Hurry Up and Kuwait
Editorial (more from this section)The earth's oil reserves just dropped by five percent. Which other countries are cooking the books?
By Ryan McGreal
Jan. 27, 2006
I have been watching the price of oil creep back up toward $70 per barrel from its anticlimactic drop after Hurricane Katrina disrupted oil operations in the Gulf of Mexico. Prices fell as the US and Europe released oil from their strategic reserves to help make up the shortfall.
Today, those reserves are depleted and prices are creeping back up despite our unseasonably warm winter, which has reduced demand for heating oil and allowed cars to run much more efficiently than they would during the bitter cold that usually accompanies this time of year.
With the ugly war of words between Iran and the United States over Iran's nuclear energy program (which, by the way, is in full compliance with the Non-Proliferation Treaty), investors worry a diplomatic or military escalation will provoke Iran to halt its oil production.
Unlike, say, the first Gulf War, when Saudi Arabia was able to step up production to replace Iraq's lost output, the world's oil producers are already running full-bore today. There is no spare capacity left in the oil production industry.
If Iran cuts off all, or even some, of its 2.5 million barrels a day, the rest of the world will not be able to make up the shortfall and oil importing countries have already dipped heavily into their strategic reserves. Most analysts agree oil will spike over $100 a barrel, shocking the global economy.
In the middle of this instability drops another whopper: Kuwait's official oil reserve, at 99 billion barrels or 10 percent of the global total, is about 51 billion barrels higher than its own internal records show.
The correct number was recently reported in the industry newsletter Petroleum Intelligence Weekly, based on leaked Kuwait Oil Company data.
That 51 billion barrels is more than the oil remaining in the United States and the North Sea combined. The earth's official oil reserve just fell by about five percent.
In a sane world, the fact that Kuwait has been lying about its oil reserves would surprise no one. In fact, it is surprising no one today - but mainly because no one is hearing about it. I searched the Toronto Star, Globe and Mail, National Post, and Hamilton Spectator in vain, even though most reported the recent death of Kuwait's Emir.
In fact, the news does show up in the Toronto Star, albeit in a letter to the editor complaining that a previous article on jittery oil futures neglected to mention the peak oil hypothesis.
The global economy survived $65 a barrel oil, surprising many analysts. However, eventually the logic of cheap energy will catch up with us. Ultimately, cheap oil is a prerequisite to participation in the economy. It's more or less necessary to own a car if you want to own a house, get to work, get to school, get to the store, meet other people, and so on, in most of our built environment.
The market cannot magically transform millions of hectares of existing sprawl into compact, mixed use development; if that's even possible, it will cost hundreds of billions of dollars, take decades to complete, and require massive changes in how the government regulates/participates in building and transportation markets.
To understand the economic implications, understand that our economy is hard-wired for growth, and growth is tied directly to increasing energy consumption. We don't have to run out of oil to bring about a crisis: all we have to do is stop growing. An economic recession is defined as two consecutive quarters in which the GDP is lower than the previous quarter.
To the extent that economic growth depends on growth in the oil supply, we can expect recessions every year until the economy figures out how to function without being dependent on oil.
According to a report Robert Hirsch produced for the US Department of Defense in February 2005, it will take two decades of accelerated effort to convert the US economy to a post-peak system. In Hirsch's words:Without timely mitigation, world supply/demand balance will be achieved through massive demand destruction (shortages), accompanied by huge oil price increases, both of which would create a long period of significant economic hardship worldwide.
Translation: during the crisis of transition, millions of people will simply be priced right out of the economy, because they won't be able to afford to drive.
When a recession lasts for 20 years, it's called a depression. That's what we're in for once oil production goes into decline.