Aya Burweila
(RIEAS Analyst on energy security and on the international and regional security implications embodied by the alliance of the Algerian GSPC with Al-Qaeda)
Copyright: www.rieas.gr
A provocative politico-economic combination of chronic nuclear crises that recently compelled Israel's deputy prime minister to remark that an attack on Iran's nuclear sites looked "unavoidable" and the weakening of the dollar, the price of a barrel of crude oil increased by seventy dollars, reaching record-breaking prices and provoking subsequent speculations that there may be a supply shortage impeding in the very near future. Consequently, consuming governments have put pressure on OPEC to increase output in order to mitigate the effects of the crises-inducing spike in oil prices. As the German Economy Minister Michael Glos pointed out, "The increase of the oil prices is becoming a real threat to the worldwide economy," while Japan’s Chief Cabinet Secretary Nobutaka Machimura remarked on May 22 that rising oil prices are causing a "big shock" to Japan's economy, which is also the second-largest economy in the world.(1)
However, with the exception of Saudi Arabia, OPEC, which supplies more than a third of the world's oil, finds it unnecessary to make such a premature move before its scheduled meeting in September. "The speculators and geopolitical tensions are to blame for the fluctuations," says Shukri Ghanem, Chair of Libya’s state-run National Oil Corp, "The market is well supplied. OPEC needs not take any action." As Libya’s peaceful rapprochement with the international community indicates, securing access to non-renewable and finite energy resources such as oil is becoming more and more critical. Emphasizing how energy security has the knock-on military effect illustrated by the Gulf War, American academic Homer-Dixon pointed out in 1994 how: “Environmental scarcities are already contributing to violent conflicts in many parts of the world. These conflicts are probably the early signs of an upsurge of violence in the coming decades that will be induced or aggravated by scarcity.”(2)
Not only is energy scarcity contributing to violent conflicts, it is also contributing to a sense of uneasiness among oil-producing nations. Though scarcity has always been a concern, with the rapidly rising economies of China and India, it is only in recent years that the drive for energy security has taken upon an added sense of urgency. While world demand for oil is expected to increase by 54 percent by 2025, meaning that the world's oil-producing countries will have to produce an additional 44 million barrels of oil on a daily basis, according to The International Energy Agency, the world expects to reach peak production between 2013 and 2037. Thereafter, production is predicted to fall by three per cent a year.(3) A bulk of this sharp increase is due to the oil needs of China and India, who are aware that their economic future is directly dependant on ensuring sufficient energy resources to accommodate their staggering economic growth.
In 2004, China, with its oil imports having doubled between 1999 and 2004, replaced Japan as the second largest oil consumer and importer of the world. Currently consuming over 6 mm bpd, which is about twice of what it produces, China’s oil demand is projected to double by the end of 2020. By 2025, China's demand for oil, which is increasing by five to seven per cent a year, will also surpass the United States’ as the world's largest consumer of oil. In the meantime, consuming 2 million bpd in 2004, the oil demand of India is set to rise to 10 percent of world demand by 2030, up from its current 3 percent.(4)
In fact, the demand of these two countries combined has grown to around 970,000 bpd, accounting for 40 per cent of total world growth.(5) In terms of consumption, too, BP reports a mixed picture. Demand for oil in rich countries fell by almost 1% last year—the biggest decline since 1983. But in poorer ones, it grew by over 4%, partly because developing economies are growing faster than those of the rich world.(6) Consequently,these figures have caused a marked strain on the spare oil production capacity of producers. Only until five years ago, spare oil production capacity exceeded world oil consumption by nearly ten percent but the rapid increase in world demand for oil illustrated above has caused spare capacity to decline to less than two percent, effectively implying that any disruption to the supply of oil can and will create a scarcity that will cause prices to skyrocket.(7) As the oil crises of the 70s and the current price spikes have shown, an increase in the prices of oil can cause debilitating economic effects around the world. In this manner, this scarcity of oil emphasizes the need for the diversification of a nation’s sources of oil.
The levels of diversification of a nation’s energy sources can translate into more energy security as it can “lessen the impact of a supply disruption on the U.S. and world economies.”(8) Furthermore, according to Tony Hayward, the boss of BP, though enough oil has already been discovered in the world to maintain consumption for another 42 years, it is poor policy-making or “the madness of men” that is responsible for impending scarcity: Around 80% of the world’s oil reserves are controlled by state-owned oil firms that tend to allow firms like BP only limited access. He believes that if these riches were fully exploited, the world could easily produce 100m barrels a day (b/d) or more.(9) Indeed, it is these implications of political policy on energy scarcity that also helped facilitate Libyan rapprochement: more oil production from Libya ensures more options and diversification for importing nations.
Holding almost a 4% share in global world reserves in oil and 1.9% share of global production in 2003, Libya, with the largest proven oil reserves in Africa, is OPEC’s eighth largest producer and the second-largest in Africa after Nigeria, accounting for 38% of the continent’s production. Like Saudi Arabia, Libya’s economy is based on oil, with exports contributing between 75% and 90% of state revenues but until the sanctions were lifted in 2003, access to Libya’s reserves were limited and handicapped. Libya has proven reserves of 29.5 billion barrels of oil and potentially holds up to 100 billion barrels. However, due to its former isolation, Libya has one of the most under-invested oil markets of today, with only 25% of the country having been explored for oil.
To raise output, it needs to attract $30 billion in investments in order to raise its current production capacity of 1.4 mm bpd to 3 mm bpd,(10) a goal it projects to reach in seven to ten years. Furthermore, since its rapprochement, Libya has been hiring foreign companies to develop more than 300 untapped fields after an increase in energy prices made it an economically viable way of raising output. To this extent, in 2005, it has awarded 41 exploration permits to almost 30 companies, which included ExxonMobil and Occidental Petroleum. It also auctioned exploration plots totaling to 220,000 sq km, which is approximately about one-eighth of its total territory.(11)
On May 29, 2007, BP signed a $900 million exploration and production agreement with the Libyan National Oil Company. This agreement covers three massive largely unexplored tracts. Needless to say, with growing demands and increasing frequency of conflicts in strategic parts of the world, the political environment of an oil-producing nation remains extremely important to global energy security. All said and done, costing it only one dollar per barrel, Libya for one, is turning madness into progress and profits.
Notes:
(1) Herald News Service, ‘What they're saying about oil,’ June 10, 2008
(2) Homer-Dixon, T. and Percival, V., “Environmental Scarcity and Violent Conflict: Briefing Book: Briefing Book,” Population and Sustainable Development Project, American Association for the Advancement of Science & University of Toronto, (1996) pg. 6
(3) CBS News, “Supply and Demand: World Oil Markets Under Pressure,” April 28, 2005.
(4) Karishma Vaswani, “Soaring Energy Demand Spark Indian Fears,” BBC News, February 16, 2006.
(5) China Business Weekly, “China's oil demand unlikely to decline,” October 7, 2004.
(6) The Economist, Plenty in the Tank, June 11, 2008
(7) Dick Lugar, “U.S. Energy Security – A New Realism,” Brookings Institution, March 13, 2006.
(8) Peter Behr and Alan Sipress, “Cheney Panel Seeks Review of Sanctions: Iraq, Iran and Libya Loom Large in Boosting Oil Supply,” The Washington Post, April 19, 2001.
(9) (The Economist, Plenty in the Tank, June 11, 2008)
(10) Ibid.
(11) “Libya May Hire Foreign Companies to Help Develop 300 Oil Field,” Alexander’s Gas and Oil Connections, February 27, 2006, Vol. 11, Issue #4.