OPEC Sees a Bright Future Ahead. Unfortunately, It's Not Yours.

As far as the Organization of Petroleum Exporting Countries, OPEC, is concerned the future looks rosy.  In its latest outlook report, OPEC foresees $177 per barrel oil prices by 2040 and a market that will require an extra 21 million barrels a day over the next 25-years to meet growing demand.

I expect you know what this means.  If they're right, OPEC's future is very bright and yours, well, anything but.  It should, however, be music to the ears of our own Dark Prince, Harper, and his acolytes, Justin the Lesser and Terrible-Tempered Tom.

The findings of the report will come as a blow to climate change campaigners who are warning that unless serious action is taken to reduce green house emissions the world will face a catastrophic global warming shock beyond 2025.

Opec – which currently pumps about a third of the world’s oil – said that after the end of this decade the world will need to find an additional 1m bpd of crude annually through to 2040 when it forecasts that demand will reach 111.1m bpd up from about 90m bpd at current levels.

Although the figure is a slight downward revision from its previous report it highlights the continued dominant role that oil continues to play in the global energy mix despite warnings from the United Nations that urgent action is required to avoid a climate change catastrophe. According to Opec, Asia accounts for 71pc of demand growth in the developing world, with total global energy demand forecast to increase by 60pc through to 2040.

“It is fossil fuels that will continue to play the leading role in satisfying world energy needs in the future,” said Opec secretary general Abdalla Salem el-Badri on the publication of the 367-page report.

This seems to be in keeping with Aussie PM, Tony Abbott's recent pronouncement that "the foundation of the world's energy needs will be coal."

Meanwhile the International Energy Agency, IEA, three years ago gave us this clear warning:

"The world is likely to build so many fossil-fueled power stations, energy guzzling factories and inefficient buildings in the next five years that it will become impossible to hold global warming to safe levels, and the last chance of combating dangerous climate change will be "lost for ever", according to the most thorough analysis yet of world energy infrastructure.

"Anything built from now on that produces carbon will do so for decades, and this 'lock-in' effect will be the single factor most likely to produce irreversible climate change, the world's foremost authority on energy economics has found.  If this is not rapidly changed within the next five years, the results are likely to be disastrous.

"'The door is closing,' Fatih Birol, chief economist at the International Energy Agency, said. 'I am very worried - if we don't change direction now on how we use energy, we will end up beyond what scientists tell us is the minimum [for safety].  The door will be closed forever.'" 

Bear in mind, also, that it was less than a month ago that the Governor of the Bank of England, Mark Carney, proclaimed that we are in a "carbon bubble" in which most fossil fuel reserves should be treated as "stranded assets."  Carney came to this conclusion on accepting that, if we're to avoid catastrophic climate change, 80 per cent of already known fossil fuel reserves would simply have to be left in the ground, unburned.  

What these messages from Tony Abbott, OPEC, and our own Stephen Harper convey is a subtle but very real declaration of war on the planet, on us and on those who will follow us.  They're not going to back off voluntarily, responsibly.
  

 

OPEC's Dilemma

The world's oil producers have a problem. For many of them, oil truly is Black Gold. For some of them, oil revenues have become the mainstay of their regimes, the grease that keeps the corrupt and oppressive wheels of their states turning.

Ask Steve Harper. It's a lot easier to rule an unruly electorate when you've got a treasury full of petrobucks to spread around. Pretty much anyone, even Steve Harper, can handle that. It's when those oil revenues stop flowing in that you get to see whether you have a bold leader, someone with vision, or a timid, feckless pretender to the throne (a.k.a. Stephen Harper).

But you can't think of oil without mentioning the Middle East. Saudi oil comes out of the ground so "sweet" that it can be pumped straight into waiting tankers. Total cost of production - ten bucks a barrel! So, even when the world oil price crashes to $40 per barrel, the Saudis still rake in a hefty profit.

When prices soared to $150 per barrel it truly was manna from heaven for the Middle East. And who can blame them for believing what the rest of us were told - that oil prices were only going up with $200 a barrel expected within a year? And so, with that in mind, they began spending like there was no tomorrow.

Even Dubai, which is essentially nothing more than a lovely beach, got into the act, building the world's most opulent hotels and lavish homes. The money was flowing in so fast they even built entire communities offshore in developments created in the shape of palm trees (see above).

Now, of course, that money has dried up and Dubai doesn't have any oil to sell, even at 40-bucks a keg. Thinking it could play banker to all the oil-rich nations around it left Dubai holding the bag with a bunch of banks in Wall Street meltdown mode.

Foreigners are fleeing Dubai as though the place has turned radioactive. The New York Times reported that Dubai's airport parking lot is littered with as many as 3,000 cars simply abandoned by foreigners who once sought to make their fortunes in that country. Apparently the exodus has something to do with Dubai law that sends defaulters to debtors' prisons.

It's a sign of the times. Dubai is a member of the United Arab Emirates and the only one that has no oil. You might have thought its fellow Emirates would come to the rescue to bail out Dubai's banks, Washington or London-style. Nope. There's a message in that.

It's a message that provides the subtext, the back story to OPEC's efforts to cut oil production in hopes of stabilizing and boosting world oil prices. Most producing countries simply can't afford to cut production. They've become utterly addicted to oil revenues to the extent they can no longer say no.

Gwynne Dyer addressed this addiction some time ago in discussing the perceived dangers of encouraging democracy in the Middle East demonstrated by election victories of Islamist parties such as Hezbollah and Hamas.

Dyer's take was that, given the brutal oppression of the Arab people by regimes we've supported (Mubarak, the House of Saud, etc.), it shouldn't be a surprise that Islamists win democratic elections. But he predicts that might last two, possibly three election cycles before moderates would begin to take over. And, in the meantime, the oil would just keep flowing because no Arab government, even an Islamist ruling party, could afford to turn off the taps.

A Reuters article places the producers' problem in perspective. To fund its current social programmes and infrastructure at current production levels, Venezuela needs $100 per barrel, Iran needs $90. Cutting production really isn't an option for those countries. Likewise Saudi Arabia has promised its people to build "economic cities" to offset unemployment and over-reliance on oil revenues (i.e. to prevent mass uprisings) for which it needs $50 per barrel. Apparently Saudi Arabia is already anticipating a deficit in 2009 of more than $17-billion. Even the Saudis aren't in a great position to start slashing production.

Taken in isolation, the Middle East's oil problems are serious but they're greatly magnified when placed in the context of the political and social unrest simmering throughout the region. This might not be the best moment to be a prince of the House of Saud.

The New World Order

Forbes.com, which calls itself the "home page for the world's business leaders" says the battered US dollar isn't coming back to its former glory any time soon.

One of the greenback's travails is OPEC. Confidence in the US dollar took a hit last week when a technician plugged the wrong line into the wrong socket and inadvertently broadcast a full half hour of OPEC deliberations and debate. It was only when the first stories hit the Reuters web page that officials realized what was going on and pulled the plug.

The brief window into OPEC revealed both Iran and Venezuela arguing to dump the American dollar as the currency of oil trading. Saudi Arabia vetoed any further discussion, warning that word of OPEC uncertainty in the dollar could send it crashing. All of this, of course, was being broadcast live to the world.

Kuwait has already moved to switch from a dollar-peg to a basket of currencies and the ongoing malaise in the dollar may force others to follow suit. Then there's the 800-pound gorilla, China, and its trillion-dollar holdings of American currency.

The United States is vulnerable and it appears destined to remain that way for another year at least. Right now the US has its hands full just trying to ride out the storm of the housing market collapse.