The Truth About Oil, 2005


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This paper was written in 2005 when the topic of "peak oil" was considered fringe and highly contentious. Not any more

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The Truth About Oil, 2005

  1. 1. FUTUREVIEW Briefing Paper # 1 DestiCorp THE TRUTH ABOUT OIL Early Warning Signals for the Tourism Industry A DestiCorp FutureVIEWS Briefing Paper Oil is the lifeblood of modern civilisation. It fuels the vast majority of the world’s mechanised transportation equipment – automobiles, trucks, airplanes, trains, ships, farm equipment, the military etc. Oil is also the primary feedstock for many of the chemicals that are essential to modern life.1If there is one global industry that is utterly dependent on oil for its viability it has to be tourism.Over 90% of energy used by tourism is incurred in the act of transporting tourists to and from theirdestination.2 The remainder is used to run accommodation, attractions and other support services.Transport-related demand accounts for over three-quarter’s of America’s demand for oil and66% of Europe’s requirements. Emerging economic powerhouses such as China and India, with theirhuge populations and relatively poorly developed infrastructures, have also recently developed anenormous appetite for oil to support growth in all sectors and especially in transportation. Virtuallyall transport’s energy requirements (96-99%) come from oil3 and the expansion of transport has notonly accounted for all growth in oil use over the past 30 years but is expected to continue to do soover the next 30 years as well. 4Of the total energy consumed from all sources, “transport” uses 18%5. This rate varies by region – inthe US and Europe transport’s share is much higher at 24%. In India, the land of the bicycle andblessed with a rail system, it stands at 10%. In China, demand for oil from the transport sector will befiercer. (Note: despite a population in excess of one billion, China only has 7.5 million cars and 6.4million commercial vehicles compare to America’s 136 million cars and 89.4 million commercialvehicles).So given this dependency on oil, every tourism destination and every tourist-related business andassociation should be asking the following questions: • Is fuel supply an issue in the short or long run? • Is the price of oil at $67 barrel a temporary high or a permanent low? • How might tourism reduce its dependency on petroleum? • Why did OPEC do the world a favour in 1973? • Why have the oil companies stopped building refineries? • What impact might oil have on global security? • Are we being told the truth about oil?This paper has been titled – The Truth About Oil – to highlight the fact that it is actually very difficultand time consuming for the general public to determine the truth as there is such a huge divergenceof opinion between politicians, government-funded agencies, economists and a growing number ofscientists and engineers regarding oil supply and prices.In some respects, the current situation is reminiscent of the global warming debate. While the bulk ofpublic opinion appears to be shifting towards the view that global climate patterns are changing due tohuman activity, scientists and politicians still remain divided over cause, rate and extent of theproblem. But unlike the global warming debate, there has, until very recently, been very littleawareness of the “oil issue” in the mainstream media. While airlines are extremely sensitive to therising cost of fuel, the tourism industry as a whole does not appear to be fully aware of the potentialfor disaster.1 Peaking of World Oil Production; Impacts, Risks & Risk Management, Hirsch, Bezdek and Wendling, February 2005, reportprepared by Science Applications International Consultants (SAIC) for the US Department of Energy.2 EEA & EPA quoted in Switched On, UNEP report page 63 ibid4 IEA/EET Working Paper, Reducing Oil Consumption in Transport, Lew Fulton, April 2005.5 International Energy Agency, World Wide Outlook, 2005 Page 1
  2. 2. FUTUREVIEW Briefing Paper # 1 DestiCorpSo what is the “oil issue” about? Are we running out?Unfortunately, that is the wrong question, as the answer – “the tank is half full” could breed amisplaced sense of complacency and security. The key issue and question of the day with regard tooil, is when will global production reach peak?Oil is not a renewable resource. Ironically, it was created several million years ago during severalepochs of huge “global warming”. It only occurs in certain parts of the globe. Geologists understandthat at some future date, world oil production will reach a maximum – a peak – after whichproduction will decline. When world oil production peaks, there will still be large reserves remaining,but it will be impossible to increase the rate of production. In a situation where demand continues torise, however, this spells trouble. Prices will trend systematically upwards while accompanied bysignificant volatility and instability over the short run. Without timely mitigation, the economic, socialand political costs will be unprecedented. The bottom line is that no one knows with certainty when oil production will reach a peak but geologist have no doubt it will happen. Projections are fraught with uncertainties because of poor data, political and institutional self interest and other complicating factors6.The one thing we do know for certain is that once peak oil production occurs, it means thepermanent end of “cheap oil” and every citizen and business on the planet will be affected. Tourismstrategists, planners, policy makers as well as corporate executives must take the time to understandthe issues, if they are not to be caught by surprise without any form of mitigation plan should fuelavailability (in terms of access and price) change.This paper is designed simply to introduce destination planners to the issues and sources ofinformation and opinion so that they may judge for themselves before proceeding down their ownpath of discovery and make their own corporate and personal plans to adapt and respond.Current Patterns of Energy ConsumptionEvery year the world consumes energy equivalent to 10 billion tonnes of crude oil equivalent (toe).Just over a third (36%), equivalent to 3250 billion toes7, is now derived from oil. Table 1: Global Sources of Energy Oil 36% Coal 23% Gas 21% Renewables 13% Nuclear 7%The energy provided by these sources is used to generate electricity (36%); some 22% is used byindustry of all kinds and nearly a quarter (24%) is burned by people in their homes and non-industrialcommercial undertakings.Of the total energy consumed globally, 1,827 billion toe (18%) are used by various aspects of theglobal transport sector. This equates to some 36 million barrels of oil a day. While not yet thedominant use of energy, transport energy use is one of the main drivers of increased energy demand,projected to grow by nearly 90% between 2000 and 2030.86 Peaking of World Oil Production; Impacts, Risks & Risk Management, Hirsch, Bezdek and Wendling, February 2005, reportprepared by SAIC for US Government7 1 toe (tonne of oil equivalent) is a measure of energy and equates to the energy produced by burning one tonne of crude oil.That is the amount an average European family would consume driving a car over a year. Note: energy consumption is measuredin a number of ways – see Appendix A.8 IEA/EET Working Paper, Reducing Oil Consumption in Transport, Lew Fulton, April 2005. Page 2
  3. 3. FUTUREVIEW Briefing Paper # 1 DestiCorpOf the transport total, road, bus, and rail burn up the most in aggregate. The aviation proportion(freight and passenger combined) varies according to region and over time. The OECD figures arepresented in Table 2 and show that by 2020, air transport could account for 18% of transport-related oil demand, up from 14% in 1977. Table 2: Consumption of Oil by Transport Sub-Sector in OECD, 1997 and 20209 1977 2020Cars 560 53.0% 742 48.8%Trucks 281 26.6% 424 27.9%Aviation 149 14.1% 277 18.2%Other 67 6.3% 76 5.0% 1057 100.0% 1519 100.0%Which Countries Consume the Oil Today?In 2004, 80.7 million barrels of oil a day are used to power the global economy with one-third beingused in North America (USA, Canada and Mexico) and a further 20% consumed by the Europeanmembers of OECD. Table 3: Consumption of Oil by Region, 2004 2004 million barrels/day North America 30% 24.6 South & Central America 6% 4.7 Europe & Eurasia 25% 20 Middle East 7% 5.3 Africa 3% 2.6 Asia Pacific 29% 23.5 Total World 100% 80.7Over the past decade, the increase in oil consumption overall totalled 18% globally but variedsubstantially between regions and countries according to their state and pace of development. Thetwo fastest growing economies of China and India, whose economic expansion has only really “takenoff” in the last five years have increased their consumption of oil by 113% and 81% respectively overthe same ten year period and are forecast to continue to grow much faster than the developed world,albeit at slightly lower rates over the next ten years.Which Countries Produce Oil Today?Oil is not evenly distributed across the planet. Many of the oil fields that were discovered at the turnof the century (notably in the US), are now either dry or too costly to extract. Oil productiondepends on the existence of known reserves and the ability of producers to be able to extract oilfrom those reserves at an economically attractive price. The cost of extraction varies by location,geology and economy and, most importantly according to the nature of the oil. For example, therising price of oil in recent years has made it economically viable in recent years to extract oil fromthe tar sands in Alberta and parts of northern Canada as well as commence exploration andextraction in the Arctic.Thirty percent of today’s oil production comes from the Middle East with Saudi Arabia providing justunder half that supply.9 Source: World Energy Outlook, 2005 as published by BP - Page 3
  4. 4. FUTUREVIEW Briefing Paper # 1 DestiCorp Table 4: Production of Oil by Region, 200410 PRODUCTION million barrels/day North America 18% 14.150 South & Central America 8% 6.764 Europe & Eurasia 22% 17.583 Middle East 30% 24.571 Africa 12% 9.264 Asia Pacific 10% 7.928 Total World 100% 80.260Saudi Arabia’s productive capacity is a very important parameter to watch. Since 1994, it hasoscillated between a low of 8.9 million barrels a day to a high of 10.584 million barrels per day someten years later. There is , however, considerable disagreement as to whether Saudi Arabia has thecapacity and the infrastructure to increase this output significantly in the future.How Much Oil will be Required in the Future?Forecasting future demand for oil is a very tricky process as future demand is related to rates ofeconomic growth and the latter are related to oil prices that, in turn, are related to the balancebetween demand and available supply!Some countries may actually grow economically but, by switching to alternative fuels and becomingmore fuel efficient, can reduce their demand for oil at the same time. This is a rare occurrence.In 2004 only three countries managed to reduce their consumption of oil by 3% or more over theprevious year while continuing to experience economic growth. These prudent countries were:Finland; Sweden, and Norway.The agency responsible for forecasting oil demand is the Energy Information Administration (EIA) thatannually publishes an International Energy Outlook. In its latest report, released in July 2005, the EIAforecast that energy consumption would increase on average by 2% per year across the globe between2002 and 2025. It should be noted, however, that in 2004, oil demand exceeded this averageconsiderably, rising 3.4% in 2004 instead of the normal 1-2%. Nearly a third of that growth camefrom China whose oil demand rocketed by 16% in one year. Current oil consumption in China measured on a per capita basis is well below one-third the world average. If China attained the world average and experienced no further increase in its population, China’s oil demand, barring economic crisis or very powerful energy diversification and oil saving energy and economic policies will almost certainly triple within 10-12 years, and China will become the biggest oil importer in the world.11It was not just China that used a lot more oil, India’s consumption also leapt last year. Despite oilprices of $50 a barrel, global demand in 2004 grew at the fastest rate on 25 years.EIA forecasts for future demand are based on the lower average growth rate figure of 2% per annum.On that basis, world oil use is expected to grow from the 80.7 million barrels per day recorded in2002 to 103 million barrels in 2015 and 119 million barrels in 2025. Note: that means that justtwenty years from now, an additional 42 million barrels of oil a day will need to be both found andextracted. That’s an amount equivalent to reserves four times the size of those located in SaudiArabia.Given the EIA’s inability to foresee the rapid rise in demand from China, it is interesting to note10 Source: ….measured in millions toe11 Andrew McKillop: Demographic Oil Demand and Peak Oil published in McKillop is a former expert ofpolicy and programming in the European Directorate DGXVII - Page 4
  5. 5. FUTUREVIEW Briefing Paper # 1 DestiCorpwhether this agency may have taken into account the more aggressive growth targets postulated bythe tourism industry. According to UNEP, international tourism is predicted to increase 4.5% annuallyover the next ten years (UNEP DTIE, Tourism Sector Report, 2002). Realising these growth rates willinevitably exacerbate demand for oil.Where will the Additional Oil Come From in the Future?Given that oil is a finite resource, the key question of the day might appear to be, “is there enough?How long will reserves last? Will we return soon to “reasonable oil prices” i.e., less than $40 a barrel?This is where opinion diverges. The “pessimists” argue that, while sufficient reserves exist overall, acombination of increasing extraction costs, lower quality output, and technological difficulty willprevent oil producers either from meeting those production requirements or from delivering oil at aprice acceptable to consumers or a combination of both. The so called “pessimists” point out thatworld oil production is rapidly approaching “peak”. The “optimists”, on the other hand, believe thateither new oil will be discovered and or technical advances will enable oil producers to extract oil inthe future from known reserves which are either too difficult or too expensive to exploit currently.They rarely mention the term peak and take great pains to reassure the global community that wehave sufficient reserves to meet current and growing demand for several years to come.Figure 1: Proved Oil Resources at End of 200412The total known reserves by end of 2004 have been estimated at just over 1.18 trillion barrels withthe Middle East clearly the dominant source. Of the countries in this region, Saudi Arabia has by farthe richest supply, sitting on 20% of total proven reserves; followed by Iran (10%), Iraq (9%), Kuwait(8%) and the United Arab Emirates (UAE) at 8%12 Source: obtained from BP’s web site Page 5
  6. 6. FUTUREVIEW Briefing Paper # 1 DestiCorpFigure 2: Source of proved (oil) reserves 1984, 1994, 2004When we look to the future, it would appear that the EIA, the US Government and a number, eventhe majority of economists, investors and pundits all fall into the optimist camp. In the EIA’s 2005International Energy Outlook published in July 2005, the agency stated: ”Members of the Organisation of Petroleum Exporting Countries (OPEC) are expected to be the major suppliers of the increased production that would be required to meet demand, and they account for 60% of the projected increase in world capacity. In addition, non-OPEC suppliers are expected to add nearly 17 million barrels per day of oil production capacity between 2002 and 2025. Substantial increments in new non-OPEC oil supply are expected to come from the Caspian Basin, Western Africa, and Central and South America. 13Later in the same report, the EIA observed: It is generally acknowledged that OPEC members with large reserves and relatively low costs for expanding production capacity can accommodate sizeable increases in petroleum demand.14One would expect that the CIA with its enormous resources for determining what’s going on aroundthe world might have identified a problem. Each year the National Intelligence Council produces aglobal overview of the issues of the day and their geopolitical implications. Back in 2000 in a reporttitled Global Trends 201515, this is what the NIC had to say on the topic of energy: Meeting the increase in demand for energy will pose neither a major supply challenge nor lead to substantial price increases in real terms. Estimates of the world’s total endowment of oil have steadily increased as technological progress in extracting oil from remote sources has enabled new discoveries and more efficient production. Recent estimates indicate that 80 percent of the world’s available oil still remains in the ground, as does 95 percent of the world’s natural gas.The more recent 2005 report, titled Mapping the Global Future, is slightly more cautious. The International Energy Agency assess that with substantial investment in new capacity, overall energy supplies will be sufficient to meet growing global demand. Continued limited access by international oil companies to major fields could restrain this investment, however, and many of the areas - the13 International Energy Outlook 2005 – Highlights ( ibid15 Report on the National Intelligence Council’s 2020 Project. Based on Consultation with Nongovernmental Experts Around theWorld. Published in 2000 Page 6
  7. 7. FUTUREVIEW Briefing Paper # 1 DestiCorp Caspian Sea, Venezuela, West Africa and the South China Sea – that are being counted on to provide increased output involve substantial political or economic risk. Traditional suppliers in the Middle East are also increasingly unstable. Thus sharper demand-driven competition for resources, perhaps accompanied by a major disruption of oil supplies, is among the key uncertainties. 16This suggests that the powers that be are waking up to the fact that in this complex, interconnected,highly volatile world of ours, uncertainties may get in the way. Generally speaking, however, when itcomes to downstream supply, the authorities do not appear to be concerned and, at first glance, thesituation appears quite comforting. This is what the secretary General of OPEC had to say in theweek following the Hurricane Katrine disaster in the US: We wont have a problem in 10, 15 or 20 years time because the resources are sufficient and the investment is already in place. We dont see any problem in meeting demand from the developing countries even if demand continues at a robust [annual] level of 5 percent. Obviously in 40 or 50 years time there may be [a problem], but we will have plenty of time to work out alternatives.17Simple arithmetic suggests that, all other factors being equal, and with reserves of 1.3 trillion barrels,the world would run out of oil within 42 years at current rates of production and consumption orwithin 29 years if demand grew to the levels predicted by the EIA. Note: this lifespan of supplyassumes that the oil remaining in the ground is as high a quality and as easy to extract as the oil thathas been used already.But this is only comforting if you are politician with a life expectancy of 4-8 years in office and quitetroubling if you are a young grandmother hoping and expecting your grandchild to enjoy a similarlifestyle to the one you enjoy.It should be especially troubling to the one industry that is currently utterly dependent on theavailability of “cheap fuel” to transport its customers from their homes to the point of consumption.Every tourist destination and therefore all tourism-related businesses will be affected by the futureavailability and price of oil.The situation becomes far more troubling, however, once you factor in some geological, economicand political realities..Reality # 1- Quality of Oil ReservesNot all oil reserves are equal. Some oil reserves will be harder to extract than others. The estimateof total proven reserves does not reflect this factor. Oil is classified as “conventional” and“unconventional.” The former is typically the highest quality, lightest oil, which flows fromunderground reservoirs with relative ease. Unconventional oils are heavy, often tar like. They are notreadily recovered since production requires a great deal of capital investment and supplementalenergy in various forms. While most of the Middle East reserves are conventional, with relatively lowcosts of extraction, the same cannot be said of non-OPEC sources, believed by many to be alreadypast their peak.Reality # 2- Production PatternsProduction of virtually all oilfields tends to increase after discovery, then peak before decliningfollowing a well known bell curve. A geologist called Hubbert first drew the world’s attention to theconcept of “peak oil” back in 1976 and that concept is now the centre of controversy concerningfuture oil supply.The key concept associated with the term “peak oil” is simple. After peak production is reached atany one oil field or all of them combined, output levels will steadily decline until all useable resourcehas been depleted. During the decline period, production cannot be ramped up to meet growingdemand so prices will rise. They may not rise evenly – in fact price instability is more likely to prevail,as suppliers and buyers respond to market conditions on a daily basis. The rate and scale of increase16 Report on the National Intelligence Council’s 2020 Project. Based on Consultation with Nongovernmental Experts Around theWorld. Published in December, 200417 Interview with Adnan Shihab-Eldin, Secretary General of OPEC in Newsweek International online( Page 7
  8. 8. FUTUREVIEW Briefing Paper # 1 DestiCorpwill be influenced by market awareness that peak has or has not been reached.It is impossible to determine precisely when the global peak in oil production will occur. It is aphenomenon that can only be seen in “the rear view mirror” i.e. when production starts to decline.Some experts believe it will occur very soon; others are forecasting peak to occur in the next five-tenyears. It is no exaggeration to state that the impact of reaching and passing peak oil production on aglobal economy that is dependent on “cheap oil” will be catastrophic and will incur change at a paceand scale unprecedented in human history.The graph below has been published by the Association For Peak Oil (ASPO)18 to demonstrate that,in their opinion, peak production will occur at some point between the years 2000 and 2010 whentotal production reaches some 31 billion barrels a year, equivalent to 90 million a day. It is importantto recognise that these are the predictions of peak oil cannot be dismissed as the fears expressed by ahandful of scientists. Well over twenty groups have been identified as having calculated the date of thepeak. They are listed on the Hirsh report on mitigation published by the US Government in February200519. Figure 3: Predictions of Peak Oil Production by RegionThe world has had some experience of the phenomenon of peaking before when U.S oil productionpeaked in the mid 1970s. Ironically this event coincided with OPEC’s oil embargo of 1973 and theIranian oil crisis when the Shah of Persia was deposed in 1979. In constant dollars, oil prices tripled in1973-74 and doubled in 1979-80. This “supply led” shock resulted in high inflation, world recessionand high unemployment for nearly a decade and during that period the US moved from being an oilexporter into an oil importer. Economic discomfort, combined with a realisation of its dependency onforeign sources of oil and high prices both triggered and enabled a decade of exploration, investmentand technological application to develop non-OPEC oil reserves. Huge finds of oil and natural gas inthe North Sea etc. then stabilised prices and kept them low from the early 1980s until 2003. Duringthis period a combination of “cheap oil”, cheap credit and huge gains in information technology havespawned a period of global economic expansion and change unprecedented in human history. While itwas possible to offset the negative effects of peak oil production in the American oilfields in the 1970sby turning to reserves located elsewhere, that option is not open to the global community today.Only one barrel of new oil is now being discovered for every four consumed.18 ASPO has been in existence since19 Peaking of World Oil Production; Impacts, Risks & Risk Management, Hirsch, Bezdek and Wendling, February 2005, reportprepared by SAIC for US Government Page 8
  9. 9. FUTUREVIEW Briefing Paper # 1 DestiCorpThe British oil bonanza is over too. 2004 was the first year since the early 70s that Great Britiainreturned to being a net importer of oil now competing with the rest of the world for a dwindlingsupply.It is not as if the politicians do not know about the seriousness of the situation. When he was stillCEO of the world’s largest oil services company, Halliburton, VP Dick Cheney gave a speech to thePetroleum Institute in London in 1999 and stated: “There will be an average 2% annual growth inglobal oil demand over the years ahead along with, conservatively, a 3% natural decline in productionfrom existing reserves”. The subject of Peak Oil and its implications remains one that politicians inoffice in the western world, at least, prefer to avoid at all costs.Reality # 3- CapacityThere is less certainty about proven reserves than the myriad of charts and detailed figures wouldappear to show. Neither countries in which the oil fields are located nor the companies that own therights to extract this resource are incentivised or required to be utterly truthful about the extent ofreserves or productive capacity. Shell Oil, for example had to downgrade its reserves on fourseparate occasions in 2004.Back in the 1980s OPEC made a rule stating that member countries could export commensurate withtheir reserves. Within two years of this ruling, every OPEC country stated reserve increases rangingbetween 5% and 200% even though virtually no new discoveries had been made. The truth is wesimply do not know for certain how much oil really exists under Saudi Arabia, Iraq or Venezuela forexample. There’s no impartial, independent agency with the mandate to lower a dipstick into the canand verify availability. But there are several reasons why countries and companies would wish toinflate their numbers.Because oil traded at a relatively low price for so long, the industry has been slow to reinvest in allaspects of the oil supply chain. Now there is limited capacity in the market for oil rigs, tankers,engineers and refineries.Global spare capacity last year dropped to around 1 million barrels per day, close to a 20 years low asillustrated in Figure 4. Figure 4: World Oil Production Capacity2020 Page 9
  10. 10. FUTUREVIEW Briefing Paper # 1 DestiCorpWithout this support capacity it is doubtful that the production targets (forecasts) set by the EIA andothers will be met.There’s another challenge. Productive capacity is not entirely determined by the level of investmentor technology or even the aspirations and promises of politicians wishing to bring hope. The earthdoes not surrender its bounty without a degree of mystery and unpredictability. What matters mostis not how much is left in the ground (ie reserves) but how much can be pumped to the surface inorder to keep up with demand. Reservoirs are extremely temperamental. If too much oil is extractedtoo quickly or if the wrong type or amounts of secondary effects are applied, the amount of oil thatcan be recovered can be greatly reduced.because Saudi Arabia is such an important source of conventional oil, all eyes are on her productivecapacity. The oil minister, Sheikh Ali-al Nami has taken pains to asset that his country can raise itscapacity from its current level of 9 million barrels per day to as high as 15 mb/day, a projection thatone of the Middle East’s most respected oilmen strongly disputes. Sadad al Hussein, Aramco’s formertop executive in charge of exploration and production, fears that over production could damage manyof the reservoirs and cause substantial reserves to be trapped – lost forever. 21Reality #4 Political ImplicationsNote: the Middle East currently accounts for 30% of oil production but 60% of known reserves. Thusas demand grows and oil from other sources starts to decline, global dependency on a few states inthis region will grow sharply with enormous geopolitical implications. Future supply will also dependon the political, diplomatic and trading relations that exist between the primary producing andconsuming countries. Kuwait, for example, exports 60% of its oil to Asian countries such as Japan,India, Singapore, South Korea, Taiwan and Thailand. Asia currently takes 60% of Saudi Arabia’sexports. Given the political instability of the region and the growing hostility between thefundamentalists associated with Islam and other faiths, we cannot assume that the reserves will beequally available to all buyers, even if they have the will and ability to pay for it.Venezuela provides a prime example of the politicisation of supply. Venezuela, sitting on the fifthlargest source of oil in the world, is the fourth most important supplier of crude petroleum to theUnited States, behind only Saudi Arabia, Canada, and Mexico. On January 30, the Venezuelanpresident signed an accord with Chinas vice president Zeng Qinghong, facilitating the China NationalPetroleum Corporation to invest in the development of Venezuelan oil and gas reserves. Relationsbetween President Chavez and the United States are currently strained with Chavez convinced thathe has been targeted by the CIA, a concern not diffused by recent statements made in the nationalpress by a leading, right wing evangelist that the US could and possibly should eliminate him! 22The Chinese argue, quite justifiably, that blaming them for high oil prices is quite inappropriate.Despite the surge in demand from this country, China is only responsible for 6.6% of the world’s oilimports and, when energy is looked at as a whole, China is a major net exporter of energy, mostly inthe form of coal. Per capita energy consumption in China is seven and four times less than in Americaand Japan respectively. 23While the US government and many governments in the western world have avoided reference topeak oil and its potential imminent arrival, the same reticence does not exist in other parts of theworld. The term “peak oil” and discussions of the implications appears throughout the main streampress in Latin America, Asia and Africa – sadly, because when prices do rise, these economies willhave least buying power and will be hardest hit. The Chinese Chief Economist, Zhang Weiping, statedon September 6, 2005, that in his considered opinion global oil production would peak within thenext five years. 24 While China and India are endeavouring to cooperate in many areas, it’s everycountry for itself when it comes to oil. On August 22, 2005, the board of Petro Kazakhstan, aCanadian-owned company with oil fields throughout Central Asia, accepted a $4.2 billion takeover bidby state-owned China National Petroleum Corp (CPNG) , beating down a $3.6 billion offer fromIndia’s own state-owned giant the Oil & Natural Gas Corp (ONCG). Much of the output of the21 The Breaking Point, article in The New York Times by Peter Maass, August 21, 2005.22 People’s Daily Online, August 17, 200524 Article published on Interfax China by Erik Dahl, September 6th, 2005 Page 10
  11. 11. FUTUREVIEW Briefing Paper # 1 DestiCorpKazakhstan plant will be processed in China once the pipeline connecting these two countries iscompleted. 25For the time being, competition between the US and China is on a relatively friendly level as bothcountries need each other – cheap imports from China help to keep inflation low and the consumereconomy working at full speed. So long as consumers believe they can afford whatsoever they want,there is confidence in the future and that is the second most important ingredient for a successfuleconomy next to cheap oil. The Chinese also need the agricultural surplus generated by Americanagribusinesses, even though that output is also dependent on cheap oil. Problems may well occur inthe future when competition stiffens and while their military might may not match that of theAmericans, the Chinese do have a powerful weapon in their arsenal – all they have to do is stopbuying US debt and the US dollar will collapse.26Reality # 5 InvestmentThe investment required to exploit known and any unknown reserves (note the EIA identifies over900 billion barrels of oil as “not yet found”) will be significant – some $3 trillion in investment by 2030will be required to ramp up global production to meet future demand.27 But given growing deficits inthe US and elsewhere; given the potential for huge price volatility, can this investment be secured, andmade in time? The necessary surge in both discovery and output will also require a dramatic increasein other forms of capacity including manpower and skills in the main producing countries of theMiddle East, as well as large scale expansion of the technical infrastructure that even establishedinvestment bankers are sceptical about. 28History of Oil PricesThere is limited precedent for rapid and sustained increases in the price of oil in real terms. In fact,when inflation is taken into account, it is clear from the following chart that modern economies haveenjoyed abundant fuel supplies at relatively low prices since the 1880s.25 China and India: A Rage for Oil, BusinessWeek, September5.12, 200526 See The Partys Over: Oil, War and the Fate of Industrial Societies by Richard Heinberg27 IEA estimates28 Reference Matthew Simmons, author of Twilight in the Desert and publicist of the peak oil issue. Matthew Simmons is partnerin a major investment bank that has serviced the energy community for over thirty years. Page 11
  12. 12. FUTUREVIEW Briefing Paper # 1 DestiCorpThe first big shock to the system occurred in the early 1973 when in response to a foiled invasion ofIsrael by Egypt the oil rich countries of the Middle East put pressure on OPEC to deploy the oil priceweapon and raise oil prices. The second spike occurred in 1979 when the Shah was deposed.These events, that had nothing to do with production, had a number of effects. On the negative side,it generated a period of very high inflation, high interest rates, recession and unemployment. It alsocaused many to think about the notion of conservation for the first time and sparked an interest indeveloping renewable energy. The oil crisis combined with concerns about population growth andpollution gave birth to the environmental movement. The main benefit of this period of dislocation isbeing enjoyed by the current generation. Reduced demand for oil between 1973 and the early1980spushed back the date of the peak by as much as ten years. This is the time that will be needed todevelop mitigation strategies to cope with peak oil when it arrives. But sadly, it also pushed pricesdown and therefore provided little or no incentive for reinvestment, hence the lack o productivecapacity across the entire oil sector today. Sadly again, fifteen years of cheap fuel combined withunprecedented levels of economic growth, have lulled many of us into a false sense of security.The more recent rise in oil prices (from $30 to $65 per barrel) that occurred over 2004-5 have notyet caused major concern in the media or political circles as economists have pointed out that a). weare less dependent on oil than before and b.) that, in real economic terms oil, at $65 per barrel, isstill not as high as it was during the oil embargo of 1979. It is in no one’s best interest in the westernworld to risk alarming the public with talk of shortfalls even though most people know in their heartsthat the global economy uses a finite set of resources that may well be dwindling.But what may be true for the global economy as a whole is not necessarily true for tourism.When it comes to oil dependency, tourism is on the front line. Its growth has been fuelled literally aswell as metaphorically by cheap oil and by the globalisation of the world economy that, in turn, hasbeen enabled by an abundant supply of energy and the confident belief that we would either find ormake more fuel in the future. Take those two factors out the demand equation (cheap oil and avibrant global economy) and tourism will be the first horse to fall at the post.The plain truth about oil prices is that, given the complex, inter-related demand and supply factorscollectively influenced by such a large number of variables, no one knows for sure what will happen tooil prices in the near and mid-term. The head of Aramco, the state-owned oil company in SaudiArabia summed it up: “Where oil price goes, nobody knows. The key is stability so we can plan. Oilinvestments take a long time to come to fruition”. The complexity of the supply chain combined withthe lack of spare production capacity mean, on the other hand, that the only certainty is that pricesare unlikely to remain stable.In what is now a highly inter-connected global economy, small shocks to the supply chain will haveincreasingly large and unforeseen consequences be they Category 5 storms, such as HurricaneKatrine that disrupted refinery production; further terrorist attacks on oil production infrastructureor workers; or a financial market crash. Given the dependency of the world economy on a consistentand predictable supply of oil, the situation resembles a game of Russian Roulette.ConclusionAs with the global warming debate, the battle lines are drawn between a few brave scientists andengineers who have had the courage to highlight the issues associated with peak oil and a vast army ofeconomists, civil servants, politicians and analysts who would prefer to maintain the status quo.Tourism leaders, be they in government or the private sector, cannot avoid determining the truth forthemselves. This paper is offered as a modest contribution to the exercise of sense making.If the scientists are right and we are either at peak or very close to it, we have little time to takemitigating steps.What can and should the tourism sector do in this context? I venture the following suggestions: 1. Become thoroughly informed about the subject and its implications. The tourism sector has begun to identify its contribution to global warming but appears to have ignored the peak oil issue. Note: should we be at or past peak and prices continue to rise, it is possible that we will be forced to significantly reduce our use of fossil fuels such that some of Page 12
  13. 13. FUTUREVIEW Briefing Paper # 1 DestiCorp the worst projections for climate change (if it is caused by human activity) might be deferred. Appendix A to this paper will provide a list of sources of information and alternative viewpoints. 2. Accelerate action to reduce oil demand through energy conservation and by switching to alternative sources of renewable energy where possible. This will require that the tourism industry act collectively. There is relatively little the airlines can do to reduce their dependency on petroleum. Other sectors of tourism, notably accommodation, ground transportation, attractions and services can, however, reduce consumption or switch to renewable sources. The peak oil debate adds enormous strength to the sustainability argument. It can also bind the various sectors of this complex and fragmented industry into a more effective and cohesive whole. IATA has long argued, for example, that significant fuel savings could be achieved through improvements to air traffic control. The tourism industry as a whole needs to lend its support to these issues. 3. Be honest with itself and then the rest of the world. No amount of rationalisation will avoid the inescapable truth: an industry as large as tourism29, that is targeted and committed to growing at 4.5% per annum and dependent on petroleum to transport its customers to the point of consumption, is utterly non-sustainable, regardless of the impact on natural environment, and the impacts of global warming. By drawing down excessive amounts of a finite fuel supply, tourism will contribute directly to the inflationary pressure that will, in turn, reduce the population of travellers with the discretionary income to travel. Like Icarus, by flying too close to the sun, tourism may melt the proverbial wax that holds its wings in place. It takes courageous leadership in today’s growth-addicted climate to even contemplate the notion of steady-state economics but that is what we need. By a more intelligent and imaginative approach to the delivery of value, there is no reason why the tourism industry cannot succeed (i.e., generate more benefit) without growing at a rate that is double what will rapidly be considered acceptable.Tourism now enjoys the recognition it fought so hard to achieve. Travel and tourism – the freemovement of people – is now as important to global economic growth as the telecommunicationsindustry and the availability of capital. We cannot afford tourism to fail. But when things get tough,when society has to make difficult choices about how it allocates a scarce resource, the tourismsector will need to demonstrate that it has acted responsibility and can justify the return on thatallocation. If it’s a choice between keeping warm in the northern hemisphere and eating in thesouthern hemisphere, and taking that third weekend trip to a second home, what will have to go?Tourism is also best positioned to “make a difference”. It meets and serves its customers when theyare on the move and when the link between their behaviour and their dependency on a limited,precious resource is most evident. By “coming clean”, by engaging its customers in more responsiblebehaviour, tourism can gain respect and stature in the marketplace and, thereby, gain more influence.On the other hand, by sustaining denial and turning a blind eye, its faces a fearful backlash that willhurt worse because of its suddenness and depth.With recognition comes attention. With success comes responsibility. Does the tourism sector havethe moral courage, the vision and the creativity to face up to a difficult future and navigate a waythrough the potentially difficult times ahead?Who should take the lead? Tourism is so large and fragmented, so where will the vision and energybe found? The answer to the concluding question will ideally emerge from the debate and may well bevery different from the one I propose now. Regardless of the answer, it is essential that the questionbe addressed.Destinations at every level – city, community, region and nation – must exercise a higher level ofmoral leadership than has been demanded of them in the past. They are stewards of the resourcesthat attract and sustain visitors and that keep their tourism economies afloat. When the airports areempty and the planes parked on the tarmac, the full impact of peak oil will become apparent.29 Forecast to move over 1.2 billion travellers a year by 2020, according to WTO Page 13
  14. 14. FUTUREVIEW Briefing Paper # 1 DestiCorpDestination leaders need to find a way to significantly minimise the use of non-renewable fuels in theirdestinations in order to keep the planes flying.Incremental benefits can accrue to the destinations that pursue this path – operating costs can bereduced; the air can be cleaner; the industry can work together more effectively; the environment canbenefit and, most importantly, the destination can be in a position to attract those visitors who valuea responsible approach and who are prepared to pay more for a quality experience.End documentComments and feedback to author welcomed:Anna Pollockanna@desticorp.comSeptember 8th, 2005Pembridge, England. Page 14