The Petroleum Age

Excellent LRB article this week from Michael Kare, “professor of peace and world security studies at Hampshire College”[1] all about the world’s continuing, in fact growing dependence on oil – “the International Energy Agency (IEA) predicts that global consumption will rise from 86.9 million barrels a day in 2008 to 94.1 million in 2013.”

Professor Kare cites two things in particular as having exacerbated the current position.

First, the decision by the Chinese government in 1994 to make car ownership a central pillar of Chinese economic policy. The result?

Until 1994, China manufactured very few cars (in 1990, it was producing only 42,000 a year) and discouraged imports of foreign-made vehicles. But after Jiang Zemin’s State Planning Commission announced that car production was to become a ‘pillar’ of national economic development, with foreign companies invited to provide capital and knowhow, China soon became the developing world’s leading recipient of foreign direct investment. By 1998, it was making 500,000 cars a year; in 2002, it was making a million; a year later it was making two million.

…The growing availability of relatively affordable cars to China’s burgeoning middle class has also satisfied a long-suppressed desire. According to a recent US government estimate, the number of privately owned cars in China is expected to rise from 27 million in 2004 to 400 million in 2030.[emphasis added]

That’s a LOT more cars.

Second, the Bush Administration’s decision in 2001 to focus probably more heavily than ever on making the US economy dependent on oil, and foreign oil to boot.

Cheney came close to revealing his objective when he told reporters on 30 April 2001, two weeks before the NEP’s release: ‘Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy.’ Oil and other fossil fuels, he said, would remain America’s principal sources of energy for ‘years down the road’. To ensure this, the NEP called for increased drilling not only in the Arctic but in other protected wilderness areas, on public land in the American West, and in the outer continental shelf. Even more significant, the report openly assumed that the United States would become more rather than less dependent on imported oil, and urged the president to take a more active role in securing American access to foreign energy reserves. Of the report’s recommendations, around a third are aimed at bolstering US participation in global oil markets.

According to BP, US consumption rose by one million barrels a day over the course of Bush’s presidency while the output of domestic fields declined by roughly the same amount, pushing net imports up by two million barrels.

This isn’t just Bush-bashing, but you couldn’t make this up. It rather reminds me of the fanatical Nazi colonel, Hessler, in the Battle of the Bulge, dreaming of a future of eternal war — “Let’s make ourselves dependent on foreign oil so that we have to fight forever to secure it.” And make money doing it, of course.

In practical terms, for insurers and reinsurers, it means that the political risk landscape is changing. As the shift in focus of production shifts from North to South, so the perils change:

When the Petroleum Age began in the late 19th century, production was concentrated in the United States, Mexico, Romania and the Russian empire. This remained the case until well after the Second World War, with the US still providing half of the world’s oil in 1955. But the centre of production has moved ever southwards, to the Middle East, Africa, Central Asia and South America. Today, the US accounts for only 9.6 per cent of output; the Middle East for 30.1 per cent; Africa for 12.5 per cent and Latin America for 12.4 per cent. All told, the non-OECD countries now supply approximately three-quarters of the world’s oil.

This shift is important because most of the major developing-world producers were at one time or another ruled by the imperial powers and continue to bear the scars. Some, like Iraq, have borders that were devised by the imperial powers to meet their own needs and bear little relation to ethnic, religious or linguistic realities. Such regions are susceptible to involvement in violent struggles for regional autonomy or secession. The spoils of oil production often exacerbate these problems, by enhancing the attractions of separatism (especially if the oil fields are located in the ethnic territory involved, as in Angola’s Cabinda province or Iraqi Kurdistan) or of seizing national power (and thus taking control of the allocation of oil revenues).

This mirrors the same change in likely war scenarios that we have seen over the last 30 years, from the global block, total catastrophe nightmare to ‘limited wars’ largely played out in the Third World (and not so obviously by proxy). The leverage for the smaller players is much higher than it has been for an age (probably ever), and the scope for attack or threat of attack on points of vulnerability is enormous.

More volatility ahead. And probably higher prices, too.

See you at the petrol pumps.

[1] An unfortunate sounding title, I think.