March 26, 2004
George W. Bush is missing his “Nixon Goes to China” moment.
In 1972, President Nixon was able to go to Beijing and negotiate with the Communists because he was an ardent anti-Communist. Bush, the Texas oil man, has a golden opportunity to ignite fundamental change in America’s ruinous energy policies, but he hasn’t done it. And that is the single greatest failing of Bush’s presidency.
Democrats are attacking George W. Bush on many fronts: the lousy intelligence that led to the Second Iraq War, his go-it-alone foreign policy, the faltering economy, the paucity of new job creation, his penchant for deficit spending, his questionable record while serving in the Texas Air National Guard, and even his syntax and invention of words like “nucular.”Â All of those things are being used to bludgeon Bush.
But all of them pale when compared to the most important issue in America today: energy. George W. Bush’s greatest failure as the 43rd president of the United States has been his lack of serious action on energy policy at a time when the world desperately needs leadership from America. Global energy consumption is soaring. Oil and gas production is faltering. Almost every month, new studies come out that corroborate the harm being done to the world’s atmosphere by carbon dioxide, which comes from the burning of fossil fuels. And yet, Bush has done nothing to address America’s long-term energy needs or deal with the greenhouse gas problem.
The unfortunate truth about America in 2004 is that it is in the same position as it was in 1973, when the first OPEC-induced oil shocks paralyzed the country. Despite three decades of rhetoric, six different presidents, and a plethora of promises, America still doesn’t have a viable long-term energy policy. It never has. America has been stuck in the same misguided trance that has paralyzed policy makers since the Organization of the Petroleum Exporting Countries decided to shut off the flow of oil to America in early 1973. Despite all that has happened since then: additional OPEC price hikes, two wars in Iraq, and the Saudi-funded attacks on America on September 11, 2001, to name just a few, America’s policy-makers are still afflicted with acute energy myopia and a firm belief that we can produce ever-increasing amounts of energy to fill our gas tanks. And George W. Bush and his cronies are the blindest of them all.
In 2001, Vice President Dick Cheney headed the National Energy Policy Development Group, which was charged with assessing America’s energy situation. The resulting 170-page report, Ã¢â‚¬Å“Reliable, Affordable, and Environmentally Sound Energy for AmericaÃ¢â‚¬â„¢s FutureÃ¢â‚¬Â (http://www.whitehouse.gov/energy), begins by saying that America now Ã¢â‚¬Å“faces the most serious energy shortage since the oil embargoes of the 1970s.Ã¢â‚¬Â And while the report includes two chapters on efficiency and renewable energy, the bulk of the document focuses on ways to produce ever-increasing amounts of energy from coal, natural gas, and oil. The report doesnÃ¢â‚¬â„¢t mention the possibility of declining world oil production. It gives little discussion to the issue of greenhouse gases or global climate change except when discussing the benefits of nuclear power plants, which, the report says, have Ã¢â‚¬Å“a dependable record for safety and efficiency and discharge no greenhouse gases.Ã¢â‚¬Â
CheneyÃ¢â‚¬â„¢s report can be summed up thusly: America doesnÃ¢â‚¬â„¢t need more efficiency or renewable energy because thereÃ¢â‚¬â„¢s always going to be plenty of oil available. We can produce our way out of our energy predicament.
ThereÃ¢â‚¬â„¢s only one problem with that thinking: ItÃ¢â‚¬â„¢s not true. All it requires to see that it’s not true is a look at the predictions known as HubbertÃ¢â‚¬â„¢s Peak.
In the 1950s, M. King Hubbert, a geophysicist who worked for Royal Dutch/Shell in Houston, began looking at oil production trends in America. In 1956, using mathematical models, Hubbert made a bold prediction: American oil production would peak in about 1969. That’s exactly what happened. In 1970, U.S. oil production reached 9.6 million barrels per day. And despite a surge in Alaskan oil production in the 1980s, domestic production has been declining ever since. (In 2002, the United States produced about 5.8 million barrels of oil per day, about one-third of the 18.8 million barrels per day that it consumed).
In the years after Hubbert made his prediction, he was derided for his pessimism. The 1950s were perhaps the fattest times in the history of American oil business. However, a few academics and energy analysts took Hubbert seriously. One of HubbertÃ¢â‚¬â„¢s co-workers at Shell was a young geologist named Kenneth Deffeyes. In the late 1990s, Deffeyes, who was then teaching at Princeton University, decided to use HubbertÃ¢â‚¬â„¢s models on global oil production. In 2001, Deffeyes published his findings in a book called HubbertÃ¢â‚¬â„¢s Peak: The Impending World Oil Shortage. In the first chapter, Deffeyes gets right to the point: In 2003 or 2004, he predicted, world oil production will begin declining. Ã¢â‚¬Å“Ã¢â‚¬Â¦An unprecedented crisis is just over the horizon,Ã¢â‚¬Â wrote Deffeyes. Ã¢â‚¬Å“There will be chaos in the oil industry, in governments, and in national economies. Even if governments and industries were to recognize the problems, it is too late to reverse the trend. Oil production is going to shrink.Ã¢â‚¬Â
Deffeyes was not alone in his predictions. Over the past few years, an increasing number of energy analysts, including Colin J. Campbell, have been sounding the alarm about the looming downturn in global oil production. Campbell, a geologist who has been working in the oil business since 1958, is a founder of the Association for the Study of Peak Oil. His 1997 book, The Coming Oil Crisis, was among the first to look at the global oil picture. Like Deffeyes, Campbell predicts calamity in the near term, particularly for the United States, which Campbell says Ã¢â‚¬Å“is perhaps the most vulnerable to the coming crisis, having farther to fall after the boom years.Ã¢â‚¬Â
Stock analysts are also considering the decline. Art Smith, the president and CEO of John S. Herold, Inc., a research and consulting firm that analyzes the valuation and performance of the worldÃ¢â‚¬â„¢s biggest oil and gas companies, told me recently that it Ã¢â‚¬Å“seems we have hit an inflection point in the past few years.Ã¢â‚¬Â Oil companies are spending increasing amounts of money to find oil but, says Smith, they Ã¢â‚¬Å“have had relatively little success in finding big reserves.Ã¢â‚¬Â
The critical issue here is not to pinpoint the exact day that world oil production peaks. Instead, as Deffeyes points out, it is to begin thinking about what the future will hold as oil becomes scarcer and more expensive.
Of course, the world isnÃ¢â‚¬â„¢t about to run out of oil. There are many billions of barrels of oil still in the ground that can be produced. Furthermore, the idea of declining production is not new. Scientists, pundits, and oil men have been predicting that the world will run out of oil ever since the gusher blew at Spindletop in Texas in 1901. In 1939, the Department of the Interior looked at the worldÃ¢â‚¬â„¢s oil reserves and predicted that global oil supplies would be fully depleted by 1952. That didnÃ¢â‚¬â„¢t happen. Instead, global oil production has been steadily rising. World oil production has more than tripled since 1960, but there is simply no denying that the number of major new discoveries are dwindling and supplies are tightening. The globe has a finite supply of oil. At some point, the amount of oil it can produce will peak and then begin to decline. In fact, a raft of recent events suggests that the production decline has already begun.
On January 9, Royal Dutch/Shell Group, the second largest oil company on earth, announced that it had overbooked its proven reserves by 20 percent and that it would write down its asset base to reflect that fact. The announcement sent shock waves through the world energy business. ShellÃ¢â‚¬â„¢s stock price plummeted. Class action lawyers immediately began to file lawsuits against the company. The stocks of other big oil companies fell on the suspicion that they, too, had been exaggerating their oil reserve estimates.
The bad news hasnÃ¢â‚¬â„¢t stopped. A short time after announcing that its reserves were far less than it had claimed, Shell announced that its oil and gas production fell by 2 percent in 2003, that it would be flat for all of 2004, and that production would fall again in 2005. The other major oil companies had similar results. In late January, Irving-based ExxonMobil, the worldÃ¢â‚¬â„¢s biggest oil company, announced that despite record profits of $21.5 billion in 2003, its total oil and gas production fell 1 percent. The company said that it produced less energy even though it spent about $20 billion exploring for new oil and gas deposits. California-based ChevronTexaco told a similar story. It, too, had a huge profit of $7.2 billion, but its total oil and gas output fell 2 percent, even though it spent over $4 billion exploring for new energy deposits.
Given todayÃ¢â‚¬â„¢s high prices for oil and natural gas, every oil and gas company, large and small, is desperately trying to increase production. They are drilling for oil in ever-more remote locations. Last September, I visited the Ursa platform, a gigantic offshore rig owned by Shell that cost more than $1 billion to construct. Located in 4,000 feet of water, the platform sits 130 miles south of New Orleans. Other oil companies are doing the same thing, spending ever-increasing amounts of money to produce oil and gas from ever-deeper water in Africa, the Gulf of Mexico, the Caribbean, and elsewhere. But they are getting less and less for their efforts.
Indeed, a quick look at ExxonMobilÃ¢â‚¬â„¢s annual reports shows that the companyÃ¢â‚¬â„¢s energy production has been flat or declining for the last six years. In 1998, the companyÃ¢â‚¬â„¢s production of oil and gas totaled 4.27 million barrels of oil equivalent per day. (The oil equivalent figure combines total oil and gas production into one figure.) In 2003, the oil giant produced 4.20 million barrels of oil equivalent per day.
Even Saudi Arabia, the worldÃ¢â‚¬â„¢s biggest oil producer, is apparently having trouble growing its production. The country is currently producing about 9 million barrels of oil per day. And the Department of Energy has predicted that the Saudis will need to produce about 19 million barrels a day by 2020 in order to meet surging world demand. Increasing numbers of people inside Saudi Arabia and elsewhere contend that the country may not be able to increase its production much beyond current levels due to the depletion of some of its major oil fields, including the biggest oil field ever discovered, Ghawar. Discovered in the late 1940s, Ghawar now accounts for half of Saudi ArabiaÃ¢â‚¬â„¢s total production, but the field has apparently begun to decline. The New York Times recently quoted an Iranian oil executive as saying that the decline in production from Ghawar Ã¢â‚¬Å“set bells ringing all over the oil world because Ghawar underpins Saudi output and Saudi undergirds worldwide production.Ã¢â‚¬Â
Saudi Arabia isnÃ¢â‚¬â„¢t the only problem area in the Persian Gulf. Oil production in the Persian Gulf has been flat since 1997. According to the Energy Information Administration, a division of the U.S. Department of Energy, the entire region produced about 18 million barrels of oil per day in 2002, about the same amount as five years earlier. Iraq, the country with the second largest oil reserves (100 billion barrels) in the world, is having great difficulty exporting any additional oil beyond the 1.5 million barrels per day now being produced. ThatÃ¢â‚¬â„¢s less than half the amount that Iraq was producing in 1979, before Saddam Hussein got his country entangled in a bloody war with Iran.
Billions of dollars of new investment will be needed in IraqÃ¢â‚¬â„¢s oil fields in order to increase production. But even if that investment is made, itÃ¢â‚¬â„¢s increasingly doubtful that any headway is possible given the chaos engulfing the country. One of the countryÃ¢â‚¬â„¢s main export pipelinesÃ¢â‚¬â€the line that carries oil from the huge oil fields near Kirkuk to the Turkish port of CeyhanÃ¢â‚¬â€has been bombed repeatedly since last June. In mid-February, insurgents bombed IraqÃ¢â‚¬â„¢s primary north-south oil artery, the Strategic Pipeline. The attack near the Shiite city of Karbala led to an oil fire that, according to a Reuters report, burned for more than week. The bulk of the oil now being exported from Iraq must go through the oil loading terminal at Mina al-Bakr on the Persian Gulf, and that terminal is near capacity.
AmericaÃ¢â‚¬â„¢s corporate proxy in Iraq, Halliburton, has been working night and day to rebuild the damaged pipelines, but it is having little success so far. Furthermore, the bombing of the Strategic Pipeline indicates that the sabotage efforts of the insurgents are becoming more widespread.
Finally, in early February, OPEC members tentatively agreed to cut its production by one million barrels of oil per day, beginning in April. The cuts are happening because the oil exporting countries want to ensure that the price of oil stays above $30 per barrel.
I could provide many more examples of why world oil supplies are tightening, but the simple truth is that HubbertÃ¢â‚¬â„¢s Peak is upon us. The issue is being discussed at virtually every major energy conference and industry gathering. And itÃ¢â‚¬â„¢s happening at a time when demand for energy is increasing dramatically. In January, the International Energy Agency estimated that worldwide demand is growing by nearly 2 percent per year. In February, ExxonMobil predicted that worldwide energy demand will have grown by 40 percent by 2020. In short, more and more people on planet Earth are vying for fewer and fewer resources. The surge in demand is coming primarily from two of the fastest growing countries on Earth: China and India. According to the IEA, China is the fastest-growing market for petroleum. During the third quarter of 2003, ChinaÃ¢â‚¬â„¢s oil consumption grew by a blistering 16 percent. The countryÃ¢â‚¬â„¢s demand is increasing thanks to its rapidly growing economy and rapidly rising income levels. And it is axiomatic that as income levels rise, so does energy usage. As people move into the middle class, they want to buy cars, TVs, air conditioners, and other products that use oil and electricity.
World oil markets might be able to absorb ChinaÃ¢â‚¬â„¢s burgeoning demand if energy demand in the United States slows down or declines. But it isnÃ¢â‚¬â„¢t. Instead, itÃ¢â‚¬â„¢s rising. Between 1990 and 2000, AmericaÃ¢â‚¬â„¢s total energy consumption increased by 16 percent, to the equivalent of nearly 48 million barrels of oil per day. AmericaÃ¢â‚¬â„¢s share of world energy consumption is rising, too. From 1990 to 2000, U.S. energy use increased from 25.3 percent to 27.3 percent of total world consumption. In 2000, Americans burned more fuel than all of the countries of Europe combined.
This is not to say that America shouldnÃ¢â‚¬â„¢t use energy or that thereÃ¢â‚¬â„¢s anything inherently bad about AmericaÃ¢â‚¬â„¢s energy usage. These facts simply underscore an obvious truth: AmericaÃ¢â‚¬â„¢s economy was built on cheap energy, and America must continue to have cheap energy in copious quantities to continue having a high standard of living. But the era of cheap oil is over. As production declines and consumption increases, prices will rise and that will have devastating effects on the American economy.
BushÃ¢â‚¬â„¢s Failing and His Opportunity
George W. Bush doesnÃ¢â‚¬â„¢t recognize any of these facts. Instead, his only discernible energy policy move has been to ignore the energy precipice on which America now teeters. The Second Iraq War, like the First Iraq War, was fought in order to gain a measure of control over the oil that flows out of the Persian Gulf. America is now spending about $1 billion per week to keep U.S. troops in Iraq. And those troops are likely to be there for the foreseeable future. But all of that expense, in both human lives and dollars, hasnÃ¢â‚¬â„¢t made AmericaÃ¢â‚¬â„¢s energy supplies in the Persian Gulf any more secure. Nor have they allowed the region to produce any more oil.
And therein lies my chief complaint with George W. Bush. As a Texan and as an oilman, he is in a unique position to effect a truly radical change in AmericaÃ¢â‚¬â„¢s energy policies. Bush has the political capital to deliver a clear and compelling message to the worldÃ¢â‚¬â„¢s biggest oil companies and to the American people. That message could be a simple one. IÃ¢â‚¬â„¢ve even gone to the trouble of drafting his speech, which could go something like this:
My fellow Americans, our country has grown strong and prosperous thanks to our vast energy reserves. We have a wealth of coal, natural gas, and oil, and we are going to be dependent on those fuels for many decades to come. But the time has come to use them more wisely, more efficiently. Four decades ago, President John F. Kennedy challenged America to put a man on the moon within 10 years. With great courage and at great sacrifice, that goal was achieved. Today, we face a challenge similar to the Space Race. We must become more self-sufficient and more judicious in our energy spending habits. Today I am introducing the Mother of All Energy Bills, a decade-long, $1 trillion research effort that will spur the development of fuel cells, photovoltaic cells, ultra-high-efficiency power plants, zero-emission engines, and other technologies that can help reduce our emissions of carbon dioxide. We must begin this effort today. And we must be totally committed to it.
Bush is in a unique position to effect fundamental change in our energy policy. He spent much of his childhood and adult life in and around the energy business. Practically every energy baron in America has given money to George W. BushÃ¢â‚¬â„¢s political campaigns. His cronies in the energy industry largely funded his race for governor of Texas. Bush wonÃ¢â‚¬â„¢t have any trouble selling this plan to the oil industry. Sure, Big Oil Big Shots like Lee Raymond, the boss of ExxonMobil, have never embraced energy efficiency. But BushÃ¢â‚¬â„¢s message for them is simple:
Gentlemen, youÃ¢â‚¬â„¢re making record profits now. YouÃ¢â‚¬â„¢re going to keep making big profits in the future because the era of cheap energy is over. But you need to join me in this quest for greater efficiency and alternative energy forms because it is in your long-term best interest. The more goodwill you have from the American people, the more profits youÃ¢â‚¬â„¢ll make in the long run. And besides, IÃ¢â‚¬â„¢m one of you.
Bush can justify his actions by looking to the history books for guidance. Most of the recent presidents can point to a single achievement that defines their place in history. For Lyndon Johnson, it was civil rights. For John Kennedy, it was the space race. For Ronald Reagan, it was cutting marginal income tax rates. For Richard Nixon, it was going to China, a move that began the normalization of relations between the United States and the Communists.
Nixon didnÃ¢â‚¬â„¢t go to China until his fourth year in office. George W. BushÃ¢â‚¬â„¢s fourth year in office has just begun. And yet, despite the energy disaster that is awaiting the United States, Bush has done nothing. In fact, his administration has gone backward, taking steps that will ensure that energy consumption in the United States rises even faster than it would have normally. In mid-2003, as part of BushÃ¢â‚¬â„¢s massive tax cut package, Congress inserted a special tax break that allows businesses to deduct up to $100,000 for the cost of an automobile if that vehicle weighs at least 6,000 pounds. This tax break was quickly dubbed the Ã¢â‚¬Å“Hummer deductionÃ¢â‚¬Â because it applies only to the very largest SUVs currently on the market.
In addition, the Bush Administration has largely ignored the gains that could be made by increasing the Corporate Average Fuel Economy, or CAFE, standards, which require automakers to gradually increase the fuel efficiency of the vehicles they produce. The gains that could be made through more efficient automobiles are sizable. Since the CAFE standards were mandated in 1979, the efficiency of the American fleet has increased by some 22 percent. But thatÃ¢â‚¬â„¢s not enough. In fact, the United States is actually driving backward when it comes to fuel efficiency. Vehicles made in America today are about 7 percent less efficient (on a miles per gallon basis) than they were in 1987. In other words, the big gains in mileage efficiency were made in the first eight years after the CAFE standards went into effect. Since then, weÃ¢â‚¬â„¢ve made no significant improvements.
The BushÃ¢â‚¬â„¢s AdministrationÃ¢â‚¬â„¢s decision to ignore the looming global energy crisis verges on criminal. Bush has certainly earned a place in American history. His misbegotten rush to send American troops into the Second Iraq War will likely be the headline for his entry in the history books. But there should be another entry: one recalling that Texas oil man George W. Bush was the president who, when faced with HubbertÃ¢â‚¬â„¢s Peak and the myriad of dangers that came with it, kept his head firmly up his own tailpipe.
Robert Bryce’s new book, Cronies: Oil, The Bushes, and the Rise of Texas, America’s Superstate, will be published in June.
Ã‚Â© Texas Democracy Foundation
March 26, 2004