The full story of crude oil

In the one second it took you to decide to read this far in the sentence, the world consumed 150,000 litres of crude oil. It would just fit in a cube 5.3 metres along each edge. This volume is burnt every second of every day of every year.

If the pundits are correct, global demand will jump 50 per cent in the next two decades. The question of supply – the ability to meet demand – is less clear cut.

Crude oil is measured and priced by an arcane yardstick called the barrel. One barrel is 42 US gallons; approximately 159 litres. Perversely, it is no longer sold by the barrel. The minimum purchase quantity for west Texas crude on the Nymex exchange is 1000 barrels, at $86 (AUD) each. There is no home-delivery option.

To conceptualise our rapacious thirst for crude oil, one must empty and replenish our hypothetical 5.3-metre cube once every second without pause. This is the liquid portion of humanity’s hydrocarbon heartbeat. A slight hiccup – refilling with ‘only’ 120,000 litres every second for a fortnight – and the global economic equivalent of a cardiac arrest would be at hand. The world could easily be on the brink of war, or a 1930s-style great depression. This is not an exaggeration.

INCONVENIENT GEOGRAPHY

Daily, 15 million barrels of crude oil (20 per cent of global supply) in supertankers steams between Saudi Arabia and Iran, and emerges from the Straits of Hormuz. It’s a tense place to transport valuable stuff.

It really would be better if the Middle East held two-thirds of the world’s supply of carrots. It doesn’t. Instead, a mind-boggling 64 per cent of global oil reserves are problematically located there.

Almost every US President since WWII has taken military action in the region. The US Military’s Central Command polices the Middle East. Its long-term mission, enunciated by former President Jimmy Carter, was to facilitate the flow of Persian Gulf oil “by any means necessary including military force” as a “vital interest” to the USA.

The first military objective of Operation Iraqi Freedom, for example, was to secure southern Iraq’s oil production.

However popularly unpalatable the US war in Iraq seems, it’s merely the latest of many regional engagements for US Central Command soldiers. The majority of post-1980 US combat deaths were from the ranks of Central Command soldiers – keeping the oil flowing. Michael Klare observes in his book Blood and Oil: “The US military is being converted into a global oil protection service.”

Eleven per cent of crude oil reserves are located in Venezuela, Nigeria and Mexico. Russia and the Caspian Sea hold seven per cent more. Together with Middle Eastern oil, the total is a staggering 82 per cent of reserves – all in unstable places. Only 18 per cent of reserves are in the USA or allied nations.

YOUR BACKYARD? DON’T BOTHER

Thinking of emulating the Beverley Hillbillies’ Jed Clampett? Save your strength; there’s no ‘Texas tea’ beneath your backyard – or just about anywhere else. Everywhere on the planet has been explored. Everywhere. Very little oil remains undiscovered.

Crude oil forms only when five key geological conditions are met. Even then nine out of 10 wells are dry, and only one in 100 hits an important oilfield. Here’s another kicker: the limit on extraction averages about 35 per cent – meaning 65 per cent of discovered crude oil remains locked underground forever.

The largest oilfield on Earth, the Saudi Ghawar field (87.5 billion barrels) was discovered in 1948. The second-largest, Burgan in Kuwait (fractionally smaller) was discovered 10 years earlier. Third largest: Samotlor in Russia, 20 billion barrels, discovered in 1961. Fourth largest: Safaniya in Saudi Arabia, 20 billion barrels, discovered in 1951. Fifth: Lagunillas in Venezuella, 14 billion barrels, discovered in 1926.

Look at the dates. What’s happened since 1961? Not much.

Consider all the money spent on geological exploration, all the technological development – computers, satellite-sensing, etc. Only 50 super-giant oilfields have ever been discovered. The most recent was in 2000 – 10 billion barrels of problematically acidic crude. It was the first big discovery since 1975.

Of the 65 oil-possessing countries, 60 have well passed their discovery peaks. Forty-nine, including the USA and UK, have also passed their production peaks.

Most of Earth’s oil has already been found.

RESERVES

Reassuringly, it’s ‘business as usual’ at oil companies. The corporate agenda does not generally embrace worrying shareholders. There was a ‘small’ hiccup in 2004 when then Shell chairman Sir Philip Watts told investors they had ‘accidentally’ overestimated Shell’s known reserves. By 20 per cent. He was sent packing and prosecuted.

The Organisation of Petroleum Exporting Countries (OPEC) is a price-fixing cartel that limits supply, controls price and exerts economic leverage against the west. But it is not a happy alliance. Since 1982, its 12 member countries have been allocated a production quota as a proportion of their individual oil reserves. Between 1985 and 1990, many OPEC countries found – fortuitously – that they had been needlessly conservative in their reserves estimates. Kuwait upped its reserves from 64 to 90 billion barrels. Abu Dhabi ‘found’ 61 billion extra barrels, possibly in a shoebox out the back, and added this to its former total, 31 billion barrels. This was nothing more than a blatant grab for more of the pie by each member. Official statements of known reserves are sometimes grossly inflated.

FUTURE SUPPLY

The oil industry is not investing in additional production capacity. The peak year for global oil tanker capacity, refining capacity and oil rig count was 1981.

Remaining oil is difficult to get at and expensive to exploit. To get Caspian Sea oil from Baku to Turkey (avoiding Chechnya and Russia), for example, a 1700km pipeline costing $4.6bn (AUD) is required. It passes through an earthquake zone and equally unstable populations. It was touted as a several-hundred-billion barrel deal, but now looks like being more like 50 billion – call it one year’s supply at projected 2030 demand levels.

One day, perhaps soon, global production will begin inexorably to decline. Expert opinion is divided on when this ‘peak oil’ point will occur. It could be any time from right now to 2030.

The oil industry is gorging itself on the spoils of discoveries past. But warning bells are ringing. Investment bank Goldman Sachs put it like this in 2004: “Global oil demand is closing fast on tanker and refining capacity. If the core infrastructure does not improve, energy crises are likely to become progressively more frequent, more severe, and more disruptive of economic activity.” Reading between the lines of banking’s stereotypical conservatism, this conclusion borders on panic.

What does this mean for us? Unfortunately, $2.00 per litre is just around the corner. And after that the hits will just keep on coming.