down in the evening and say I’m going to do this from cover to cover. And so my guess is – what I was told yesterday by the publishing firm, they just did their July wrapup, they are now in their third printing, it has sold 44,500 copies, which is a really tremendous amount of books in their experience for a book that has not had really a ton of publicity yet – I think it will be Labor Day before I start getting really good, widespread feedback. But from the letters and emails I’ve had so far, which range in the hundreds, I’d say 1 out of 20 people are raising questions or suggesting I should’ve done something different, and about the other 19 are saying the nicest compliments I could ever imagine. I would’ve actually thought, getting closer and closer to the publication date, that by about 6 or 8 eight weeks into it, somebody would have launched an attack of some argument I would never have thought of, to really try to discredit the effort. But so far the arguments have been a handful of people who work for Aramco as clients, and all saying the same thing, “technical papers are a stupid way to do analysis because they just deal with problems; investment bankers don’t know how to read technical papers; and they’ve technically proven they don’t have any problems by their ‘trust me’ statements.” [1:00:53]

JIM: Matt, if you were to talk to a reader of your book, and have that reader walk away with one important concept, what would that be?

MATT: That we’ve probably exceeded sustainable peak oil, and read the book and you’ll see why. When I finally realized I had about one more day to make any last changes in the book and then it was going to go print, I read through one more time and I thought, “you know, I actually sort of feel like I now have just submitted the briefing papers to the Supreme Court, as a lawyer for some really important issue. And I think I’ve actually said it the best I can. And now we’re going to basically see what world opinion and how they digest this stuff.” [1:01:33]

JIM: Perhaps a final question. Having read your book what is it that we can do as individuals right now.

MATT: We can all clamor for energy data reform. That’s the one thing that can happen before the end of this year, and where are mandated field by field quarterly production reports, and the number of well bores each of those fields have; some data on proven reserves we don’t even need. That’s the only thing we can do and effect in 2005, and that system being mandated would allow less than 30 people in less than 30 days to come up with a realistic supply assessment over the next 3 years, and pretty well prove or disprove we’ve actually now exceeded peak oil, or it’s right ahead of us. That’s the one thing that every person in the world has a role in demanding that happen. And if people say, “Naw, that’s not important,” we fully deserve every bit of pain we’re going to get. [1:02:29]

JIM: When you look forward into the future, 5 years out, 10 years out, are you optimistic or pessimistic?

MATT: Yes, I am. I am optimistic that we’re going to figure this out, and we’re going to go to plan B and plan C and that 7-10 years from now we’re going to say, “look at all the fundamental changes we’ve made.” And we’ll have a better economy, and we’ll have resolved all these nasty, nasty fights between modern energy producers, and people that have called themselves environmentalists. And actually have a better quality of life. And we’ll be paying very high prices for energy which we should have been doing for the last 100 years. [1:03:00]

JIM: Well, I’ll tell you, it’s a very thought-provoking book, and I think it is a book that is very timely, especially now for anyone listening to this program, just turn on your TV or pull into a gas station and take a look at the price of oil.

MATT: And remember: 18 cents a pint. [1:03:17]

JIM: Yes, 18 cents a pint, but it’s gotten people’s attention.

Matt, I want to thank you for joining us here on the Financial Sense Newshour and giving up part of your vacation time. One of the best books I’ve read on energy, and I’ve read a lot of them, and I think very timely. I commend you on the work you’ve done and I think you’ve done us all a great service.

MATT: Thank you very much. I appreciate being on the program.

Robert Scheer - Mortgaged to the House of Saud

2005-08-10T19:17:00.000-07:00

August 9, 2005 – The only evidence you need that President Bush is losing the "war on terror" is this: On Sunday, the foreign minister of Saudi Arabia said that relations with the United States "couldn't be better."

Tell that to the parents of those who have died in two wars defending this corrupt spawning ground of violent extremism. Never mind the ugly facts: We are deeply entwined with Saudi Arabia even though it shares none of our values and supports our enemies.

Yet on Friday, Bush's father and Vice President Dick Cheney made another in a long line of obsequious American pilgrimages to Riyadh to assure the Saudis that we continue to be grateful for the punishment they dish out.

"The relationship has tremendously improved with the United States," Saudi Foreign Minister Saud al Faisal told a news conference in Riyadh. "With the government, of course, it is very harmonious, as it ever was. Whether it has returned to the same level as it was before in terms of public opinion [in both countries], that is debatable."

Well, score one for public opinion. It makes sense to distrust the mercenary and distasteful alliance between the U.S. and Saudi Arabia. We protect the repressive kingdom that spawned Osama bin Laden, and most of the 9/11 hijackers, in exchange for the Saudis keeping our fecklessly oil-addicted country lubricated.

Yes, it has stuck deep in the craw of many of us Americans that after 9/11, Washington squandered global goodwill and a huge percentage of our resources invading a country that had nothing to do with Al Qaeda, while continuing to pander to this dysfunctional dynasty. After all, Saudi Arabia is believed to have paid Bin Laden's murderous gang millions in protection money in the years before 9/11, and it lavishly funds extremist religious schools throughout the region that preach and teach anti-Western jihad.

"Al Qaeda found fertile fundraising ground in the kingdom," noted the 9/11 commission report in one of its many careful understatements. The fact is, without Saudi Arabia, there would be no Al Qaeda today.

Our president loves to use the word "evil" in his speeches, yet throughout his life he and his family have had deep personal, political and financial ties with a country that represents everything the American Revolution stood against: tyranny, religious intolerance, corrupt royalty and popular ignorance. This is a country where women aren't allowed to drive and those who show "too much skin" can be beaten in the street by officially sanctioned mobs of fanatics. A medieval land where newspapers routinely publish the most outlandish anti-Semitic rants. A place where executions are held in public, torture is the norm in prison and the most extreme and expansionist version of Islam is the state religion.

It's hard to see how Saddam Hussein's brutal and secular Iraq was worse than the brutal theocracy run by the House of Saud. Yet one nation we raze and the other we fete. Is it any wonder that much of the world sees the United States as the planet's biggest hypocrite?

As insider books by former White House terrorism advisor Richard Clarke, journalist Bob Woodward and others have recounted, punishing Saudi Arabia in any way for its long ideological and financial support of terrorism was not even on the table in the days after 9/11. Instead, within hours of the planes hitting the towers, the powerful neoconservatives in the White House rushed to use the tragedy as an excuse for a long-dreamed invasion of Iraq.

Meanwhile, after two wars to make the Middle East safe for the Saudis, wars that cost hundreds of billions of taxpayer dollars and thousands of American lives, the price of oil is soaring — up 42% from just a year ago. Good thing we just passed a pork-laden energy bill that will do little to nothing to ease our crushing – and rising – dependence on imported oil. Federal officials project that by 2025, the U.S. will have to import 68% of its oil to meet demand, up from 58% today.

There are those who argue that the best rationale for invading Iraq was to ease our dependence on Saudi Arabia's massive oil fields, which might allow for a more rational or moral relationship. Yet the dark irony is that with Iraq in chaos and its oil flow limited by insurgent attacks and a bungled reconstruction, Saudi Arabia is now more important to the United States than ever.

It's scary, but these gaping contradictions don't seem to trouble our president a whit.

As the drumbeat of devastating terrorist attacks in Baghdad, London and elsewhere continue, Bush prattles on – five times in a speech last Wednesday – about his pyrrhic victories in the "war on terror." This is a sorry rhetorical device that disguises the fact that the forces of Islamic fanaticism in Saudi Arabia and elsewhere in the world are stronger than ever.

Copyright © 2005 Robert Scheer

Scheer, a journalist with over 30 years experience, has built his reputation on the strength of his social and political writing. His columns appear in newspapers across the country, and his in-depth interviews have made headlines. As Scheer creates his weekly national and local columns, he draws upon a wealth of experience and knowledge. Between 1964 and 1969, he was Vietnam correspondent, managing editor and editor in chief of Ramparts magazine. From 1976 to 1993, he served as a national correspondent for the Los Angeles Times, where he wrote articles on such diverse topics as the Soviet Union, arms control, national politics and the military. He is currently a contributing editor at The Times, as well as a contributing editor for The Nation magazine.

Scheer has interviewed every president from Richard Nixon on through Bill Clinton. He conducted the famous 1976 Playboy interview with Jimmy Carter, in which the then-presidential candidate admitted to have lusted in his heart.

Scheer has also taught courses at Antioch College in San Francisco, New York City College, UC Irvine, UCLA and UC Berkeley. He is now a Senior Lecturer at the University of Southern California's Annenberg School for Communication, where he teaches a course on media and society.

Scheer also directs the Privacy Project at the Annenberg School. On Tuesday afternoons, Scheer can be heard on the political radio program "Left, Right and Center" on KCRW, the National Public Radio affiliate in Santa Monica.

An accomplished author, Scheer has written six books including "Thinking Tuna Fish, Talking Death: Essays on the Pornography of Power"; "With Enough Shovels: Reagan, Bush and Nuclear War" and "America After Nixon: The Age of Multinationals."

Over the years, Scheer has been honored for his work, including his coverage of the underprivileged and the welfare system. Recently, he was the 1998 honoree of the Shelter Partnership, an organization of Los Angeles downtown businesses, and the USC School of Social Work's Los Amigos award recipient. He has also received awards and citations from Stanford University, the Moscow Academy of Sciences, UC San Diego and Yale University.

Scheer was raised in the Bronx where he attended public schools and graduated from City College of New York. He studied as a Maxwell Fellow at Syracuse University and was a fellow at the Center for Chinese Studies at UC Berkeley where he did graduate work in economics. Scheer has also been a Poynter fellow at Yale, and was a fellow in arms control at Stanford.

SOME THOUGHTS ON PEAK OIL

2005-08-09T04:58:00.000-07:00

EARLY SIGNS OF PEAK OIL

Peak oil does not mean that we will go from our present consumption to zero overnight.
Peak oil means that we are pumping crude out of the ground faster then we are discoverimg new crude.
Peak oil also means that as we find new oil - it is generally of lower quality (higher sulfur, higher molecular weight - therefore more expensive to refine), in smaller deposits (therefore more expensive to drill), and in more politically unfriendly places (therefore more "Blood for oil" wars).
BOTTOM LINE - LESS AND LESS OIL AT HIGHER AND HIGHER PRICES.

WHAT ARE WE DOING ABOUT IT? NOTHING!

Nothing
OK - we are giving the oil companies tax breaks
And relaxing environmental limits on coal

WHAT SHOULD WE BE DOING ABOUT PEAK OIL

Raising "CAFE" (Corporate Average Fuel Economy) across the board from its present 22 mpg to a Prius level.
Moving ahead with the alternatives that have proved technologically feasible (bio-diesel, anaerobic digested farm and packing house and sweage waste)
Shift our "plastics" BACK TO coal and vegetable oil chemistry; Carbon-Carbon and Carbon-Hydrogen and Carbon-Oxygen bonds are the same from petroleum, coal, vegetable oils.
Moving towards to "organic farming"
Implementing Mass Transit
Going back to rail roads vice "Big Rig" trucks
Mandating pedestrian friendly, transit friendly "neighborhoods" instead of pedestrian unfriendly "developments" in rural regions. We can keep paving over farmland and rely on chemically intense agriculture.

Realize that at any point, crude may come down a little ("Random Walk") - but the trend is up. That is PEAK OIL.

PEAK OIL AND 9/11

Our "response" to Peak Oil has been a military response. One of many multiple causes of 9/11 was that we put US troops (including females) on the holy ground of Saudi Arabia to protect the oil from "terrorists" and Saddam Hussein.

Our response to Peak Oil has been ever closer relationships with the House of Saud and ceding ever more control of our Foreign Policy to "Big Oil." Another of the many multiple causes of 9/11 was that many in the region perceive that the US is exploiting (in the Karl Marx sense) the Arab proletariate by supporting Big Oil.

Again, as our our response to Peak Oil has been ever closer relationships with the House of Saud, it is only natural that another of the many multiple causes of 9/11 was that many in the region perceive that the US is backing the autocratic House of Saud.

All PEAK OIL

HOME PAGE

2005-08-02T17:57:00.000-07:00

THINKERS UNDERGROUND is a prototype for a chat room that I am developing. The target audience is a mature, left-center community driven away from the shrill "Undergrounds" with their sound bite hysteria and ad hominems and ad horrendums.

The initial topic will be petroleum politics - from the role of petroleum politics in creating nations (see, e.g., William Engdahl's "A Century Of War : Anglo-American Oil Politics and the New World Order" and the Sykes-Picot Agreement), creating, implementing and guiding our foreign policy, and the creation of non-state actors.

A subsequent topic will be our preparedness for massive natural disasters and terror attacks. Because of my own involvement with volunteer responder organizations, and my early professional experience in the "HazMat" field, I am going to explore our preparedness to withstand attacks against "HazMat" infrastructure (See, my friend Stephen Flynn's "America The Vulnerable: How Our Government Is Failing To Protect Us From Terrorism), as well as our ability to recover from tornadoes, earthquakes, and hurricanes.

After that I want to explore some aspects of my own youth (chronological and political) as they relate to the "faith based left" movement.

It's an experiment, and if we go forward into a chat room, it will be monitored - and will not descend in the cesspool of racism and bigtry that has bedeviled other issue oriented chat rooms.

THINKERS UNDERGROUND

Laurie David, ExxonMobil's Inconvenient Truth

Laurie David, ExxonMobil's Inconvenient Truth

The Iraq Oil Bonanza: Estimating Future Profits - James A Paul

The Iraq Oil Bonanza: Estimating Future Profits

By James A. Paul

Iraq: the Struggle for Oil - James Paul

Iraq: the Struggle for Oil

By James A. Paul

Executive Director, Global Policy Forum

Oil Companies in Iraq: - James A Paul

Oil Companies in Iraq:A Century of Rivalry and War

By James A. Paul

Oil in Iraq: the heart of the Crisis - James A Paul

Oil in Iraq: the heart of the Crisis

James A. Paul

Iraq and the Problem of Peak Oil - F. William Engdahl

Peak oil

Case studies

No new giant discoveries

Disappointing Caspian results

Interest in West Africa

Growing energy demand

What Cheney knew in 1999

The Achilles heel of the US?

An Energy Pearl Harbor?

An Energy Pearl Harbor?

A Near Miss in Saudi Arabia Hints at Future Shocks

The New 'Sputnik' Challenges: They All Run on Oil

The New Red White and Blue, Thomas Friedman

War Footing: 10 Steps America Must Take to Prevail in the War for the Free World

Bush gives new reason for Iraq war, Boston Globe, August 31, 2005

Bush gives new reason for Iraq war

Says US must prevent oil fields from falling into hands of terrorists

Even in Summer, Americans Dread Winter Heating Bills

Even in Summer, Americans Dread Winter Heating Bills

THE BREAKING POINT

The Breaking Point

HOW INDIA RECONCILES HINDU VALUES AND BIOTECH

How India Reconciles Hindu Values and Biotech

The Oil Effect, New York Times, Saturday, August 20, 2005

Get Serious About Energy Before Oil Output Dwindles - Steve Yetiv

Our failed ME policy is our crack cocaine dependence on Saudi Oil.

Is The Oil Industry Behind PNAC?

We have passed the "Peak" of "Peak Oil"

Matthew Simmons Interview of August 6, 2005

Robert Scheer - Mortgaged to the House of Saud

SOME THOUGHTS ON PEAK OIL

HOME PAGE

Oil Companies in Iraq:
A Century of Rivalry and War