Survey of Oil Exports from the Middle East

With all of the current strife in the Middle East and North Africa hitting the main stream media, I thought it would be interesting to examine the petroleum export trends for the countries in these regions.

My hypothesis is that as the exports for oil exporting countries go into decline, this stress on the economy will increase the likelihood of civil unrest and political upheaval.  Especially those countries which are heavily dependent upon petroleum exports for revenue will suffer sever economic contractions as export revenues decline and then ceases altogether.  These ex-exporters will then either have to decrease their domestic consumption or start importing petroleum.  The transition from exporter to importer would not be easy, and cutting consumption, to maintain exports, would not go over very well, politically either.   With little other revenue sources, declining rates of petroleum exports are a formula for civil unrest and regime change.

Other factors being equal, I would expect that the greatest potential for civil unrest would be in those countries with present high standard-of-living (e.g., GDP per capita) and which are at or headed towards net zero exports.  Of course, all the other factors are usually not equal, and so I considered a few other factors as well.  Population growth, in particular, looks quite troubling for these regions.

In this article, I survey the fourteen countries of the Middle East.  This is actually part of a larger on-going study that I am conducting to quantitatively examine global oil production, consumption and export trends. 

Data Sources

All production, consumption and export rate are reported in units of billions of barrels per year (bbs/yr).  I used this to calculate net exports (or imports) as production minus domestic consumption. The petroleum production and consumption data I gathered from both the EIA Energy Profiles and BP Statistical Review.   Population data, plotted on the right axis in units of millions, was extracted from the US Census Bureau International Database, as were 2010 estimates of the growth rates.  GDP per capita (purchasing power parity corrected) and public debt, as a percentage of GDP, are as reported in the CIA World Fact Book entry for each country. Predominant religions are as reported in Religion Facts, or, in the CIA World Fact Book.

When reported in the CIA fact book or EIA country analysis brief, I also present the destinations of the oil exported by the countries being considered and the proportion of federal income or GDP that is dependent on the petroleum industry.  Unfortunately, this information is not consistently presented for every exporting country.

Both of the EIA Energy Profile and BP Statistical Review data bases have their flaws, if one’s goal is to examine long term production and consumption trends on a country-by-country basis.

The BP statistical review nicely shows data back to 1965, but, only shows data for about the top 40 highest consuming or producing countries, which are not necessarily the same countries.  Lower consumption or production countries get lumped together within a geographic region. 

The EIA nicely shows both consumption and production data separately for nearly every country in the world, but, this data is only presented from 1980 on, and so longer term trends can be difficult to see.

Generally, the BP and EIA data are in good agreement—one exception being when a country, like Brazil, has significant “other liquids” production (i.e., ethanol) which the BP data does not include. However, that is not the case for the present countries.

Okay, enough ranting about data bases, without further adieu, here’s my survey and assessment of the recent petroleum export trends (the big green arrow in the figure for those who will not read).

Survey of the Middle Eastern Countries

Bahrain

Religion: 100% Muslim (70% Shi'a, 30% Sunni)

Population: 1.1 million; growth rate 3%

CIA:

GDP per Capita: $40,400 (2010 est.)

Public Debt: 59.2% of GDP (2010 est.)

Petroleum production and refining account for more than 60% of Bahrain's export receipts, 70% of government revenues, and 11% of GDP (exclusive of allied industries).

EIA:

no report

Recent Petroleum Export Trend: Hitting net-zero exports now (production declining; consumption rapidly increasing).

Iran

Religion: 98% Muslim (89% Shi'a, 9% Sunni)

Population: 77 million; growth rate 1.3%

CIA:

GDP per Capita: $11,200 (2010 est.)

Public Debt: 16.2% of GDP (2010 est.)

Population below poverty line: 18% (2007 est.)

EIA:

Oil accounts for 44% of total energy consumption; Nat gas is 53%

Oil exports provide approximately half of Iran’s government revenues, while crude oil and its derivatives account for nearly 80% of Iran’s total exports.

Iran is OPEC’s second-largest producer and exporter after Saudi Arabia

Top petroleum export destinations (2008): Japan, China, India, S Korea (60% of total); Italy, Spain, Greece, France, (19% of total)

Recent Petroleum Export Trend: Flat (production and consumption both increasing at about the same rate)

Iraq

Religion: 97% Muslim (60% Shi'a, 37% Sunni)

Population: 30 million; growth rate 2.4%

CIA:

GDP per Capita: $3,600 (2010 est.)

Public Debt: no data

Population below poverty line: 25% (2008 est.)

The oil sector provides over 90% of government revenue and 80% of foreign exchange earnings.

EIA:

Oil accounts for 96% of total energy consumption; Nat gas is 4%

Top petroleum export destinations: Asia (47% of total); Europe (22% of total); Western Hemisphere (30%)

Recent Petroleum Export Trend: Increasing (production increasing faster than increasing consumption).

Israel

Religion: 14.6% Muslim (mostly Sunni), 80% Jewish, 2% Christian

Population: 7.3million; growth rate 1.6%

CIA:

GDP per Capita: $29,500 (2010 est.)

Public Debt: 77.3% of GDP (2010 est.)

Population below poverty line: 24%

EIA:

no report

Recent Petroleum Import Trend: declining (no production; declining consumption)

Israel has almost no domestic oil production and imports substantially all of its petroleum.

Jordan

Religion: 92% Sunni Muslim, 6% Orthodox

Population: 6.2 million; growth rate 2.2%

CIA:

GDP per Capita: $5,300 (2010 est.)

Public Debt: 61.4% of GDP (2010 est.)

Population below poverty line: 14.2% (2002)

EIA:

no report

Recent Petroleum Import Trend: declining (no production; declining consumption)

Jordan has no domestic oil production and imports substantially all of its petroleum.

Kuwait

Religion: 85% Muslim (70% Sunni, 30 Shi'a), 15% Christian, Hindu, Parsi, other

Population: 2.5 million; growth rate 2.1%

Concerning the drop in 1991, from Population of Kuwait:

In 1985, the population reached 1.697.301 persons, comprised 56% males and 44% females. In 1990, the population reached 2.141.465 persons. The percentage of non-Kuwaitis scored 72%. In same year, the Iraqi aggression against Kuwait occurred. As a result, large number of the non-Kuwaitis emigrated. Hence, major changes in the population structure took place.

CIA:

GDP per Capita: $51,700 (2010 est.)

Public Debt: 12.6% of GDP (2010 est.)

Population below poverty line: no data

Petroleum accounts for nearly half of GDP, 95% of export revenues, and 95% of government income.

EIA:

Kuwait's economy is heavily dependent on oil export revenues which account for roughly 90 percent of total export earnings.

Top petroleum export destinations: Japan, S Korea, India, Taiwan, Singapore, China (64% of total); USA (8.7% of total); Western Europe (7.5%)

Recent Petroleum Export Trend: Flat (production and consumption both increasing at about the same rate).

Lebanon

Religion: 60% Muslim, 39% Christian

Population: 4.1million; growth rate 0.6%

CIA:

GDP per Capita: $14,200 (2010 est.)

Public Debt: 150.7% of GDP (2010 est.)

Population below poverty line: 28% (1999 est.)

EIA:

no report

Recent Petroleum Import Trend: flat (no production; flat consumption)

Lebanon has no domestic oil production and imports substantially all of its petroleum.

Oman

Religion: Ibadhi Muslim 75%, 25% other (includes Sunni Muslim, Shia Muslim, Hindu)

Population: 3 million; growth rate 2%

CIA:

GDP per Capita: $25,800 (2010 est.)

Public Debt: 4.4% of GDP (2010 est.)

Population below poverty line: no data

Oman is a middle-income economy that is heavily dependent on dwindling oil resources. By using enhanced oil recovery techniques, Oman succeeded in increasing oil production, giving the country more time to diversify.

EIA:

Though Oman is a significant net exporter of petroleum, they are not a member of OPEC. As is the case with other exports from the Gulf, Asia provides the main consumer markets for Omani crude, led by China and Japan.

Exports of natural gas have diversified the economy away from oil, but Oman will remain highly dependent on its hydrocarbon sectors for the foreseeable future. Oman is pursuing economic diversification, however its industrialization program is itself reliant upon increased volumes of petroleum and natural gas as feedstock.

Recent Petroleum Export Trend: Flat (production and consumption both increasing).

Palestine

(data from Palestinian Territories Fact Sheet)

Religion: The West Bank is 75% Muslim (predominantly Sunni), 17% Jewish, and 8% Christian and other. The Gaza Strip is 98.7% Muslim (predominantly Sunni), 0.7% Christian, and 0.6% Jewish.

Population: 4 million; growth rate 3.6% (based on the statement that the population will double in 20 yrs)

GDP per Capita: $3,000 (based on a GDP of $12 billion)

Population below poverty line: 46%

CIA:

no report

EIA:

no report

Recent Petroleum Import Trend: increasing (no production; increasing consumption) Palestine has no domestic oil production and imports substantially all of its petroleum.

Qatar

Religion: Muslim 77.5%, Christian 8.5%, other 14% (2004 census)

Population: 840,000; growth rate 0.9%

CIA:

GDP per Capita: $145,300 (2010 est.)

Public Debt: 10.3% of GDP (2010 est.)

Population below poverty line: no data

EIA:

Oil accounts for 25% of total energy consumption; Nat gas is 75%

Though Qatar’s petroleum production has grown steadily since 2002, Qatar’s fields are maturing, and output at Dukhan – formerly the largest producing field – is in decline. To offset anticipated declines, enhanced oil recovery (EOR) techniques are being considered for several fields.

The vast majority of Qatar’s oil exports are sent to Asian economies. Japan is the single largest importer, though South Korea is also an important export market.

Recent Petroleum Export Trend: Increasing (production increasing faster than increasing consumption).

Saudi Arabia

Religion: Muslim 100%

Population: 26 million; growth rate 1.5%

CIA:

GDP per Capita: $24,200 (2010 est.)

Public Debt: 16.7% of GDP (2010 est.)

Population below poverty line: no data

The petroleum sector accounts for roughly 80% of budget revenues, 45% of GDP, and 90% of export earnings

EIA:

Oil accounts for 56% of total energy consumption; Nat gas is 44%

Saudi Arabia exported an estimated 7.3 mbd of petroleum liquids in 2009 (7.5 mbd in 2010), the majority of which was crude oil. Asia now receives an estimated 55 percent of Saudi Arabia's crude oil exports, as well as the majority of its refined petroleum product and natural gas liquids (NGL) exports.

Top petroleum export destinations: Far East (57% of total); USA (14% of total); Europe/Mediterranean (9%)

Recent Petroleum Export Trend: Flat to declining (production flat; consumption increasing).

Syria

Religion: 74% Sunni Muslim, 16% other Muslim sects, 10% Christian

Population: 22 million; growth rate 2%

CIA:

GDP per Capita: $4,800 (2010 est.)

Public Debt: 29.8% of GDP (2010 est.)

Population below poverty line: 11.9% (2006 est.)

Long-run economic constraints include declining oil production, high unemployment, rising budget deficits, and increasing pressure on water supplies caused by heavy use in agriculture, rapid population growth, industrial expansion, and water pollution.

EIA:

Oil production has stabilized after falling for a number of years, and is poised to turn around as new fields come on line. While much of its oil is exported to Europe, Syria's natural gas is used in reinjection for enhanced oil recovery (EOR) and for domestic electricity generation. Syrian crude oil exports go mostly to OECD European countries, in particular Germany, Italy, and France, totaling an estimated 143,000 bbl/d in 2009, according to International Energy Agency (IEA) data.

Recent Petroleum Export Trend: Declining (production declining; consumption increasing).

Unite Arab Emirates

Religion: 96% Muslim (16% Shi'a),

Population: 5.1 million; growth rate 3.6%

CIA:

GDP per Capita: $40,200 (2010 est.)

Public Debt: 44.6% of GDP (2010 est.)

Population below poverty line: 19.5% (2003)

Dependence on oil, a large expatriate workforce, and growing inflation pressures are significant long-term challenges.

EIA:

The UAE has been able to maintain its proven reserves over the last decade primarily due to enhanced oil recovery (EOR) technologies increasing extraction rates of mature oil projects combined with higher oil prices making more reserves commercially viable.

In 2009, the UAE exported 2.3 mbd, predominantly to Asian markets. Japan is the main market for UAE petroleum exports, encompassing 40 percent of its export volumes. South Korea and Thailand are the other major destinations for Emirati crude.

Recent Petroleum Export Trend: Flat (both production and consumption increasing).

Yemen

Religion: Muslim including Shaf'i (Sunni) and Zaydi (Shia), small numbers of Jewish, Christian, and Hindu

Population: 23 million; growth rate 2.7%

CIA:

GDP per Capita: $2,600 (2010 est.)

Public Debt: 39.1% of GDP (2010 est.)

Population below poverty line: 45.2% (2003)

Yemen is a low income country that is highly dependent on declining oil resources for revenue. Petroleum accounts for roughly 25% of GDP and 70% of government revenue.

EIA:

Yemen's economy is heavily dependent on hydrocarbons, which account for 30 percent of GDP, nearly 75 percent of government revenues, and over 90 percent of foreign exchange earnings.

Production has been declining steadily since reaching a peak of 440,000 bbl/d in 2001. EIA estimates oil output will decrease further to 250,000 bbl/d in 2011 and 2012.

As domestic oil consumption rises, net exports are falling along with production. Net oil exports were 150,700 bbl/d in 2008. Yemen's net imports of refined oil products in 2007, the most recent data available, were estimated at 43,000 bbl/d, mainly distillate and residual oils. Asian countries account for the majority of Yemen's oil exports.

Recent Petroleum Export Trend: Declining (production declining and consumption increasing).

Summary and Conclusions

Well even if you just looked at the pictures you might have the same over reaction as I do which is: does anything look good here?  No, not really, but some countries certainly look much worse than others and are currently in the throes of dealing with declining exports, while other look like declines are about to start.  Only a few actually have increasing exports, but the rapid population growth in the countries will mitigate the increase in exports as domestic consumption increases. 

Of these fourteen countries, four are importers: Israel, Jordan, Lebanon, and Palestine.  None of these countries have any significant domestic production and they have to import essentially all of their petroleum. Israel, Jordan, Lebanon (and probably also Palestine) have significant population growth ranging from 1.6% , 2.2% and 3.6% for Israel, Jordan and Palestine, respectively. Only Lebanon at 0.6% has a modest growth rate.  The percentage of public debt to GDP is very large range from 61%, 77% and 151% for Jordan, Israel and Lebanon.  A tightening supply of petroleum with rising prices will damage the economies of these countries.

About to join the ranks of importer for this region is Bahrain, which is hitting zero net exports now.  With 70% of government revenues dependent on production and refining it is not hard to see how this country will suffer economic hardship in the very near future.  With high standard of living at $40k/p), the population has recently spiked upwards (a 3%/yr growth rate), as has petroleum consumption.  This looks like a prime candidate for civil unrest as Bahrain transitions into an importer. 

Not far behind Bahrain are Syria and Yemen whose exports are rapidly declining.  If their downward trends in exports continue at the same pace it looks like they would hit net zero exports in the 2010s.  Both countries are highly dependent on declining oil resources for revenue.  Like Bahrain, the population of Syria and Yemen are rapidly escalating (2% and 2.7% growth rates, respectively).  Unlike Bahrain, however, the standard of living of Syria and Yemen are already much lower ($4.8/yr and $2.6/yr, respectively), and so the fall will not be as great.  However, with 45.2% of the population below the poverty line, there is really is no where to fall further to.  I put Syria and Yemen high on the list a candidate countries for civil unrest.

Neither Syria nor Yemen are large exporters (each about 0.12 mbd) so declining exports from these countries wouldn’t have much effect on the global supplies of oil.  The largest effect would be on the top export destinations: Germany, Italy, and France, and, Asia.  Perhaps, as suggested by the EIA, production in Syria will turn around production.  However in remains to be seen if any increase in production will actual outpace consumption which is also on an upward trend. 

Not too far behind Syria and Yemen, is Oman which has recently staved off a down trend in exports by introducing enhanced oil recovery techniques.  This might be doing little more than accelerating production from diminishing reserves of oil, which in turn, will cause an even steeper production declines a few years out.  For now, however its exports could stay flat, or increase slightly, if production can keep ahead of increasing domestic consumption.

The Kingdom of Saudi Arabia also is showing signs of declining exports.  Perhaps, like Oman, enhanced oil recovery techniques may allow Saudi Arabia to maintain its production at constant levels.  However, increasing population (1.5% growth rate) and increasing petroleum consumption trends will probably mean continued declines in exports.  As I discussed previously, even if production stayed constant, the increasing trend in domestic consumption would cause net exports to go to zero by about 2044.   For the time being however I would not expect petroleum exports to be a factor driving civil unrest.

Iran, Kuwait, and UAE all have flat exports. Apparently, UAE is maintaining its production with enhanced oil recovery techniques, and so I have the same concern as with Oman that this will very steep production declines eventually.  Population growth in UAE looks ridiculously high (3.6%/yr), and I expect that this will eventually cause consumption to spike upwards.    Population growth in Iran (1.3%/yr) and Kuwait (2.1%/yr) is not as steep as UAE, but I expect that is will continue to driven up the rate of domestic consumption and cut into exports.  Like Saudi Arabia, however, export revenues from petroleum exports should be stable and therefore would not be a factor driving civil unrest.

Iraq and Qatar are the only two counties with upwards trends in petroleum exports.  For both countries this is due to increased production rate out pacing increasing domestic consumption rates.  As I discussed previously, Iraq is thought to have the potential for a huge increase in production rates, but it remains to be seen if foreign investors and private companies with the know-how will invest in Iraq to make this a reality.  Qatar, on the other hand, may be turning to enhanced oil recovery techniques just to keep production rates increasing. 

---------------------

Next time:  survey of oil exports from North Africa

Investing in view of the Export Land Model

A few weeks ago, Erik Townsend, a previous frequent contributor at Chris Martensen’s and at Jim Puplava's websites, released a pair of videos titled, Peak Oil Explained for Investors (video 1 of 2) and  Peak Oil Speculative Trading Strategies (video 2 of 2).

Part 1 gives a nice introduction to the concept of peak oil, common misconceptions, and Erik’s perspective on why a number alternative means of generating energy will likely, at least in the short term, fall short.  Part 2 discusses possible speculative investment scenarios that can take advantage of the present market under pricing of oil, including taking advantage of price up or down turns in or investing in alternative energy industries.  Some of the investment schemes Erik describes are quite complex and would only be suitable for advanced professional investors, but other could be used by any investor.  I would highly recommend watching both these videos, even if you are not an investor type.  The videos are completely free and Erik is not selling anything. 

You can watch the videos at Erik’s website or download the higher quality MPEG4 video files.  If you do decide to download them, be warned that these are big files.  Also, if you have an older computer, like mine, you might have trouble playing them.  I found that the freely available VLC media player worked well for this purpose.

Erik’s presentations caused me to think, in a new light, about my previous articles about the Export Land Model analysis for the USA and the earlier supporting article on the production and consumption trends for the USA’s top ten export sources. 

If there few people that understand the implications of peak oil, then even fewer understand the implications of declining oil exports.   Global oil exports will likely decline at an even faster rate than post-peak oil production rates decline.  An exporting country’s declining net exports can be due to one or both of declining oil production rates and increasing domestic consumption.  A combination of declining production rates and increasing consumption rates means that the rate of decline in exports will be the sum of these two rates. 

I didn’t find much on the internet discussing implications of the Export Land Model on investing.  I only found one article by David Galland, What the Export Land Model Means for Energy Prices (guess what, they go up).  While this article nicely explains what the export land model is, in my opinion, it falls short by not considering how declining net exports will specifically affect the economies of different countries depending on what type of oil importer or oil exporter they are.

I believe that the Export Land Model analysis could be useful in predicting how different countries will fare in the face of zero net export.  This might create some interesting investment ideas, which I briefly explore below, for five different classes of countries:

Net petroleum exporters with no end in sight.

Canada and Brazil are examples of countries with increasing production and signs of flat or declining domestic consumption going forward.  I therefore expect exports from these countries to increase in the coming years, and this should greatly benefit their economies in general, and in the petroleum sector in particular.  Especially if the price of oil spikes, these country’s economies would boom. Moreover, both of these countries are stable politically as compared to a number of other exporting nations, and therefore, stable oil production is more reliable. 

One problem with Canada is that it's economy is so closely tied to the USA's; if the USA goes into a recession or depression, then so will Canada's.  It's energy sector might stay strong, so long as the government doesn't tax it too heavily.

Present small exporters with a large speculative upside potential in production

Angola  and Iraq are examples of countries with low domestic consumption and the potential for spectacularly large increases in production over present production rates—160% for Angola and 400-500% for Iraq compared to present levels. 

I class this upside as speculative because there are real risks of civil war in both of these countries.  Additionally, for the production rate increase to be realized in the next 5-15 years there have to be sustained large year-over-year increases in the production rate (20-30%.yr), which I think will be challenging to pull off in such politically unstable countries. 

Present exporters rapidly headed towards ex-exporter status

There are several present exporters that I would put in this class, and based on my modeling, I can make an estimate of the year when they will transition from being a net exporter to ex-exporters:  Mexico (2014), Venezuela (2022), Saudi Arabia, Russia (both 2023), Algeria (2030),  and Nigeria (2039).  With the exception of Russia, which I expect to have flat to declining consumption going forwards, these are countries with both declining production and increasing consumption rates.  

I predict troubles ahead for countries like Mexico and Venezuela that are just few years away from hitting zero net exports and whose domestic economies are heavily dependent on income from the oil industry.  I would avoid investing in these countries, unless there is some way of shorting domestic industries or foreign industries that are heavily dependent on continued oil imports from these countries.  One possible negative play would be those Caribbean refineries that import Venezuela’s and Mexico’s oil and then re-export it to the USA. 

I have the same concern with Russia and Saudi Arabia.  Maybe new oil production technologies and new arctic oil drilling will allow Saudi Arabia and Russia, respectively, to delay the time of net zero exports, but I would like to see more evidence of a changing trend in exports, before I believe it. 

Net importers that still have significant domestic production

The USA, UK and China are all examples of many countries that are not totally reliant on petroleum exports and therefore could still carry on if (when) global net exports reaches zero.  If these countries could no longer import petroleum, I predict that the extent of the decline in their economies (% decline in GDP) would be roughly proportional the ensuing relative decrease in petroleum consumption (% decline in dQ/dt).

I wrote more about this here in the context of the USA, but the principle is probably generally applicable. 

For instance, for the USA if because of falling imports, petroleum consumption decreases by 40% (see Figure 3 here) then I think that the GDP would decline in proportion. 

The economies of these countries will be hurt badly by net zero exports, but it would not be a total economic collapse for them.  However, to the extent that most of the OECD countries in the world fall into this class, the size of economic contraction would set off a world-wide recession that would probably last several years as populations adapt to the new realities of decreased oil consumption.  

Countries totally reliant on petroleum imports
As I pointed out here, Japan and South Korea are examples of countries that import nearly all of their petroleum, and have no significant domestic production.  Net exports going to zero should scare the hell out of the governments and population in these, and similarly import-dependent, countries. 

There are signs that Japan is aware of the economic threat of a short term disruption in exports (see Japan’s 2010 Annual Report on Energy noting Japan’s high dependency on oil passing through transportation choke points).  Japan appears to be moving to nuclear energy, to mitigate their dependency on oil, with plans to nine new nuclear power plants by 2020 and more than 14 by 2030, although I think that this will be too little too late.  I don’t find similar signs of an awakening from South Korea. 

Net zero exports would devastate the economies of these types of countries, in my opinion.  And a simultaneous recession in the other OECD countries would make it worse, because Japan’s and S Korea’s exports of manufactured goods would also get hammered.  I imagine Japan and South Korea having to adapt in the same manner as in the "special period" of Cuba when, after the Soviet Union collapsed, Cuba's petroleum imports dropped ninety percent.  It will probably be worse for Japan and Korea, in that Cuba actually produces some oil domestically.  For instance, using EIA data, Cuba produces more petroleum than Japan and S Korea combined but consumes less than 1/20 and 1/10 that of Japan and S Korea, respectively.  Moreover, after the shock, Cuba was able to import oil from another source: Venezuela.  In 2009 Venezuela exported about 100,000 bpd to Cuba at a discounted price (see Venezuela's Oil-Based Economy).  Japan and South Korea may not be so fortunate in a time of net zero exports.  

Then we have the issue of North Korea.  North Korea's traditional oil import sources from Soviet Union/Russia, China and Iran have been in steady decline for over a decade, as has its domestic coal production (Economy of North Korea; N. Korea's shrinking oil imports reflect economic hardships).  I expect that at some point this energy choke will spell war between North and South Korea, or more hopefully, regime change in the North.  But then South Korea will inherit the energy mess. 

And what about other less developed countries that are totally dependent on imported oil with no domestic production?  Other than Cuba's special period I do not have an example to give, but I’m sure there are many.  I would not want to be invested in (or maybe even located in) an underdeveloped country that is also totally dependent on oil imports when global net exports go to zero. 

An Export Land Model Analysis for the USA-Part 4

In the fourth and final part of the series, I summarize the results of my analysis from the first three parts, explore the economic implications, consider the likely government response leading up to net zero exports and give you some advice on individual preparation.

I started this analysis because I wanted to examine how Brown and Faucher's seminal concept of the export land model pertains to US imports.  Brown and Faucher predicted a composite export decline rate be -6.2%/yr for Saudi Arabia, Russia, Norway, Iran and UAE.  However, only two of these countries are substantial suppliers of oil to the USA.  Brown and Faucher used a linearized version of the Hubbert equation, which has been criticized, to predict future production rates and, a Monte Carlo analysis to predict future consumption, which was not described in enough detail for me to verify or reproduce. 

Hey, {dancing with the stars/the big game} is coming on in

three minutes—so just give me the bottom line, and make it fast!

Summary of Parts 1, 2 and 3

I used a non-linear least squares analysis with the Hubbert equation, and a modified Hubbert equation, to analyze production and consumption rates for the US and its top ten export countries.  For the past 30 years, the sum of petroleum imports from the top ten, plus US production, is highly correlated with the US consumption rate.  I used this observation, plus predictions of future rates of the top ten's petroleum production, consumption and exports, to predict the US’s petroleum consumption rate over the next 20 years.  My best estimate is that US consumption rates will decline on average by -3 to -4%/yr until the earlier 2020s and then plateau or decline at a slower rate thereafter. 

More pessimistic assumptions about production, consumption and exports all suggest a steeper decline in the consumption rate of -4 to -5%/yr in the 2010s and beyond.  More optimistic assumptions suggest a shallower decline rate untill the mid-2020s and then a steeper decline rate thereafter. 

Only if I assume a very optimistic simultaneous set of circumstances, such as Saudi Arabia and several other of the top ten, all maintaining their current production for 20 years, and Iraq, within the next six years, producing more oil than Saudi Arabia, do I see another decade of an increasing rate of consumption, after which the consumption rate still declines anyway.

The key point here is declining consumption rates, sooner (within 10 years) or later (within 20-30 years), no matter which scenario is considered. 

My predicted mid-2020s plateau in the declining consumption rate turns into a shallow decline if I assume that the ex-exporting countries will get a “fungible proportion” of their oil imports from the remaining top ten, or, if I assume that the average ERoEI for the production rate reaches 2:1 by 2030. 

Considering declining export rates, a la the export land model, is a game changer compared to just focusing on oil production rates alone.  Considering a declining ERoEI, on top of declining export rates, plus fungible sharing of the remaining exportable oil between the top ten, would be a game ender.  

For instance, an ERoEI assumed to decline linearly from 20:1 to 2:1 from 2010 to 2030 would drive net exports to zero well before 2030 and would also cut into useful domestic production.   Under this assumption of declining ERoEI by 2030, the US’s consumption rate would only be about 14% of its 2009 value and the rate of decline up to that point is roughly linear at -4.2%/yr.  Assuming a global average ERoEI of 2:1 by 2030 might be extreme.  But, this does help to illustrate the point that if (or when) ERoEI decreases to the 2:1 to 3:1 range, oil exports would rapidly decline to zero.

Okay, okay, for those in a hurry, the bottom line—the implications of my analysis are that your standard of living is going steadily down over the next 20 years, probably by at least about 50%, and, there’s not a whole lot your government, or you, can do about it. 

Come back after your show is over, and I’ll explain my reasoning. 

The Tight Relationship between GDP, Standard of Living and Oil use

Once again, Charles Hall and colleagues should get credit for recognizing, over 25 years ago, the tight long-term relationship between economic growth and fuel use:

(full paper available at Energy and the US economy: a biophysical perspective)

Cleveland et al. were careful to point out that correlation doesn't prove causation, in one direction or the other.  However, as GNP and fuel use are so tightly correlated for such a long period, it is hard to imagine how a decline in fuel use would not be contemporaneous with a decline in GNP. 

In Cleveland et al., fossil fuels was just one of three energy parameters (electricity and nuclear were the other two) making up the term “fuel use.”  So, it is unclear to me from the paper how fossil fuel use alone correlated with GNP.

Fortunately, Adam Sieminski, chief energy economist for Deutsche Bank, has recently pointed out a nearly one-to-one relationship between the percent change in global oil consumption and the percent change in global GDP:

(full presentation at: Energy and the Economy. US EIA & JHU SAIS 2010 Energy Conference April 6, 2010)

Robert Hirsh also arrived at this same approximate one-to-one relationship when considering the percentage declines in the USA’s GDP and in the oil supply during the two oil shocks of the 1970s:

(full presentation available at: How Oil Will Invigorate Coal)

A common method to quantify and compare the standard of living between different countries is to calculate GDP per capita (see e.g., Standard of living).  Another graph from Sieminski’s presentation shows how oil consumption per capita linearly correlates with GDP per capita from several countries: 

The Economic Implications of Declining Petroleum Consumption in the USA

Based on these reports, I assume that if US petroleum consumption rates go down, due to declining imports, then US GDP will go down, more or less contemporaneously.  And, to the extent that GDP per capita is a measure of standard of living, the standard of living will go down proportionally and contemporaneously with a decline in consumption rate per capita. 

Perhaps these assumptions will fly in the face of some pundits who try to analyze and predict economic trends without regard to the energy supply—kind of like Dogbert assuming that there is a limitless fungible pool of oil to tap, if only the consumptive demand is there.  I don’t believe that this type of compartmental thinking in very effective if you want to understand long term economic trends in a world of finite oil.  I admit my bias here: real economic growth (i.e., not some bs financial bubble) is driven by cheap sources of energy, and for the last century, the primary cheap energy source has been oil. 

The work of Hall, Sieminski and Hirsh all suggest that in the past, changes in the economy and changes in energy consumption, specifically petroleum consumption, are so highly interlinked that there can’t be too much of a hysteresis between the two for too long.  Certainly, there can be some hysteresis, and that is the place where short-term investors and speculators can try and eke out a profit margin.  But over a longer term (maybe several months or a few years, but not decades), relative changes in petroleum consumption and GDP will normalize.  I view all of the machinations and fluctuations in financial markets over the past few years as reflecting an ongoing normalization in the face of a static or declining cheap petroleum supply. 

Therefore, if my estimate is correct that petroleum consumption rates will decline by -3 to -4%/yr until the earlier 2020s and plateau or decline at a slower rate thereafter, then GDP should change by about the same relative amount over this period. 

What about standard of living? 

As shown above in Sieminski’s slide 7, oil consumption per capita is linearly related to GDP per capita for a broad range of countries.  Based on this, I hypothesize that my best estimate of declining consumption rate per capita will be representative of the decline in the standard of living going forward.  Therefore, my estimated changes in petroleum consumption rate, expressed per capita, should reflect how the standard of living will change.  

Figure 16 recasts the same data from earlier parts of this series: reported USA consumption rates, and my best estimate of future consumption rates, in terms of per capita consumption:

The petroleum consumption rate per capita in the figure is expressed in units of barrels per year-person (bs/yr•p). The pre-1949 data added to this plot is from appendix E of the AER 2009 (after converting quadrillion btu units to bbs/yr and assuming 0.173 bbs/qd btu see EIA Energy Calculator).  I got the historic US population data from the US census bureau.  I assumed that the US population would continue its long term growth trend of about 1% per year (I calculated an average annual percentage change of 1±0.5 over the last 30 years).   Also shown for comparison, are consumption rates per capita for selected countries, as reported in the Wikipedia article, Petroleum.

I find it interesting that the peak in the USA’s petroleum consumption rate per capita (31 bs/yr•p) occurred 23 years ago, in 1978.  After a sharp decline in the early 1980s, a massive increase in oil imports from 1982 to 2007 managed to keep the per capita consumption rate fairly constant at about 25 bs/yr•p.  In effect, the imports covered the decline in the domestic production rate, plus the population increase (231 million in 1982 to 307 million in 2009) to provide 25 years of stable consumption per capita.

My assumption, that the US population will continue to increase at 1%, might not seem like much.  However, in 20 years, this will take the US population up to about 378 million—a 23% increase above 2009 levels.   Population growth is yet another exponentially increasing factor that causes the consumption rate, when expressed per capita, to decline at a slightly steeper rate than I summarized above. 

My best estimate of the consumption rate per capita predicts a -38% decline by 2020, compared to 2009 levels.  I assume that this will correspond to a -38% decrease in standard of living.  A consumption rate per capita of 14 bs/yr•p in 2020 would put the US at about the same level it was at in 1949, or, about the level of Japan in 2008.   By 2030, the consumption rate per capita has further declined -51% compared to 2009 levels.   That is about the same consumption rate per capita as the USA in the early 1940s, or, France and Germany in 2008.  These percentage levels of declining consumption over 20 years would not be the “end of the world”—but it would take a good deal of adjustments in the American lifestyle. 

If I also assume a proportional sharing of the remaining exportable oil (fungibility) then my best estimate of the per capita consumption rate predicts a -45% decrease by 2020—that’s down to European  consumption levels, circa 2008, in ten years instead of twenty years.  By 2030, consumption per capita is down by -66% —roughly the same as the USA in the 1930s, or, Russia in 2008.

If I further add my declining ERoEI assumption, then the decline in the per capita consumption rate by 2020 is -54%.  This would be the same rate the USA had in 1940, or, in the UK had in 2008.  By 2030, however, the per capita consumption rate would have further declined by -89% compared to 2009 levels.  That's about the same as the USA’s per capita consumption rate in 1915, or, China’s in 2008.  This would be a major adjustment in standard of living—although still not impossible.

In my opinion, an -89% decline in the per capita consumption rate to 2.5 bs/yr•p would likely mean a substantial de-urbanization of the American population.  How much?  Well, as a guide, between 1910 and 1920, the percentage of Americans living in rural versus urban communities was about 50:50 (see Selected Historical Decennial Census Population and Housing Counts; Urban and Rural Populations).  This is about the same as the number of Chinese living in rural versus urban communities today (53:47 Rural:Urban; Urbanization in the People's Republic of China). 

Oh yes, don’t for a minute think that I am saying that I expect the European countries, Japan, South Korea, or even China to stay at their 2008 levels of consumption rate per capita, or, standard of living.  To the extent that these countries depend on foreign petroleum imports, their GDP and standard of living will also proportionally decline if the imports decline. 

I predict that the standard of living decline would be worst for countries like Japan and South Korea who are heavily dependent on imports and have no domestic production to speak of.  For instance, in 2009, Japan imported 4.3 mbd of the 4.4 mbd of the petroleum it consumed (Energy Profile Japan), and 80 percent of those imports came from the Middle East (Country Analysis Brief Japan).  In 2009, South Korea imported all of the 2.1 mbd of petroleum that it consumed (Energy Profile South Korea), 75 % of which came from the Middle East (Country Analysis Brief, South Korea).  I predict that Japan’s and Korea’s economies will be devastated when global net exports hit zero because their relative decline in the petroleum consumption rate will be even greater than the USA’s, which will still at least have some domestic petroleum production. 

It is difficult to judge what effects a global decline in the standard of living among the net importing countries will have on the exporting countries, and in particular, on their petroleum export rates.  On one hand, these countries, seeing the predicament ahead, may want to cut exports in order to conserve their oil for themselves.  On the other hand, and more likely in my opinion, the exporters will still need to export oil in order to earn income to import other things, like food, even if this means that their own domestic consumption rate has to be decreased.  This is an excellent formula for civil unrest and regime change in my opinion.

... a problem calls for a solution; the only question is whether a solution can be found and made to work and once this is done, the problem is solved. A predicament by contrast, has no solution. Faced with a predicament, people come up with responses; Those responses may succeed, they may fail or they may fall somewhere in between, but none of them “solves” the predicament, in the sense that none of them makes it go away.

For human beings, at least, the archetypal predicament is the imminence of death. Facing it, we come up with responses that range from evasion and denial to some of the greatest creations of the human mind. Since it’s a predicament not a problem, the responses don’t make it go away; they don’t “solve” it, they simply deal with the reality of it.  

The Long Descent: A User's Guide to the End of the Industrial Age, 2008 John Michael Greer, p. 22 see also Problems and Predicaments, The Archdruid Report, August 31, 2006

What will we do?

If by “we,” you mean the government, or, the US population in general—I expect that nothing useful will be done until there are multiple repeated system failures in society and the predicament becomes obvious to the majority of the population.  Politicians will not react until their constituents demand action.  And the constituents do not want to hear about this—not yet anyway.   Think about it: is there 1 person in a 100, or a 1000, in your neighborhood that is aware of peak oil, let alone peak exports?  And even if they are aware, how many of those believe that this is simply a conspiracy of big government, big oil, or, some other all powerful group?

If you are in the “conspiracy group,” I can’t blame you—I really can’t.  There are many problems that government’s hide or soft peddle, and of course, corporations exist to make a profit for their shareholders (and for the executives too, of course).  There is much to be skeptical about when it comes to politics and big business.  I even hope that you are right, because a conspiracy among human beings is much easier to overcome than a physical reality of declining oil production and exports.  In my opinion, however, by choosing to reject the possible realities of peak oil production and exports,going to zero even faster, as explained in this series, you are not making a good life strategy.  Good luck, though.

There is plenty of evidence to indicate that US government officials, at very high levels, are aware of peak oil and looming export declines.  I presented some examples of this evidence in the context of an article I wrote discussing a Robert Hirsch interview.  Hirsch, by the way, was lead author of the “Hirsch report,” Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, which was commissioned by the US Department of Energy, and published in 2005. 

But, here are a few more “Presidential” examples:

To the best of my knowledge I never had a security briefing which said what some of these very serious but conservative petroleum geologists say, which is they think that either now or before the decade is out that we'll reach peak oil production globally and with the rise of China and India and others coming along unless we can dramatically reduce our oil usage we will run out of recoverable oil within 35 to 50 years.

Clinton: not briefed on peak oil

Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology. Since 2001, we have spent nearly $10 billion to develop cleaner, cheaper and more reliable alternative energy sources. And we are on the threshold of incredible advances. So tonight I announce the Advanced Energy Initiative -- a 22 percent increase in clean-energy research at the Department of Energy to push for breakthroughs in two vital areas. To change how we power our homes and offices, we will invest more in zero-emission coal-fired plants; revolutionary solar and wind technologies; and clean, safe nuclear energy.

President Bush, State of the Union Address on January 31, 2006

After all, oil is a finite resource. We consume more than 20 per cent of the world's oil, but have less than 2 per cent of the world's oil reserves. And that's part of the reason oil companies are drilling a mile beneath the surface of the ocean because we're running out of places to drill on land and in shallow water.

For decades, we have known the days of cheap and easily accessible oil were numbered. For decades, we have talked and talked about the need to end America's century-long addiction to fossil fuels. And for decades, we have failed to act with the sense of urgency that this challenge requires. Time and again, the path forward has been blocked not only by oil industry lobbyists, but also by a lack of political courage and candor.

BP oil spill: Barack Obama's speech in full

Well, of course Clinton was very busy with other important matters, so he might have missed such a briefing—but even if President Clinton didn’t know it when he was office, then he sure did at the time of this 2006 interview.  Bush and Obama didn’t lose their briefs—so at least the last two administrations are well aware of the predicament ahead, even if they do not understand the full implications.

So why don’t we hear more about this in the main-stream media, and, at least in the USA, why is this fringe news?  Why does it take someone with a pot of coffee, publically available data, and EXCEL SOLVER to do the export land model analysis and show you the nitty-gritty details of the predicament that the USA and many other countries are in?

I my opinion, the present (and past) administrations simply will not voluntarily be the harbingers of such “bad news.”  If peak oil and declining imports were publically accepted as a fact by the government, and they announced tomorrow, tough austerity measures in an attempt to mitigate its effects, this would panic the general population, cause financial markets to crash, and, the generate the wrath of the voting public in the next election.  As Hirsch pointed out, in a recent interview with Jim Puplava on FSN (starting at 21 min), the government organization or person who stands up and announces the problem is going to initiate the chaos that is associated with the public realization of the problem.  Who wants to cause that chaos?

If you want to call that a “conspiracy,” then I agree—but it’s a conspiracy of fear and silence.

Drill baby drill is too little too late.

Even if the government could find the political mandate and unity of opinion to promote a ramp up of domestic production, I do not believe that substantial new production would come online soon enough, and in large enough quantities, to mitigate collapsing imports in the 2010s.  Here are two examples of why I believe this:

Example 1: Frackin the Bakken?

The Bakken and the Eagle Ford are each expected to ultimately produce 4 billion barrels of oil. That would make them the fifth- and sixth-biggest oil fields ever discovered in the United States. The top four are Prudhoe Bay in Alaska, Spraberry Trend in West Texas, the East Texas Oilfield and the Kuparuk Field in Alaska.

...

Within five years, analysts and executives predict, the newly unlocked fields are expected to produce 1 million to 2 million barrels of oil per day, enough to boost U.S. production 20 percent to 40 percent. The U.S. Energy Information Administration estimates production will grow a more modest 500,000 barrels per day.

New drilling method opens vast oil fields in US

Okay, a production rate of 0.5 mbd, or about 0.18 bbs/yr, would only offset the -0.2 bbs/yr domestic production rate decline that I am predicting by 2015 (see Figure 2 here).  On the other hand, 2 mbd  (0.73 bbs/yr), after mitigating the expected domestic production decline, would add an additional 0.5 bbs/yr to production.  That would pretty well cover the end of net exports from Mexico by 2015 (see Figure 4 here), which would be significant. It still doesn't mitigate the overall decline in exports, however.

Also, I have three issues with this scenario.  First, at a production rate of 0.73 bbs/yr and an ultimate recoverable reserve of only 4 bbs, we would only get about 5.5 years of production—so this would be a short lasting effect.  Of course, these effects would drag out over a longer period if we assume that the production rate follows a typical Hubbert curve—but that would also mean lower production rates than 0.73 bbs/yr on either side of the peak in production.

Second, the ERoEI of the oil extracted from Bakken Shale and Eagle Ford is likely a lot lower than tradition oil reserves (less than 2:1 according to Cleveland, in Oil Shale's Energy Return on Energy Investment or An Assessment of the Energy Return on Investment (EROI) of Oil Shale). 

Third, there is the real threat of ground water pollution with the waste products of the hydro-fracturing process.  If nothing else, EPA compliance will create delays and increase the costs (the “energy in”) of the production process.

Example 2: Drilling off the coast of California?

The federal government estimates the nation's outer continental shelf might hold 85.9 billion barrels of crude, including 10.13 billion barrels off California. For comparison, the United States consumes about 7.56 billion barrels of oil per year. The nation's sea floor also could hold 419.9 trillion cubic feet of natural gas, equal to U.S. consumption for 14 1/2 years. But the federal estimates are just that - estimates.

"You don't really know what's there until you go out and drill a well," said Ken Medlock, an energy research fellow at Rice University's James A. Baker III Institute for Public Policy. "And even then, you're not 100 percent sure of what you're going to get."

In addition, offshore oil exploration is slow and costly.

If the federal government opened California's coast to drilling tomorrow, the first exploratory wells probably wouldn't be drilled for at least six years, Medlock said. Bringing newly discovered oil fields into full production would take longer.

That means any new oil wouldn't arrive on the market until midway through the next decade, at the earliest. The process is slow enough that the Energy Information Administration, the statistics branch of the U.S. Department of Energy, estimated last year that opening the coasts to offshore drilling would have no significant impact on oil prices before 2030

California has about 23 percent of the country's estimated offshore reserves, with 10.13 billion barrels in federal waters that begin 3 miles off the state's coast. An additional 1 billion barrels may lie closer to shore, in waters controlled by the state government.

California witnessed the world's first offshore oil well, drilled in 1897 at the end of a pier near Summerland (Santa Barbara County). But a 1969 accident at a well farther west in the Santa Barbara Channel, which spewed crude oil into the water and coated beaches, turned public opinion against offshore drilling.

The lowdown on offshore oil reserves

In theory, the estimated 10-11 bbs of oil off the coast of California would help mitigate the coming import shortfall in the 2010s—although this would only provide less than 2 years worth of the USA’s present total consumption rate.  And look at the time scale mentioned in the article.  Six years for the first exploratory wells, and even longer before full production.  This means that the US will be well into its economic decline before serious production could start.  By the mid 2010s, where will the investments come from to further develop the fields?  The lack of financing would probably delay these projects even farther.   

My hunch is that about the same kind of scenario would apply to any new oil production in the Gulf of Mexico or ANWR in Alaska. 

On the bright side, these sources of oil might help sustain a basal level of oil production in the USA through the 2030s and 2040s when there will be little to no imports and conventional domestic production is in decline.  I have little doubt that all of these sources will be taped eventualy, but not enough in the next ten years.

What should I do?

Several months ago, I wrote a series of articles pondering the prospects of transport fuel rationing in the USA, based on a hypothetical scenario where there was a sudden 35% drop in imports to the USA, e.g., due to disruptions in the Middle East. 

When I wrote Transport Fuel Rationing in the USA the going concern then was the possibility of war with Iran.  Currently, it is the civil unrest and regime change in Tunisia and Egypt that causes fears of a disruption in the transport of oil by tankers through one of many transportation choke points in the Middle East, or, though damaged export pipelines.  Perhaps in the coming months or years it will be civil unrest and regime change in Algeria, Saudi Arabia or other countries in the Middle East.  I expect that this will be one of the societal “system failures” that will eventually wakes up the American public.  Another likely “system failure” will be the federal, state and local government’s declining ability to respond to any number of natural disasters (hurricanes, fires, snow storms, etc...) that will disrupt fuel supplies, and, which are bound to occur and reoccur over the next 20 years.  This all translates into a lower standard of living, on average.

The imminent death of exportable oil, like death, is a reality that nations and individuals will simply have to deal with. Similar to peak oil, declining exportable oil is a predicament, not a problem that can be solved.  Moreover, net exports will hit zero long before production does, so if you are concerned about peak oil, then net zero exports should concern you even more.   Don’t expect much help or understanding from the government or your neighbors in the mean time.  Just get on with preparing the best you can, as soon as you can, with the resources that you have.

The suggestions I gave in the final part of Transport Fuel Rationing in the USA and here, were intended to help you prepare for a sudden disruption in the availability of oil.  These same measures, however, should put you in good stead to tolerate a steady decline stretched out over several years, with intermittent “system failures” along the way. 

A standard of living that is about the same as your grandparents or great grandparents is not the end of the world, but it will be a hard transition to make over a 20 year period.

Take advantage of the time that you have now to prepare the best you can.  

--In this series I considered the sum of exports from the USA’s top ten suppliers, which accounts for 57% of the global pool of petroleum exports.  In a future series, I plan to explore all regional sectors of production and consumption with the goal of quantifying the entire global pool of exports and to better predict its change over time.  I hope that you will join me then.--