Middle East at a crossroads
by Richard Heinberg
Published on 4 Aug 2006 by MuseLetter / Energy Bulletin. Archived on 4 Aug 2006.
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A New Oil Regime in the Middle East?
There is considerable danger that the smoke and fire from these three geographic flashpoints--Iraq, Iran, and Lebanon--could converge in a larger regional conflagration. In light of all this potential for apocalyptic mayhem, a discussion of the oil business may seem almost frivolous. But it is important to remember that, historically, the drawing of borders in the Middle East; the establishment of British, French, and later US-backed puppet governments in these faux nations; and the rise of a radical Islamic fundamentalist movement to challenge the Western-backed regimes, have all been fueled by the wealth produced by oil, and by the need for oil on the part of importing countries.
For decades there was a petroleum status quo of sorts in the Middle East: the capacity for production exceeded demand, and OPEC worked to restrain exports in order to keep prices from collapsing; meanwhile big producers like Saudi Arabia served as the world's petroleum bankers, maintaining the solvency of the system. On only one occasion--the embargo of 1973-74--did the swing producers withhold needed oil flows for political reasons, or cause prices to reach levels unacceptable to consumers (the other major post-1970 oil shocks, due to wars or revolutions, were beyond OPEC's control).
Now the status quo is crumbling--not so much for political reasons (though those are certainly imaginable, given the situations outlined above), but for reasons of geology.
Questions about the real size of Kuwait's oil reserves have emerged in the Kuwaiti National Assembly, leading the opposition party to call for production cuts. Remarkably, Kuwait appears to be groping toward implementation of the Oil Depletion Protocol, without ever having heard of it. However, from the standpoint of nations that want to keep the oil flowing so the global industrial party can continue, this is bad news.
Even worse news, potentially, comes from Saudi Arabia, where oil flows have shrunk by some 400,000 barrels per day over the past few months, despite astronomic prices. No one knows for sure what is going on. The Saudis themselves say the production cuts are due to lack of demand, but this hardly seems plausible, unless the kingdom is only able to deliver unwanted heavy, sour crude to market--but even in that case, one would expect flows to increase, with a price discount factored in for resource quality.
At the same time, the Saudis are hiring just about every spare drilling rig in the world, resulting in a dramatically falling rig count in the Gulf of Mexico--a place that would otherwise be seeing an increasing count, given the fact that Mexico's giant Cantarell field is in now in steep decline, with dire implications for the nation's economy.
Matthew Simmons (Twilight in the Desert) has been insisting for the past few years that Saudi production is close to peak and that Ghawar, the world's biggest field, may be in decline. Now many others are speculating that this is the real reason for the falling production figures.
What happens next? It depends on the real condition of Ghawar. Perhaps a heroic drilling campaign could result in a temporary bloom in production, lasting perhaps three years, followed by a swift, terminal collapse. On the other hand, it is possible that the field has been so thoroughly exploited already that we are seeing the irreversible, rapid decline. At the ASPO conference a well-connected industry insider who wishes not to be directly quoted told me that his own sources inside Saudi Arabia insist that production from Ghawar is now down to less than three million barrels per day, and that the Saudis are maintaining total production at only slowly dwindling levels by producing other fields at maximum rates. This, if true, would be a bombshell: most estimates give production from Ghawar at 5.5 Mb/d.
Disturbing Trajectory
While these events in Kuwait and Saudi Arabia are not front-page news, they are in their way every bit as significant as the ongoing violence in Iraq and Lebanon, and the ritualistic war dance of the American and Iranian leaders. The Israel and Lebanon situation seems to be about religion, terrorism, and land; the US-Iran situation seems to be about nuclear proliferation. But if one looks beneath the surface, nearly everything of significance that happens in the Middle East is at least partly about oil.
It may be pure coincidence that, just as the world's biggest oil producers are reaching a historic turning point signaling the end of the energy regime that has held since the end of US production dominance in 1970, a war has erupted between Israel and a militant organization supported by a nation the US plans to attack anyway in order to maintain dominance of world oil supplies going forward. History is full of such coincidences. But coincidence or not, it will be difficult to keep these unfolding realities from rebounding off one another, undermining attempts at a peaceful resolution.
Some commentators speculate that we are seeing the slow-motion commencement of World War III (or IV or V, depending on who's counting). I have no interest in fueling apocalyptic speculations. My strong wish is for a quick and peaceful resolution of the Israeli-Hezbollah-Lebanese conflict, a US stand-down from confrontation with Iran, and a speedy, voluntary US exit from Iraq.
In his talk at the ASPO conference, Terence Ward repeatedly said that America's bombing of Iran would make the work of petroleum depletion analysts easier--presumably because skyrocketing oil prices would force everyone to acknowledge that Peak Oil is a reality. On this point I disagree. If the scenario Ward outlined comes to pass, the public's attention will be fixated on military developments and casualties, with horrific news footage dominating nearly every moment of every television news broadcast. Oil prices will indeed soar and everyone will feel the economic pain from a crashing global economy--but few will look to geology as an explanation. Instead, they will point to the obvious proximate causes--attacks and counterattacks disrupting oil shipments, with speculators pushing prices even higher than they would otherwise go.
We have many reasons to hope that events are not spinning out of control.
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