Black Gold

It’s true: Oil does make the world go round. Worldwide petroleum demand is growing. Trouble is, supplies are maxed out, and disruptions to the supply are likelier than ever.
From the September-October 2004 Trumpet Print Edition

The music blares. You stare bleary-eyed at the bright red numbers on your clock radio. You rise, trudge to the bathroom and swing open the shower curtains. As you work the shampoo into your hair, you begin to wake up.

After showering, you get half-dressed, slip into your slippers and put a rousing cd into the cd player. As you dry your hair, the loud whine of the hair dryer briefly drowns out the music. Some toothpaste refreshes your mouth. After smoothing on some deodorant, you put in your soft contact lenses, dab on a bit of perfume behind the ears and apply some lipstick. Just in time. Little Timmy wakes up and is crying. You hurriedly put on the rest of your clothes, pop an aspirin into your mouth for your headache and rush out to take care of Timmy.

After breakfast you prepare to go shopping. When you buckle Timmy into his car seat, you remember that the forecast calls for rain so you dash back into the house for your raincoat and umbrella. For now though, the sun is bright so you don your sunglasses. Timmy listens to his favorite audiocassette playing. First stop is the home-supply store. Out comes the baby stroller. As you push Timmy along, you notice some balloons highlighting a special sale. Inside the store you pick up some fertilizer for the garden, insecticide for those nasty bugs, some paint to decorate Timmy’s room with and a tent you need for the camping trip next week.

Next stop is the all-purpose superstore. You find some plastic containers you’ve been looking for and some crayons and diapers for Timmy. As you peruse the food section you carefully screen the ingredients for food preservatives. Now it’s time to check out. One swipe of the credit card and you’re on your way home.

Before Timmy’s afternoon nap you feed him some nutritious homemade baby food, which you mix in your blender. What he doesn’t eat will be stored in those convenient food storage bags for another day. At nap time Timmy strikes an unusual pose. You grab some film to put in the camera and take some precious photographs. You take advantage of Timmy’s nap time to clean up his toys and send some e-mails on the computer. After a couple hours Timmy wakes up.

As he plays near the patio screen door, he cuts his finger on a broken piece of screen mesh. You apply a bandage and comfort him. The telephone rings and your husband relays that he’s on his way home. You make supper and prepare a special table setting, including candles. After supper and clean-up you cinch the garbage bag, take it outside and breathe a sigh of relief. As you put your feet up on the recliner and watch a dvd movie, you can finally relax!

The purpose of the story on the preceding page is to help illustrate how dependent modern society is on oil! Most of us know that gasoline, or petrol, is derived from crude oil. But less than half of each barrel of oil is used for this purpose. In the form of petrochemicals, oil is a key ingredient in thousands of other products. There are 44 items mentioned in that story and each one of them (in italics) has petrochemicals in it. The modern world in its work and leisure relies very heavily on oil. As the saying goes, oil makes the world go round! It’s such a key commodity that it’s sometimes called black gold. Lately, it has become even more valuable. Why?

The Demand for Oil

The world currently extracts almost 81 million barrels of oil out of the ground every day. Since there are 42 gallons to a barrel, that’s an average of 3,402,000,000 gallons per day—2,362,500 gallons per minute—39,375 gallons per second—each and every day, around the clock! It’s barely enough, yet the demand keeps growing.

The United States is by far the world’s biggest oil consumer, guzzling more than 20 million barrels a day—a full quarter of the world’s output. And demand in the U.S. steadily climbs. For example, gasoline efficiency of American autos in terms of miles per gallon has been declining since 1988. Last year, for the first time in almost 30 years, the average weight of a new car or small truck was over 4,000 pounds. Meanwhile, U.S. oil production has been steadily falling. Current output is about 7.9 million barrels per day, a dramatic drop from its peak production of 10.6 million barrels per day in 1985. Obviously, the trend is that the U.S. is becoming increasingly reliant on other countries to supply its growing oil needs.

Japan has historically been the world’s second-largest oil consumer. Thanks in large part to the booming Chinese economy, Japan’s economy is now on the mend after years of recession and stagnation, which means it requires more oil. But the fastest-growing demand comes from China and then India. Indeed, China has now overtaken Japan as the world’s second-largest oil consumer. Last year, China alone accounted for 41 percent of the growth in demand for world oil. And its oil imports rose 32 percent. The country’s auto market grew by an astonishing 80 percent! According to the Institute for Analysis of Global Security, by 2030 China is expected to have more cars than the U.S. and import as much oil as the U.S. does today! (Wall Street Journal, May 5).

India likewise is on the verge of significant economic growth. According to Aloulou Fawzi, an Energy Information Administration economist, almost 75 percent of the increase in oil consumption by China and India between 2001 and 2025 will be from cars and trucks (ibid.). The demand for oil seems endless as the world’s two most populous nations, having tasted of industrialization, surge forward in their economic expansions. Other smaller Asian nations, some of which are net oil exporters now, are projected to soon become oil importers as their economies grow. Dr. Marc Faber, author and reputed Asia watcher, estimates that Asian demand for oil will double in the next 6 to 12 years (Edge Singapore, May 3). The Wall Street Journal article referred to above reported that worldwide demand is forecast to rise by more than 50 percent in just 20 years, to 121 million barrels a day!

Will the nations be able to supply such massive amounts of oil?

Strain on Supply

Oil supplies are barely keeping pace with today’s demand, which doesn’t bode well for future needs. In recent months, the Organization of Petroleum Exporting Countries (opec) has steadily raised production, reaching more than 32 million barrels a day in August, which accounts for 40 percent of the world’s oil output. Most of the increase though came from just one country—Saudi Arabia. The rest of opec is pretty much at full capacity already. (Iraq has the potential to produce more, but sabotage has made its current output less than prior to the war.)

With opec increasing its oil production, the world’s spare production capacity, which has averaged about 5 million barrels a day over the last 10 years, is down to zero. According to opec President Purnomo Yusgiantoro, “[T]here is no more supply” (Stratfor, August 3). The Saudis might be able to bring another million barrels a day online in the next few months from old wells that haven’t been used in a while. But that’s it! In a world that produces almost 81 million barrels a day, a margin of 1 million is rather tiny, especially in light of surging demand with no end in sight and increasing threats of supply disruptions. Stratfor confirms that “Global supply is effectively maxed out. No non-opec state regularly keeps spare capacity on hand …. Any additional supplies that might trickle onto the market would come from ‘surge’ production, which is sustainable only for short periods” (June 11).

To be fair, some strategists see a few potential bright spots that could increase oil supplies. Libya’s oil fields for example, which have been closed to U.S. companies for two decades, are now available again. Libya produces about 1.5 million barrels a day. With billions of dollars of American investment, Libya’s output over the next decade could double. With all the trouble in Iraq, that may be preferable to U.S. investors, especially since Libyan oil is low in sulfur and therefore easier and cheaper to refine. And the fact that Libya is located on the Mediterranean means that there is less of a security concern for transporting oil compared to the risks in the Gulf region via the Strait of Hormuz (see map, page 6).

Another example of potential oil development is in Central and West Africa. According to a report released in May by the Center for Strategic and International Studies titled “Rising U.S. Stakes in Africa,” this region could increase world output by 2.5 to 3 million barrels a day within 7 to 10 years. However, doing business in Africa comes with many risks, including corruption in government, internal instabilities caused by economically deprived citizens and deep religious divisions to name but a few. These are factors that can give rise to terrorist activities. Oil companies are increasingly hesitant to invest billions of dollars in unstable regions. They risk destruction of facilities (as in Iraq) and theft of oil (as in Nigeria).

If oil development were to go forward in these relatively small regions, it would be a case of too little, too late. The extra oil would not be nearly enough to satisfy the burgeoning demand in the next few years, and it wouldn’t be possible to get it to market fast enough. The fact remains that for now, there’s no spare production capacity except for maybe 1 million barrels a day the Saudis could revive from mothballed production. In a world that’s using close to 81 million barrels a day and rapidly increasing its intake, that’s not very reassuring!

Even if ample supply were to somehow meet demand, bottlenecks in the supply chain would have to be remedied. For example, there aren’t enough supertankers to transport an increase in oil production of any consequence. Also, refineries are getting old. In the U.S., no major new refineries have been built for over 20 years. According to the U.S. Department of Energy, demand for gasoline has increased 27 percent since 1977, but refining capacity has grown by just 2.4 percent. In California, 20 refineries have shut down since the mid-1980s! Only 13 remain, and Shell recently announced plans to close another one. Most of the refineries in California have closed because they can’t afford the costly upgrades required by state regulatory agencies, or they choose not to spend the money. The alternative is to build new ones, but they cost anywhere from $2.5 to 4 billion each! And they take up to seven years to complete.

When surging demand clashes with limited supply for the most important commodity in the world, there are only a couple of alternatives: price adjustment or war. Just allowing for inflation, the peak prices experienced almost 25 years ago would translate to $70 a barrel in today’s dollars. In the U.S., that equates to about $3.50 for a gallon of gas. Given the laws of supply and demand and the bottlenecks in the supply chain, that is a reasonable expectation of what to expect in the foreseeable future. Granted, rising oil prices may contribute to regional recessions (which would cool demand) and temporary lowering of prices. In the longer term however, there is every reason to expect that oil prices will continue to rise.

But there is yet another factor that affects the price of oil.

Terrorism and Instability

Terrorist activities that disrupt production and expectations of imminent disruptions contribute to the volatility of oil prices. The “terror premium” when the price of oil was fluctuating between $35 and $42 per barrel was about $8, or roughly one fifth of the cost, according to Stratfor (June 11). This is the additional charge (due to terrorist activities) on top of what would normally be expected under current supply-and-demand pressures. It rises and falls according to the intensity of supply disruptions and the perceived threat.

In Iraq, pre-war output was 2.5 million barrels per day. Continual attacks on vital oil pipelines have prevented Iraq from returning to pre-war production levels. For example, on June 16, Iraq’s main export line was taken out of operation after three bombings in a 48-hour period. That act reduced Iraqi oil exports from 1.85 million barrels per day to just 200,000—almost a 90 percent drop! It took several weeks to repair the damage. These attacks were just a few miles from the Iranian border and in Shiite territory. According to Stratfor, attacks in Shiite territory began with foreign jihadists, and Iran is the suspected antagonist. If true, such attacks are “imminently repeatable” (June 16).

Some estimate that Iraq has the potential to produce 6 million barrels of oil a day. It would require about $25 billion of investment, and the new oil would not be available until 2008 at the earliest. But who would be willing to risk investing in a war zone? In mid-July, interim Iraqi Prime Minister Iyad Allawi said that saboteurs were responsible for 130 attacks in the preceding seven months, causing hundreds of millions of dollars in damage and lost oil income.

Nigeria is Africa’s most populous nation and biggest oil producer with a total output of about 2.5 million barrels a day. It is the world’s seventh-largest oil exporter and the fifth-biggest supplier to the U.S., which imports almost two thirds of all Nigerian production. The country is plagued with widespread corruption, civil unrest, tribal battles, oil-worker strikes, extensive oil theft and sabotage of oil-producing facilities. Rebels accuse the government of squandering the nation’s oil income—some $20 billion a year. Residents of oil-rich areas bitterly resent the lack of electricity, running water, paved roads, schools and hospitals.

Well-armed gangs routinely tap into pipelines to steal oil and sell it for as low as $5 a barrel to tankers waiting offshore. The estimates of how much oil is stolen vary, but Royal Dutch/Shell, Nigeria’s largest producer, figured in July that it was losing 55,000 barrels (worth about $2 million on the open market) to theft each day!

Shell commissioned a study earlier this year that brought to light that about 1,000 people per year are killed in the violence of the Niger Delta—where most of Nigeria’s oil is. That is on a par with the violence in Columbia and Chechnya and threatens not just the oil industry but Nigeria’s national security, especially since the study predicts increasing violence in the years to come.

Venezuela, which can produce about 3 million barrels of oil a day, is the world’s fifth-largest oil exporter and the fourth-biggest supplier to the U.S. The country has a history of political instability under unpopular President Hugo Chavez. In April 2002, a coup removed him from office for two days before military loyalists returned him to power. In January last year, he fired 700 workers from the state-owned oil company Petróleos de Venezuela S.A. after three fourths of the 40,000 workers had been on strike for 40 days. The strike reduced Venezuela’s oil output from 3 million barrels a day to about 400,000 and shut down thousands of other businesses. In other actions he has taken, Chavez has proven that he will not give up power easily. Political instability in Venezuela could lead to significant disruptions of oil supply in the near future.

Then there’s Russia. It’s the second-biggest supplier of world oil after Saudi Arabia. Yukos, Russia’s largest private company and top oil exporter, produces about 1.7 million barrels of oil a day—more than Libya. It exports 75 percent of that output. And it’s in trouble. The chairman of Yukos and Russia’s richest man, Mikhail Khodorkovsky, made the mistake of using his wealth to support political parties that were opposed to the re-election of President Vladimir Putin. He’s now in prison. The government says Yukos owes almost $7 billion in back taxes for 2000 and 2001. Estimates are that after 2002 and 2003 audits, the total tax bill will be $10 billion! Apparently, the government’s case is based on some murky tax procedures that almost all big Russian exporters abide by, not just Yukos.

As of this writing, the Russian government is moving to seize the company and sell off some of its assets in order to pay the tax debt. Potential buyers are state-owned firms or others close to the Kremlin. Analysts have characterized the move as excessive since the Kremlin has ignored at least 11 offers to restructure the debt, including an offer by Khodorkovsky to settle the claim with his stake in the company. The move to dismantle Yukos is causing fears of supply disruptions. But that’s not the biggest problem.

The attack has soured the investment climate in Russia and raised concerns about property rights. It highlights the risks of doing business in Russia at a time when the world is demanding more oil at a record-breaking pace. Here’s how Stratfor summarized the problem: “For foreigners, this represents the worst Russia has to offer: backroom deals, rigged auctions, ignored property rights and heavy-handed courts with predetermined verdicts. As a result, direct investment of foreign money in Russian equipment, companies and infrastructure is stalled and will not return until the government re-creates a sense of stability for the foreign investment community. After the 1998 default, that process took about three years …” (July 20).

In spite of the international backlash, it appears President Putin is determined to consolidate his hold over the Russian oil industry, just as this magazine’s editor in chief said he would. “Mr. Putin is going to control that asset [oil], no matter how much Western powers thunder in protest. Oil profits will help to place Russia back on the world stage as a dominant world power” (Personal, Trumpet, January 2004). Notice this strikingly similar corroboration in the Washington Post seven months later: “Now that oil has replaced military might as the source of Russian power, Putin is using it to assert himself on the global stage …” (August 11). This he will do, in spite of apprehensions by free-market enthusiasts and investors.

Yes, jitters about the future of oil are justified, and the instability of major oil markets around the world will only drive the price upward, especially as the U.S. finds itself incapable of winning the war on terror. This is doubly true as terrorists take the fight to the world’s number-one oil producer and exporter, Saudi Arabia, which alone is pumping about 10 million barrels a day—about 12 percent of the entire world’s supply!

Threats to Saudi Arabia

With the recent bombings and kidnappings of foreigners in Saudi Arabia, it’s clear that the kingdom is not going to be insulated from terrorist activities. Al Qaeda has long criticized the Saudi rulers for being too cozy with the West, and it aims to weaken the royal family any way it can. One strategy it has taken up is to drive out foreign oil workers (expatriates).

While Saudis operate most of the oil business, the highly skilled positions are generally filled by a group of about 100,000 expatriates, two thirds of whom are from the U.S. and the UK. Some with more than 15 years’ experience are fleeing the country. The immediate impact is minimal, but as more of them leave, operational efficiencies will suffer and there will be a gradual deterioration of recovery rates and new exploration. Perhaps the most significant blow would be to the kingdom’s ability to quickly add new production in times of stress as it did during the Iran-Iraq war, the Gulf War of 1990 and less than 24 hours after 9/11.

The expatriates are not popular with the masses since they are exempt from the Wahhabi laws that govern the kingdom. In their secluded compounds, Westerners are allowed easy access to the Internet, cable TV and alcohol; and women have much more freedom. By targeting the expatriates, al Qaeda not only seeks to weaken the oil infrastructure but it is also evoking sympathy and support for its cause from a populace that is already unhappy with the ruling family. The terrorists want to capitalize on and harness the internal unrest in the country as it percolates with growing intensity.

Internal Muslim fundamentalist leaders have unabashedly called for the toppling of the house of Saud. The majority of Saudis are offended with their government’s loyalty to the West (even though it’s in their own interest) and with the eccentric behavior of their royal rulers, which they perceive to be contrary to Muslim values.

Moreover, in 2001 per capita income in Saudi Arabia was only $6,800—a dramatic drop from $28,600 just 20 years before. The country, outside of Africa, has one of the highest birth rates in the world, and half the population is under 18 years old. Unemployment is estimated to be between 20 and 30 percent and expanding by about 100,000 men per year. Mix in the fact that Saudi Arabia is the world’s premier welfare state that offers little incentive to work (free health care, free college education, interest-free loans, utilities and gasoline far below cost). Add in a barrel of disillusionment for the royal family that cooperates with the West, and we have a formula for turning idle young men into jihadists!

Yet the Saudi rulers are not at all keen to stifle their people’s contempt for America. That would give even more cause for the masses to rebel against them. Therein lies the reason for the dichotomy of Saudi Arabia’s position vis-à-vis the West.

On one hand, the Saudi leadership is often cooperative with the West. Really, it has no choice. About 80 percent of all state revenues derive from oil exports. Dr. Ibrahim al-Assaf, the Saudi minister of finance, claims that Saudi Arabia needs to sustain 8 percent growth in gross domestic product to cope with the growing social problems and mushrooming population (FromTheWilderness.com, June 2). It has not been able to do that even with oil income as large as it is. So the nation can’t afford to lose any of it.

On the other hand, it’s been well documented that the Saudi government supports and finances terror. This is done in order to pacify the growing hordes of frustrated Saudi citizens. By channeling their people’s anger against the West, the Saudi royal family deflects that anger away from itself.

According to the Atlantic Monthly, the Defense Policy Board sponsored a report that showed how Saudi Arabia plays a central role in the Arab world’s “outwardly directed aggression” (May 2003; emphasis mine). The report also stated that “The Saudis are active at every level of the terror chain, from planners to financiers, from cadre to foot-soldier, from ideologist to cheerleader” (ibid.). The Atlantic Monthly documented numerous and specific actions the Saudis have taken. Yet the Bush administration looks the other way. Why? Only Canada supplies more oil to the U.S. than does Saudi Arabia.

So we see why the house of Saud is sometimes pro-U.S. and anti-U.S. at the same time! It’s a precarious balancing act in a bid to hang on to power and a lavish lifestyle as long as possible in a country with significant social problems. The U.S., meanwhile, walks a political tightrope, because it knows what the Saudis are doing but also knows how the unencumbered flow of Saudi oil is vital to the stability of the U.S. economy. The terrorists know it too, and that’s one reason they are seeking to destabilize Saudi Arabia! But there’s more to it than that.

The Final “Push”

For more than 10 years our editor in chief has identified Iran as the “king of the south” prophesied of in Daniel 11:40. (If you have not done so, request your free copy of The King of the South, which will open your eyes to Iran’s role in end-time affairs.) This magazine has shown how Iran is causing turmoil in Iraq in order to consolidate its power in that region. But Iraq is not the only prize Iran seeks. It is also taking advantage of the uneasiness in Saudi Arabia by aggressively provoking revolt within its borders too!

Note this startling prognostication by Richard J. Maybury in his book The Thousand-Year War in the Mideast: “My guess is that Iran’s secret agents will continue working to foment revolution [in Saudi Arabia], and they’ll do it in a way designed to prevent U.S. intervention. The rebels will claim to be fighting for a more democratic Arabia. Once they’ve succeeded and are in power, they will request assistance from Iran to ‘stabilize’ Arabia. This voluntary invitation to Iran by the new ‘democratic’ government will be an end run that will deprive the U.S. government of justification to intervene.” With the debate and fallout over U.S. action in Iraq, this does not seem like a far-fetched scenario. What would be the consequences?

If Iran is allowed to manage Iraq and Saudi Arabia, it will control about 20 percent of the world’s current production of oil and about half the world’s oil reserves! That is not only a dangerous proposition for the United States, but much more so for the European Union! While the U.S. imports about 54 percent of its oil, the EU imports more than 80 percent—a figure projected to be 87 percent by 2010. Moreover, Germany has virtually no oil. It imports about 97 percent! The prophesied “king of the north” is extremely dependent on outside sources of oil. (For a history and analysis of the king of the north, request a free copy of Germany and the Holy Roman Empire.)

Now notice this pivotal end-time prophecy in Daniel 11:40: “And at the time of the end shall the king of the south push at him: and the king of the north shall come against him like a whirlwind ….” The word push means to push, thrust or gore. An Islamic group of nations led by Iran will thrust at the European Union and cause it harm, at first. This push will probably revolve around Jerusalem, as in the time of the Crusades, and it will likely involve oil. Germany and the EU will respond like “a whirlwind”—with blitzkrieg warfare that will annihilate the king of the south! (request our free booklet Jerusalem in Prophecy to understand).

It was earlier stated that when surging demand clashes with limited supply for the most important commodity in the world, there are only a couple of alternatives—price adjustment or war. The world demand for oil, at 81 million barrels per day, is unprecedented, and the projected need is for an average increase of 2 million barrels a day each year for the next 20 years! At the same time, supply is not only strained but threatened by terrorism and government instability in many of the major oil markets of the world. Any significant disturbance in the supply chain will impact global prices. Expect prices for oil and gasoline to continue rising over the long haul.

But very soon, “in the days of these kings shall the God of heaven set up a kingdom, which shall never be destroyed: and the kingdom shall not be left to other people, but it shall break in pieces and consume all these kingdoms, and it shall stand for ever” (Daniel 2:44). That’s the good news we can all look forward to, and the fight over “black gold” shows that we are getting ever closer to that fateful day!