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Is the Era of Crude Oil About to End

By Wisam Al-Shalchi Oil Expert
Until a few years ago most studies suggested that the era of crude oil use would not end before the middle of the second half of the twenty-first century, and that the era of natural gas would not end before the beginning of the next century. However, the accelerating pace of climate changeof which crude oil is a significant cause has occurred in the last ten years, has made it critical for a solution to be found by 2020 or 2025 at the latest. Trying to remedy the solution after that time frame would be useless because the ability to reduce or reverse the effects of carbon dioxide molecules in the atmosphere would be diminished. The reason why this time frame is so critical is because the estimated age for the presence of carbon dioxide in the atmosphere is about two hundred years, which means that any amount of this gas emitted into the atmosphere will stay there for at least 200 years. This also means that the impact of the huge amount of this gas present in the atmosphere now, as well as the impact of what is emitted during the next few years will continue to raise the temperature of the planet for the next two centuries. The expected increase in the temperature of the Earth will be more than 5o C at the end of this century. This increase is sufficient to melt large swaths of glaciers in both the Arctic and Antarcticawhich would then put at risk sinking two-thirds of the planet. The rapid worsening of the climate change phenomenon and the need to find a solution to this problem may force us to end the crude era much earlier than anticipated. Since carbon dioxide is currently the biggest pollutant in the atmosphere and since the use of crude oil as a source of energy is the major cause of this emission, this simply means that the solution to the climate change problem would not be effective, unless it was based mainly on the cessation carbon dioxide emissions in the atmosphere. In other words, we must stop burning crude oil and its derivatives for power generation, or at least reduce it significantly as a source of energy and find other clean energy solutions.

The use of natural gas as an energy source is preferable because it is much cleaner and therefore less polluting to the environment. Therefore, natural gas use would not need to be reduced greatly. After the summer of 2009, the global crude oil market has become a barometer that abruptly changes with any small impact. The examples of these are many: for instance, the seizure of an Iraqi oil well by Iran last December reflected strongly and rapidly on global crude oil prices. This means that this market has become very sensitive to any effect no matter how small it isto the extent that it is now affected by mere rumors. The impact that world events are having on crude oil prices show that this material is no longer as strong and stable in the economic balance as it has been in the past. Its hard to explain the reasons behind the rapid increase in crude oil prices between 2007 and 2009with the catastrophic drop that occurred in the summer of 2009, when the price of a barrel dropped from $150 to about $30. Crude oil fields and production levels did not change during that period, and there were no significant political events that justified the high increase followed by the major drop in prices, such as what happened in the early 80s during the outbreak of the Iran-Iraq war. Moreover, it is certain that what happened in the global crude oil market was more or less one of the reasons behind the economic crisis that swept the world in September, 2009. That crisis has clearly exposed what areas are vulnerable during any global economic crisis. Industrial countries have exerted great efforts and spent large sums of money in the last forty years to find alternative sources of energy to substitute for the use of crude oil and its derivatives. Those efforts have been focused on two essential components: cost and environmental impact. And although research has not brought to fruition any cost effective energy sources to replace crude oil, this should not prevent us from continuing to look for alternativesand there is promising work being done that could lead to breakthroughs with hydrogen and fuel cells. It is strange that oil-producing countries have thus far been out of the loop on working around these issues. Despite some timid conferences and seminars held by those countries to discuss global energy problems and their impacts on the future, they, in fact, are satisfied with revenues gained from the production and export of crude oil, especially after the relative

improvement in its price in recent months. These countries do not seem to be aware that things are about to change and that one day they will wake up to find that the wealth they imagined would continue for ages is suddenly worthless. All the current talk around finding solutions to carbon dioxide emissions into the atmosphere will not work without reduction, especially with the rapid increase of emissions. It may seem difficult to imagine but if reduction does not occur, measures will have to be mandated for the safety of the planet. It would be plausible to imagine strict international sanctions imposed on producers of crude oil who surpass what their imposed production cap is. Consumers that burn more than what they are allowed would also face similar sanctions. These things would not bode well for the price of crude oil and it is likely that prices would fall below ten dollars a barrel by the beginning of the third decade of the 21st century. Despite this, a significant event with profound implications for the global oil market took place last year. During two oil-licensing rounds posed by the Iraqi Ministry of Oil, in June and December 2009, a number of servicing contracts for major Iraqi oil fields were granted to several Asian, European and African companies, but not to US oil companies. There were two types of fields awarded: productive fields, those to be developed to increase their capacity and explored fields, which would be converted to productive fields. After the contracts were awarded to develop the fields it was announced that there were no plans at this time for a third licensing round to develop new fields. The Iraqi Oil Ministry has justified not awarding the US firms any contracts during these two rounds because they had requested a higher rate for each barrel of crude oil produced under these contracts than rates requested by other companies. Still, the failure to award any oil contract to any US company in Iraq is puzzling, because it strongly contradicts the allegation that the US occupied Iraq for its crude oil reserves. Even more confusing was that some US companies pulled out of negotiations with the Iraqi Ministry of Oil for oil licensing rounds during the early stages, which gave the impression that they were no longer interested in the material.

But even looking at the development of Iraq's oil industry both in terms of updating already existing functional units, and the construction of new units, we find that US companies are also not interested in working in the Iraqi market, and there is a reluctance to move towards this market. Moreover, many of these companies removed the Iraqi region from their circle of interest more than two years ago. While all this is confusing, we can make a few assumptions. First is the belief that US companies may have been paid by the US government to leave the Iraqi market for political reasons, or, that companies have decided not to proceed in this direction for reasons that they alone know. If we move away from the political reasoning and focus on economic and technical aspects we can also see other possibilities driving these events. One possible reason might be that US companies have little confidence in the stability of the Iraqi market and fear unstable fluctuations in the country, viewing with uncertainty the ability to guarantee yields and the potential loss of funds expended in investment operations. Another reason might be that the companies that won oil licenses have paid more in commissions than US companies to get those contracts. We must not forget that US tax laws are very strict and most American companies are limited in the scope of what they can pay in gifts and incentives making their bids less significant. As a technical researcher I am inclined to look at these issues from another perspective. The more technically convincing reason is that the twodecade extendable licenses are not attractive to US companies because of the potential decline in the value of crude oil during this period. Any large international company should make strategic calculations when trying to get any long-term investment contract. This means that whatever profits US companies could earn from these license contracts put out by the Iraqi Oil Ministry are not encouraging enough to compete with other companies, especially with the strong possibility of a collapse in the demand for crude oil in the near future. This seems the most plausible reason why these companies have withdrew from negotiations early on. Going back to what was predicted at the beginning of this article on the likely significant decline in the price of crude oil at the beginning of the next decade; we find that the earning a few dollars in service fees per barrel would be very difficult when the price of a barrel falls below ten dollars. In

such a situation, companies would not even be able to recover the capital spent in investment operations. Under this scenario it is more likely that US companies preferred to withdraw from the competition for such useless contracts because they will certainly be unprofitable in the future. It seems that companies prefer the management of their producing fields rather than new opportunities, especially since the era of crude oil is in decline. We find such companies show increased interest and great enthusiasm toward investments in natural gas because the age of this material will remain active for a long period, and may extend until the end of this century at least. All available evidence suggest that the era of crude oil is about to reach its end, and we can probably bear witness to these events by the year 2030 when we see new sources of energy replace crude oil. It is regrettable that many oil-producing countries have not been benefited by it, but have squandered their revenues in things that are not feasible to sustain. The era of crude oil will leave them empty-handed and Iraq may be the best example of this. Wisam Al-Shalchi January 22, 2010 wisamalshalchi@yahoo.com