At present, there are at least five major conflicts that could potentially flare up over oil and gas resources in the next three decades of the twenty-first century. The most dangerous among them are a conflict between Saudi Arabia and Iran over Iran’s nuclear programme and primacy in the Gulf region and a conflict between China and the United States that has the potential to escalate to war over dwindling oil resources or over Taiwan or over the disputed Islands in the South China Sea claimed by both China and Japan with the United States coming to the defence of Japan.
Yet oil has also proved that it can be a blessing for some and a curse for others. Since its discovery, it has bedevilled the Middle East and the world at large with conflicts and wars. Oil was at the very heart of the first post-Cold War crisis of the 1990s – the Gulf War. The Soviet Union squandered its enormous oil earnings in the 1970s and 1980s in a futile arms race with the United States. And the United States, once the largest oil producer and still its largest consumer, must import 41% of its oil needs, weakening its overall strategic position and adding greatly to its huge outstanding debts – a precarious position for the only superpower in the world.
Those who are already starting to talk prematurely about the decline of the supremacy of oil should think again. They should look no further than the adverse impact that the collapse of oil prices since July 2014 has had on the global economy.
The global economy has not been able to reconcile itself with the collapse of oil prices because the main ingredients that make up the global economy such as global investments, the oil industry and the economies of the oil-producing countries, are all being undermined.
While it is true that low oil prices could reduce the cost of manufacturing, thus helping the global economy to grow, it is a short-term benefit as this is vastly offset by a curtailment of global investment which forces companies around the world to cut spending, sell assets and make thousands, if not millions, of people redundant.
There has been a loss of 0.75%-1.00% annually in global economic growth since 2014.
The seven major oil companies in the world - Royal Dutch Shell, BP, Exxon Mobil, Chevron, Total, ENI and Statoil - need a price of $125-$135/barrel to balance their books. They also need certainty about the future trend of oil prices before committing themselves to huge investment in exploration and production.
As a result of declining oil prices, the oil majors have already sold many of their production assets and have cancelled more than $200 bn in oil & gas investments so far, which will translate in two years' time into a smaller share in the global oil production. Oil production by the major oil companies: Exxon Mobil, Shell, Total, Chevron and ENI has declined from 11.5 million barrels a day (mbd) in 2003 to 9.5 mbd in 2015. This will be reflected in steeper oil prices in the near future.
At prices much below $75 a barrel, some of the North Sea’s remaining economically-recoverable reserves, estimated at 15 and 16.5 billion barrels (bb) of oil and natural gas, will end up as so-called stranded assets - hydrocarbons that are simply too expensive to develop.
Moreover, global investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to leading US consultants IHS.
The Arab Gulf oil producers earned $574 bn in net oil export revenues in 2013. My calculations show that they earned an estimated $452 bn in 2014, down 21% on 2013 earnings. Their earnings in 2015 were estimated at $254 bn based on an average oil price of $40/barrel. The Arab Gulf oil producers have lost a total of $320 bn in oil revenues in 2014 & 2015 (see Table 1).