Oil Über Alles

by Michael G. Livingston

If you understand the importance of oil to modern capitalism, you will understand a great deal indeed. Oil prices briefly hit $57 a barrel in early April, continuing an 18 month rise. Remember that in December 2003 oil prices were around $29 a barrel and were expected by Wall Street analysts to stay at about that price in the coming year. Instead, prices have risen steadily while also at the same time fluctuating considerably due to supply disruption and a fluctuating albeit high demand. In mid-April oil prices per barrel reached an eight week low, at $50 per barrel! By the end of April, prices had returned to around $54 a barrel. These prices are in line with U.S. Department of Energy predictions from mid-March; they predicted that the price per barrel would stay above $50 for the rest of the year.

Analysts at the investment firm of Goldman Sachs warned of a possible rise—they called it a “super spike”—to $100 a barrel by year’s end. While the price spikes are important, what matters more is the long-term trend line. The prices had been relatively stable for some time until the end of 2003. Since then the average price trend has been steadily upward. By my crude calculations, the trend line shows an average increase of 37% per year. At that rate, the price per barrel doubles every two years.

While the fluctuations around the average trend are due to conjunctural factors, such as the war in Iraq and a lack of refining capacity, the overall increase has other causes. The principal cause, the one that no one in the capitalist media wants to talk about, is Hubbert’s Peak—the coming decline in world oil production.

Hubbert’s Peak is the point at which half of all the available oil is used up and total supply starts to decline. (The peak is actually the peak of a bell-shaped curve representing oil production). After that point supplies decline and prices climb. Worldwide, Hubbert’s Peak is expected to occur between 2006 and 2015. The peak can also be calculated for individual countries but can not be known absolutely until several years after the peak is reached. For example, the peak for U.S. oil fields in the lower 48 states was estimated by Hubbert (in 1949) to take place between 1966 and 1972. The actual U.S. peak occurred in 1970, and domestic oil production has been declining steadily ever since, in spite of advancing technologies and intense exploration.

In March of this year the oil industry analysts John S. Herod Inc. estimated the Hubbert’s Peak for the giant oil companies. Herod’s is widely respected by investors and is well known in investment circles for being the first group to point out that Enron had few assets and declining profits, and that their stock was overinflated. Enron collapsed, much to most people’s surprise, 10 months after the Herod report on the company.

By Herod’s calculations, all of the large oil companies will hit their peak in the next 4 years. The French oil giant Total S.A. is expected to peak first in 2007. Exxon Mobil, Conoco Phillips, BP, Royal Dutch Shell, and Eni S.p.I (an Italian corporation) will all peak in 2008. Chevron Texaco, with the largest reserves, will peak in 2009.

As demand continues to climb and the major oil corporations and the world approach Hubbert’s Peak, several things will happen.

First, prices will climb steadily. This will have a direct impact on all the economies of the world. In the U.S., the cost of living will increase, consumer spending on homes, durable goods, and other items will decline, and unemployment will increase. This could result in a period of stagflation or, as some experts predict, a depression.

Second, profits will surge. While the rising price of oil will hurt the working people of the world, it will result in massive profits for the oil companies. The cost of production is not changed in the short run by the declining supplies. In the medium run, new investment in production, refining, and transportation of oil will be required to get at the harder and harder to find remaining oil deposits.

Third, the corporations, unable to find enough new supplies to meet demand, will use some of their profits to buy up other corporations to increase their reserves. This is already starting, as reported in the April 5 New York Times, which reported: “Giant oil companies are flush with cash because of record crude oil prices, but short of fresh opportunities to develop fields. That has led some companies, like BP in Russia, to seek growth through acquisitions rather than through exploration” (p. C1). The Times report focused on the $16.8 billion acquisition of Unocal by ChevronTexaco. More acquisitions are on the way as the giants acquire the smaller companies and even other oil giants. In other instances, the oil corporations will use their superprofits to gain control of other energy sources, such as coal or hydrogen. This is the apparent strategy of BP, whose ads claim that BP stands for “beyond petroleum.”

Fourth, the U.S. will become even more dependent on oil produced in OPEC countries and U.S. capitalism will be even more likely to intervene for the sake of control of the oil supply (and oil profits), as it did in Iraq. The next most likely target is Venezuela, which has the largest known reserves outside of the Middle East and a government that refuses to be controlled by Washington.

The Bush proposal to drill in the Arctic National Wildlife Refuge (ANWR) and the recent passage of this proposal in the U.S. House of Representatives must be seen in the light of the upcoming peak in production. The amount of oil in ANWR is insignificant compared to world demand and, as even President Bush has acknowledged (see his statement in the April 21 New York Times, p. A17), will not lower domestic oil prices at all. (In fact, there is no reason to believe that any of the oil will reach the lower 48 states. The most likely destination is the booming Chinese market.) What the Bush proposal will do is provide yet another source of superprofits for the oil companies while destroying a fragile eco-system. In addition, just to sweeten the pot for the oil companies, the Bush bill provides for an estimated $22 billion in tax relief and federal aid to oil corporations over the next ten years. Apparently, it is not enough to be given access to ANWR; the oil companies also need massive corporate welfare besides.

The problem of global warming, the most serious environmental problem facing our species, and the capitalist system’s overreliance on increasingly scarce supplies of oil are linked. A starting point for dealing with both problems is to nationalize all oil companies in the U.S., under workers’ control, and use the profits from oil production to convert to mass transit and renewable energy. In the process, we would dramatically reduce greenhouse gas emissions by the approximately 70% reduction that is needed. Nationalization would also permit a just transition for oil workers away from oil production to renewable energy sources, such as wind power and solar power, as the oil industry is systematically reduced. The current path followed by our misleaders such as Bush will lead to super-accumulation of wealth for the capitalist politicians’ “base,” the rich and the super-rich.  For the rest of us—it will lead to environmental catastrophe and economic ruin.

The author can be reached at livingstonmiguel@hotmail.com. He welcomes your suggestions, comments, and ideas.