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Crude Oil, Global Energy Security and the War in Iraq
By Constantine C. Haramis
M.E. Ch.E.
Energy forms the foundation of global economic performance. Its ready availability at reasonable prices is of paramount importance to every developed and developing country. Crude oil is the cornerstone of this foundation: consumption is currently 77 million barrels per day (mbd) and is expected to rise to 110 mbd by 2020. Proven reserves currently stand at approx. 950 billion barrels (bbl), or roughly 34 years' worth at current consumption levels, and significantly less if consumption grows as projected. In the past, increased exploration and technological advances added new reserves: between 1980 and 1990 total reserves increased by 56%. But that bonanza is apparently over: reserves increased only 1.4% between 1990 and 2000. Most credible oil experts agree that reserve additions have peaked and that in the future we will experience significant drawdowns. In addition, 65% of total reserves are in the sensitive Persian Gulf, where Saudi Arabia and Iraq alone account for a whopping 36% of global reserves.

The strategic importance of the region cannot be overstated, particularly post Sept. 11, 2001. The United States, the world's largest oil consumer by far, can no longer rely solely on its traditional close relationship with the kingdom of Saudi Arabia for its energy security. Political and social instability in this key country (and the region in general) would severely threaten America's economy and way of life. It is thus not surprising that the U.S. has chosen to commence a war against Iraq in order to overthrow the regime of Saddam Hussein, no matter how unpopular such action may be with global public opinion.

The furious reaction of European governments to the war, and in particular that of France, Germany and Russia, is predictable. The EU is even more dependent on imported oil than the US and thus does not look favorably on possible sole American control of Iraqi oil. Most significantly, almost 90% (in bbl) of all new oilfield concessions in Iraq between 1991 and 2002 were granted to French and Russian oil companies, during a time that American companies were prohibited by US law from any activity in Iraq. Any new post-war Iraqi government is certain to be heavily influenced by the US and will likely critically re-examine all contracts signed by Saddam's regime. Also, in the past 12 years there has been very little additional exploration and development of Iraqi oilfields, raising expectations that Iraq's reserves may prove to be measurably larger than the currently estimated 110-120 bbl. Some analysts put the country's possible reserves as high as 300 bbl. Furthermore, extraction costs for Iraqi oil are just about the lowest in the world: at $1-3 per barrel they compare extremely favorably with $10-15 in Russia, US, North Sea, the Caspian Basin, etc.

While US governments have historically not recoiled from coming to terms with megalomaniac dictators when it suited American interests, in the new era of asymmetric terrorist threats such containment is no longer deemed an acceptable risk by Washington's policy makers. In Saddam Hussein's case maximum military power is being brought to bear for his removal and the establishment of a more pro-western administration. In simple terms, the financial and diplomatic costs of removing Saddam are much smaller than allowing the US to become hostage to his hostile regime in the near future, when rising oil revenue could have allowed him to develop weapons of mass destruction and foment instability in the wider region.

Despite its determination to increase short-term energy security, the US likely realizes that safeguarding Iraqi oil supplies alone is not a long-term solution. After all, crude oil is a fungible commodity that is inexorably getting scarcer. Its price is set by the incremental demand for each additional barrel by any consumer, anywhere in the world. The rapid growth of China and India with their massive populations is driving their energy needs upwards and thus their desire for increasingly large amounts of imported oil. The vision of 3 billion Chinese and Indians driving gasoline-fueled automobiles becomes a nightmare, in resource utilization economic and environmental terms. Clearly, the longer-term solution must lie elsewhere.

The West must soon seek to end its oil dependency by switching its oil-based economy to alternative fuels, possibly to hydrogen fuel cells. This technology has been around for decades, but massive investment in research and development is still needed to refine and commercialize it on a wider scale. Some experts calculate that a $100 billion investment, over 10 years, in fuel cell R&D, tax credits and publicity will result in the US substituting at least 10-15% of its oil consumption with hydrogen. While this may initially seem a small percentage, the dynamic process of substitution will rapidly move forward, towards full substitution and complete energy independence. The benefits to the environment will also be tremendous.

The US has historically embarked decisively on such massive programs whenever its security needs became apparent. The Manhattan project for the development of the atom bomb (1940's), the construction of the national highway system for troop movement (1950's) and the space program for ballistic research (1960's and 70's), are all examples of such longer-term actions, spanning several administrations. They all addressed immediate security concerns and eventually resulted in vast additional benefits for the broader economy.

The adoption of a concerted hydrogen project could stimulate the US and global economy on an unprecedented scale. The construction of new hydrogen production and distribution facilities, novel automobiles and power generation facilities have the potential of adding several percentage points to global GDP growth over several decades, in a sustained fashion. Private companies that come to the forefront of this technology will profit handsomely, while established concerns can also re-fashion themselves to take advantage of this opportunity. Movement in this direction is already apparent: Mercedes, GM and Ford are already developing fuel cell cars, while BP (the old British Petroleum) now wants it understood that BP stands for Beyond Petroleum.

The road ahead will not be easy nor cheap to travel, but the investment is certainly well within the means of the US, European and Japanese economies that will most benefit from energy independence. When considering the alternatives - continuous wars for the domination of diminishing oil reserves and environmental degradation - massive public spending for alternative fuel development appears not only wise, but absolutely essential. After all, the current war in Iraq alone will cost upwards of $80 billion. Hopefully, a similar sum of money will be soon be appropriated for developing alternative energy sources and ultimately achieving real energy security.


Constantine C. Haramis is the chairman of Haramis Cox SA, an Athens, Greece-based institutional brokerage company. After completing his M.E. in Chemical Engineering in 1982 (thesis on alternative fuels) at Stevens Institute of Technology, USA, he worked as a project engineer with a leading engineering firm. He subsequently joined Merrill Lynch and then Smith Barney in NY, where he worked as a financial professional for 10 years. In 1993 he moved to Greece where he founded Haramis Cox SA.

 

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