Sunday, November 22, 2015

The "Syrian Sickness": what crude oil gives, crude oil will take away.


Here, I argue that the origins of the Syrian collapse are to be found in the economic downturn generated by the gradual depletion of the Syrian oil reserves. Crude oil had created modern Syria, crude oil has destroyed it. This phenomenon can be termed the "Syrian Sickness" and the question is: "which country will be affected next?"


Crude oil is a great source of wealth for the countries that possess it. But it is also a wealth that comes as a cycle. Normally, the cycle spans several decades, even more than a century, so that those who live through it may completely miss the fact that they are heading to an end of their wealth. But the cycle is faster and especially visible in those areas where the amount of oil is modest; there, wealth and misery appear one after the other in a dramatic series of events.

One of these rapid cycles of growth and decline is that of Syria. It is a country that never became a major world producer, its maximum output was less than 1% of the world's total production when it peaked, around 1995. (graph below, from Gail Tverberg's blog). For the small Syrian economy, however, even this limited amount was important.



The Syrian oil production went through its cycle over little more than three decades. Depletion generated progressively higher production costs and that led to a scarcity of capital investments to keep production increasing, eventually forcing it to decline. The result was the "bell shaped" production curve that is often called the "Hubbert curve". Around 2011, the internal consumption curve crossed the production curve and that transformed the country from an oil exporter to an oil importer. The cross-over point corresponded to the start of the civil war.

The IMF data show that the Syrian government's budget was still 25% dependent on oil in 2010. Data on what it was earlier on are hard to find, but it is clear that it must have been much larger. It may well be that, at the time of the peak, most of the government's revenues came from oil. Seen in this light, it is not surprising that the complete loss of these revenues generated a big turmoil.

So, we can build up a narrative of what happened in Syria after the peak. With progressively lower oil revenues, the government was less and less able to afford the bureaucracy and the social services it used to provide. Gradually, it became also unable to afford an efficient police force and a functioning army. The middle class, that had been strongly dependent on the government's handouts, was badly hit. The most educated and wealthy ones left the country or, at least, moved their financial assets abroad. Those who were forced to remain saw their assets destroyed by hyperinflation and became an impoverished urban proletariat. At the same time, the countryside also went through an economic disaster, enhanced by the droughts created by climate change. At this point, a large number of young men, unemployed and without hope for the future, become cannon fodder for religious fanatics and for local warlords, often paid by foreign powers interested in carving out the country in pieces to be distributed among themselves. The destruction of whatever was left was also helped by economic sanction and aerial bombardments. The final result is what we see: the "Syrian Sickness." A nearly terminal form of social sickness; it is hard to imagine when and how Syria will be able to recover even a shade of its former wealth and stability.

The factors that led to the Syrian disaster are by no means limited to Syria alone. Yemen went through a nearly identical cycle; going through the peak its oil production in 2002 at levels smaller than those of Syria, but probably even more important for the local economy. The cross-over point of the production and consumption curves took place in 2013 and, like Syria, the country is at present being destroyed by civil war and aerial bombardments.  (image from "crudeoilpeak")


There are several other examples of minor oil producers that went through similar cycles. Egypt, for instance, experienced the cross-over of production and consumption in 2010, experiencing a phase of dramatic civil unrest. Egypt, however, did not collapse; most likely because the importance of oil in its economy was not as large as it was for Syria. Other examples of countries that experienced the cross-over are Malaysia and Indonesia, also undergoing internal troubles, but no generalized collapse. No country is completely immune to the Syrian sickness, but some are less sensitive to it. So, some oil producers, such as the United Kingdom went through the cross-over point without suffering evident disasters; but the dependency of the UK government on crude oil was only 2% in 2011.

At this point, the question is obvious: given the known cases of Syrian Sickness, given that depletion is unavoidable, which country is next in line?

There are several candidates for a future crossover of production and consumption, but none seems to be very close to it. Venezuela, Iran, and Mexico may be the producers most at risk; but the critical moment may still be several years away in the future. But the most interesting and worrisome case is that of Saudi Arabia. The data shown below are from Mazamascience. Most producers of the Arabian peninsula (with the exception of Yemen) show a similar pattern.



You see that, despite the rapid increase in internal consumption, Saudi Arabia is still able to export about two thirds of its production. But how about the future? Of course, extrapolations are always dangerous, but it doesn't seem that the production and consumption curves are destined to cross each other very soon. Hence, the country might still have at least a couple of decades of substantial oil export revenues. The problem is that the Saudi economy is heavily dependent on oil: 90% of the government revenues come from oil. So, Saudi Arabia may not need to go through the cross-over point to start experiencing troubles. Consider that it is nearly completely dependent on imports for the food its population consumes, and that the trend is worsening because of the depletion of local aquifers. You can imagine what the problem could become in case of a substantial loss of financial resources coming from crude oil. If Saudi Arabia starts suffering of the Syrian Sickness, the result disaster may make the Syrian collapse look like a children's game.

Is there any hope for Saudi Arabia or any other producing country to avoid the Syrian Sickness? There are several ways to postpone or reverse the decline of oil production if sufficient financial resources are available. However, these are just stopgap measures: depletion is an irreversible process. A country can only prepare for it by building an alternative economic infrastructure while it is still possible; an opportunity that was missed in Syria. Today, Saudi Arabia doesn't lack the financial resource for massive investments in renewable energy, that would provide an alternative to the collapse created by depletion. Unfortunately, it doesn't appear that these investments are being made, with the Saudi government preferring to engage in expensive military power games. That's a bad idea not only for Saudi Arabia, but for the whole world: with more than 10% of the world's oil consumption provided by producers in the Arabian Peninsula, you can imagine what might happen if the region falls victim of the Syrian Sickness.

Crude oil has given a lot to Saudi Arabia, crude oil can take back a lot from it. But there is something that crude oil can never provide, and it is wisdom necessary to manage it well.




22 comments:

  1. The UK production/consumption curves crossed in 2005.

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    1. Yes, but the UK government relied for only about 2% of its revenues on oil. http://www.resourcegovernance.org/countries/europe/united-kingdom/overview

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  2. Hasn't climate change also played a part in Syria's uprising in 2011? It is well-known that hunger often results in uprisings and revolutions, and hunger looms when food production suddenly drops and/or basic-food imports suddenly become too expensive.

    According to the Foreign Agricultural Service of the US Department of Agriculture (http://www.pecad.fas.usda.gov/highlights/2008/05/Syria_may2008.htm ), Syrian grain production has been more or less self-sufficient in the 1990 and 2000 decades, despite a relative rainfall scarcity due to its location. But in 2007–2008, Syria faced an exceptional drought (consistent with what climate scientists expect in such a world region: dry regions tend to become drier and suffer more droughts). This drought in 2008 led to a drop of about 50% in the domestic wheat production, and forced the Syrian government to massively import wheat (almost as much as Syria produced that year). And despite a wheat production almost back to normal in 2009, Syria went on importing wheat massively the following year (about as much as in 2008, see http://www.pecad.fas.usda.gov/highlights/2012/06/Syria/ ).

    Usually, about 200 millions tons of wheat are exported and sold on the world marketplaces every year, and Russia exports half this amount. But in 2010, Russia faced so severe a heatwave (again, matching what climate scientists expect, all the more during an El-Niño event) that the Russian government decided to completely stop wheat exports that year, and this unilateral decision led to an international-wheat-price rise of 30% overnight and of 100% at the end of the year at the Chicago Exchange. Obviously, this was a major blow to every Middle-East and Maghreb country, which imported large amounts of wheat (for instance Egypt, which was the top wheat importer all over the world, and also Tunisia and Libya, which were wheat importers too).

    As Syria had also become a wheat importer, didn't this international-wheat-price rise in 2010 play its part in starting the uprising by causing too considerable a discontent among the Syrian people?

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    1. Of course, climate change must have played a role, too (and it is stated in the article). But note that it affected also other neighboring countries in the region; for instance Jordan and Lebanon, that didn't go through such a massive collapse.

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  3. Also during the two prosperous decades the population doubled. Never forget Prophet Malthus.

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  4. So how did the USA manage to avoid Syrian Sickness for 40 years?

    RE

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    1. I am not sure the US really avoided the Syrian Sickness; it is just that the symptoms are less evident

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    2. Also see "The Great U-Turn" of 1990, describing how the US economy went in reverse after the 1970 oil peak

      https://books.google.it/books/about/The_Great_U_Turn.html?id=xv7NjQ7OlyQC&redir_esc=y

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  5. I think the Syrian disaster has multiple causes, it is not possible to state which one is overriding, they have all come together in this one region.

    First, the Assad regime has always a been a brutal one which met dissent with excessive violence. Second, the disastrous US/UK invasion of Iraq caused millions of Sunni refugees to move over the border into Syria, putting a huge strain on the local food supply and leading to widespread under employment. Third came the climate change enhanced drought, and forth was oil production decline resulting in falling government income and the inability to pay for food imports on a sufficient scale. Finally and hardest to quantify, it is clear that geopolitics from US/Saudi Arabia, and probably influenced by Israel and probably other nations, actively undermined the Syrian regime and funded and armed opposition groups when attempts at peaceful protest in the Arab Spring period where met will the usual murderous repression.

    Unfortunately , ISIS is far from unique in recent history in using ideology and/or religion and/or racism to drive otherwise normal people to mass murder. The last 100 years has at least 4 other examples.

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  6. Up to "so, we can build up a narrative about what happened to Syria after the peak" I am in agreement. But where is the evidence for the various components and their particular sequence in the narrative that actually was built up? And what about the interplay of the many internal and external political factors at play? Were they, their origins, their dynamics, and their complex interplay brought about by peak oil or by peak oil alone? And might the current disastrous outcome have been different if different such factors had been at play or if they had been better managed or addressed by the various actors involved? Without convincing answers to the preceding I am skeptical of the apparent generalized conclusions of this post unless further and much better qualified case by case.

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    1. Max, unfortunately the available data about the Syrian economy are outdated. The latest GdP data from the World Bank, for instance, do not go beyond 2007. Up to then, the Syrian economy was still growing; which makes sense if we note the increased internal oil consumption. But we have no recent data, so we can only make educated (maybe) guesses.

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  7. Another reason why attributing the "Syrian Sickness" to peak oil or to climate change is a very dangerous path to tread, is because people like Prince Charles (and probably a whole bunch of other Bilderbergers) agree and because mainstream outlets like Reuters, spread the idea far and wide...

    http://uk.reuters.com/article/2015/11/23/uk-climatechange-summit-charles-idUKKBN0TC0ND20151123?utm_source=Facebook

    It's nice and also quite useful to take the responsibility for the slaughter and the disaster and the catastrophe AWAY from those who control the policies of Western governments and their regional allies and place it mostly on "inevitable" things like peak oil and/or climate change which of course "we support doing everything possible to combat it" about.

    And if the keynote speech of the COP 21 is going to be as indicated, the event may just as well be cancelled to spare the emissions caused by the delegates flying there.

    http://uk.reuters.com/article/2015/11/23/uk-climatechange-summit-charles-idUKKBN0TC0ND20151123?utm_source=Facebook

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  8. Roger Ebert:

    As the US holds the reserve currency of the world they have been able to avoid most of the consequences of 'crossing the line' by printing money. They appear to have reached peak money as near zero interest rates fail to promote real growth but instead are used to inflate a hot air balloon on the street named after the Wall that was built to keep pigs out. (It didn't work.)



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  9. Replies
    1. www.mazamascience.com. Anyway, a new Iranian collapse will not be soon. Not very soon, at least......

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  10. The idea of crude as wealth is fine as it goes, but for many it just kicks the entire argument into what can best be described as "the resource curse", the dependency upon a resource seemingly causing all sorts of internal issues that then create economic basket cases, Venezuela and Russia springing to mind. Iran and Iraq being 2 others. Some of the developed world has handled this much better, but the future is going to be defined by those who are continually increasing their GDP per unit of energy input, as opposed to those who are nearly exclusively dependent on a commodity, the price of which can bite them in the ass in a heartbeat. The USSR being one example, what is currently going on in Saudi Arabia, Venezuela and Russia being another.

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    1. ".. for whom the bell tolls"

      I would like Ugo's expert assessment on the issue of GDP/unit of output. Apparently, 'economic growth without resources' (i.e. by means of 'efficiency gains') is an illusion.

      This Monbiot article captures the argument in layman terms http://www.monbiot.com/2015/11/24/false-promise/ but refers to a PNAS article.
      http://www.pnas.org/content/112/20/6271.full

      See in particular this interesting figure http://www.pnas.org/content/112/20/6271/F1.large.jpg

      I see this costly 'illusion' as diverting attention from 'wealth pumps’ performing in imperial fashion via international trade. Perhaps this goes some way to explain why some polities cannot ‘succeed’ or indeed why they ‘fail’ for geopolitical reasons when they can no longer ‘grow’ and/or when they find they are in the wrong geopolitical space between contending forces? Significant parts of Africa, or whole unfortunate polities like Syria, Yemen, Afghanistan, or even Greece or Ukraine are excluded or used as battlegrounds.

      Quote from PNAS article:
      “Humanity is using natural resources at a level never seen before. … Few countries would be able to satisfy their material needs with domestic resources, and the current level of national material consumption has only been made possible through a record increase in international trade.”

      best
      Phil

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    2. Thanks for calling me an "expert", Phil. I can only state my opinion, which is that those people who speak of "decoupling" intended as GdP growing while resource consumption shrinks are basically believing in perpetual motion. But a lot of people seem to believe that you can get something out of nothing..... well.....

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    3. I did not intend to flatter.For your book Extracted for the Club of Rome you pulled together some useful people to review world mineral resources.

      We have seen 1.3 billion more people undergoing intensive industrialisation in the last 20 years (China). The PNAS paper now helps address the obvious constraints on continuing economic growth, which would entail further tranches of resources to be used at an even faster rate on a yearly basis. Loss of chunks of the industrial base will occur from time to time - e.g. end of USSR and 2008 financial crash - but it is the rate that international trade can be (or cannot be) restored to a growth curve that will determine the fate of increasing numbers of economies, I guess.

      best
      Phil

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  11. In the early 1900s before Saudi Arabia started producing oil, its population was around 1.5 million who mainly engaged in herding. Its current population is over 20 million. If current Saudi regime fails, it will have to return to the above population level because it has no other mechanism or resources except oil to support such level of population.

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  12. Thanks for your very interesting article. I'm very sorry for the remaining peasants in Syria.

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Who

Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)