Peak Oil: The Threat of Resource Nationalism

Last year on this day, oil was selling for about $115 per barrel, having fallen from a peak price of $147 a month earlier and on its way to around $35 per barrel in December, 2008. The price has been bouncing around $70 per barrel for the last few months. Earlier this month, the International Energy Agency's chief economist, Fatih Birol warned that global oil production will peak by 2020. As the Independent reports:

…the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago. On top of this, there is a problem of chronic under-investment by oil-producing countries, a feature that is set to result in an "oil crunch" within the next five years which will jeopardise any hope of a recovery from the present global economic recession, [Birol] said. 

Let's focus on "chronic under-investment" which I have previously described as driving what I call "Political Peak Oil." My concern about political peak oil…

….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.

The column then goes on to detail the incompetence and under-investment that is occurring in Iran, Mexico, Venezuela, and Russia. But wait, the situation is possibly worse than I thought. In the current issue of The Futurist, oil analyst Roger Howard's article, "Peak Oil and Strategic Resource Wars," (sub required) points out another looming barrier to boosting oil production, resource nationalism. As Howard notes:

As oil becomes scarcer, producing countries will become increasingly dependent on foreign skills and technology. There are two key respects in which Western companies--oil majors like Total and ExxonMobil, as well as service companies like Halliburton and Schlumberger--are far more skilled than their counterparts elsewhere in the world. One is in making the most of existing sources of oil by using sophisticated methods of enhanced or tertiary recovery to squeeze as much as possible out of existing wells. The other is is offshore work, finding and then exploiting resources in deep waters. …

In the coming years, many producers will be forced to make a clear choice. Either they must watch their output reach a plateau and then gradually decline, with disastrous economic and political consequences, or they must swallow their pride and accept that they are dependent on foreign assistance to secure their future. Since the late 1960s--even longer in the case of Iran--Middle East producers have tried to go it alone, expelling international oil companies from their soil and establishing their own rival national corporations instead. But to confront the challenge of diminishing output, these countries will need to revert to bygone days and accept the support of Western companies. 

But even if such countries did "swallow their pride," why would Western companies risk investing in them? After all, Venezuela recently seized Western oil company assets, and is now producing 25 less oil than it did in 1997. And Russia has also begun taking over Western oil and gas company projects on specious environmental grounds, just as its production begins to decline.

The conclusion is inescapable: if an "oil crisis" occurs, it will be the result of massive government incompetence, not market failure. Sadly, there's nothing new about that.