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.

Comments

[Shelby]

I'd like to whine about how depressing this is, but I'll skip that for now. Thanks for pulling this stuff together, Ron.

[Jose Ortega y Gasset]

"The conclusion is inescapable: if _______________ it will be the result of massive government incompetence, not market failure."

That's a handy fill-in-the-blank sentence.

[John]

I do not buy into peak oil. But I am willing to beleive and am starting to think that perhaps the Venezualans, Russians, Mexicans, Iranians and Californians are too retarded to extract their own resources and that retardation could create artifically the same effects of a peak oil scenerio.

[SugarFree]

I might be concerned about peak oil if it wasn't promoted by the same granola dumbasses that rub their hands together with glee at every "crisis" in the naked hope it will destroy modern life.

[Episiarch]

The conclusion is inescapable: if an "oil crisis" occurs, it will be the result of massive government incompetence, not market failure.

And, just like the mortgage crisis was blamed on "free market capitalism", the same assholes will blame the "oil crisis" on Peak Oil, and not political chicanery. Bet on it.

Isn't this fun?

[John]

We are not experiencing peak oil. We are experiencing peak socialism. The effects of both are very similiar.

[bohica]

We are experiencing peak socialism

I wish it was the peak and we could expect a decline in socialism in the years to come. However, just like with oil, I have a feeling that whenever we think we've maxed out, someone (e.g. The Obama) will come along and discover some vast new reserves of socialism yet to be tapped.

[Gilbert Martin]

The Chinese are using the global recession as an opportunity to lock up future sources of oil and natural gas around the world on the cheap.

They are making new deals with the Russians and in Brazil and other places.

Meanwhile, the morons running the show in this country sit on their ass and blather about "green jobs" and do their best to prevent us from accessing any of the fossil fuel resources that exist in our own area.

What a bunch of fucking morons.

[Joe M]

This entire thing is straight out of Altas Shrugged.

[R C Dean]

The Chinese are using the global recession as an opportunity to lock up future sources of oil and natural gas around the world on the cheap.

Very true. Two observations:

(1) They are buying these natural resources (and others, especially metals) with dollars. Thus do the Chinese escape the soi-disant dollar trap.

(2) By doing so in countries that are prone to nationalizing investments, they are taking a considerable risk. I would be willing to bet, though, that the Hugo Chavezes and Vlad Putins of the world, who do not hesitate to seize assets held by US corporations, will be far less likely to seize assets held by the Chinese.

[Episiarch]

Locking up resources is how wars start. Super.

[Gilbert Martin]

"2) By doing so in countries that are prone to nationalizing investments, they are taking a considerable risk. I would be willing to bet, though, that the Hugo Chavezes and Vlad Putins of the world, who do not hesitate to seize assets held by US corporations, will be far less likely to seize assets held by the Chinese."

I agree with that assesment.

Chavez knows that the U.S. govt will basically do nothing more than jawboning about it.

But they will think twice about messing with the Chinese.

[15% of the GDP and Everybody\']

"Locking up resources is how wars start. Super."

[citation needed]

[Matt]

Nothing to worry about. Why would western companies bother too invest when they can just lobby the U.S. Gov, a la Cheney's top secret "Energy" meetings, and lobby for War!, err regime change!, err Islamofacists!, err WMD!, err bottle rockets!. Then we can just kill their leaders and convert them to free-market (for them) capitalism. Peak oil postponed thru 2100 at least.

[R C Dean]

Locking up resources is how wars start.

Then we should be glad that the Chinese are guaranteeing a supply of the resources their economy will need, and will not feel compelled to go to war to obtain them.

[Episiarch]

[citation needed]

Japanese and American relations leading up to the attack on Pearl Harbor.

[Imperialist]

The solution is simple, just keep expanding south until it all belongs to us.

[Xeones]

Sadly, we are still nowhere near peak retard.

[Warty]

Epi, stop putting pins in rattlesnakes.

[BlueBook]

There is no problem that cannot be solved with ignorance, paranoia, and superstition. Start a viral conspiracy theory that crude oil is not a naturally occurring fossil fuel, but a toxic mind-control agent concocted by the Jews and injected underground to silently despoil the precious bodily fluids of God-fearing Muslims. The only way to safely dispose of the vile poison is to pump it out of the soil and ship it to the heathen Occident, where no virtuous person will be harmed by it.

[Episiarch]

I have to have my fun, Warty.

[Devious Schemer]

None of you appreciate the deep plan: the oil offshore of the United States isn't being spudded because of environmental reasons, it's because we are saving it for when the rest of the world runs out. When the millions of Chinese and Indian cars need gasoline, they will have no choice but to buy it from the US. Our debts, our trade deficits, will disappear. The US will have its New American Century at last.

[Pro Libertate]

Peak Oil is mostly crap, though I'll grant that oil isn't going to last forever. However, I'm pretty sure it'll last until a successor energy source (or sources) is instituted in its place.

It would be so awesome if fusion or some other game-changing technology would become feasible on the large scale soon. If I were president when that happened, I'd send engraved letters to a number of people with "Fuck You" written in Lucida Blackletter.

[sage]

All I know is that gasoline is expensive, therefore we are obviously being ripped off.

Sure, it wasn't as expensive as a year ago, but that was just a setup so we wouldn't whine so loud about $3 gas.

[Anonymous]

Devious Schemer, the problem with that is by that time we'll be growing diesel trees on the moon, and drilling for oil won't be cost effective.

[D.R.M.]

Oil is irrelevant in the long run.

Large capital investments, coal, and water = $50/bbl equivalent production of gasoline, diesel, chemical feedstocks, etc.

The reason you don't see huge coal-to-liquid plants being built today is because the oil companies (you know, the people who have the best experts in petroleum geology and extraction on their payrolls?) expect that the long-term sustained price of a barrel of oil is too low to make such plants pay off.

If and when $75/bbl becomes a permanent fixture for petroleum, coal will replace oil as the feedstock for motor fuel. (Even if environmentalists stop the plants from being built in the U.S., China and India will go ahead.)

[DanD]

Word, Pro Libertate. Lucida blackletter is the best "fuck you" font!

[Russ 2000]

I would be willing to bet, though, that the Hugo Chavezes and Vlad Putins of the world, who do not hesitate to seize assets held by US corporations, will be far less likely to seize assets held by the Chinese.

Why? Because of some socialist brotherhood? The Chinese are much less of a military risk than the US has been.

[John]

"I would be willing to bet, though, that the Hugo Chavezes and Vlad Putins of the world, who do not hesitate to seize assets held by US corporations, will be far less likely to seize assets held by the Chinese."

The Chinese can't project power accross the Formosa Straights. What chance do they have to project it to Venezuala or Russia? The US is still the only country in the world that can park an aircraft carier on your lawn or put three for four armoured divisions in your backyard.

[JW]

Word, Pro Libertate. Lucida blackletter is the best "fuck you" font!

That's just crazy talk. Everyone knows that Goudy Stout is the preferred font to flip people off with.

If you *really* want to drive them nuts, use Comic Sans.

[Pro Libertate]

JW,

I ran across a truly bizarre font when highlighting a weird Japanese Doritos package yesterday.

[Gilbert Martin]

"Peak Oil is mostly crap, though I'll grant that oil isn't going to last forever"

Exxon, which is not known for making foolish or trendy investments, is developing a process to create oil from algae. And by oil, I mean a product that is virtually identical to the crude oil that comes out of the ground.

That means it can be handled by the same refining and distribution infrastructure that is currently in place and will contain the same energy content as gasoline refined from the crude that comes out of the ground.

Unlike ethanol - which is a less efficient store of energy and has properties that requires alternative transportation means.

[Gilbert Martin]

"Large capital investments, coal, and water = $50/bbl equivalent production of gasoline, diesel, chemical feedstocks, etc."

That is indeed a larg potential source of gasoline - even more so if we replace a bunch of coal fired power plants with new nuclear plants and divert that coal stream to making synthetic gasoline.

[John]

Glibert,

I have heard of that. I hope it works. I can't wait for the day that oil becomes renewable energy. The Leftitard greens will have a stroke.

[JW]

I ran across a truly bizarre font when highlighting a weird Japanese Doritos package yesterday.

That is excellent.

The Japanese really aren't like anyone else, for that matter, and I am eternally grateful for that (and I'm not just talking about tittering schoolgirl porn). They're about as close to alien culture as I think we puny Earthlings will ever come.

"The problem with aliens is that they're so....alien."

[jasno]

I think Devious Schemer hit the nail on the head. Sure, the value of money is related to the time at which it is available - the basis of all investing. But if you think the rising price of your commodity will benefit you more than selling it now and investing the profits, what incentive do you have to sell now?

I think a lot of countries may be using some game theory to direct their decisionmaking. They'll continue to sit on their oil until they can reap a substantial profit in the future.

Also, while the west possesses superior oil extraction efficiency now, what's to say that will remain the case in the future? Nothing. There's nothing stopping foreign corporations from buying our expertise, or growing it at home. If, in 20 years, the price of oil shoots through the roof, these countries will have the collateral to raise capital to buy all of the oil extraction technology they want.

It's all a gamble though - with the rise of green power and all that. Oil is still the basis for most(all?) commercial plastics, fertilizers, etc. I wonder what the price would be if it were no longer used as fuel.

[Pro Libertate]

They are quite unique. What's really interesting about the Japanese to me is how incredibly different from us they are and, simultaneously, how much of our culture they've adopted.

Love that sushi!

[ian]

What I'm expecting is a little different. As resources worldwide start, or in some cases, continue, to decline, more and more oil producing countries will decide to keep more of their own oil for domestic use.

Both rising oil prices or decreasing oil revenues harm the economy of Venezuela, Russia, et. al. Given two bad choices, would you pick the one that deprived your people of gas for their cars and heat for their homes? No. You'll hoard your remaining oil (mostly) and sell what little you can spare at stratospheric prices.

[ian]

I find it interesting the many people here dismiss peak oil as "crap." Are any of you geologists? If not, you might review the following link (Search for "Hatfield"):

http://www.utoledo.edu/as/envsciences/pdfs/NEWSLETTER_Winter-08.pdf

This guy actually *is* a geologist.

[D.R.M.]

There are lots of other possible replacements for oil, too, of course.

It's just that coal-to-liquids is in actual commercial use in South Africa (the capital investment was made when apartheid sanctions denied the country access to imported oil), so there are no unexpected technical difficulties, costs, engineering hurdles, or the like to get in the way.

So even if nothing else pans out, we have plenty of coal and a process that's already proven to be technically feasible at a price that's economically bearable (though significantly more expensive and capital intensive than extracting oil from the ground).

[Gilbert Martin]

"It's just that coal-to-liquids is in actual commercial use in South Africa "

It goes back further than that.

The Germans were doing it in WW2.

[Pro Libertate]

Damned Nazi coal-oil.

[Gilbert Martin]

"I have heard of that. I hope it works. I can't wait for the day that oil becomes renewable energy. The Leftitard greens will have a stroke."

Of course they will. What they are always really all about is attempting to force everyone else to live by their own personal preferences.

As I said before a good while ago on one of these threads, if tomorrow morning somebody made a scientific breakthrough on nuclear fusion energy that would enable us all to have virtually limitless cheap energy, the eco-socialist wackos would be denouncing by tomorrow afternoon.

Cheap energy enables more consumption of everything - bigger houses, more consumer goods, more roads, etc, etc.

They would be squealing like stuck pigs at the prospect of it.

[Nick Outram]

It's easy to blame things on incompetant Governments of type (insert Socialist, Capitalist, etc.) But let's not forget two words:

"Non" and "Renewable"...

Nick.

[Pro Libertate]

I suppose water is non-renewable, too, in some sense. But we're not running out of it tomorrow. Whether we'll run out of oil soon is debatable, though it seems unlikely. Whether we'll run out of it before we have a substitute or total replacement in place seems highly unlikely.

[R C Dean]

Why? Because of some socialist brotherhood? The Chinese are much less of a military risk than the US has been.

Any wealthy and powerful nation has numerous ways to put the hurt on another nation that fall short of military force.

The US, regardless of its capabilities, has shown absolutely no willingness to defend the rights of its citizens against the depredations of of crypto-socialist kleptocrats.

The Chinese, I suspect will not be so unwilling. Especially since it will be some combination of the Chinese government and powerful members of that government who would be dispossessed by a Putin or a Chavez.

[Paul]

As oil becomes scarcer

Could someone shoot an email over to Tim Cavanaugh and ask him if this should be "...oil becomes more scarce..." or if it's ok in its current form?

[Forbes]

The Chineese didn't bat an eye when it came to forcing down one of our spy planes in early 2001--and holding the crew for some time. IIRC, most people were more than a little nervous with the Chineese--due to their unpredictability.

The US has a long record of not responding to provocation. Recent examples of Iraq (twice) and Afghanistan are just that--exceptions.

[Pro Libertate]

Yet we also have the reputation for really losing our cool if provoked enough.

[Lost_In_Translation]

I wish I had been able to get to this thread earlier. Most likely now I'm too late and will probably be the last post.

To those of you that claim peak oil is "crap", look at this chart and this one.

Now check out the production charts here.

I grant that political factors do effect the rate at which oil can be produced as we all know, but that doesn't stop the fact that all over the world, countries hungriest for oil cash are seeing production drop and the oil left in the ground is more expensive with less availability. What we'll see is a peak in rate (which may have occured or may occur soon with the recovery) as the big producers become many smaller producers and the overall rate drops as price increases. That is what we're seing right now. People are beginning to realize that rate CAN'T climb much more above our current level and long term outlook is LESS at greater cost.

I work in a gas field and I see everyday what's happening on a small scale and I talk to geologists struggling to find the next elephant. Even if the government released all public lands to drill, more expensive wells with more complex recovery systems would still be required and it would only be profitable at higher costs. Simply put, we're finally gaining a practical understanding that oil is a limited resource.

You may see talk about reserves of oil shale and oil sands. Well oil sands require alot of energy to extract crude and oil shale still doesn't have a technology that is net energy positive (amount of oil BTU's retrieved are greater than the amount of energy BTU's put into the ground to retrieve the oil). Those technologies may be improved, but the amount of research and equipment is likely to still be very costly.

My greatest hope is that governments acknowledge this and remove the restrictions placed on true replacements like nuclear, which in current form are clean and safe and cheap and allow industries to make up the difference with a combination of gas and gassified coal. Oil is reaching the limitations of economic feasibility and we need to allow the nation to prepare for the transition. Obama is telling us a fairy tale of wind and solar (both of which are limited in placement and scale) and ignoring what really needs to be done.

A combination of pushing nuclear and allowing oil and gas companies to start accessing the last of the major oil reserves would put the US in a stronger position to both recover from recession and fuel growth on the rebound. To keep feeding us the line about "green" and doing nothing to prepare will put us just in the wrong position when we're ready to start expending again.

[Anonymous]

LIT, I can't argue with anything you said, except "do effect" should be "do affect".

[Michael Ejercito]

Exxon, which is not known for making foolish or trendy investments, is developing a process to create oil from algae. And by oil, I mean a product that is virtually identical to the crude oil that comes out of the ground.

Cool.

How much would production costs per barrel be?

[geolog]

About: " The other is offshore work, finding and then exploiting resources in deep waters. ..."
There is a new technology for oil/gas detection providing above three discoveries in four wildcats instead of one. See: http://www.binaryseismoem.weebly.com
A. Berg, Ph.D

[Lost_In_Translation]

geolog,

Finding more oil is only one part, if we're finding small reserves that are still hard to produce, it still won't contribute enough to overall production to raise overall output.

[Bob Smith]

Didn't the Muslim oil-producing states get their oil fields by tearing up the leases and seizing Western oil company assets? Who's to say they won't repeat the performance?

[peter]

Lousy article.
The author forgot to mention state companies in Saudi Arabia and Brazil, to mention a few, that have seen massive increases in investments and upstream projects coming online.
Furhermore, private 'Western' companies have reduced investments by an awful lot when the price of oil started dropping below $50 and many projects were cancelled. Rig count was reduced to half its peak. All this will come back to haunt us when demand picks up again. Of course, their only motive is profit and not energy security, unlike national state oil companies. The price of oil will get above $100 again and those oil champions, Exxon and Shell, etc. will be able to make those same absurd profits as they did before, satisfying shareholders rather than the regular folks at home, cursing the fact that gas hits $5 a gallon.

[larry]

The coming oil crunch will be interesting. It will be the first time we go into an energy crunch with alternative energy ready for utility scale use. Electric cars are ready, solar and wind are ready, at this point its just $$$ to ramp up.

[bob]

The article deals with this topic far too simplistically. I expected more from this publication. There are geological limits too not just political limits. I suggest you look at the data for yourselves before making motor home purchases, for example.

[Peter]

Also of concern is the fact that demand for oil in oil exporting countries is rising very fast. This mean that their is less oil available for export. Look up Export Land Model for more info.

[James]

if we were really running out of oil, the first thing governments do would be to take over oil wells!!