Political Peak Oil

Petroleum geologists are pretty sure that there is more than enough oil in the world to meet projected demand for at least the next 25 years. In other words, as I reported in my article “Peak Oil Panic” last year, geologically speaking “peak oil” is at least a generation away.

But the days when you could punch a hole in the ground and up would bubble some crude have now passed. It will take increasing technical savvy and a lot of money to keep oil production up with demand. Fortunately, the International Energy Agency believes that projected demand for oil and gas can be met if producers invest $4.3 trillion and $3.9 trillion (in 2005 dollars) respectively over the next 25 years. The question is that level of investment happening?

That’s were I get worried. The problem arises because 77 percent of the world’s known oil reserves are in the hands of state-owned oil companies. Such “companies” do not respond with alacrity to market signals and so are under-investing in new production technologies and even in maintaining the production facilities that they currently have. I have earlier pointed out that an “oil crisis,” that is, a steep rapid run up in the price of oil may occur at any time due to government incompetence or maliciousness.

Iran: A new study published in the Proceedings of the National Academy of Sciences caught my attention when it projected that Iran’s exports of oil could dry up by 2015. Why? Because, according Johns Hopkins University geographer Roger Stern, “Iran's petroleum sector is unlikely to attract investment sufficient to maintain oil exports. Maintaining exports would require foreign investment to increase when it appears to be declining.” Basically, Iran’s oil exploration and production facilities are rusting away as the Iranian government spends the current oil windfall to maintain itself in power. The country cannot generate enough investment capital nor develop the expertise it needs to boost oil production without foreign private investment.

Today, Iran produces about 3.7 million barrels a day, about 300,000 barrels below its Organization of Petroleum Exporting Countries (OPEC) quota. Stern somewhat oddly concludes that this oil production death spiral may be behind Iran’s claim that it needs to develop nuclear power. However, as Stern himself points out this claim “strains credulity.” Iran flares off enough natural gas now for it produce four times the electricity that the nuclear plant it is constructing would generate, and much more cheaply too. Stern concludes, “Energy subsidies, hostility to foreign investment, and inefficiencies of its state-planned economy underlie Iran's problem, which has no relation to ‘peak oil.’”

Mexico: Production in Mexico’s largest oil field peaked in 2004 and is slated to decline at about 14 percent per year. Mexico has discovered many other deep water oil fields that could offset the declining production in older fields, but does not have the funding or the expertise to develop them. All Mexican oil and gas resources were nationalized in 1938 and foreign ownership is prohibited by the Mexican constitution.

Last March, the CEO of Petroleos Mexicanos (Pemex) Luis Ramirez Corzo stated that the company needs to invest $20 billion annually for the next 20 years to maintain production. However, Pemex has invested only about half that over the past 5 years. Amazingly, as private oil companies around the world raked in record profits last year, Pemex lost $3.75 billion. Why? The chief reason is that the Mexican government loots the company to finance itself. Only a state-owned oil company can lose money when oil prices have been this high.

Russia: Last year, Russia’s oil production actually exceeded Saudi Arabia’s which is constrained by OPEC production quotas. Ominously the administration of Russian president Vladimir Putin seems bent on renationalizing his country’s oil and gas industry. Between 1999 and 2004, private sector Russian oil production grew 47 percent. In those years, private oil companies made over $41 billion in the net profits and reinvested more than $36 billion in exploration, drilling, and modern technology. At the same time, state-owned companies increased production by 14 percent. Production the largest state-owned company, Rosneft, was basically flat.

As part of the drive to renationalize Russia’s energy industries, the Putin administration ginned up some tax evasion charges against the highly successful private Russian oil giant Yukos and then basically seized it. Now the Putin administration is using ham-fisted bureaucratic maneuvers to seize the assets of foreign owned oil and gas companies. For example, last month, Russia forced a deal in which the state-owned oil and gas company Gazprom paid well below the market price for a majority share of the giant $20 billion Sakhalin-2 oil and gas project which had been built by Shell Oil. In addition, Russia is increasingly using its energy resources as a foreign policy weapon.

However, those days are numbered. Due to under-investment, Russian gas production is already beginning to decline. As a recent report from the Congressional Research Service noted, “Russia’s ability to maintain and expand its capacity to produce and to export energy faces difficulties. Russia’s oil and gas fields are aging. Modern western energy technology has not been fully implemented.” And just where will Russia get the latest technologies for maintaining and boosting production if its government continues to seize private assets? An attorney for jailed Yukos executive Mikhail Khodorkovsky, Robert Amsterdam told the Washington Times, "By putting energy companies in the hands of rival bureaucratic factions in the Kremlin, profit is suppressed, investment is suppressed.”

Venezuela: The U.S. Government Accountability Office (GAO) issued a report in June 2006 that found the Venezuelan oil production dropped from 3.1 million barrels per day to 2.6 million barrels per day since 2001. Again the administration of the leftwing populist Hugo Chavez is starving his country’s oil industry of needed investments to pay for an array of social programs. The GAO report noted, “Venezuela needs willing foreign oil company partners to maintain the country’s current level of oil production.” Venezuela is also making itself unfriendly to outside investors. In 2006, Petroleos de Venezuela SA (PDVSA) seized oil fields run by ENI of Italy and Total of France. Five others were "voluntarily" handed over including ones run by ExxonMobil and Statoil of Norway. In March 2006, Karen Harbart, assistant secretary for policy and international affairs in the U.S. Department of Energy testified before a congressional hearing that Venezuelan “production levels are down [and] current production is increasingly coming from private sector sponsored fields, as state company investment and expertise declines. Private foreign companies have all but frozen new investment due to the uncertainty of the situation.”

Besides the ones mentioned above, the list of corrupt oil producing countries is nearly endless--Nigeria, Chad, Sudan, Angola, Libya--and that’s just in Africa. If an “oil crisis” fails to materialize, it will be because nimble private oil companies will have succeeded in boosting production capacity in enough places around the world that temporarily losing one or two major producers to incompetence or malice won’t matter much. But the sad fact is that the world’s energy security would be a lot greater if more of the world’s oil and gas resources were in the hands of private companies.

Disclosure: Yes, yes, yes. I still own 50 shares of ExxonMobil. And yes, ExxonMobil has been a contributor to the Reason Foundation. So go ahead and take everything I’ve written above with a grain of salt—it doesn’t matter because the reporting is still as true and as accurate as I can make it.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.