When the Gas Pumps in Europe Run Dry

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When the Gas Pumps in Europe Run Dry

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It is unusual for a well-known European politician to make the rounds soliciting better trade conditions. It is even more unusual that two influential Europeans visit the same region within a matter of weeks to express Europe's interest in an important commodity. That's the way it was earlier this year when German Chancellor Gerhard Schroeder and EU Energy Commissioner Andris Piebalgs both visited the oil-rich Persian Gulf region.

In February Schroeder made a stop in Kuwait during his weeklong trip through seven Persian Gulf countries. There he expressed his unease about the high oil prices by stating, "We are very, very concerned." He added, "We are interested in the most reasonable oil price as possible." Schroeder also had a solution for rising oil prices: Increase production.

At the beginning of April Piebalgs also visited Kuwait, voicing interest in good trading relations with the Persian Gulf countries and other OPEC members. Piebalgs met with Kuwaiti Minister of Energy Sheik Ahmed Fahad al Ahmed al Sabah, who is also the chairman of OPEC, to discuss stabilizing the price of oil.

Europe's dependence on foreign energy

Thirty years after the oil shock resulting from the Yom Kippur War, Europe is still dependent on foreign energy sources. It has been possible to slow the consumption of oil through other sources of energy (especially natural gas) but not to reverse the ever-increasing demand. At the beginning of the 1970s it took 12 million barrels of oil to meet Europe's daily needs. By 2001, European consumption had grown to 14.4 million barrels daily.

Europe's energy demands increase 1 percent to 2 percent a year, small in comparison to the increased energy usage in the United States. Since 1991, oil consumption in the United States has increased 17 percent compared to 7 percent for the "old" European countries. However, its smaller increase in oil consumption does not change the fact that Europe is heavily dependent on foreign energy sources.

Piebalgs emphasized the importance of energy in the daily lives of Europeans: "Energy affects every aspect of our life—it gives us light, heating, and provides us with fuel allowing us to use transport and various appliances. Did you know that in 2030 most—70%—of European Union's energy needs will have to be covered with imported energy, if the current energy consumption trends in Europe are not reversed?"

The estimates of the European Commission for the two most important energy sources are sobering. By the year 2030 the EU would have to increase total oil imports from 75 percent to 90 percent. Currently OPEC countries supply half of the EU's oil imports. The increase in oil consumption could be contained by using more natural gas, but the EU is also dependent on foreign sources for gas. If present trends continue, the EU will have to increase importation of natural gas from 40 percent to 70 percent of total consumption by 2030.

Europe is an example of how global developments can affect an area that is lacking its own energy sources. Since the oil embargo of 1973, Europe has tried to improve energy conservation, but despite a measure of success, Europe is faced with increased energy costs—because the demand for energy worldwide is growing and the supply is limited. Speculation about an increase in the price of oil to $100 per barrel by summer has led Commissioner Piebalgs to consider an EU speed limit of 55 miles per hour, which would represent a drastic change for Europeans' driving habits.

Growing demand for oil worldwide

With a share of 40 percent, oil remains the largest component in the world's energy equation. Even though natural gas usage is expected to increase (it is currently 20 percent of world energy consumption), oil will retain its share.

The economic law of supply and demand cannot be avoided when it comes to the price of oil. The equation is quite simple: Worldwide demand is increasing and production is either stagnating or not increasing fast enough.

The increase in demand is often attributed to China's growing consumption of oil. China's annual consumption has grown each year for over a decade. However, energy consumption in America and Europe is growing as well. There doesn't seem to be any limit to America's thirst for oil.

Despite being in third place on the list of oil producers with an estimated 7.5 million barrels pumped a day, America is the only major oil producer dependent on imports. With its consumption of 20 million barrels a day, America is the unchallenged leader in oil usage, leading China by more than a 3 to 1 margin. Even more amazing is a UN analysis showing that the United States consumes about 25 percent of all fossil fuels (coal, gas and oil) burned worldwide.

During the first 90 years of its oil production, America needed no imports whatsoever. Just a few years after World War II America needed to import oil to meet its needs, and imports now make up about 60 percent of daily consumption. Some of that oil comes from America's neighbors like Mexico, but 15 percent of the oil used in the United States is imported from Saudi Arabia.

Oil consumption in China has grown by 150 percent in the last 10 years, including last year's increase of 14 percent. Two years ago, China replaced Japan as the world's second-largest consumer of oil.

Will tight oil market soon ease?

Some observers believe that the recent spike in oil prices is only temporary and will be relieved by the end of the year because of a "hard landing" in the booming Chinese economy. True, a slowdown in China's economic growth could help ease world oil markets. However, it is a complete illusion to believe that this will permanently solve the world oil crisis.

The energy crisis of the 1970s proves the point. A worldwide economic slowdown and better fuel efficiency—even in the United States—alleviated tight market conditions. The result was that world oil consumption in 1993 was only slightly more than at the height of the crisis in 1979.

Oil consumption grew at a fast pace in the 1990s. The current high price for oil on world markets is all the more remarkable in view of the general economic slowdown in Western countries. How much oil would be consumed if growth rates in industrialized countries were to reach the level of the mid 1990s?

Regardless of what happens in the West, demand for oil in Asia will continue to rise. The potential for increased consumption appears to be sky-high. Just look at China's per capita consumption when compared to the United States: Each American consumes on average 24 barrels of oil a year. A Chinese citizen, by contrast, uses only two barrels of oil annually.

However, China's economic development is producing a Chinese "middle class" that wants to own and drive cars. Consider this: China's per capita oil consumption is about one third as high as Mexico's, and Mexico's is 75 percent less than in the United States. If per capita consumption in China were to rise to the level of Mexico's, world oil production would have to double to meet the increased demand!

And China isn't the only Asian country with a growing appetite for oil. India and its more than 1 billion people are using more oil each year—11 percent more last year alone. The growth rate in Indian oil consumption means that India will soon replace Germany as the world's fifth-largest oil consumer. Within seven years, daily oil consumption in India will reach 5 million barrels; and by the year 2020 India will be the third-largest consumer and importer of oil, trailing only the United States and China.

Limited supply

The situation in countries like China and India is different from that of the United States or Western Europe. Years of continued development lie ahead of China and India for their people to have a standard of living similar to that of the West. The only way that goal can be achieved is for world oil production to increase.

There's just one problem: Where is the additional oil going to be produced? Experts point out that there has not been a major new oil discovery in the last 30 years. Oil production in countries that are major producers but also big consumers—America, China, Russia, the United Kingdom and even Mexico—has peaked or will peak soon.

England is a prime example of declining oil production. The North Sea fields (British and Norwegian) produced about 9 percent of the world's oil in 1998. With their North Sea fields the British were net exporters of oil for more than 20 years. With the decline in British North Sea production, the British are again among the net importers of oil, and the economic viability of their North Sea oil fields is predicted to be minimal in another 10 years.

In view of current trends, former British Secretary of Energy David Howell predicts the demand for oil will reach 122 million barrels daily by 2025. Current daily consumption is estimated to be about 82 million barrels, about 35 percent more than the 60 million barrels consumed daily in 1980.

Why haven't any major oil fields been found in recent years? Some experts believe that they have all been found. In addition, some of the major fields currently utilized have already reached the mid-point of their economic viability. Once that happens, oil production peaks and then drops rapidly, simply because more and more pressure is needed to pump the remaining oil to the surface.

One thing is sure: In the long term the price of oil can go no place but up. The question isn't if but when.

"It's every man for himself"

Considering the tight conditions on world oil markets and the expectation of future supply problems, it is only prudent that the European Union seek improved trade relations with the Persian Gulf region. Doing nothing would be a fatal mistake, especially since other countries are looking out for their own needs.

China's leaders know how vulnerable their country's economic development is when it comes to oil. "Since 2003 China's foreign policy is geared to securing raw materials and energy worldwide... In international circles concern is growing that authoritarian China could use its military muscles to secure its energy needs" (Die Welt, March 14, 2005).

Military intervention as a means of securing raw materials is nothing new. Many experts view the Japanese attack on Pearl Harbor in December 1941 as a response to America's prohibition on exporting scrap iron and other materials to Imperial Japan for its war machine.

America also knows how to protect its economic interests. In his book A Century of War: Anglo-American Oil Politics and the New World Order, American author F. William Engdahl takes his readers through a history of the oil industry's influence on the world economy.

Engdahl sees America's intervention in Iraq as part of a struggle over oil reserves: "Today, much of the world is convinced the Bush Administration did not wage war against Iraq and Saddam Hussein because of threat from weapons of mass destruction, nor from terror dangers. Still a puzzle, however, is why Washington would risk so much in terms of relations with its allies and the entire world, to occupy Iraq... It is increasingly clear that the US occupation of Iraq is about control of global oil resources... The Iraq war is but the first in a major battle over global energy resources" ("Iraq and the Problem of Peak Oil," Current Concerns, 2004, No. 1).

The problem of tight supply could be addressed if all oil-consuming nations were willing to agree on a common standard of living for the people of the world. There is just one catch: The world's energy resources are insufficient to provide everyone with a Western standard of living. So the world's richer countries would have to be willing to lower their standard of living in order to raise the standard in poorer countries. Human history teaches us that no such agreement will be made.

The fact that disagreements over material possessions can lead to war is no new revelation. Nearly 2,000 years ago the apostle James wrote: "What causes fights and quarrels among you? Don't they come from your desires that battle within you? You want something but don't get it. You kill and covet, but you cannot have what you want. You quarrel and fight" (James 4:1-2, NIV).

As long as oil remains the primary energy source for the world economy, tensions will increase in the world oil market and among oil consuming nations. Like China and the United States, the European Union has no other option but to pursue foreign policy and promote trade relations to secure a stable supply of oil.

Which region of the world will be of greatest interest to these world leaders? Can it be any other than the region having the most proven reserves and the highest production capacity? Half the world's remaining oil supply can be found in five Persian Gulf countries: United Arab Emirates, Iraq, Iran, Kuwait and Saudi Arabia. Will the European Union succeed in defending its interests in the region? WNP