CRUDE OIL: THE DAY AFTER TOMORROW by A.M. Samsam Bakhtiari

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August 2006 INTRODUCTION Crude oil is a commodity unlike any other: it is simultaneously a strategic raw material, a unique industrial feedstock and the most essential of fuels. It also is "the most conveniently and widely traded form of energy... and therefore the swing element in the world's energy mix" [1] At present, worldwide consumption of all liquid hydrocarbons stands at around 81 million b/d (give or take one million b/d). Thus, the oil business turnover stands at roughly $6bn on every single day with double that being traded (so-called 'paper barrels') on the exchanges of NYMEX (New York) and IPE (London). Another salient characteristic of crude oil is that, to the contrary of other commodities which have free markets, "there is no free market in oil" [2] But crude oil is much more than sum of its parts: it is the main pillar upon which the roof of our present global economy rests. No wonder its price is the most important figure quoted daily by the media. For the better part of the 20th century, however, crude oil was taken as granted as any other commodity. It was always priced relatively cheaply and made readily available at any given location. Generation after generation simply got addicted to using its derivatives without further ado. Seemingly there was nothing special about crude oil... TODAY Worldwide crude oil production has now peaked. In order to ascertain this fact, suffice it to add up total depletion from all existing oil fields (chalking up their negative impact on global supply) and then add up all the incoming crude from new oil fields coming on stream (with their positive influx) in order to obtain the final impact on global oil supply by adding up the two. Under the most plausible simulations and scenarios, the final sum-up is always negative, thereby pointing to a declining supply. Thus, a century and a half after the inception of the modern oil industry in 1859, the world is entering a brand-new era --- that of irreversibly declining worldwide crude oil production. According to my 'World Oil Production Capacity' [WOCAP] model, today's global output of some 81 million b/d should steadily decline to reach some 55 mb/d by 2020 [3]. Curiously enough, a group of Italian academics working under Prof. Renato Guseo did reach the very same conclusion of 55 mb/d for 2020 using a totally different model which was based upon 'Non Linear Least Squares'methods [4]. Therefore, successive declines will occur over a number of 'transitions' --- the first of which is 'Transition One' ['T1'], followed by 'T2', 'T3' and 'T4' [5]. The very rough timeframe for each transition being between three to five years --- with an average of four years per transition. Today we stand at the very onset of 'T1'; even at this initial point of inception, everything has already changed, because our old 'Pre-Peak' rules do not apply anymore, and we are still at a loss over the new 'Post-Peak' rules. Suffice it to mention that 'Business As Usual' is no longer a viable scenario as nothing is 'usual' anymore… TOMORROW With the gradual preponderance of Supply over Demand achieved during 'T1', both oil prices and price volatility are bound to rise. The poor will be the first to be hit by these skyrocketing prices --- whether among nations or individuals. Hardest hit will be those at the bottom of the pile. As for the resulting small dent in demand, the slack will readily be taken up in stride by the richest consumers. In between poor and rich, the middle classes will begin to have to adapt to circumstances and to the fresh rules of the energy game. This will not occur without social tensions over-spilling into the political realm and leading to domestic sparks that might create serious problems on the national stage. Internationally, nations competing for ever diminishing oil resources will enter strong-arm rivalries. It will not be anything akin to any 'New Great Game'; but rather deadly duels between masterminds trying their best to give their own nation-states the better of a poor deal. Those countries which used the 'Pre-Peak' era (and also 'T1') to get prepared for the coming 'Post-Peak' shocks will naturally fare much better than those who have wasted their time and let their golden opportunities pass by. Of course, that very special region known as the Middle East will come to focus both geopolitical ambitions and global energetic questions. That might lead to an even more chaotic situation than the present one. But, for those players willy-nilly keeping an iron in the fire, future rewards might prove worthwhile after flashpoints and hot-heads have eventually cooled down… THE DAY AFTER TOMORROW It should always be borne in mind that the four Transitions outlined above are but an overall theoretical framework for distinct phases of the global oil output decline. It almost goes without saying that, in practice, things will not develop as smoothly as outlined theoretically because the transitions themselves will come to impact on policies, strategies and events. Even the rather benign 'T1' might come to witness unexpected developments --- as the masterminds having correctly read their 'tea leaves' will endeavor to preempt moves being planned by theirrivals. And, if not unduly influenced by 'T1', events will inevitably be precipitated by the far-less benign 'T2'. It is therefore difficult to imagine that the critical Middle Eastern applecart will not be upset some time during these first two Transitions. After having attempted to optimize oil demand by price for as long as possible, the 'powers that be' will have to come to terms with the inescapable fact that there is simply not enough oil for all of those still willing to pay stratospheric prices. Then, they will have to turn to national and regional quotas in order to foreclose chaos. The inevitably ensuing power struggles and deadly conflicts might well decide of not only our 21st century's outcome but also about the very predicament of Mankind [6]. In this 'Post-Peak' era, even the winners might turn out to be losers as well. In a world which still has the possibility to destroy itself, utmost restraint will have to be shown not to tip the planet over the brink into the abyss. It is to be hoped that the major Powers will carry on with their deterrent games as they have over the past fifty years or so [7], and won't allow minor newcomers to spoil their broth. CONCLUSION After a century and a half of addiction to oil and its myriad derivatives, the world is suddenly facing the brand-new situation of having to cope with a declining oil supply. In theory, the initial decline should occur over four major transition periods of roughly four years each. In practice, events triggered by the tense 'Post-Peak' era might come to upset these orderly transitions, leading to explosive outbursts which seemed to have been the rule rather then the exception during the long History of Oil. In any event, oil prices and their volatility are bound to set fresh records with every passing year. At some point, even optimizing by price will prove futile and availability will have to become the fresh yardstick. Rivalries, struggles and conflicts will become the order of the day between societies and nation-states pressed to provide whatever oil they can put their hands on to try quench the insatiable thirst of their citizens for that magical black liquid. It is to be hoped that the planet does survive the momentous shock-waves unleashed by the 'Post-Peak' era and its ineluctable Transitions. But, as Lord Tennyson wondered in his sublime poem'Locksley Hall Sixty Years After': "Who can tell how all will end?" ACKNOWLEDGEMENT I take this opportunity to thank my dear friend Mr. ABDOL REZA KHAMNEIPUR for providing me, over the years, thousands of relevant articles and other pertinent information --- some of which were used in compiling the present paper. REFERENCES 'The Politics of Middle East Oil', edited by Paul Tempest, 'Royaumont Group' (London: Graham & Trotman, 1993) p.249. Silvan Robinson, 'Real cost base of oil isn't what you think', in 'Petroleum Intelligence Weekly' (April 3, 1989) pp.6-7. A.M.Samsam Bakhtiari, 'The World Oil Capacity Production [WOCAP] model' (December 2003) see website at R.Guseo et al., 'World Oil Depletion Models: Price Effects Compared with Strategic or Technological Intervention', paper presented at the 'Italian Society of Statistics'conference (Bari, Italy - June 2004). On 'Transitions' see the excellent paper by Byron W. King in www.EnergyBulletin.net dated August 27, 2006. For a rather grim view of 'Post-Peak', see Richard C. Duncan: 'The Olduvai Theory: sliding towards the post-industrial stone age' (Seattle: The Institute of Energy and Man, 1996). Although nowadays 'deterrence' is not what it used to be as outlined by Gabriel Kolko in 'The Death of Deterrence', on AsiaTimesOnline, August 30, 2006.