Peak Oil and Corporate Policy

Global Oil: Peak Oil Analysis and Corporate Policies on Energy Peter R. Sinclair Introduction In recent years, advocates of the view that the world is close to achieving the maximum possible production of conventional oil, or has already done so, have become more influential. They have also faced severe criticism. This paper looks at reactions on the part of the major oil companies1 and the implications for rural or isolated areas if oil supply becomes seriously reduced and thus expensive. I begin by considering how corporations are likely to act during periods of stress. Then I review the trends in production and supply of conventional oil to set the stage for the controversial ‘peak oil’ interpretation. Next, I consider corporate responses to the general issue before turning to some reflections about what may happen in rural areas. Perspective: expectations for corporate action in period of stress This work looks at a particular moment in the history of complex networks of social life and the interface of humankind with the material or natural world. Hence, the explanation of corporate actions must be sought crucially at the level of the driving forces that structure the network. The concept of network is more appropriate than the more common system, because the former is less open to reducing explanation to determination by structures. Networks are like systems in so far as they have parts that interconnect and affect each other. The nodes of the network, however, are not designed and have not evolved in order to meet network needs. Thus, it is equally plausible to consider nodes of action as responsible for changing network relations as much as for maintaining them. Indeed, it is more sensible to consider networks as temporary structures subject to negotiation among components and externally imposed conditioning. Capitalism is a complex network of constantly emergent properties based on the dynamic force of profit accumulation. Capitalists (whether individual entrepreneurs or part-owners of corporations) own or borrow means of production and hire the labour of others as cheaply as possible to produce goods and services with the objective of selling them at a profit. They may reinvest all or part of any profit with the objective of increasing wealth. This process depends on free (unrestrained) markets in goods and labour to operate most successfully. Capitalism functions on the related assumptions that perpetual growth is possible at the aggregate level and that sufficient material resources will always be available. 1 Which companies count as majors may be disputed. In this paper, I include in order of size as measured by sales ExxonMobil, Shell, BP, Total, Chevron and ConocoPhillips. Some authors choose only the first three or five. According to Marxist theory, capitalism eventually will collapse as a result of increasing internal contradictions. Periods of overproduction relative to the capacity of the market to absorb goods and services at a profit lead to (1) concentration of means of production among those best equipped to survive economic depression, (2) technological innovation that reduces costs (and the need for labour), and (3) the development of new markets where possible. A subsequent round of expansion and then partial collapse follows. Finally, the extreme inequalities between owners and labour break the system in a revolutionary process. History been unkind to this Marxian model, which anticipates revolutionary change in the most developed capitalist centres. This has not happened. However, in the present period of global or mature capitalism, the limits to extraction from nature and the scale of environmental degradation generated by human production and consumption threaten the way of life built around this dominant global capitalism. This constitutes the second contradiction, one evident in the relatively neglected writing of Marx on nature, but see such notable exceptions as Burkett (1999), Foster (2000; 2002) and O’Conner (1998).2 What happens as the capitalist network unfolds depends on the relative powers of various participants and on the interpretations of those who have the capacity to define situations, at least for the time being. No person can speak for or control the complete network, include states, firms, labour and consumer organizations, inter-state organizations and various non-governmental organizations. Increasingly, environmental pressure groups that work at corporate, national, international, and even global scales are key components of the overall network. Oil companies are important components in this larger capitalist network and figure 1 depicts their location, indicating paths of influence and exchange. The next step is to review basic data on oil production and consumption. 2 See also Wallerstein (2004) who provides a helpful neo-Marxist summary except that he offers only passing commentary on the environmental source of crisis. Parsons (1977) presents selections by Marx and Engels on ecology. 2 Environmental Organizations State regulations Other companies Technology Company HQ Products to Material inputs markets Company sites Labour Supra- state org. Time Figure 1: The Energy Company Network Trends in Production and Consumption At first glance, data on oil production and consumption do not indicate a critical supply situation, but we will see later how these figures are deceptive. As reflected in figure 2, overall growth in oil production and supply was interrupted somewhat in 1974-75 (following the OPEC embargo on sales to the US) and more substantially in the second oil crisis that followed the Iranian revolution of 1979. From the mid-1980s, production increased again with only minor interruptions. For the world as a whole, average daily production of crude oil expanded dramatically from 45,886,000 barrels daily in 1970 to a peak of 73,807,000 barrels in 2005 (figure 2). The term oil supply refers to crude oil plus natural gas plant liquids, other liquids and additions (or losses) in the refining process (U.S. Department of Environment 2007). Crude oil is increasingly supplemented by 3 these additions, but the critical point is that a decline occurred in 2006, despite high demand and high prices. Figure 2: World Oil Production and Supply (thousand barrels daily). Source: U.S. Department of Environment (2007). The overall expansion of oil production masks several important changes in the structure of the industry. Allowing for substantial yearly fluctuations, it is still clear that OPEC production reached a peak in the 1970s and then plummeted in the 1980s to a trough from which it gradually recovered. However, the 1979 volume was not reached again until 2003-4. By the early 1980s, oil from non- OPEC sources (excluding Russia) accounted for more of the world total and by 2005 still exceeded OPEC production. The former Soviet Union was already a major world source of oil in 1965, but experienced a serious decline associated with the upheaval involved in the overthrow of the Communist Party and the introduction of a more extensive internal market economy after 1990 (figure 3). By the early 21st century, Russian production was again on the rise and Russia, indeed, was second only to Saudi Arabia in this regard. 4 Figure 3: Oil Production for OPEC, non-OPEC and former USSR Source: BP (2007). Looking at the distribution of world production in more detail, several trends with important socio-political implications are evident. Extraction of crude oil in the USA reached its historical maximum in 1970. Even the opening of the north Alaskan fields failed to reverse the subsequent decline with result that the volume in 2006 was only 60.3 percent of the 1970 figure (BP 2007). Despite increases in Canadian and Mexican production in recent years, the overall North American total has been declining (figure 4). The Middle East took a long time to recover from the Iranian revolution and later the Iran-Iraq war. However, by the 1990s, this region was again in a dominating position as a contributor to world supply, with Saudi Arabia alone contributing 13.5 percent. Recent declines in extraction from North Sea fields have been counteracted by increases in Russia and several former Soviet states. In addition to well established production in Nigeria, Algeria and Libya, Angola now contributes an increasing amount to the African oil supply. Venezuela remains dominant in South America, while China and Indonesia are the largest Asia-Pacific producers (BP 2007). 5 Figure 4: Oil Production by Region, 1965-2007. Source: BP (2007). Estimates of reserves should be treated with scepticism, as there is a tendency to exaggerate for various reasons, such as OPEC's allocation of quota to members according to proven reserves. That said, BP's data give rise for concern. Most informative is the ratio of reserves to annual production. This figure indicates the number of years at current production levels until no more oil can be extracted unless new discoveries are made. For the world as a whole, there remain 40.5 years of supply on this basis. For North America, the estimate is 12.0 and 11.2 years, while for the Middle East countries another 79.5 years are available (but the latter figure is probably highly optimistic). Moreover, for the period 2003-6, consumption appears to have exceeded production, which is only possible by drawing on accumulated stocks and various additives (BP 2007). Somewhat separate from the issue of global supply is the regional distribution of supply relative to consumption. As indicated in figure 5, the USA and Asia are both seriously dependent on external supplies of crude oil. Given the continued centrality of oil to their economies, coupled with the concentration of claimed reserves in the Middle East, the reliability of supply must be a fundamental political issue. This is also a core economic issue for the oil majors. 6 Figure 5: Oil consumption as percent of production, 1965-2006 Source: BP (2007, my calculations) Consumption patterns World consumption of oil products naturally shows the same overall growth pattern as the production data (figure 6).

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