The Truth About Oil, 2005

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.1

If 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 their
destination.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 and
66% of Europe’s requirements. Emerging economic powerhouses such as China and India, with their
huge populations and relatively poorly developed infrastructures, have also recently developed an
enormous appetite for oil to support growth in all sectors and especially in transportation. Virtually
all transport’s energy requirements (96-99%) come from oil3 and the expansion of transport has not
only accounted for all growth in oil use over the past 30 years but is expected to continue to do so
over the next 30 years as well. 4

Of the total energy consumed from all sources, “transport” uses 18%5. This rate varies by region – in
the US and Europe transport’s share is much higher at 24%. In India, the land of the bicycle and
blessed with a rail system, it stands at 10%. In China, demand for oil from the transport sector will be
fiercer. (Note: despite a population in excess of one billion, China only has 7.5 million cars and 6.4
million commercial vehicles compare to America’s 136 million cars and 89.4 million commercial
vehicles).

So given this dependency on oil, every tourism destination and every tourist-related business and
association 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 difficult
and time consuming for the general public to determine the truth as there is such a huge divergence
of opinion between politicians, government-funded agencies, economists and a growing number of
scientists and engineers regarding oil supply and prices.

In some respects, the current situation is reminiscent of the global warming debate. While the bulk of
public opinion appears to be shifting towards the view that global climate patterns are changing due to
human activity, scientists and politicians still remain divided over cause, rate and extent of the
problem. But unlike the global warming debate, there has, until very recently, been very little
awareness of the “oil issue” in the mainstream media. While airlines are extremely sensitive to the
rising cost of fuel, the tourism industry as a whole does not appear to be fully aware of the potential
for disaster.

1
Peaking of World Oil Production; Impacts, Risks & Risk Management, Hirsch, Bezdek and Wendling, February 2005, report
prepared by Science Applications International Consultants (SAIC) for the US Department of Energy.
2
EEA & EPA quoted in Switched On, UNEP report page 6
3
ibid
4
IEA/EET Working Paper, Reducing Oil Consumption in Transport, Lew Fulton, April 2005.
5
International Energy Agency, World Wide Outlook, 2005

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So 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 a
misplaced sense of complacency and security. The key issue and question of the day with regard to
oil, is when will global production reach peak?

Oil is not a renewable resource. Ironically, it was created several million years ago during several
epochs of huge “global warming”. It only occurs in certain parts of the globe. Geologists understand
that at some future date, world oil production will reach a maximum – a peak – after which
production 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 to
rise, however, this spells trouble. Prices will trend systematically upwards while accompanied by
significant volatility and instability over the short run. Without timely mitigation, the economic, social
and 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 the
permanent end of “cheap oil” and every citizen and business on the planet will be affected. Tourism
strategists, planners, policy makers as well as corporate executives must take the time to understand
the issues, if they are not to be caught by surprise without any form of mitigation plan should fuel
availability (in terms of access and price) change.

This paper is designed simply to introduce destination planners to the issues and sources of
information and opinion so that they may judge for themselves before proceeding down their own
path of discovery and make their own corporate and personal plans to adapt and respond.

Current Patterns of Energy Consumption
Every 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 by
industry of all kinds and nearly a quarter (24%) is burned by people in their homes and non-industrial
commercial undertakings.

Of the total energy consumed globally, 1,827 billion toe (18%) are used by various aspects of the
global transport sector. This equates to some 36 million barrels of oil a day. While not yet the
dominant 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 2030.8

6
prepared by SAIC for US Government
7
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 measured
in a number of ways – see Appendix A.
8
IEA/EET Working Paper, Reducing Oil Consumption in Transport, Lew Fulton, April 2005.

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Of 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 are
presented 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 2020
Cars 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 being
used in North America (USA, Canada and Mexico) and a further 20% consumed by the European
members 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% 80.7

Over the past decade, the increase in oil consumption overall totalled 18% globally but varied
substantially between regions and countries according to their state and pace of development. The
two fastest growing economies of China and India, whose economic expansion has only really “taken
off” in the last five years have increased their consumption of oil by 113% and 81% respectively over
the 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 turn
of the century (notably in the US), are now either dry or too costly to extract. Oil production
depends on the existence of known reserves and the ability of producers to be able to extract oil
from 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, the
rising price of oil in recent years has made it economically viable in recent years to extract oil from
the tar sands in Alberta and parts of northern Canada as well as commence exploration and
extraction in the Arctic.

Thirty percent of today’s oil production comes from the Middle East with Saudi Arabia providing just
under half that supply.

9
Source: World Energy Outlook, 2005 as published by BP -

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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% 80.260

Saudi Arabia’s productive capacity is a very important parameter to watch. Since 1994, it has
oscillated between a low of 8.9 million barrels a day to a high of 10.584 million barrels per day some
ten years later. There is , however, considerable disagreement as to whether Saudi Arabia has the
capacity 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 of
economic growth and the latter are related to oil prices that, in turn, are related to the balance
between demand and available supply!

Some countries may actually grow economically but, by switching to alternative fuels and becoming
more 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 the
previous 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) that
annually publishes an International Energy Outlook. In its latest report, released in July 2005, the EIA
forecast that energy consumption would increase on average by 2% per year across the globe between
2002 and 2025. It should be noted, however, that in 2004, oil demand exceeded this average
considerably, rising 3.4% in 2004 instead of the normal 1-2%. Nearly a third of that growth came
from 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.11

It was not just China that used a lot more oil, India’s consumption also leapt last year. Despite oil
prices 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 in
2002 to 103 million barrels in 2015 and 119 million barrels in 2025. Note: that means that just
twenty years from now, an additional 42 million barrels of oil a day will need to be both found and
extracted. That’s an amount equivalent to reserves four times the size of those located in Saudi
Arabia.

Given the EIA’s inability to foresee the rapid rise in demand from China, it is interesting to note

10
Source: ….measured in millions toe
11
Andrew McKillop: Demographic Oil Demand and Peak Oil published in www.vheadline.com. McKillop is a former expert of
policy and programming in the European Directorate DGXVII -

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whether this agency may have taken into account the more aggressive growth targets postulated by
the tourism industry. According to UNEP, international tourism is predicted to increase 4.5% annually
over the next ten years (UNEP DTIE, Tourism Sector Report, 2002). Realising these growth rates will
inevitably 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, a
combination of increasing extraction costs, lower quality output, and technological difficulty will
prevent oil producers either from meeting those production requirements or from delivering oil at a
price acceptable to consumers or a combination of both. The so called “pessimists” point out that
world oil production is rapidly approaching “peak”. The “optimists”, on the other hand, believe that
either new oil will be discovered and or technical advances will enable oil producers to extract oil in
the 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 we
have sufficient reserves to meet current and growing demand for several years to come.

Figure 1: Proved Oil Resources at End of 200412

The total known reserves by end of 2004 have been estimated at just over 1.18 trillion barrels with
the Middle East clearly the dominant source. Of the countries in this region, Saudi Arabia has by far
the 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

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Figure 2: Source of proved (oil) reserves 1984, 1994, 2004

When we look to the future, it would appear that the EIA, the US Government and a number, even
the majority of economists, investors and pundits all fall into the optimist camp. In the EIA’s 2005
International 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. 13

Later 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.14

One would expect that the CIA with its enormous resources for determining what’s going on around
the world might have identified a problem. Each year the National Intelligence Council produces a
global overview of the issues of the day and their geopolitical implications. Back in 2000 in a report
titled 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 - the

13
International Energy Outlook 2005 – Highlights (www.eia.doe.gov/oiaf/ieo)
14
ibid
15
Report on the National Intelligence Council’s 2020 Project. Based on Consultation with Nongovernmental Experts Around the
World. Published in 2000

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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. 16

This 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 it
comes to downstream supply, the authorities do not appear to be concerned and, at first glance, the
situation appears quite comforting. This is what the secretary General of OPEC had to say in the
week following the Hurricane Katrine disaster in the US:

We won't have a problem in 10, 15 or 20 years' time because the resources are sufficient and the
investment is already in place. We don't 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.17

Simple 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 or
within 29 years if demand grew to the levels predicted by the EIA. Note: this lifespan of supply
assumes that the oil remaining in the ground is as high a quality and as easy to extract as the oil that
has been used already.

But this is only comforting if you are politician with a life expectancy of 4-8 years in office and quite
troubling if you are a young grandmother hoping and expecting your grandchild to enjoy a similar
lifestyle to the one you enjoy.

It should be especially troubling to the one industry that is currently utterly dependent on the
availability 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 future
availability and price of oil.

The situation becomes far more troubling, however, once you factor in some geological, economic
and political realities..

Reality # 1- Quality of Oil Reserves
Not all oil reserves are equal. Some oil reserves will be harder to extract than others. The estimate
of 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 from
underground reservoirs with relative ease. Unconventional oils are heavy, often tar like. They are not
readily recovered since production requires a great deal of capital investment and supplemental
energy in various forms. While most of the Middle East reserves are conventional, with relatively low
costs of extraction, the same cannot be said of non-OPEC sources, believed by many to be already
past their peak.

Reality # 2- Production Patterns
Production of virtually all oilfields tends to increase after discovery, then peak before declining
following a well known bell curve. A geologist called Hubbert first drew the world’s attention to the
concept of “peak oil” back in 1976 and that concept is now the centre of controversy concerning
future oil supply.

The key concept associated with the term “peak oil” is simple. After peak production is reached at
any one oil field or all of them combined, output levels will steadily decline until all useable resource
has been depleted. During the decline period, production cannot be ramped up to meet growing
demand 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 increase

16
Report on the National Intelligence Council’s 2020 Project. Based on Consultation with Nongovernmental Experts Around the
World. Published in December, 2004
17
Interview with Adnan Shihab-Eldin, Secretary General of OPEC in Newsweek International online
(http://www.msnbc.msn.com/id/9191046/site/newsweek/)

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will 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 a
phenomenon 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-ten
years. It is no exaggeration to state that the impact of reaching and passing peak oil production on a
global economy that is dependent on “cheap oil” will be catastrophic and will incur change at a pace
and 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 when
total production reaches some 31 billion barrels a year, equivalent to 90 million a day. It is important
to recognise that these are the predictions of peak oil cannot be dismissed as the fears expressed by a
handful of scientists. Well over twenty groups have been identified as having calculated the date of the
peak. They are listed on the Hirsh report on mitigation published by the US Government in February
200519.

Figure 3: Predictions of Peak Oil Production by Region

The world has had some experience of the phenomenon of peaking before when U.S oil production
peaked in the mid 1970s. Ironically this event coincided with OPEC’s oil embargo of 1973 and the
Iranian oil crisis when the Shah of Persia was deposed in 1979. In constant dollars, oil prices tripled in
1973-74 and doubled in 1979-80. This “supply led” shock resulted in high inflation, world recession
and high unemployment for nearly a decade and during that period the US moved from being an oil
exporter into an oil importer. Economic discomfort, combined with a realisation of its dependency on
foreign sources of oil and high prices both triggered and enabled a decade of exploration, investment
and technological application to develop non-OPEC oil reserves. Huge finds of oil and natural gas in
the North Sea etc. then stabilised prices and kept them low from the early 1980s until 2003. During
this period a combination of “cheap oil”, cheap credit and huge gains in information technology have
spawned a period of global economic expansion and change unprecedented in human history. While it
was possible to offset the negative effects of peak oil production in the American oilfields in the 1970s
by 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 since
19
prepared by SAIC for US Government

Page 8


The British oil bonanza is over too. 2004 was the first year since the early 70s that Great Britiain
returned to being a net importer of oil now competing with the rest of the world for a dwindling
supply.

It is not as if the politicians do not know about the seriousness of the situation. When he was still
CEO of the world’s largest oil services company, Halliburton, VP Dick Cheney gave a speech to the
Petroleum Institute in London in 1999 and stated: “There will be an average 2% annual growth in
global oil demand over the years ahead along with, conservatively, a 3% natural decline in production
from existing reserves”. The subject of Peak Oil and its implications remains one that politicians in
office in the western world, at least, prefer to avoid at all costs.

Reality # 3- Capacity
There is less certainty about proven reserves than the myriad of charts and detailed figures would
appear to show. Neither countries in which the oil fields are located nor the companies that own the
rights to extract this resource are incentivised or required to be utterly truthful about the extent of
reserves or productive capacity. Shell Oil, for example had to downgrade its reserves on four
separate occasions in 2004.

Back in the 1980s OPEC made a rule stating that member countries could export commensurate with
their reserves. Within two years of this ruling, every OPEC country stated reserve increases ranging
between 5% and 200% even though virtually no new discoveries had been made. The truth is we
simply do not know for certain how much oil really exists under Saudi Arabia, Iraq or Venezuela for
example. There’s no impartial, independent agency with the mandate to lower a dipstick into the can
and verify availability. But there are several reasons why countries and companies would wish to
inflate their numbers.

Because oil traded at a relatively low price for so long, the industry has been slow to reinvest in all
aspects 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 as
illustrated in Figure 4.

Figure 4: World Oil Production Capacity20

20
http://www.economist.com/surveys/displaystory.cfm?story_id=3884623

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Without this support capacity it is doubtful that the production targets (forecasts) set by the EIA and
others will be met.

There’s another challenge. Productive capacity is not entirely determined by the level of investment
or technology or even the aspirations and promises of politicians wishing to bring hope. The earth
does not surrender its bounty without a degree of mystery and unpredictability. What matters most
is not how much is left in the ground (ie reserves) but how much can be pumped to the surface in
order to keep up with demand. Reservoirs are extremely temperamental. If too much oil is extracted
too quickly or if the wrong type or amounts of secondary effects are applied, the amount of oil that
can be recovered can be greatly reduced.

because Saudi Arabia is such an important source of conventional oil, all eyes are on her productive
capacity. The oil minister, Sheikh Ali-al Nami has taken pains to asset that his country can raise its
capacity from its current level of 9 million barrels per day to as high as 15 mb/day, a projection that
one of the Middle East’s most respected oilmen strongly disputes. Sadad al Hussein, Aramco’s former
top executive in charge of exploration and production, fears that over production could damage many
of the reservoirs and cause substantial reserves to be trapped – lost forever. 21

Reality #4 Political Implications
Note: the Middle East currently accounts for 30% of oil production but 60% of known reserves. Thus
as demand grows and oil from other sources starts to decline, global dependency on a few states in
this region will grow sharply with enormous geopolitical implications. Future supply will also depend
on the political, diplomatic and trading relations that exist between the primary producing and
consuming 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’s
exports. Given the political instability of the region and the growing hostility between the
fundamentalists associated with Islam and other faiths, we cannot assume that the reserves will be
equally 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 fifth
largest source of oil in the world, is the fourth most important supplier of crude petroleum to the
United States, behind only Saudi Arabia, Canada, and Mexico. On January 30, the Venezuelan
president signed an accord with China's vice president Zeng Qinghong, facilitating the China National
Petroleum Corporation to invest in the development of Venezuelan oil and gas reserves. Relations
between President Chavez and the United States are currently strained with Chavez convinced that
he has been targeted by the CIA, a concern not diffused by recent statements made in the national
press by a leading, right wing evangelist that the US could and possibly should eliminate him! 22

The 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 oil
imports and, when energy is looked at as a whole, China is a major net exporter of energy, mostly in
the form of coal. Per capita energy consumption in China is seven and four times less than in America
and Japan respectively. 23

While the US government and many governments in the western world have avoided reference to
peak oil and its potential imminent arrival, the same reticence does not exist in other parts of the
world. The term “peak oil” and discussions of the implications appears throughout the main stream
press in Latin America, Asia and Africa – sadly, because when prices do rise, these economies will
have least buying power and will be hardest hit. The Chinese Chief Economist, Zhang Weiping, stated
on September 6, 2005, that in his considered opinion global oil production would peak within the
next five years. 24 While China and India are endeavouring to cooperate in many areas, it’s every
country for itself when it comes to oil. On August 22, 2005, the board of Petro Kazakhstan, a
Canadian-owned company with oil fields throughout Central Asia, accepted a $4.2 billion takeover bid
by state-owned China National Petroleum Corp (CPNG) , beating down a $3.6 billion offer from
India’s own state-owned giant the Oil & Natural Gas Corp (ONCG). Much of the output of the

21
The Breaking Point, article in The New York Times by Peter Maass, August 21, 2005.
22
http://mediamatters.org/items/200508220006
23
People’s Daily Online, August 17, 2005
24
Article published on Interfax China by Erik Dahl, September 6th, 2005

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Kazakhstan plant will be processed in China once the pipeline connecting these two countries is
completed. 25

For the time being, competition between the US and China is on a relatively friendly level as both
countries need each other – cheap imports from China help to keep inflation low and the consumer
economy 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 successful
economy next to cheap oil. The Chinese also need the agricultural surplus generated by American
agribusinesses, even though that output is also dependent on cheap oil. Problems may well occur in
the future when competition stiffens and while their military might may not match that of the
Americans, the Chinese do have a powerful weapon in their arsenal – all they have to do is stop
buying US debt and the US dollar will collapse.26

Reality # 5 Investment
The investment required to exploit known and any unknown reserves (note the EIA identifies over
900 billion barrels of oil as “not yet found”) will be significant – some $3 trillion in investment by 2030
will be required to ramp up global production to meet future demand.27 But given growing deficits in
the US and elsewhere; given the potential for huge price volatility, can this investment be secured, and
made in time? The necessary surge in both discovery and output will also require a dramatic increase
in other forms of capacity including manpower and skills in the main producing countries of the
Middle East, as well as large scale expansion of the technical infrastructure that even established
investment bankers are sceptical about. 28

History of Oil Prices
There 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 have
enjoyed abundant fuel supplies at relatively low prices since the 1880s.

25
China and India: A Rage for Oil, BusinessWeek, September5.12, 2005
26
See 'The Party's Over: Oil, War and the Fate of Industrial Societies' by Richard Heinberg
27
IEA estimates
28
Reference Matthew Simmons, author of Twilight in the Desert and publicist of the peak oil issue. Matthew Simmons is partner
in a major investment bank that has serviced the energy community for over thirty years.

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The first big shock to the system occurred in the early 1973 when in response to a foiled invasion of
Israel by Egypt the oil rich countries of the Middle East put pressure on OPEC to deploy the oil price
weapon 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 also
caused many to think about the notion of conservation for the first time and sparked an interest in
developing renewable energy. The oil crisis combined with concerns about population growth and
pollution gave birth to the environmental movement. The main benefit of this period of dislocation is
being enjoyed by the current generation. Reduced demand for oil between 1973 and the early1980s
pushed back the date of the peak by as much as ten years. This is the time that will be needed to
develop mitigation strategies to cope with peak oil when it arrives. But sadly, it also pushed prices
down and therefore provided little or no incentive for reinvestment, hence the lack o productive
capacity across the entire oil sector today. Sadly again, fifteen years of cheap fuel combined with
unprecedented 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 not
yet caused major concern in the media or political circles as economists have pointed out that a). we
are less dependent on oil than before and b.) that, in real economic terms oil, at $65 per barrel, is
still not as high as it was during the oil embargo of 1979. It is in no one’s best interest in the western
world to risk alarming the public with talk of shortfalls even though most people know in their hearts
that 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 as
well as metaphorically by cheap oil and by the globalisation of the world economy that, in turn, has
been enabled by an abundant supply of energy and the confident belief that we would either find or
make more fuel in the future. Take those two factors out the demand equation (cheap oil and a
vibrant 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 factors
collectively influenced by such a large number of variables, no one knows for sure what will happen to
oil prices in the near and mid-term. The head of Aramco, the state-owned oil company in Saudi
Arabia summed it up: “Where oil price goes, nobody knows. The key is stability so we can plan. Oil
investments take a long time to come to fruition”. The complexity of the supply chain combined with
the lack of spare production capacity mean, on the other hand, that the only certainty is that prices
are unlikely to remain stable.

In what is now a highly inter-connected global economy, small shocks to the supply chain will have
increasingly large and unforeseen consequences be they Category 5 storms, such as Hurricane
Katrine that disrupted refinery production; further terrorist attacks on oil production infrastructure
or workers; or a financial market crash. Given the dependency of the world economy on a consistent
and predictable supply of oil, the situation resembles a game of Russian Roulette.

Conclusion
As with the global warming debate, the battle lines are drawn between a few brave scientists and
engineers who have had the courage to highlight the issues associated with peak oil and a vast army of
economists, 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 for
themselves. 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 take
mitigating 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


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 free
movement of people – is now as important to global economic growth as the telecommunications
industry 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 tourism
sector will need to demonstrate that it has acted responsibility and can justify the return on that
allocation. If it’s a choice between keeping warm in the northern hemisphere and eating in the
southern 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 they
are 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 responsible
behaviour, 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 will
hurt worse because of its suddenness and depth.

With recognition comes attention. With success comes responsibility. Does the tourism sector have
the moral courage, the vision and the creativity to face up to a difficult future and navigate a way
through the potentially difficult times ahead?

Who should take the lead? Tourism is so large and fragmented, so where will the vision and energy
be found? The answer to the concluding question will ideally emerge from the debate and may well be
very different from the one I propose now. Regardless of the answer, it is essential that the question
be addressed.

Destinations at every level – city, community, region and nation – must exercise a higher level of
moral leadership than has been demanded of them in the past. They are stewards of the resources
that attract and sustain visitors and that keep their tourism economies afloat. When the airports are
empty 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

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Destination leaders need to find a way to significantly minimise the use of non-renewable fuels in their
destinations in order to keep the planes flying.

Incremental benefits can accrue to the destinations that pursue this path – operating costs can be
reduced; the air can be cleaner; the industry can work together more effectively; the environment can
benefit and, most importantly, the destination can be in a position to attract those visitors who value
a responsible approach and who are prepared to pay more for a quality experience.

End document

Comments and feedback to author welcomed:
Anna Pollock
anna@desticorp.com

September 8th, 2005
Pembridge, England.

Page 14

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