Escaping the Resource CurseA message for us all

Richard O’Rourke, ASPO Ireland, October 2007

Macartan HumphriesAssist. Prof. of Political Science, Columbia University, New YorkJeffrey SachsDirector, Earth Institute, Columbia University, New YorkJoseph StiglitzProfessor, Columbia University, New York

Nobel Prize winning economist, Joseph Stieglitz, Head of the UN Millennium Project, Jeffrey Sachs, and fellow Irishman, Macartan Humphries, recently edited a collection of papers dealing with the peculiar phenomenon: the resource curse, observed in resource rich (oil specifically) developing countries whose people remain impoverished despite the nations apparent wealth. Having studied the collection, four specific messages resonated with my broader study of the ‘Peak Oil’ problem, namely:

- a call for greater transparency- oil is a depletable resource, Fig 3.7

- selling oil is really a form of asset disposal, ‘selling the family silver’ (pg 170)

- prepare an exit strategy (pg 191)

Kuwait will never disclose the size of its oil reserves for reasons of national security, Oil Minister Sheikh Ali Al-Jarrah Al-Sabah was quoted as saying after Kuwait announced a new oil find.

Industry newsletter Petroleum Intelligence Weekly (PIW) said in January 2006 it had seen internal Kuwaiti records showing reserves were about 48 billion barrels — half the officially stated 99 billion, or some 10 percent of global oil reserves.i

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On the first point, a call for greater transparency, which is repeated throughout the book, attention is drawn in particular to Dr. Heals’ paper ‘Are Oil Producers Rich?’ in which he argues that most conventional statements of national income overestimate the incomes of such countries by failing to account for resource depletion. He has quite reasonably used the officially quoted figure for Saudi Arabia’s proven reserves of 262.7 billion barrels of oil to make his point that images of ‘extreme’ abundance may be misplaced. I outline below how such misconceptions may be more so. He extends the point in the subsequent paragraph referring to Saudi Arabia’s daily production of 8 million barrels of oil daily (although the latest edition of BP’s statistical reviewii puts the Saudi production level at almost 11 million barrels, 13.1% of the 81.7 million barrels produced daily in 2006).

These two numbers, proven reserves and annual production, are important for different but implicitly related reasons. The founder of ASPO, Dr. Colin Campbell(New Scientist Ref), a retired oil geologist now living in Ireland, has campaigned tirelessly for much of the last ten years on the issue of transparency around oil reserve and production reporting. In particular he has drawn attention to apparent discrepancies between what is reported and what might reasonably be estimated as reserve figures for some of the OPEC producers.

In the 1980s OPEC decided to switch to a quota production system based on the size of reserves. The larger the reserves the larger the production quota and consequently the revenue generated. In 1984 Kuwait revised upwards its reserve estimates by 50%. It was soon followed by the United Arab Emirates, Iran, and Iraq. In 1988 Saudi Arabia revised its reserve estimates, adding 88bn barrels. The average price for oil that year was $16/barrel, down from an average the previous year of just over $19/barreliii.

As a footnote to the opening news article on Kuwait’s oil reservesiv:

The resignation on 30 June of Kuwait’s Oil Minister Shaikh ‘Ali al-Jarrah al-Sabah after a cabinet meeting brought to a conclusion

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the latest bout of political infighting between the opposition-dominated National Assembly and the government.

Since Kuwait’s official oil reserves figure of 101.5bn barrels was challenged by the industry press in early 2006 (MEES, 30 January 2006), the government has been under pressure to present an accurate picture of national oil reserves to MPs. Former minister Shaikh ‘Ali al-Jarrah in mid-2006 promised MPs a full report on reserves but later went back on this commitment.

Neither of these latest figures (51bn barrels or 24bn barrels) has been officially endorsed, but the 24bn barrel figure, if true, represents a 75% reduction in officially-stated Kuwaiti reserves. As such, it represents a political bombshell that will undermine the government’s credibility and have major reverberations outside the country.

This summer, in what can only be described as a very frank interview with the International Energy Agencies’ Chief Economist, Fatih Birol, he called for greater transparency when reporting oil reserve datav:

Y a-t-il des raisons de s’attendre à des mauvaises surprises de ce côté-là ?

Je crois que le gouvernement saoudien parle de 230 milliards de barils de réserves. Je n'ai pas de raison officielle de ne pas y croire. Cependant l'Arabie saoudite de même que les autres pays producteurs et les firmes internationales devraient être plus transparents dans la présentation de leurs chiffres. Car le pétrole est un bien très crucial pour nous tous, et notre droit est de savoir, selon des standards internationaux, combien de pétrole il nous reste.

On the second point, oil is a depletable resource, Mr. Fatih Birol warned that there will be a peak in 2015 of non-OPEC oil production coinciding with China’s economic expansion:

Les capacités de production existent-elles pour répondre à une telle

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augmentation de la demande ?

D’ici à 2015, le marché et l’industrie du pétrole vont être sévèrement mis à l’épreuve. D’ici cinq à dix ans, la production pétrolière hors-OPEP va atteindre un maximum avant de commencer à décliner, faute de réserves suffisantes. Il y a chaque jour de nouvelles preuves de ce fait. Au même moment aura lieu le pic de la phase d'expansion économique de la Chine. Les deux événements vont coïncider : l'explosion de la croissance de la demande chinoise, et la chute de la production hors pays de l'OPEP. Notre système pétrolier sera-t-il capable de répondre à ce défi, c’est la question.

Predicting when OPEC will peak, which will determine a global peak, is now the subject of much concerned debate. Oil demand projections prepared by the IEA, the EIA, and OPEC, all show it growing to over 100 mbpd by 2020, largely driven by growing demand in the developing world and China in particular. In contrast, the oil industry expresses serious concerns about its ability to supply in excess of that thresholdvi and there are those that are speculating that global oil production is peaking as we speakvii. Greater transparency over Middle East oil reserves is critical to getting an accurate picture of the situation.

i ‘Kuwait oil reserves secret for national security’, Arab Times, May 2007ii BP Statistical Review of World Energy, 2007iii Energy Information Agency, US Dept. of Energy

(http://tonto.eia.doe.gov/dnav/pet/hist/rwtcA.htm)iv Candidates For Oil Portfolio Emerge As Kuwait Plunges Into New Reserves Row,

Middle East Economic Survey, July 2007v ‘Sans l'or noir irakien, le marché pétrolier fera face à un "mur" d'ici à 2015’, Le Monde,

June 2007vi "Petroleum Investment: Perspective from an International Oil Company" - Mr.

Christophe de Margerie, President, Exploration & Production, Total, Third OPEC International Seminar, September 2006

vii Matt Simmons, interview: Future Shock: End of the Oil Age, RTE, June 2007

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Projections of world oil demand for 2020viii

Mr Birol also advises us that we must get used to the current high oil price and the challenge that will be for developing nations:

Depuis 2005, la hausse du prix du baril s’est confirmée : le prix actuel, proche de 70 dollars, est un signal important pour les grands pays consommateurs.

L’économie a accepté quasiment sans difficulté cette augmentation du prix du baril.

Vous avez raison, l’économie riche l’a acceptée. Mais le monde ne s’arrête pas aux pays riches. L’Afrique est en grande difficulté. La dette se creuse pour acheter le pétrole. Pour les générations futures, il y a là quelque chose de grave.

UN Foundation Chairman, Ted Turner, also highlighted this problem in his speech at a WTO meeting last yearix:

“Ten years ago, when the world agreed on debt relief for the poorest countries in Sub-Saharan Africa, the price of oil was 22 dollars a barrel. Over the last four years, the price has more than tripled. Higher oil prices now cost Ethiopia 5 times as much as they are gaining from debt relief. Other developing countries who import oil face the same burdens.

viii World Oil Outlook 2007, OPEC, June 2007ix World Trade Organization Public Forum, Geneva, September 2006

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Gambia now spends six times as much money on fuel as it does on health. Sierra Leone now spends twice the money on fuel as it does on all efforts at poverty reduction combined.

And the energy problems of developing nations go beyond higher budget expenditures. Most of Sub-Saharan Africa has no electricity at all. In many countries, women gather and carry loads of firewood for miles each day.”

It is interesting that Mr Turner continues in this speech to advocate strongly the opportunity presented by biofuels. Just weeks prior, Lestor Brown warned in a Washington Post Op-Ed articlex:

Whenever the food value of a crop drops below its fuel value, the market will convert it into fuel. Ultimately, this dynamic risks driving up world food prices, destabilizing governments in low-income nations and disrupting global economic growth.

And only five months later the New York Times reportedxi:

Tens of thousands of workers and farmers filled this city’s central square on Wednesday to protest spiralling food prices, ratcheting up the volume over a problem that has dogged President Felipe Calderón in his first weeks in office.

I participated in a one week workshop on the Millennium Development Goals (MDGs) at the UN HQ in New York last summer organized by the Buckminster Fuller Institute. As I immersed myself in the goals, understanding their objectives, and evaluating initiatives, I couldn’t help but be struck by the fact that 20% of the world’s population currently use 80% of all energy consumed. Non-OPEC oil production will start to go into decline (and hopefully not sooner) to coincide with the target date for the achievement of the MDG’s.

x ‘Starving the People To Feed the Cars’, Washington Post, September 2006xi ‘Thousands in Mexico City Protest Rising Food Prices’, New York Times, February

2007

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On the third, and in my opinion the most significant, point, ‘selling the family silver’:

The figures suggest that no resource-rich countries are attaining appropriate investment levels: All are depleting their natural capital and not replacing it with any other form of capital, a sure road to poverty in the long run.xii

Given the focus of my studies over the past two years I was immediately struck by the question ‘Is it not also true of a resource-poor country?’ Ireland is a case in point; total energy import dependency was 90% in 2005xiii.

Over the last fifteen years Ireland’s Total Primary Energy Requirement (TPER) has grown on average 3.4% per annum to 15,600 ktoexiv in 2005 (64% in absolute terms). Ireland must import all its oil, some 200,000 barrels per day (bpd). Per capita, this translates to a TPER of 102,000 kcal per day – compared to the 2,500 kcal consumed by the average person. Ninety percent of that is ‘family silver’ acquired from an energy exporter.

While Ireland’s economy has been the envy of its European partners throughout this period, GDP grew by over 250% between 1990 and 2005, a closer inspection reveals that, in terms of sustainability, it has not invested its energy capital wisely, instead creating a society which demands continued consumption of largely imported energy. Examining Ireland’s residential sector is instructivexv:

xii ‘Are Oil Producers Rich?’, Escaping the Resource Curse, Geoffrey Heal, 2007xiii ‘Energy in Ireland 1990 – 2005, Trends, issues, forecasts and indicators’, SEI,

November 2006xiv ktoe: kilotonnes oil equivalentxv Energy Consumption and CO2 Emissions in the Residential Sector, 1990 – 2004,

Sustainable Energy Ireland, December 2005

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Residential Sector Energy Balance 2004

In 2004 the “average” dwelling consumed a total of 57,700 kcal/day of energy and was 112 square metres in size (515 kcal/day/m2). There were an estimated 1.44 million permanently occupied dwellings in the State at the end of 2004, an increase of 43% (2.6% per annum) over 1990. Building these dwellings has been an enormous investment of both financial and energy capital but because of how they’ve been built (‘high’ energy consumption per square metre) and located (low density, sprawling suburbs with poor public transport infrastructure) Ireland has engineered a society that must continue to depend heavily on imported fossil fuels to sustain itself, an ultimately unsustainable situation. To re-engineer a sustainable energy society will require further significant investment of both financial and energy capital just at the time when we can only expect the cost of energy to rise as its availability declines.

If we believe it is prudent to manage the risk of oil supply going into decline at some point in the not-too-distant future, the challenge facing Ireland’s newly elected coalition government and it’s newly appointed energy minister, Deputy Eamon Ryan, T.D., in particular, comes into sharp relief. Holding office during a period of

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sustained energy price increases and potential disruptions of supply is unenviablexvi.

The Minister for Communications, Energy and Natural Resources, Eamon Ryan T.D., has announced that funding for housing developers to build more sustainable energy houses, will now require builders to ensure that the units they build are 60% more efficient than the requirement under current building regulations.

The Minister announced the new provision at an event to mark the fifth anniversary of the establishment of Sustainable Energy Ireland (SEI). Speaking at the event, Minister Ryan said: “The last five years have been marked by many ground breaking initiatives, led by SEI, which give us a good basis for moving ahead. The hallmark of the next five years will be accelerated and intensive delivery of change to ensure a truly sustainable energy future for Ireland.”xvii

On the final point, prepare an exit strategy, Dr. James Schlesinger, former US Secretary of Defence during the first oil crisis and Secretary of Energy during the second, warned before the US Senate Committee on Foreign Relations in 2005xviii:

‘In the long run, unless we take serious steps to prepare for the day that we can no longer increase production of conventional oil, we are faced with the possibility of a major economic shock – and the political unrest that would ensue.’

In a separate article he remarksxix:

‘It is interesting to note, in light of the recent discussion of Chinese ambitions in acquiring oil assets, that the Chinese seem

xvi ‘Vote for me, dimwit - How the electorate is irrational’, Lexington, The Economist, June 2007

xvii ‘Minister Ryan Moves to Align Schemes with New Programme for Government.’, press release, Dept. Communications, Energy, and Natural Resources, Irish Government, June 2007

xviii Statement of James Schlesinger before the Committee on Foreign Relations, United States Senate, November 2005

xix ‘Thinking Seriously about energy and oil’s future’, James Schlesinger, The National Interest, 2005

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to believe that world production will reach a peak around 2012.’

In complete contrast and just last month, Michael Spence was quoted in a speech given in Shanghai, that he could not ‘see anything in the way’ of continued economic expansion for decades to come. A problem of asymmetric information?

Spence, who won the Nobel Prize for Economics in 2001 for his contribution to the analysis of markets with asymmetric information, however, says: "The economy is more global in every dimension and it just seems to me that there is lot of potential. The reason I am optimistic is that I don't see anything in the way; your government seems to understand perfectly the dynamics (required for sustained high growth)."xx

In early 2005 the US Department of Energy commissioned a risk mitigation study on Peak Oil. Prepared by the Science Applications International Corporation (SAIC), and titled "Peaking of World Oil Production: Impacts, Mitigation and Risk Management", it is known commonly as the Hirsch Report after its primary author Robert L. Hirsch. The executive summary of the report warns that "as peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking." We may not be so lucky as to have ten years to implement a mitigation program and would do well to manage that risk by insisting on greater transparency.

My recently completed masters in sustainable energy made it clear that there is no quick fix and no mix of sustainable solutions that will allow us to enjoy the same per capita energy consumption that we now do in the developed world. And while there are ample opportunities to reduce our current level of ‘spend’, to really get us to a

xx 'Rapid growth to sustain 20 years', China Daily, June 2007

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sustainable level while continuing to enjoy a relatively high standard of living will require capital investment and certainly more importantly, a profound and fundamental change in our attitude towards energy and how we use it. Our collective behaviour, however, based on the desire and expectation of ever more people to continuously ‘raise’ our standard of living and consume more is clearly at odds with this. We’ve grown up in a world that demands economic growth. I can’t imagine an Irish person would enjoy any more than a Chinese person being told that they will have to figure out how to get by using less energy. The poor and vulnerable in our society will suffer first and hardest as energy prices stretch beyond their means, and with our fossil-fuel dependent industrial agricultural and distribution system, food prices must surely follow suit.

In summary, it has been refreshing to read a consistent call for greater transparency and repeated statements that oil is a depletable resource. The call to treat oil revenue as an asset disposal and to prepare an exit strategy for the day when that revenue will no longer be available is simple yet profound. While clearly outside the scope of ‘Escaping the Resource Curse’, I suggest that for the oil producer to treat its sale as an asset disposal then it must follow that the oil purchaser is in turn acquiring an asset. How it chooses to invest that asset is critically important and I have pointed out the challenges a heavily oil import dependent country like Ireland faces as this resource is depleted. The challenge is to maintain a high standard of living for all its citizens while living within the limits of its energy current account, a sustainable level.

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