Energy wars of attrition: The irony of oil abundance

March 16, 2016 12:01 am0 CommentsViews: 15

by Michael T Klare

THREE and a half

years ago, the International Energy Agency triggered headlines around the world by predicting that the United
States would overtake Saudi Arabia to become the worlds leading oil producer by 2020 and, together with
Canada, would become a net exporter of oil around 2030. Overnight, a new strain of American energy
triumphalism appeared and experts began speaking of Saudi America, a reinvigorated USA animated by
copious streams of oil and natural gas, much of it obtained through the then-pioneering technique of hydrofracking. This is a real energy revolution, the Wall Street Journal crowed in an editorial heralding the IEA
pronouncement.
The most immediate effect of this revolution, its boosters proclaimed, would be to banish any likelihood of a
peak in world oil production and subsequent petroleum scarcity. The peak oil theorists, who flourished in the
early years of the twenty-first century, warned that global output was likely to reach its maximum attainable
level in the near future, possibly as early as 2012, and then commence an irreversible decline as the major
reserves of energy were tapped dry. The proponents of this outlook did not, however, foresee the coming of
hydro-fracking and the exploitation of previously inaccessible reserves of oil and natural gas in underground
shale formations.
Understandably enough, the stunning increase in North American oil production in the past few years simply
wasnt on their radar. According to the Energy Information Administration of the department of energy, US
crude output rose from 5.5 million barrels per day in 2010 to 9.2 million barrels as 2016 began, an increase of
3.7 million barrels per day in what can only be considered the relative blink of an eye. Similarly unexpected
was the success of Canadian producers in extracting oil (in the form of bitumen, a semi-solid petroleum
substance) from the tar sands of Alberta. Today, the notion that oil is becoming scarce has all but vanished, and
so have the benefits of a new era of petroleum plenty being touted, until recently, by energy analysts and oil
company executives.
The picture in terms of resources in the ground is a good one, Bob Dudley, the chief executive officer of oil
giant BP, typically exclaimed in January 2014. Its very different [from] past concerns about supply peaking.
The theory of peak oil seems to have, well, peaked.
The arrival of a new energy triumphalism
WITH the advent of North American energy abundance in 2012, petroleum enthusiasts began to promote the
idea of a new American industrial renaissance based on accelerated shale oil and gas production and the

development of related petrochemical enterprises. Combine such a vision with diminished fears about reliance
on imported oil, especially from the Middle East, and the United States suddenly had so the enthusiasts of
the moment asserted a host of geopolitical advantages and fresh life as the planets sole superpower.
The outline of a new world oil map is emerging, and it is centered not on the Middle East but on the Western
Hemisphere, oil industry adviser Daniel Yergin proclaimed in the Washington Post. The new energy axis runs
from Alberta, Canada, down through [the shale fields of] North Dakota and South Texas to huge offshore oil
deposits found near Brazil. All of this, he asserted, points to a major geopolitical shift, leaving the United
States advantageously positioned in relation to any of its international rivals.
If the blindness of so much of this is beginning to sound a little familiar, the reason is simple enough. Just as
the peak oil theorists failed to foresee crucial technological breakthroughs in the energy world and how they
would affect fossil fuel production, the industry and its boosters failed to anticipate the impact of a gusher of
additional oil and gas on energy prices. And just as the introduction of fracking made peak oil theory
irrelevant, so oil and gas abundance and the accompanying plunge of prices to rock-bottom levels
shattered the prospects for a US industrial renaissance based on accelerated energy production.
As recently as June 2014, Brent crude, the international benchmark blend, was selling at $114 per barrel. As
2015 began, it had plunged to $55 per barrel. By 2016, it was at $36 and still heading down. The fallout from
this precipitous descent has been nothing short of disastrous for the global oil industry: many smaller
companies have already filed for bankruptcy; larger firms have watched their profits plummet; whole countries
like Venezuela, deeply dependent on oil sales, seem to be heading for receivership; and an estimated 250,000
oil workers have lost their jobs globally (50,000 in Texas alone).
In addition, some major oil-producing areas are being shut down or ruled out as likely future prospects for
exploration and exploitation. The British section of the North Sea, for example, is projected to lose as many as
150 of its approximately 300 oil and gas drilling platforms over the next decade, including those in the Brent
field, the once-prolific reservoir that gave its name to the benchmark blend. Meanwhile, virtually all plans for
drilling in the increasingly ice-free waters of the Arctic have been put on hold.
Many reasons have been given for the plunge in oil prices and various conspiracy theories have arisen to
explain the seemingly inexplicable. In the past, when prices fell, the Saudis and their allies in the Organisation
of the Petroleum Exporting Countries (OPEC) would curtail production to push them higher. This time, they
actually increased output, leading some analysts to suggest that Riyadh was trying to punish oil producers Iran
and Russia for supporting the Assad regime in Syria. New York Times columnist Thomas Friedman, for
instance, claimed that the Saudis were trying to bankrupt those countries by bringing down the price of oil to
levels below what both Moscow and Tehran need to finance their budgets. Variations on this theme have been
advanced by other pundits.
The reality of the matter has turned out to be significantly more straightforward: US and Canadian producers
were adding millions of barrels a day in new production to world markets at a time when global demand was
incapable of absorbing so much extra crude oil. An unexpected surge in Iraqi production added additional
crude to the growing glut. Meanwhile, economic malaise in China and Europe kept global oil consumption
from climbing at the heady pace of earlier years and so the market became oversaturated with crude. It was, in
other words, a classic case of too much supply, too little demand, and falling prices. We are still seeing a lot of
supply, said BPs Dudley last June. There is demand growth, theres just a lot more supply.
A war of attrition
THREATENED by this new reality, the Saudis and their allies faced a painful choice. Accounting for about 40
per cent of world oil output, the OPEC producers exercise substantial but not unlimited power over the global
marketplace. They could have chosen to rein in their own production and so force prices up. There was,
however, little likelihood of non-OPEC producers like Brazil, Canada, Russia, and the United States following
suit, so any price increases would have benefited the energy industries of those countries most, while
undoubtedly taking market share from OPEC. However counterintuitive it might have seemed, the Saudis,
unwilling to face such a loss, decided to pump more oil. Their hope was that a steep decline in prices would
drive some of their rivals, especially American oil frackers with their far higher production expenses, out of
business. It is not in the interest of OPEC producers to cut their production, whatever the price is, the Saudi
oil minister Ali al-Naimi explained. If I reduce [my price], what happens to my market share? The price will
go up and the Russians, the Brazilians, US shale oil producers will take my share.

In adopting this strategy, the Saudis knew they were taking big risks. About 85 per cent of the countrys export
income and a staggeringly large share of government revenues come from petroleum sales. Any sustained drop
in prices would threaten the royal familys ability to maintain public stability through the generous payments,
subsidies, and job programs it offers to so many of its citizens. However, when oil prices were high, the Saudis
socked away hundreds of billions of dollars in various investment accounts around the world and are now
drawing on those massive cash reserves to keep public discontent to a minimum (even while belt-tightening
begins). If prices continue to be low, we will be able to withstand it for a long, long time, Khalid al-Falih, the
chairman of Saudi Aramco, the kingdoms national oil company, insisted in January at the World Economic
Forum in Davos, Switzerland.
The result of all this has been an oil war of attrition a struggle among the major oil producers for
maximum exposure in an overcrowded energy bazaar. Eventually, the current low prices will drive some
producers out of business and so global oversupply will assumedly dissipate, pushing prices back up. But how
long that might take no one knows. If Saudi Arabia can indeed hold out for the duration without stirring
significant domestic unrest, it will, of course, be in a strong position to profit when the price rebound finally
occurs.
It is not yet certain, however, that the Saudis will succeed in their drive to crush shale producers in the United
States or other competitors elsewhere before they drain their overseas investment accounts and the foundations
of their world begin to crumble. In recent weeks, in fact, there have been signs that they are beginning to get
nervous. These include moves to reduce government subsidies and talks initiated with Russia and Venezuela
about freezing, if not reducing, output.
An oil glut unleashes world-class havoc
IN THE meantime, there can be no question that the war of attrition is beginning to take its toll. In addition to
hard-hit Arctic and North Sea producers, companies exploiting Albertas Athabasca tar sands are exhibiting all
the signs of an oncoming crisis. While most tar sands outfits continue to operate (often at a loss), they are now
postponing or cancelling future projects, while the space between the future and the present shrinks ominously.
Just about every firm in the oil business is being hurt by the new price norms, but hardest struck have been
those that rely on unconventional means of extraction like Brazilian deep-sea drilling, US hydro-fracking,
and Canadian tar sands exploitation. Such techniques were developed by the major companies to compensate
for an expected long-term decline in conventional oil fields (those close to the surface, close to shore, and in
permeable rock formations). By definition, unconventional or tough oil requires more effort to pry out of the
ground and so costs more to exploit. The break-even point for tar sands production, for example, sometimes
reaches $80 per barrel, for shale oil typically $50 to $60 a barrel. What isnt a serious problem when oil is
selling at $100 a barrel or more becomes catastrophic when it languishes in the $30 to $40 range, as it has over
much of the past half-year.
And keep in mind that, in such an environment, as oil companies contract or fail, they take with them hundreds
of smaller companies field services providers, pipeline builders, transportation handlers, caterers, and so on
that benefitted from the all-too-brief energy renaissance in North America. Many have already laid off a
large share of their workforce or simply been driven out of business. As a result, once-booming oil towns like
Williston, North Dakota, and Fort McMurray, Alberta, have fallen into hard times, leaving their man camps
(temporary housing for male oil workers) abandoned and storefronts shuttered.
In Williston once the epicentre of the shale oil boom many families now line up for free food at local
churches and rely on the Salvation Army for clothes and other necessities, according to Tim Marcin of the
International Business Times. Real estate has also been hard hit. As jobs dried up and families fled, some
residential neighbourhoods became ghost towns, Marcin reports. City officials estimated hotels and
apartments, many of which were built during the boom, were at about 50-60 per cent occupancy in November.
Add to this another lurking crisis: the failure or impending implosion of many shale producers is threatening
the financial health of American banks which lent heavily to the industry during the boom years from 2010 to
2014. Over the past five years, according to financial data provider Dealogic, oil and gas companies in the
United States and Canada issued bonds and took out loans worth more than $1.3 trillion. Much of this is now
at risk as companies default on loans or declare bankruptcy. Citibank, for example, reports that 32 per cent of
its loans in the energy sector were given to companies with low credit ratings, which are considered at greater
risk of default. Wells Fargo says that 17 per cent of its energy exposure was to such firms. As the number of

defaults has increased, banks have seen their stock values decline, and this combined with the falling value
of oil company shares has been rattling the stock market.
The irony, of course, is that the technological breakthroughs so lauded in 2012 for their success in enhancing
Americas energy prowess are now responsible for the market oversupply that is bringing so much misery to
people, companies, and communities in North Americas oil patches. At the beginning of 2014, [the US] was
pumping so much oil and gas that experts foresaw a new American industrial renaissance, with trillions of
dollars in investments and millions of new jobs, commented energy expert Steve LeVine in February. Two
years later, he points out, faces are aghast as the same oil instead has unleashed world-class havoc.
The geopolitical scorecard from hell
IF THAT promised new industrial renaissance has failed to materialise, what about the geopolitical advantages
that new oil and gas production was to give an emboldened Washington? Yergin and others asserted that the
surge in North American output would shift the centre of gravity of world production to the Western
Hemisphere, allowing, among other things, the export of US liquefied natural gas, or LNG, to Europe. That, in
turn, would diminish the reliance of allies like Germany on Russian gas and so increase American influence
and power. We were, in other words, to be in a new triumphalist world in which the planets sole superpower
would benefit greatly from, as energy analysts Amy Myers Jaffe and Ed Morse put it in 2013, a
counterrevolution against the energy world created by OPEC.
So far, there is little evidence of such a geopolitical bonanza. In Saudi attrition-war fashion, for instance,
Russias natural gas giant Gazprom has begun lowering the price at which it sells gas to Europe, rendering
American LNG potentially uncompetitive in markets there. True, on February 25th, the first cargo of that LNG
was shipped to foreign markets, but it was destined for Brazil, not Europe.
Meanwhile, Brazil and Canada two anchors of the new world oil map predicted by Yergin in 2011 have
been devastated by the oil price decline. Production in the United States has not yet suffered as greatly, thanks
largely to increased efficiency in the producing regions. However, pillars of the new industry are starting to go
out of business or are facing possible bankruptcy, while in the global war of attrition, the Saudis have so far
retained their share of the market and are undoubtedly going to play a commanding role in global oil deals for
decades to come (assuming, of course, that the country doesnt come apart at the seams under the strains of the
present oil glut). So much for the counterrevolution against OPEC. Meanwhile, the landscapes of Texas,
Pennsylvania, North Dakota, and Alberta are increasingly littered with the rusting detritus of a brand-new
industry already in decline, and American power is no more robust than before.
In the end, the oil attrition wars may lead us not into a future of North American triumphalism, nor even to a
more modest Saudi version of the same, but into a strange new world in which an unlimited capacity to
produce oil meets an increasingly crippled capitalist system without the capacity to absorb it.
Think of it this way: in the conflagration of the take-no-prisoners war the Saudis let loose, a centuries-old
world based on oil may be ending in both a glut and a hollowing out on an increasingly overheated planet. A
war of attrition indeed.
TomDispatch.com, March 8. Michael T Klare, a TomDispatch regular, is a professor of peace and world
security studies at Hampshire College and the author, most recently, of The Race for Whats Left.
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