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Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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The Catastrophic Consequences Of Peak Oil Demand

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With OPEC’s 2016 World Oil Outlook now grimly forecasting that peak oil demand could become a reality in just over a decade, and natural gas and renewables chomping at the bit to cannibalize commodity market growth, it may be good for the environment, but the trade-off will be global instability on a catastrophic level.

The dynamics of the rush to adopt natural gas and renewable energies - launched by the landmark climate change agreement signed in Paris last year – was about protecting our planet. But without an effective back-up plan, resource-cursed nations such as Venezuela, Libya, Nigeria and Iraq—among others—will not survive this evolution and economic destabilization and sociopolitical instability would irrevocably change the geopolitical landscape. Destitution spells disaster in this scenario.

Weaning off ‘Black Gold’? Not in our Lifetime, and not Without Repercussions

Hundreds of trillions of dollars have been spent worldwide over the past century to develop technologies for the safe transport and use of “black gold,” which, in turn has built energy-driven economies on practically every single continent, aside from Antarctica.

Venezuela, Libya, Nigeria and Iraq are the first nations that come to mind when compiling a list of oil-dependent states, mostly because of their current plights caused by the two-year oil price crisis, as well as the political instability, civil war, domestic militancy and terrorism threats that each country faces, respectively.

Chronically low prices compromise the ability of oil-addicted economies to tackle domestic unrest, which was brought about by stinted revenues in the first place.

If OPEC’s predictions on the imminent-ness of peak oil prove to be true, underdeveloped producers that have not yet planned for a fossil fuel-free world will inevitably face sociopolitical collapse. As oil demand spirals downward, the world’s major exporters are expected to ramp up output in order to profit as much as possible before the commodity becomes a relic of the past.

Related: Oil Majors See Reserves Evaporate: Write Downs Continue

And, as we know from the state of current markets, the bigger the glut, the sadder the prices.

The four countries mentioned earlier, along with Algeria, represent the nations most vulnerable to the global abandonment of oil. But even Mexico, which has invited public and private actors to set up a sophisticated governmental hedge against depressed prices for the next year, will see its economy falter when there’s no market left to hedge.

Sovereign Wealth Fund or Bust

The Gulf nations have amassed a vast amount of fuel wealth over the past few decades. Wielding their financial-savvy as an economic shield, the countries have stored the revenues in sovereign wealth funds that invest internationally, paving the way for post-oil revenue streams. This starkly contrasts with the situation in Venezuela and Nigeria, both of which are on the hunt for billions in lost—as in nowhere to be found—profits.

On the other end of the spectrum, European producers—especially Norway and France, as well as the United States and Canada—enjoy diversified economies that subsidize fossil fuel, but do not play a direct role in its extraction or distribution. In this group of states, it is the private companies that weather the bulk of the losses in a market downturn.

Of course, these governments must still provide the unemployment benefits entitled to workers who are fired during a downturn, and budget specialists must maintain a plan to navigate lower tax revenues from domestic oil majors, but overall, their public sectors remain far more insulated from the volatilities of the oil sector than those nations with mammoth nationalized firms.

These are just the domestic implications of the end of the oil era. Foreign policies, especially of the world’s biggest superpowers, have long revolved around energy needs.

Balances of Power, Oil Friends and Foes

Control over oil has shaped major aspects of the United States’ relationship with Russia and the Arab World. The OPEC-led Arab Oil Embargo of 1973 - protesting the sale of arms to Israeli military forces by Western states - caused massive fuel shortages in the U.S., leading Congress to ban the export of domestically produced oil. The prohibition ended just last year, four decades later.

Still, the U.S. elects to import oil from the bloc’s de facto leader, Saudi Arabia, rather than turn to its eternal foe, Russia. Cold War anxieties from the 1980s - fresher in the minds of the American electorate than the Arab-Israeli wars of the 60s and 70s - steer leaders away from fuel trades with President Vladimir Putin.

Europe has been seeking new natural gas partners after Russia, which provides the continent with a quarter of its gas supplies, seized Crimea and supported the oppressive Syrian government.

Donald Trump’s selection as U.S. president-elect could change the country’s dynamic with Russia. Trump has famously praised Putin for his “leadership,” but it’s far too soon to measure the wildcard’s willingness to pursue stronger ties with Russia.

Can Natural Gas Save the Vulnerable?

For many nations, the next big environmental step after oil is natural gas. When we compare a list of countries with the largest proven oil reserves with the same list for natural gas deposits, a bunch of the same countries appear in the highest positions, albeit in a different order.

Venezuela boasts the largest oil reserves in the world, but it stands in eighth place on the natural gas list. Saudi Arabia, Russia, the United Arab Emirates, Iran and Nigeria take positions in the top 10 for both commodities as well.

The overlap in major players in the oil and natural gas markets says there will certainly be some continuation as demand shifts from one commodity to another, even as Canada, Libya and Iraq will find themselves as losers longer-term, in the absence of a push for renewables (the trio is included in the oil top 10, but disappears in the natural gas list).

Related: With Trump Elected, What’s Next For Oil?

Turkmenistan will see new prominence as natural gas gains popularity. As the only country not to appear on in the top 20 positions of the oil reserves list, but present at 4th place in the gas deposits list, the central Asian nation is due for more geopolitical love in the coming decades.

The former Soviet republic currently exports two-thirds of its gas to Russia’s Gazprom.

Turkmenistan’s reserves will add to Russia’s international political leverage as countries all over the world develop the infrastructure to support liquefied natural gas in their oil-based economies.

As the 103 countries that have ratified the United Nations-led change agreement meet at the COP22 conference in Marrakesh this week, the world inches closer to making a carbon-neutral world possible, but careful consideration of the geopolitical ramifications should also be made.

The domestically fragile oil producers - which more closely resemble an oil-soaked house of cards than stable nations - will need major economic attention as renewables and natural gas become the new energy standard.

By Zainab Calcuttawala for Oilprice.com

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  • Jack Ma on November 14 2016 said:
    There is no such thing as peak oil demand. That would be like saying there will come a day when you are still alive but you no longer need to consume food or breath air. The shorts would love peak oil demand. I would love it too but we have keep our concepts grounded to reality. A fun read indeed. Thanks.

    Warmest regards
  • Bill Simpson on November 14 2016 said:
    Oil is finite, so it has to decline in use. And when it does, millions of people in some of those countries will starve. The time horizon is what they have wrong. President Trump and the Republican Congress will turn back the climate change clock by between 4 and 8 years. So forget about oil not being used in the USA because it causes pollution. If foreigners insist on staying with the switch to some other, more expensive energy source, that will be great, because it will give the USA an unfair economic advantage over them. Go for it, Chinese and Europeans. Switch to solar cells and expensive batteries. We will wait for more efficient, cheaper ones down the road. Then we will buy the best new ones, and you will be stuck with the older obsolete ones. In the meantime, our industrial goods will be cheaper. And our economy will grow faster.
    Oil is too great a substance for some other energy source to displace it until it begins to physically run out, with the price then going through the roof. Electric cars will NEVER be as convenient as gasoline powered ones. Gasoline and diesel are just too energy rich for batteries to naturally displace them. And mass production, and quality control have made fossil cars cheap and durable. It will be at least two decades before countries with a lot of liquid oil have to worry about the world not wanting it. Oil is just too good for that. They call it 'black gold' for a reason, and will for decades more.
    The problem will come when the oil supply available starts to decline, forcing the world to shift to a more expensive, and less efficient energy source. That will be a dark day. When it arrives, the big problem will be preventing the banks from collapsing. They aren't designed to function in a shrinking economy. And barring some major scientific breakthrough, less oil will force the global economy to shrink.
  • Tee Dubs on November 14 2016 said:
    Second article by Zainab Calcuttawala for Oilprice.com I read to the end. Good writing.
    As to you Jack, right now there is peak child which leads to peak population which leads to peak everything really.
  • Lee James on November 14 2016 said:
    Hello, Jack Ma

    I think the author is right-on on in stressing the geopolitical fragility of oil-producing nations. As big and as powerful and essential as oil is, over-reliance on oil's wonders often ends up as a kind of a curse -- especially if the sovereign oil fund was under-attended to in up-cycles so as to be ready for low market prices.

    As for peak oil demand, the transition away from burning petroleum has begun. Slow, steady progress along the lines of 3 or 4% growth a year seems economically assured. Really, the main question is how quickly should we un-soak ourselves, beyond what is naturally in the cards already for transitioning away from burning up a great resource?
  • DR on November 15 2016 said:
    Much of the NG in countries like Venezuela is natural gas associated with oil production. NG in oil reservoirs cannot be counted as a gas resource if oil is not being produced.
  • citymoments on November 15 2016 said:
    'With OPEC’s 2016 World Oil Outlook now grimly forecasting that peak oil demand could become a reality in just over a decade, and natural gas and renewables chomping at the bit to cannibalize commodity market growth, it may be good for the environment, but the trade-off will be global instability on a catastrophic level'.


    With all due respect to the author, before I refute her conclusion, I would like to point out there is an obvious grammatical error in above paragraph. Secondly, if renewables means solar and wind powers, they are not new source of energy but derive from fossil energy and traditional commodities - you need diesel power to dig out silicon under the ground to be manufactured by fossil powered factories to make solar panel. Without fossil fuel and base metal, there is no way you can make solar panel and wind turbine.

    Forgive me to say, most conclusions in this article are purely childish views not based on facts and common sense.
  • PA Investor on November 15 2016 said:
    Bill,

    You stated that "Electric cars will NEVER be as convenient as gasoline powered ones. Gasoline and diesel are just too energy rich for batteries to naturally displace them."

    This is such a foolish thought I'm not sure its even worth trying to correct you. Electric cars can accelerate significantly faster than gasoline powered vehicles because electric motors delivery full torque at low RPM's. The energy density issue is basically done now that Telsa and GM have shown you can create vehicles that get well over 200 miles on a full charge. The barrier to wider adoption of electric vehicles has primarily been one of cost (too high). Since you obviously have not been paying attention to the cost curve of battery storage I'll give you an update...they are coming down fast and there is no end in sight to the trend.

    Let's leave the full BEV aside for a moment. About 80% of Americans have a commute that is less than 20 miles. Add in a small cushion for misc. trips and most people drive well under 50 miles per day. A plug in hybrid with a relatively low cost battery will be able to charge at night using relatively inexpensive electricity and that will display a huge amount of demand for liquid fuels. We will still need oil and gas but all pricing is set at the margin and oil and gas are about to be in for a world of hurt when they lose pricing power. Consumers never really had a viable alternative to gasoline until recently and we are just at the very tip of the curve for the electrification of transportation. Everything is tied to the cost of batteries coming down quickly and that is unstoppable at this point in time.
  • Ian Ivey on November 15 2016 said:
    Many countries have suffered from commodity slumps and irrelevances, not just in the oil and gas sector. The challenge is to wean highly dependent oil and gas countries off their commodity resource base and become more diversified and resilient. Oil and gas revenue is 'easy' whilst diversification and resilience building requires a concerted effort and considerable investment. Many of the countries mentioned as being vulnerable to oil and gas slumps also suffer from high levels of corruption and poor political governance. Whilst that continues, making the necessary changes (which take at least a generation - 30 years+) is almost impossible - as Trinidad and Tobago has found. There has been much 'talk' but little 'walk' when it comes to economic diversification in that country. It's really a problem that the people living in the challenged countries need to solve, not foreign powers. Once the latter become involved then things can get messy (e.g. Syria and Libya). As noted by one of those making comments, oil and gas are finite. They won't be around forever. Time to move towards more sustainable models - not just for the countries concerned but for all of humanity!
  • citymoments on November 15 2016 said:
    Again, to all those who fancy that we can simply replace gas and oil with renewables , I like to ask you some simple questions? Do you understand what is base power? the power to lift off a 747 is equal to the power needed to send the first rocket to the orbit , not solar wind or battery power but only fossil fuel power can offers such a base power. without jet fuel there will be no air travel and most tourism hotels mus be closed. Without oil and gas, how can we dig out the basic commodities needed under the ground to manufacture solar panels, wind turbines, batteries ???

    I wonder, it is the lack of basic science teaching in our time of mass education, which results so many people to mistake political propaganda as genuine science. What this modern mass education creates is not men of knowledge but ignorant spoiled brats and street thugs.
  • Trevor on November 16 2016 said:
    @Bill Simpson, you have nailed the real issue: "The problem will come when the oil supply available starts to decline, forcing the world to shift to a more expensive, and less efficient energy source. That will be a dark day. When it arrives, the big problem will be preventing the banks from collapsing. They aren't designed to function in a shrinking economy. And barring some major scientific breakthrough, less oil will force the global economy to shrink."

    Without cheap oil in the current anaemic global economy which still hasn’t managed to get out of the GFC of 2008, the global financial Ponzi scheme would implode starting with the US and swiftly moving on to Europe and eventually China. Low oil prices are needed to keep interest rates near 0 and the QE unlimited gravy train running 24/7 to prop up the big US/European banks. If oil prices are allowed to reach their real economical values, inflation will quickly follow and interest rates will have to rise and that will be the end of QE and free money for the big banks.

    It’s somewhat insulting to see articles like this on sites such as oilprice, laced with opinion supported by few real facts. Peak oil supply will hit the world much before (watch the documentary Collapse featuring Michael Ruppert who provides real facts) peak oil demand given the way the likes of the Saudis are pumping. These fools fell for the disinfo that expensive and mass polluting fracking would somehow compete with conventional supplies and hiked their production providing a field day for the big US banks that shorted oil to absurd levels. But now it is coming to haunt them not just the likes of Venezuela.
  • George Barnett on November 16 2016 said:
    I joined an oil company right out of college in 1965. Even then the popular talk was the sunset of oil as fields depleted. Now there's more oil and gas than ever; with new massive deposits in West Texas shale announced today. And fracking has yet been exploited on a global basis. Cheap and plentiful fossil fuels will be the dominant driver of global energy supply and economic growth for another generation. Energy demands in China and India alone are insatiable, and the leaders there are counting of fossil fuel use exploding by 100% over the next 25 years. From Western Europe, across Russia's Siberia, nations are aggressively expanding into the Arctic in order to expanding fossil fuels exports to earn hard currency. And allegedly progressive countries like Germany are in process of displacing clean nukes with imported coal. Fossil fuels are inescapably cheap and plentiful and renewables simply cannot compete.
  • NorEastern on November 16 2016 said:
    And then there are those two GW solar installations being built in the UAE and Chile for under $0.03 dollars a kwh. For a point of reference in the US, with some of the cheapest NG prices on the planet, a new natural gas plant produces electricity at $0.046 dollars a kwh. Oil and NG are dead in the near future. Coal is already six feet under.
  • Mark Ziegler on November 22 2016 said:
    What will we do without Mexican Oil?
    https://en.wikipedia.org/wiki/Oil_reserves_in_Mexico
  • Ronald Wagner on November 26 2016 said:
    Good article! it recognizes the importance of natural gas as an alternative to diesel and gasoline.
    It can do anything they can do, and with far less pollution. It is a natural barrier to high oil prices, as advances in lower priced solar power continue. The artificial promotion of battery powered vehicles rather than natural gas will not work with large vehicles such as trucks, locomotives, ships etc. Natural gas is the answer to replacing dirty forms of energy and fueling small electric vehicles with electricity. It can also run hybrid electric vehicles.
  • Colin MacDonald on December 01 2016 said:
    I don' know about America but here in Europe fossil fuel production certainly isn't "subsidized". If it were Norway would have no sovereign wealth fund, instead it contains one trillion dollars, all taken from one of the worlds highest cost oil provinces. For sure the government tax from oil production is absolutely minimal right now and there are various scraps being chucked to the oil companies in an effort to maintain production. However the government receipts from fuel duty far outweigh these subsidies.
  • Hipshot on December 01 2016 said:
    go in your house and throw out every thing made from oil.......plastic, rubber, styrofoam...etc
    then go outside and make tires out of tree bark and grass clippings.......good luck on that

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