July 2005: Peak Oil and the End of Globalization

U.S. dependence on oil drives its efforts to control what's left
July 1, 2005

When Paul Martin met with George Bush and Vicente Fox in Texas last March to chart further continental integration (while Martin’s neo-liberal competitor for the Liberal Party crown, John Manley, was pushing for even further subordination of Canada’s economic and political sovereignty to American interests),  all of Canada’s political-economic élite seemed blissfully ignorant that globalization, as we know it, is about to implode. Canada is increasingly tying itself to a falling star—the American Empire.  The reason it’s falling? Peak oil and the related phenomenon of global warming.

Increasingly, both opponents and supporters accept that globalization is really just another name for the expansion of the American Empire in the post-cold-war period. (For documentation, see James Petras and Henry Veltmeyer, Globalization Unmasked published in Canada by Fernwood in 2001.)  The connection to oil is very direct. The American economy is not only based on oil, it is dependent on oil, and as North American supplies of oil decline, the American Empire must necessarily expand, by force if necessary, to incorporate more and more of the world’s dwindling sources of petroleum within its economic control.

But let us step back a bit and explore the connection between energy and empire. In the industrial era, the first empire was that of the British which, though initiated by the military superiority of its navy, was consolidated by an industrial revolution based on the original industrial fossil fuel, coal.  By the Great Exhibition of 1851, England had become the “workshop of the world” with its manufacturing supremacy, and proceeded to impose “free trade imperialism” on much of the rest of the world, particularly outside Europe and North America. But imperial overreach, the rise of opposing empires and the resulting war, and technological change—the move from coal to oil—brought the First World War and an end to the British Empire.

The inter-war period, from 1918 to 1940, saw the collapse of global trade and investment, a period of “de-globalization” that initiated a depression in North America that has affected the political consciousness of both Canada and the United States ever since. Even that memory, however, has begun to fade in the glow of the post-war expansion and the triumphalism of American capitalism after the disintegration of the Soviet Union in the 1980s. The American Empire began to expand after World War II, aided by the Bretton Woods financial institutions (the IMF, World Bank and GATT/WTO). But, after the U.S. abandoned the Bretton Woods agreements in 1971 and after the Soviet Union collapsed in 1989, the U.S. economic empire was left without effective constraints—except two: global warming and peak oil.

Both these constraints relate to the resource that powers the American economy and its empire: oil. Where the British Empire was fueled by coal, the American Empire is fueled by oil. But we know that, with fossil-fuel industrialism, carbon-dioxide-induced global warming began, though it wasn’t until the last couple of decades that we have begun to realize how much the rapid rise in temperatures caused by burning fossil fuels threatens not only the global economy and ecology, but all human life on this planet. While the world, with the exception of the United States, has awakened to the threat of global warming, it has not awakened to the possibility that the problem may be self-correcting. Simply put, we are beginning to run out of oil. But, as one commentator has noted, that is like saying we don’t have to worry about dying of cancer because we will die of heart disease first.

The problem is graphically illustrated by Richard Heinberg.“The industrial revolution, still continuing, is all about replacing human and animal labour with the work of machines running directly or indirectly on fossil energy. Each day, the energy from oil used by people around the world equals the work of some 180 billion humans. It is as if the average global man, woman, or child had 30 slaves toiling around the clock. But those petroleum “ghost slaves” are not evenly distributed. Each inhabitant of the U.S. has, on average, more than 120 of them. This is the energetic basis of the American Way of Life.” (Quoted by Tefel Hall, “The Big Rollover,” http://tefelhall.com/oldwebsite/Articles/The%20Big%20Rollover.htm.) But what happens when these “slaves” die?

Peak Oil: The Emerging Crisis

Except for the related problem of global warming, the limits to globalization and to the “energetic  basis of the American way of life” is predicated on the upcoming shortage of oil. What is the basis of this prediction?

In 1956, an oil company geologist, King Hubbert, forecast that approximately 20 years after oilfields in America were discovered and brought into production, their output would begin to decline following a typical “bell curve” pattern. He was ridiculed at the time, though in 1970 his prediction for the United States proved absolutely accurate. Output did begin to decline. A similar pattern can be seen in Canadian production of conventional crude. When extended to the world market, supplies of conventional crude can be expected to begin declining approximately two decades after field discovery and development reach their maximum. And this is exactly what is happening. Already it is estimated that 98% of the world’s petroleum reserves have been identified, so that “new” oil potential is virtually non-existent.

While world supply of oil is increasingly constrained, world demand for oil is increasing exponentially, particularly from the emerging industrial powers of China and India. The result is rising demand for oil at a time when supplies of oil are leveling off or declining. This means, of course, that the price of oil is unlikely to fall much from its current elevated level. In fact, the price should probably increase significantly in the longer run. Supply may be maintained by shifting to heavy oils, tar sands and oil shales, but at a much higher monetary cost and, perhaps equally important, involving higher energy inputs to produce (i.e., smaller and smaller net energy outputs). And even these additional supplies will only extend the period by around 10 years before supply peaks and production from all sources begins its inevitable decline.

Already, Goldman Sachs has predicted a spike in oil prices to US$105 a barrel in the near future, though they expect that, once that spike shocks American consumers into trading in their SUVs and hummers for hybrids and compact cars and begin conserving on energy, the price of crude will fall back to the mid-$30 range. This is what happened after the oil crisis in the early 1970s. Energy consumption fell quite significantly after the price spike which, given the surplus pumping capacity that existed at that time and the failure of OPEC to control the supply to the market, caused prices to fall to the ridiculously low levels of the 1980s and 1990s.

But conditions in 2005 are very different than those in the 1980s, and the major difference is peak oil: there no longer exists significant excess pumping capacity. Indeed, for many countries and oil fields, including Canada, the United States, Mexico’s Cantarell, the world’s second largest oil source, and the North Sea,  production of conventional crude is falling. The world’s greatest oil field, Saudi Arabia’s Ghawar field, has already plateaued and is beginning to decline despite the application of secondary recovery techniques (Jorge Figueiredo, “The Great Phase Transition: The Post-oil Era,” http://www.globalresearch.ca/articles/FIG503A.htm; Adam Porter, “Ghawar in decline,” http://archives.econ.utah.edu/archives/a-list/2005w15/msg00012.htm).  To make matters worse, U.S. production of natural gas, the best alternative for oil for heating and electricity generation, is also falling, while gas from Canada is peaking. The alternative—moving natural gas from offshore to North America—is both expensive and dangerous.

Have we reached the global peak of production? No one can say with certainty, but most of the forecasts estimate that the peak in world oil production will occur between 2005 and 2010.  Even the most optimistic are unwilling to push the peak beyond around 2020. Almost all agree: it is not if, but when, world oil production will begin falling. And when it does, we can expect real energy prices to begin to climb steadily, particularly given the escalating demand from the growing economic behemoths, China and India. One Iranian expert, Ali Bakhtiar, creator of the World Oil Production Capacity model, warns that prices could reach $125 a barrel by 2006 even before a predicted oil peak in 2008 (Jorge Figueiredo, “The Great Phase Transition: The Post-oil Era,” http://www.globalresearch.ca/articles/FIG503A.htm).   

Peak Oil and Globalism: Transportation and Trade

What does this mean for globalism and the Canadian economy? Two industries are most affected: agriculture and transportation. The case of transportation is straightforward. Increased transportation costs act very much like tariffs, reducing international trade by raising the delivered prices of imports. Thus increases in fuel costs will likely lead to a decline in the international movement of goods, particularly for those goods shipped by air or truck, where fuel costs are most significant, and for lower- value bulk goods where transportation is a more important element in final price. In North America, for instance, food items travel an average of 1,500 miles from the growing-processing region to store shelves.

To the extent that increased transport costs reduce the price advantage to outsourc-ing, not only will this reduce the trade in goods, but also American investment in countries such as China and even Mexico, which have been the major recipients of American outsourcing. (In the case of Mexico, this decrease may be a good thing since the boom in trade has brought greatly increased truck traffic and, as a consequence, severe pollution to border areas and along the transport corridor leading north, seriously threatening human health standards.)

James Kunstler makes the point about the threat of peak oil to international trade and production very dramatically in his book The Long Emergency.  He notes: “Anything organized on the large scale, whether it is government or a corporate business enterprise such as Wal-Mart, will wither as the cheap energy props that support bigness fall away. . . Wal-Mart’s ‘warehouse on wheels’ won’t be such a bargain in a non-cheap-oil economy. The national chain store’s 12,000-mile manufacturing supply lines could easily be interrupted.” (James Howard  Kunstler, Excerpt from The Long Emergency, http://archives.econ.utah.edu/archives/a-list/2005w12/msg00035.htm) He goes on to argue that production and distribution will have to be re-organized on a local scale, but will still result in higher prices and less choice. The only economical form of transport will be a resuscitated railway system. “If we don’t refurbish our rail system, then there may be no long-range travel or transport of goods at all a few decades from now. The commercial aviation industry, already on its knees financially, is likely to vanish.” (James Howard  Kunstler, Excerpt from The Long Emergency, http://archives.econ.utah.edu/archives/a-list/2005w12/msg00035.htm) If he is correct, we should also see the return of the trans-oceanic liners. But, in any case, global trade, investment and mobility—i.e., globalization—will contract.

As for agriculture, whatever the impact of peak oil and rising energy prices on the transportation industry, it appears almost small when compared to the impact of permanently rising oil prices on global agriculture. This is visibly demonstrated in a February, 2004 article by Richard Manning in Harper’s, “The oil we eat: Following the food chain back to Iraq.” (available at  http://www.findarticles.com) Manning’s main point is that agriculture has become a petroleum-dependent industry and that the industry as we know it today is unsustainable and will collapse in the face of declining supplies and rising prices of oil. As Kenneth Deffeys notes in the introductory chapter of his seminal book on peak oil, Hubbert’s Peak: The Impending Oil Shortage, never mind the rising cost of transporting food to market, “90% of an Iowa corn farmer’s costs were, directly and indirectly, fossil fuel costs” (Princeton University Press, 2001, p. 10).

Manning’s argument goes something like this. All fossil fuels are the product of millions of years of storing up the sun’s energy in the form of plant material compressed and heated to form oil, gas (at deeper and hotter levels) and coal. Since the industrialization of agriculture, particularly with the so-called “green revolution” which has multiplied the use of oil-rich fertilizers, pesticides, herbicides and irrigation, the energy taken out of the soil by intensive farming is increasingly being replaced by fossil-fuel-intensive fertilizer. “On average,” he writes, “it takes 5.5 gallons of fossil energy to restore a year’s worth of lost fertility to an acre of eroded land.. . . Every single calorie we eat is backed by at least a calorie of oil, more like ten.” (pp. 3, 5) Then, when you add in processing the food for human consumption, the cost in energy multiplies. Production of breakfast cereals, he notes, uses “about four calories of energy for every calorie of food energy it produces. A two-pound bag of breakfast cereal burns the energy of a half-gallon of gasoline in its making. Altogether, the food-processing industry in the United States uses about 10 calories of fossil-fuel energy for every calorie of food energy it produces.” (p. 7) And this doesn’t include transportation costs to the market.

What does all this mean for the impact of peak oil on globalization, particularly of agricultural supplies? The IMF, World Bank, WTO, the U.S. and all the agencies of international capitalism have been pressuring developing countries to abandon programs of food self-sufficiency and grow cash crops for export. With the rising cost of producing and transporting cash crops and the rising prices of subsistence food imports, poor countries will be forced to return to local production for subsistence even though it will mean, at least initially, a decrease in total productivity. The fact of the matter is that local production means not only the end of international agribusiness with its gluttonous use of oil inputs, but also a smaller surplus for transfer to the large urban centres that dominate, not only in the industrialized world, but also increasingly in the developing world. Everywhere, there will be need for increased labour-intensive agriculture, a rising rural population and a falling urban one (Figueiredo).  

On an even more dismal note, in poor countries the rising price of kerosene and heating fuels for cooking will force many to return to the cutting of local forests, thereby increasing soil erosion and droughts and decreasing food supplies. This has already occurred in Nigeria, an oil-rich country which is already at, or over, peak production. Since independence in 1960, 85% of its forests have been cleared and Nigeria, once Africa’s biggest agricultural exporter, is now completely dependent on imported food.(Andrew McKillop, “Demographic Oil Demand and Peak Oil,” http://archives.econ.utah.edu/archives/a-list/2004w38/msg00011.htm)

Still, on the brighter side, Cuba basically faced a similar crisis when the collapse of the Soviet Union cut off its access to cheap oil at the end of the 1980s. Indeed, the cut-off of oil was much more sudden and was made worse by the American boycott and Cuba’s foreign currency shortage that prevented access not only to oil, but also to fertilizers, pesticides, farm machinery, and all the major inputs of “modern” agriculture. Despite the difficult “special period” that followed, Cuba survived and re-engineered its agriculture, creating a local, small-scale, labour-and-animal-power-intensive, and relatively organic industry that is not dependent on fossil fuels but is still capable of sustaining its population.

Peak Oil, Canada, and the American Empire

The challenge of peak oil is much more than just the threat of rising food and transportation costs.  Petroleum  is the feed-stock for much, if not most, of our manufacturing industries, including plastics, pharmaceuticals, agricultural chemicals and fertilizers, never mind the energy to power our manufacturing plants and, along with other fossil fuels, to smelt and refine our supplies of steel, aluminum and other metals, to generate electricity to heat and cool our homes and offices, and—perhaps most importantly—to fill the fuel tanks of our ubiquitous private, gas-guzzling vehicles. As Dr. David Goodstein has noted, “Our vehicles, our roads, our cities, our power plants, our entire social organization has evolved on the promise of an endless supply of cheap oil.” (David Goodstein,  “Running out of Gas,” http://solutions.synearth.net/2004/06/07) Perhaps, even more dramatically, Goodstein concludes: “Civilization as we know it will come to an end some time in this century, when the fuel runs out.”

Many North American analysts of the energy scene have argued that politicians and policy-makers have blissfully ignored the impending crisis posed by peak oil, even more so than the global warming threat related to the increasing consumption of fossil fuels. Certainly, this would seem to be the case for Canada, where so many governments are gleefully looking ahead for higher prices for oil to grease their provincial economies. Alberta is a particular case in point. In the medium run, it stands to gain from rising oil and gas prices, even though its own supplies of conventional oil have already begun to decline. With the world supply of conventional oil reaching its peak, the demand for, and the price of, synthetic oil from the Alberta tar sands will begin spiralling upward. But the oil from the tar sands comes at a heavy cost in pollution, in water consumption, and in energy use, and in any case is in limited supply and also subject to its own “peak” in the longer run.  

This is recognized even in the Canadian business press, even if not by government. Andrew Nikiforuk wrote in the January 17, 2005 issue of Canadian Business that “[l]ike most big energy projects, Alberta’s oil-sands will deliver more hyperbole than oil. . .  The ever-prudent BP Statistical Review lists only 16.9 billion barrels as recoverable and under active development.” Higher estimates “just don’t reflect economic, environmental and engineering constraints.” They also ignore the fact that producing synthetic crude is an enormous user of natural gas and that “the burning of gas to make oil [is] a process akin to turning gold into lead.” Furthermore, it takes around 1.5 barrels of water to produce one barrel of oil, and Alberta is already beginning to run short of water. (Andrew Nikiforuk, Canadian Business, January 17/30, 2005, available at  http://archives.econ.utah.edu/archives/a-list/2005w06/msg00033.htm)

If Canadian governments are doing little to prepare for the coming energy crisis, the same cannot be said of the American government. The Bush administration has received numerous reports on peak oil and the threat it poses to the American economy and, indeed the whole “American way of life,” for several years, from sources such as MIT, the Pentagon, and private energy analysts. (See, for instance, Adam Porter’s article on the report by Robert Hirsch, et al., “Peaking of World Oil Production: Impacts, Mitigation and Risk Management,” commissioned by the US Department of Energy, available at http://archives.econ.utah.edu/archives/a-list/2205w10/msg00053,htm.) As early as April 2001, the U.S. Council on Foreign Relations reported to Bush:

“As the 21st century opens, the energy sector is in critical condition. A crisis could erupt at any time.... The world is currently close to utilizing all of its available global oil production capacity, raising the chances of an oil supply crisis with more substantial consequences than seen in three decades.” (Ian Rutledge, “U.S. appears to have fought war for oil and lost it,” http://archives.econ.utah.edu/archives/a-list/2005w15/msg00002.htm.)

But, rather than attempting to reduce consumption and conserve oil and develop alternative energy sources, the U.S. has been actively extending its empire to capture control of most of the remaining world supplies. Some years ago, when asked what America’s policy was with respect to energy, the Weekly Standard’s Irwin Stelzer reportedly replied, “Aircraft carriers.” (Tefel Hall, “Are We Facing Another Oil Crisis,” http://tefelhall.com/oldwebsite/Articles/The%20Big%20Rollover.htm.)  The wars in Afghanistan, Iraq, Colombia, and Yugoslavia and the one being planned against Iran, the attempted coup in Venezuela, regime changes orchestrated and/or attempted in Georgia, Ukraine, North Korea and Lebanon, support for the rearming of Japan and establishing military bases and proxy armies in south-east Asia and in the Asian “Stans” of the former Soviet Union, have all been tied to the U.S.’s search for control of the world’s major remaining supplies of oil. If one has any doubts that American foreign policy is directed at, and dedicated to, securing oil supplies, Linda McQuaig’s It’s the Crude, Dude: War, Big Oil, and the Fight For the Planet (Doubleday Canada: 2005) should dispel them.

One can understand why control of oil is critical to the U.S. Globalization, the American Empire and the whole American economy and way of life are based on oil. In the U.S., per capita consumption is approximately 25 barrels per year, double that of western Europe, more than five times the world average, and 16 times higher than China’s per capita consumption. But the U.S. produces less than half of the oil it consumes and its dependency on imports is rising as its own production falls and demand increases. The problem is that extending and maintaining an empire is an expensive and energy-intensive process. And peak oil will only exacerbate that contradiction. As Heinberg has concluded, “We are too many people extracting too many resources, too quickly, from a finite planet.” (Richard Heinberg, The Party’s Over, New Society Publishers, 2003)

(Paul Phillips is Professor Emeritus, Economics, at the University of Manitoba and a CCPA-BC Research Associate.)