Let the Market Solve the Energy Crisis
Far less than 10% of the world's oil reserves are in countries that allow private companies to operate freely, writes Jeremie T.A. Rostan. This means that the latter and, through them, consumers, are denied access to far more than 90% of the world's oil reserves. State-owned companies control more than 65% of the world's oil reserves -- e.g., in Saudi Arabia. As for the 25% left, they are mainly situated in countries such as Iran, Russia, Venezuela, etc., where, because of above-ground political factors, private Western companies have the greatest difficulties working efficiently -- as demonstrated by BP's recent problems in Russia.FULL ARTICLE
Comments (16)
The two US wars and agression against Iran have nothing to do with it?
BP may stand for beyond petroleum but it stands for BIG TIME Political Correctness. I bet it slipped his mind that the US wars (The ultimate intervention) have had zero impact on price.
I think he ignores another factor about the wars. They chew up tons of petrol. Planes, tanks, boats and trucks eat petrol. I bet the government does not efficient use these either.
I agree with the primise though but lets look at the facts. These wars have a huge effect on the price of petrol.
Published: July 16, 2008 8:33 AM
Frank
Of course the US government makes up a large part of the world's energy demand and military action and the threat thereof have reduced supply. The wars do have a huge effect, but that does not preclude in any way any of the statements made in the article.
Published: July 16, 2008 9:01 AM
Paul Marks
The main effect of the wars is financial - i.e. the money spent on them. There would still be a credit money bubble even if there had been no wars - but it would be smaller, as part of the monetary build up was to ease the fiscal pressure the wars put on the economy (it is a mistake to try and reduce the pressure this way - but it is a mistake that gets made again and again).
However, the idea that the amount of FEUL used has a "huge" effect on the oil market is just false.
As for the supply of energy:
We all know what needs to be done.
The regulations blocking the developement of oil and oil shale, in various areas, need to be removed.
The regulations de facto blocking the developent of nuclear power (regulations that do NOT improve safety) need to be removed.
And (for future energy technologies) the Capital Gains Tax should be abolished and Corporation Tax (and the higher rates of Income Tax) radically reduced - this would mean that people had a reason to invest.
Chances that any of the above will be passed by the Congress of Comrade Speaker Pelosi and Comrade Majority Whip Durbin - about nill.
Published: July 16, 2008 9:38 AM
David C
Is there an energy crises? Oil production is up this year. Of course, oil prices increased about 18% from last year, but so did the M3. IMHO, our oil problem is all a monetary problem so far.
Published: July 16, 2008 10:30 AM
Stephen W. Carson
When the article refers to "resource nationalism" it makes me wonder if we are going through another phase of a sort of mercantilism. Wikipedia defines mercantilism as "an economic theory that the prosperity of a nation depends upon its capital, and that the volume of the world economy and international trade is unchangeable."
The latter part reminds me of today's "peak oil" folks. The first part of the definition meant, in practice, that the mercantile states tried to maximize the amount of gold they had. "Resource nationalism" sounds like governments are trying to hold on to as much "black gold" as they can. Again from Wikipedia "Adam Smith noted that at the core of the mercantile system was the 'popular folly of confusing wealth with money'..."
Oil mercantilism?
Published: July 16, 2008 11:43 AM
Florida Economist
I agree that in general higher oil prices are clearly caused by economic fundamentals, but I disagree that today's hyper-inflated prices are solely due to economic fundamentals. The fact is that geopolitical conflicts that merely lightly-threaten to restrict access to a given amount of oil immediately cause the price of oil to increase based on the off-chance that restriction may occur. This is evident time and time again when any given oil producing dictator says something that creates fear and the next day the price of oil skyrockets in response. This is NOT a supply and demand response. The entire event takes place much to fast.
It is an access and demand response based on fear and speculation. It is entirely reasonable to conclude that as much as $50 of the $130 plus cost per barrel is a "fear tax" being artificially placed on the market.
Published: July 16, 2008 2:07 PM
Walt D.
Paul Marks
I agree with everything you wrote - I think you have it spot on. I would add that the problem with the war is not only the $200 billion a year (at least) down the crapper, but the fact that the Bush Administration has had to sign off on a huge increase in pork barrel spending to get the Democratic controlled congress to fund the war. (BTW many Republicans are equally to blame).
Also, coal can be profitably turned into diesel fuel for less than $60 a barrel (42 gallons). We would need 150 plants in the US. The chance of getting this done is nil - environmentalists hate coal as much as oil. However, China, who has huge coal reserves has already purchased this technology from South Africa and will be building a plant. They are also going to build pebble-bed nuclear reactors. (Think of these as a Lexus nuclear plant instead of a Yugo nuclear plant).
Published: July 16, 2008 2:18 PM
Vincent Cook
This article makes a number of important points, but there is much more to be said about government interventionism in the oil market.
First, the OPEC cartel arrangement has created an incentive for OPEC member states to grossly overstate their reserves. As Mat Simmons has documented with regards to Saudi Arabia, the reports coming the from fields and published in engineering journals paint quite a different picture from the official reserve figures. This long-running OPEC deception arguably has been responsible for promoting overconsumption of oil over the years. Contrary to the nonsense being peddled now concerning speculation, the problem isn't that we have too much speculation today; rather, it is that we haven't had enough speculative hoarding over the past three decades.
Second, the amount of oil that can be recovered from a given field is a function, not only of the level of investment in it, but also of how rapidly one tries to extract it. Politicians, having shorter time horizons than private shareholders, typically do a great deal of damage to the fields under their control in order to secure short-term gains.
Finally, the private oil supermajors are hardly paragons of laissez-faire. Historically, they have been one of the major drivers of America's imperialistic foreign policy (and of Britain's and even France's), with the object of using purely political means for controlling fields to the exclusion of their rivals. Remember that an oil company doesn't have to be state-owned to be evil--in many instances, they own the state, or at least a good portion of the state's ruling class.
Certain large banks have also played an insidious role, controlling the financial assets of some OPEC member states. Defense contractors and other subsidy-mongers have also cashed in on OPEC largesse over the years.
In short, firms with political connections, the ruling classes of imperialistic states, and the ruling classes of OPEC states are all pretty much on the same team when it comes to fouling up the market, treating oil fields as opportunities for short-run political rent-seeking. Naturally, this has tended to keep oil out of the hands of the most efficient producers, and has spurred a great deal of destructive conflict.
Published: July 16, 2008 4:34 PM
FrancisD
Skim off the cost of inflation, then we'll start to talk about what are the consituents of the remainder.
And I do think speculation do plays in the price.
Just picture a seller and a buyer in convo:
Seller: "Hey, you heard that the official inflation numbers are bunk and it's really something more like 10%+ and will be even more next year? Also, we might face a war in Iran and a 'little' supply disruption there!"
Buyer: "Yeah, that's what our economists tell us too."
Seller: "So, you want that 160$ barrel in six months?"
Buyer: "Of course!"
The article still makes good points.
Published: July 16, 2008 7:03 PM
RdC
"With about a half-a-century's worth of proven oil reserves, the problem is not in bringing on new production."
Whoa, with this little sentence the author tries to smuggle in the thesis that 1) OPEC's official "proven" oil reserves really exist and 2) that they can get the oil out of the ground any time they want.
Of course both these assumtions are very, very wrong.
On 1:
- Don't you find it strange that almost all OPEC-countries have magically increased their "proven reserves" in the 80's and 90's? Some even doubled or tripled them in a single year without finding any large oil-field.
- Don't you find it strange that these same "proven reserves" that magically jump up in one year then stay the same for many years? Saudi-Arabia produces over a billion barrels/year, yet their "proven reserves" don't change for many years (they do jump up from one year to another but otherwise they are perfectly flat), and most "proven reserves" of OPEC countries look similar.
- Kuwait recently admitted that they have surpassed Peak Oil, despite posting huge "proven reserves". Kuwait currently produces less oil every year than the year before.
- But let's look at the so-called private oil companies, right? See http://www.oilcrisis.com/news/article.asp?id=5018 : "Shares in Royal Dutch/Shell fell [..], after the company said it was cutting its "proven" oil and gas reserves by 20 per cent." So it turnes out that 20% of Shell's "proven reserves" NEVER EXISTED. And that's Shell, a publicly traded company which has to report to shareholders. OPEC's state-owned companies are much less transparent, don't release and detailed reports and deserve a lot less trust than Shell.
On 2:
It's geologically impossible to get out the oil at any time you want. To simplify a bit (or a lot): You can suck the oil out of the pipe, but the oil takes time to travel through all that rock to get to your pipe. Of course you can bore more holes, use horizontal drilling and inject water or gas into the field - which will all increase the flow of oil out of a field, but:
a) you have to be careful not to damage your oil-field when you do this. Too fast extraction of oil can lead to oil becoming locked in pockets where it can never be economically extracted. (i.e. you need more oil for drilling and pumping than you can get out. No matter how much the price for oil is, it's not economic to drill it)
b) all these techniques are already being used for several decades. Effectively everybody is already pumping at full speed and there is not a lot of room for increases - if any (see a) what happens when you increase it too much)
c) even if you may be able to get out the oil faster, the fact remains that even at the faster rate this rate is limited and it still takes many years, usually at least 2-3 decades, to drain a oil-field using the fastest-way possible. (In the North-sea this has been done because the upkeep for offshore-production is very expensive and you want to get the oil out in the shortest time possible.)
d) Of course the faster you get the oil out, the faster the oil-field is depleted and the bigger the decline becomes when you finally surpass peak-oil in a given field.
Also, you should take into consideration that almost all oil has already been found and that almost all new fields that are found today look like a mouse next to an elephant.
Take Ghawar, the biggest field in the world, for example. This field alone makes up about 60% of Saudi-Arabia's oil-production! Production started in 1948, so they are already pumping oil out of this field for 60 years. - So what happens when Ghawar declines by 10%? All the other fields in Saudi-Arabia would have to rise their production by 25% just to keep up the whole production in Saudi-Arabia. And most of those other fields are also online for many decades.
The age of cheap oil is over. Forever. Of course we will still have fuel in the future, but it will no longer be cheap.
Published: July 17, 2008 2:56 AM
RdC
"With about a half-a-century's worth of proven oil reserves, the problem is not in bringing on new production."
Whoa, with this little sentence the author tries to smuggle in the thesis that 1) OPEC's official "proven" oil reserves really exist and 2) that they can get the oil out of the ground any time they want.
Of course both these assumtions are very, very wrong.
On 1:
- Don't you find it strange that almost all OPEC-countries have magically increased their "proven reserves" in the 80's and 90's? Some even doubled or tripled them in a single year without finding any large oil-field.
- Don't you find it strange that these same "proven reserves" that magically jump up in one year then stay the same for many years? Saudi-Arabia produces over a billion barrels/year, yet their "proven reserves" don't change for many years (they do jump up from one year to another but otherwise they are perfectly flat), and most "proven reserves" of OPEC countries look similar.
- Kuwait recently admitted that they have surpassed Peak Oil, despite posting huge "proven reserves". Kuwait currently produces less oil every year than the year before.
- But let's look at the so-called private oil companies, right? See http://www.oilcrisis.com/news/article.asp?id=5018 : "Shares in Royal Dutch/Shell fell [..], after the company said it was cutting its "proven" oil and gas reserves by 20 per cent." So it turnes out that 20% of Shell's "proven reserves" NEVER EXISTED. And that's Shell, a publicly traded company which has to report to shareholders. OPEC's state-owned companies are much less transparent, don't release and detailed reports and deserve a lot less trust than Shell.
On 2:
It's geologically impossible to get out the oil at any time you want. To simplify a bit (or a lot): You can suck the oil out of the pipe, but the oil takes time to travel through all that rock to get to your pipe. Of course you can bore more holes, use horizontal drilling and inject water or gas into the field - which will all increase the flow of oil out of a field, but:
a) you have to be careful not to damage your oil-field when you do this. Too fast extraction of oil can lead to oil becoming locked in pockets where it can never be economically extracted. (i.e. you need more oil for drilling and pumping than you can get out. No matter how much the price for oil is, it's not economic to drill it)
b) all these techniques are already being used for several decades. Effectively everybody is already pumping at full speed and there is not a lot of room for increases - if any (see a) what happens when you increase it too much)
c) even if you may be able to get out the oil faster, the fact remains that even at the faster rate this rate is limited and it still takes many years, usually at least 2-3 decades, to drain a oil-field using the fastest-way possible. (In the North-sea this has been done because the upkeep for offshore-production is very expensive and you want to get the oil out in the shortest time possible.)
d) Of course the faster you get the oil out, the faster the oil-field is depleted and the bigger the decline becomes when you finally surpass peak-oil in a given field.
Also, you should take into consideration that almost all oil has already been found and that almost all new fields that are found today look like a mouse next to an elephant.
Take Ghawar, the biggest field in the world, for example. This field alone makes up about 60% of Saudi-Arabia's oil-production! Production started in 1948, so they are already pumping oil out of this field for 60 years. - So what happens when Ghawar declines by 10%? All the other fields in Saudi-Arabia would have to rise their production by 25% just to keep up the whole production in Saudi-Arabia. And most of those other fields are also online for many decades.
The age of cheap oil is over. Forever. Of course we will still have fuel in the future, but it will no longer be cheap.
Published: July 17, 2008 2:58 AM
Jeremie Rostan
First, I have to thank J. Tucker for his great editing job.
Second, it seems obvious to me, now, that I should have been more precise and stated that the economic-fundamentals explanation presented in this article only stresses one factor (among others) that had not been pointed out, contrarily to the inflationist one, for instance, which is DEFINITELY another and an essential factor at work, here, but which had been mentioned and explained (at least among austrians, and on mises.org).
Jérémie T.A. Rostan
Published: July 17, 2008 6:14 AM
IMHO
Thank you for an interesting and informative article. I was unaware of how little of the world's oil reserves are in countries that allow private companies to operate freely. The fact that state-owned operations are not particularly efficient at getting oil out of the ground does not surprise me. It's one more example of what happens when government interferes with the free market.
I'm curious as to what will happen now that Bush has rescinded the ban on off-shore drilling.
Published: July 17, 2008 8:43 AM
M West
Great article from Anchorage-based Petroleum News – “Gull Island buzz: 200 years of oil from Alaska’s North Slope?” It includes a map and deals with all the legends and allegations about the oil potential of Gull Island, which is offshore the North Slope in Prudhoe Bay.
Here’s the link to the article in html (text): http://www.petroleumnews.com/pnads/690171677.shtml
Here’s the pdf version that shows article and a map http://www.petroleumnews.com/pdfarch/543591276.pdf#page=1
I called them and PN executive editor Kay Cashman is looking for more information on Gull Island kaycashman@petroleumnews.com. The newspaper is going to continue follow the subject.
Published: July 18, 2008 7:19 PM
elizabeth
There is another big problem. Much of the proven reserves in the USA are on the big old leases in South Texas. ExxonMobil, Chevron, Shell and a few other majors control these leases. The SEC allows companies to book "proven reserves" as assets -- so, the companies will not produce the wells -- because every dollar they make is actually a loss. They can use the leases to offset debt.
The Richard E. King lease is a good example of that possible scenario. It's 600,000 acres of old Humble OIl lease. Many of the mineral owners of these old leases are suing the majors to start drilling, but the leases are old and can be held by one well. Also, they are large, so there is not the pressure to drill offset wells.
We live on a 38,000 acre ranch that is leased by ExxonMobil and Chevron from leases in the 1930's. There doesn't appear to be any interest on the behalf of the companies to produce the potential. ExxonMobil went to the RRC in 1996 and made a big display of the huge proven reserves, asked for a Vicksburg and Frio consolidation and then pretty much just shut the stuff in when they got the approval. Go figure. I think they just needed some verification from the RRC so they could justify booking the dollar amount as a capital asset.
Published: July 28, 2008 8:29 PM
Charles Hill
Economic and Energy crisis, the real 3 a.m. call for Obama and McCain.
Lehman Brothers fails today. Falling values for homes continues to affect financial institutions all across the country. The real truth is that the crisis in the economy and the energy crisis are really one and the same. As the price of energy, and everything else has soared, this has a ripple effect throughout the entire economy. Gas cost more, so you have less to spend on other things and all the people that work in the stores that sold you those things now have a lower income. They therefore cannot afford to buy things, like houses, and on and on down the line. Plus the cost of everything that you have to buy goes up. Everything in every store you ever visited got there by truck. Any energy prices are causing the cost of driving a truck to go up. There is an underlying energy cost in virtually every single product that you buy, be it houses, electronics or food. Farmers had to buy gas to plow their fields, plant their seeds, harvest the crops, and transport the crops to market and on and on.
The underlying economic problem in this country for quite some time is the very simple fact that we import more than we export. You can relate how this works to a household budget. Your imports are the amount that you spend your exports are the amount of income you earn and if you continuously spend more than you earn, you're not going to end up doing very well economically. For years, the biggest factor in our trade deficit has been the importation of oil. Decades ago when oil was cheaper, we decided to make a trade-off. That trade off was a willingness to spend money to import oil and produce less domestically, because it was dirty. The oil spills off the Gulf coasts and off the coast of California were an annoying problem for anyone who went to the beach. I am old enough to remember visiting the beach as a youngster, and at the steps of every hotel along the beach there was basically some rags in a bucket of kerosene or some similar solvent to clean your off the bottom of your feet so you wouldn't track oil back into the hotel. The technology has greatly advanced. Offshore wells now have shut off valves below the seafloor. They close automatically in an emergency to prevent large quantities of oil from leaking into the sea. As a side note, 80% of all the oil on the earth that’s ever been formed has already leaked to the surface. The amount of oil spilled into the ocean today by man is only a tiny fraction of natural leakage of oil. Oil is lighter than water or rock, and after enough rock builds up over the top of it, it gets squeezed and the pressure goes up. If there are any fissures or cracks in the rock, it rises to the surface. Bacteria consume it and it becomes part of the food chain. After all, crude oil is pure organic material; it only causes problems in high concentrations, like a major oil spill. There have been no major oil spills off the coasts as a result of offshore drilling in many years.
And most importantly, the economics of our decision to import oil instead of producing it domestically has changed. At current world prices, and especially their peak price reached a few months ago, we are spending hundreds and hundreds of billions of dollars to import oil. The cost of the Iraq war is also an economic drain but the economic drain of the Iraq war is only about 20 or 30% of the economic drain of importing oil. In 1973, the Arab oil embargo caused a similar economic crisis in our country. Of course the obvious effects were the gas lines and the increased price of filling up your car at the pump. But our entire economy suffered greatly. Inflation soared and jobs were lost. Pretty much the same thing that we're experiencing right now. It was because of the ripple effects of energy prices, which is an underlying cost to produce virtually everything we eat or use in our daily lives. This is somewhat mitigated however, if the energy that we are paying increased prices for comes from inside the US. Because the net wealth stays inside our country, increased income from producers of oil is used to purchase goods, products and services that everyone else depends on for their income. If the money flows outside of the United States it is a net loss of wealth.
Earlier this year, when the price of energy soared, that was the 3 a.m. wake-up call. It should have been easily foreseen by Obama and McCain and everyone else that the ripple effects of virtually doubling of energy prices would have throughout the economy. The fallout was going to be brutal and widespread. McCain reversed his earlier position, and the position of pretty much everyone else, and said it was time to open up the outer continental shelf, but not ANWR, for drilling. He made it part of the way but didn't really propose an all-out plan to increase production. Obama came out against offshore drilling. It's McCain that got a grade of “incomplete” and Obama, a grade of complete failure.
The real solution to both the energy and related economic crisis is to become energy independent. Either Obama or McCain could have said the following statement and passed their 3 a.m. test:
“We are in a national emergency. We must become energy independent. This emergency requires the concerted efforts of our most creative and hard-working people all across the country. We need to greatly increase our investments in alternative energy sources, especially carbon free sources, like nuclear, wind and solar. But we also must realize that the time has come to explore every resource we have available to us. We need to produce every additional alternative energy source we can produce, and we need to extract every last barrel of oil and cubic foot of natural gas on American soil that we can find in an environmentally sound way. And we need to do it very quickly. We are out of time.”
The question of course is which candidate will figure this out, and will they figure it out before it's too late.
Published: September 16, 2008 4:18 PM