The Bad News at the Pump: The $100-plus Barrel of Oil and What It Means

Michael T. Klare

On Monday March 3, the price of crude oil reached $103.95 per barrel on the New York Mercantile Exchange, surpassing the record set nearly 30 years ago during another moment of chaos in the Middle East. Will that new mark prove distinctive in the annals of world history or will it be forgotten as energy prices drop, just as they did following their April 1980 peak?

When oil costs are plotted over time, the 1980 oil crisis — prompted by Ayatollah Khomeini’s Iranian revolution — stands out as a sharp spike on that price curve. Both before and after that moment, however, oil supplies proved largely sufficient to meet rising global demand, in part because the Saudis and other major producers were capable of compensating for declining Iranian production. They simply increased their output substantially, dumping a surplus of oil onto the global market. Aided by the development of new fields in Alaska and the North Sea, prices dropped precipitously and stayed low through the 1990s (except for a brief spike following the Iraqi invasion of Kuwait in August 1990).

we face not a sudden spike, but the results of a steady, relentless climb that began in 2002 and shows no signs of abating

Nothing similar is likely to happen now. For the present surge in prices — crude oil costs have risen by 74% over the past year — no such easy solution is in sight. To begin with, we face not a sudden spike, but the results of a steady, relentless climb that began in 2002 and shows no signs of abating; nor can this rise be attributed to a single, chaos-causing factor in the energy business or in global politics. It is instead the product of multiple factors endemic to energy production and characteristic of the current era. There is no prospect of their vanishing any time soon.

Three factors, in particular, are responsible for the current surge: intensifying competition for oil between the older industrial powers and rising economic dynamos like China and India; the inability of the global energy industry to expand supplies to keep pace with growing demand; and intensifying instability in the major oil-producing areas.

A Tsunami of Energy Needs

The crucial role of the developing economic dynamos in Asia on the global energy market was already evident as this century dawned. With their phenomenal rates of growth, these countries must have more oil (and other forms of energy) to power their expanding industries, fuel their new cars and trucks, and satisfy the aspirations of their burgeoning middle classes. According to the U.S. Department of Energy (DoE), combined oil demand from China and India, already at 8.9 million barrels per day in 2004, is expected to hit 12.1 million barrels by 2010 and 15.5 million barrels by 2020. These are staggering rises. If you include anticipated consumption by Brazil, Mexico, South Korea, and other rapidly industrializing nations, demand from the developing world is truly expected to soar.

With their phenomenal rates of growth, these countries must have more oil (and other forms of energy) to power their expanding industries, fuel their new cars and trucks, and satisfy the aspirations of their burgeoning middle classes.

To this tsunami of new energy needs must be added an already high level of consumption by the mature industrial powers led by the United States, the European Union, and Japan. This shows little sign of lessening, which means we face an unprecedented surge in the total demand for oil. According to the DoE, combined world oil consumption, which reached 83.7 million barrels per day in 2006, is projected to hit 90.7 million barrels in 2010 and 103.7 million in 2020. We’re talking about an increase of 20 million barrels per day in just 15 years. To achieve this would require a mammoth, unbelievably costly effort on the part of the world’s giant oil companies (and their lenders and government backers), and even then it might not be possible.

American consumers, facing gas-pump hell, are, at the moment, being further punished by the fact that most global oil transactions are denominated in dollars. Given the declining value of the dollar relative to other currencies, we wind up paying more per barrel than competitors who can convert their euros, yen, or other strong currencies into dollars before bidding against us on the international energy market. Global investors, sensing the trend, are dumping the dollar for these other currencies or buying oil futures, only adding to the slide of the U.S. currency and the rising price of crude.

A Tough Oil World

Lurking behind soaring demand is another crisis entirely — a crisis of production. The energy industry is now in the difficult process of transitioning from a world of easily tapped oil supplies to one in which mainly tough-oil options prevail. Those “easy-oil” supplies are the ones we’ve long been familiar with: the giant petroleum reservoirs in friendly, stable countries that provided most of the world’s oil during the formative years of the Petroleum Age, stretching from the late nineteenth century until the Arab oil embargo of 1973.

Those “easy-oil” supplies are the ones we’ve long been familiar with: the giant petroleum reservoirs in friendly, stable countries that provided most of the world’s oil…

These mammoth reservoirs include Ghawar in Saudi Arabia, Burgan in Kuwait, and Cantarell in Mexico — monster fields that produce hundreds of thousands or even millions of barrels of crude per day. In the last quarter-century, however, discoveries of “elephant” fields like these have been almost nonexistent. The world is, as a result, becoming increasingly dependent on smaller fields, often in remote, unwelcoming locations that require far more expense to develop and bring online. This, too, is adding to the price of oil.

As an illustration of this trend, take Kashagan, a giant oil field discovered in 2000 in Kazakhstan’s sector of the Caspian Sea. It represents the single largest discovery worldwide in the past 40 years. Although it does harbor significant reserves of oil and gas, the field poses staggering challenges to the international consortium of energy companies attempting to develop it. It contains, for example, high concentrations of poisonous hydrogen sulfide gas, which makes its development using conventional (and so cheaper) production technology impossible. Development costs to bring the field online have already soared from an estimated $57 billion to $135 billion with no end in sight. In the meantime, the projected date for the start-up of production at Kashagan has been continually pushed back. Once expected to come online in 2005, it’s now slated for 2011 — at the earliest. This, in turn, has led a frustrated Kazakh government to demand that the state-owned KazMunaiGaz energy company be given a larger stake in the field’s operating consortium.

Most of the other big discoveries of recent years — the “Jack” field in the deep waters of the Gulf of Mexico, the Doba field in Chad, fields off Russia’s Sakhalin Island, and the Tupi field in the deep Atlantic off Brazil — exhibit similar characteristics. They are either far offshore and difficult to develop or entail problematic relationships with unreliable governments — or, worse yet, some combination of the two. You can essentially do the math yourself when it comes to the future cost of oil produced at such sites.

So here’s the bad news at the pump…