- I am often asked about the "peak oil" theory.
I've even had some people send me junk mail predicting when the date would
come. Sometime in June, 2006, I recall. (Unsolicited investment advice:
go very long!) I didn't really pay attention. And yet many do. There are
websites, books, email lists, conferences, and tracts of every sort promoting
this doomsday theory (here
is a of the subject, and, yes, the domain name peakoil.com is taken). In
millennialist language, these people say that the human race is on the
verge of a massive turning point because oil is nearly depleted. You can
fill in the rest.
- The last year has been a good year for those inclined
to fear the end of oil. High prices usually bring the worst out, and it
doesn't help that Royal Dutch/Shell reduced its stated reserves by the
equivalent of 4.5 billion barrels of oil (that's Saudi Arabia's total production
for 16 months - an "accounting error" that has made Shell the
poster child for how not to run an oil company) and that a couple of wise
analysts have accused the ever-secretive Saudis of improperly managing
their reserves to the point of exhaustion. But every since OPEC gained
its feet and was able to exercise some power in the market beginning in
1973, high prices have always prompted panic that the global oil tank is
running on empty.
- I'm not a geologist or a geophysicist, so I do not know
whether crude oil and natural gas are made from biomass - the result of
time, heat and pressure acting upon tons and tons of dead things, mostly
algae and phytoplankton - or whether the complex hydrocarbons we extract
from the earth are "inorganic" - the result of time, heat and
pressure acting upon chalk, water and a few other odds and ends chemicals.
I do know that the theory of inorganic crude oil and partially renewable
reserves is not widely held outside of Russia, and that the Western majors
all "publicly" base their estimates of reserve life on the assumption
that petroleum is a very finite resource, and expect current world reserves
to last between 40 to 80 years, given improved field management, recovery
techniques and relatively constant development.
- There's an estimated 1.2 trillion barrels of liquid crude
oil in the world - about 40 years reserves at the rate they are currently
being used (80 million barrels per day). Of this, about one-quarter lies
under the deserts of Saudi Arabia. Iraq's reserves could be larger, but
no one really knows and the Saudi reserves are well explored. Most forecasts
expect that demand to rise by 50 percent to 120 million barrels per day
by 2020, though anyone who works with statistical data will tell you that
forecasts more than a year or two out are, at best, simple guesswork. In
the 150 years human being have drilled for and refined petroleum, it's
estimated we've used about 1 trillion barrels.
- However, As Nymex and Brent prices were bid up past the
$50 mark last autumn, producers were pumping about 1 million barrels per
day more than consumers were using, though it is clear that some of that
"surplus" can be accounted for by undocumented use in China and
Russia. The price rise was not the result of an overall shortage of crude,
but a lack of light, sweet crude for gasoline in China. There's a lot of
sour crude in the world, more than anyone can use. More than anyone wants
- Hardly empty.
- It is also generally accepted in the industry, as I understand
it, that we have probably found all of the major oil reserves that we are
going to find. That doesn't mean there aren't major reserves out there
to develop - such as offshore Sao Tome or deep in Siberia. It does mean
that, most likely, knowing what we know about the Earth's geology, there
probably is not another Ghawar formation (the world largest petroleum deposit,
located in eastern Saudi Arabia) lurking out there yet to be discovered.
- This, of course, could be very wrong. But the bet, right
now, is that it is not.
- But as demand across the world rises, and the call on
the resource increases, the price will likely slowly but inexorably rise.
Efficiency and conservation will buy room, but the economic affect of using
less and using more efficienctly is equivalent to increased production,
and those extra barrels will be used by someone somewhere. And for those
wishing for an end to Saudi influence on the oil market, officials with
the Bush Administration have said that a 120-million-barrel-pay day world
is going to need 20 million barrels each day from Saudi Arabia, making
the world more, and not less, dependent on the Gulf kingdom. (One former
Aramco executive said 20 million barrels per day will be impossible to
- Sure, there are alternatives. There are huge bitumen
deposits in Venezuela and Alberta, tar sands that combined hold more than
twice the current estimated world reserves of liquid crude oil. But bitumen
is costly to refine, a potential environmental nightmare to extract, and
right now, only a tiny fraction of the crude in either the Athabasca oil
sands or the Orinoco Belt can be recovered.
- There's a lot of shale in North America, and the process
to synthesize crude from shale is fairly old and well known. It is also
water intensive, and not terribly economical right now (because most of
the shale is buried out West, where there is very little water). The technology
is pretty well established to make synthetic crude oil from coal (lots
of North American coal too) or natural gas, or even turkey guts or pig
manure - if the price is right.
- But none of that matters, because while synthetic crude,
whether made from bitumen or natural gas, makes great diesel fuel, kerosene
and fuel oil (some buses in Washington, D.C., for example, are powered
by diesel synthesized from natural gas), it tends to make really lousy
gasoline. Or very little gasoline. And I cannot emphasize enough - right
now, gasoline is what everyone wants. Gasoline is what makes the world
- First Things First
- The first thing to understand about petroleum is this:
crude oil is only valuable because it can be made into other things. By
itself, petroleum is virtually useless. There's very little call to seal
and waterproof wooden galleons or hurl Greek fire at one's opponents. Now,
all the products we distill and refine from crude oil - liquefied petroleum
gas (LPG or condensate, stuff like propane and butane), gasoline, diesel,
kerosene, heating oil, fuel oil, asphalt and coke - can be derived from
every grade of crude pumped out of the ground. But not every grade of crude
can be refined into the same spread of substances. Without a lot of work,
heavier, thicker, higher sulfur grades of petroleum (the bulk of the world's
crude oil, including that produced by most OPEC countries) yields very
little gasoline, while lighter, low-sulfur crudes yield substantially more
- And gasoline, the motor fuel of choice for most of the
world's passenger cars, is what matters. The more gasoline you can squeeze
out of a barrel of crude, the greater the value of the crude.
- (Petroleum with less than 1 percent sulfur in it is "sweet,"
while crude with a higher sulfur content is "sour.")
- The price you usually see quoted for a 42-gallon barrel
of crude oil - what got wound up to $55.67 per barrel in October - is the
New York Mercantile Exchange (Nymex) contract and spot price for West Texas
Intermediate, a fairly low-sulfur, high-gasoline content crude that is
one of three major global benchmarks used by oil producers as the basis
for pricing. (The other two are Dubai, which is the benchmark for fairly
heavy and high-sulfur crude oil shipped, generally, to Asia; and UK Brent,
which is pumped from the North Sea and is the price benchmark for roughly
40 percent of world's crude grades.) The lighter the crude and lower the
sulfur content, the more gasoline you can get, and the higher the price
the crude commands on the market. Conversely, the heavier and higher in
sulfur the oil is, the lower its price.
- For example, Light Louisiana Sweet - a grade of crude
pumped from the Gulf of Mexico - usually costs slightly less than West
Texas Intermediate (WTI), while Mars - Royal Dutch/Shell's unofficial Gulf
of Mexico sour crude - sells at a substantial discount to WTI, what is
called the sweet-sour spread.
- On Tuesday, December 28, the New York Mercantile Exchange
price for WTI delivered in February (the contract month) closed at $41.77
per barrel (while the WTI spot price for delivery at the huge oil terminal
complex in Chushing, Oklahoma, was $41.75 per barrel). That same day, Light
Louisiana Sweet traded at $41.68, Mars from the US Gulf at about $33.30
per barrel, Alaska North Slope crude (which has a fairly high sulfur and
heavy metal content) for delivery to California traded at $34.97 per barrel,
low-sulfur Nigeria Bonny Light posted $40.08 per barrel, high-sulfur Dubai
finished at $35.63 and Russian Urals (another moderately high-sulfur grade)
closed at $37.08.
- Why buy Light Louisiana Sweet when Nigeria Bonny is $1.60
cheaper? Simple. It will cost more than $1.60 per barrel to get that Nigerian
crude to the US - possibly much more.
- I have to admit at this point, I know very little about
how the actual shipping of petroleum - and, more importantly, what it costs
- works. In most non-term transactions, the buyer takes title of the oil
at the producer's oil port, puts it on a tanker, and is at the whims of
the market all the way home. In some instances, the seller assumes the
cost of shipping and insurance as a way of encouraging sales. On December
28, Ecuador Oriente high-sulfur crude for shipment to the Gulf Coast was
quoted at a bid-ask (the lowest price a buyer was willing to pay versus
the highest price the seller wanted; it does not mean the crude actually
traded) of $29.94-$30.09, with the buyer assuming all the additional costs
of shipping and insurance. That same day, the same grade of crude for delivery
to the US West Coast quoted at a bid-ask of $29.77-$29.87, with the seller
picking up the cost of freight and insurance. That difference could mean
a couple of things - Oriente is more useful in a Texas refinery than it
is in a California one; or, possibly, the Ecuadorians are much more interested
in cultivating California customers.
- Just about everything that can be traded in this market
is: the crude itself, oil contracts, gasoline, heating oil, jet fuel, residual
fuel oil, asphalt, coke, tanker space, and any kind of derivative or spread
between two or more types of contracts. This is the real work of civilization,
the trading of commodities. It's the work that makes all others possible.
Virtually everything in your home is made from something that has been
bartered, brokered or bet on by someone somewhere.
- The difference between a futures market, like the Nymex
or the International Petroleum Exchange in London, and a forward market
is that most of the trading on a futures market is speculative, with very
few contract traders seeking actual delivery of actual oil at the end of
the month when contracts settle. In fact, as speculative ventures, more
paper contracts trade than available oil. This is a money-making venture,
used by investors, funds, oil companies and governments to hedge their
bets and cover any possible losses they might incur elsewhere in the supply
chain. Forward traders, however, are actually hedging future production
or demand and hope to take possession of real oil (or sell real oil) -
or soybeans, or cocoa, or electricity, or whatever - at a later date. Speculators
are important to a market because they bring liquidity and information
as they place their bets on whether a commodity will increase or decrease
- Hedging is even an issue with long-term contracts. It
takes about eight weeks for a great big boat (a technical term) full of
Arabian crude to reach the Louisiana Offshore Oil Port (LOOP) from the
Arabian Peninsula. Eight weeks, in the market we have today, is an eternity.
Buyers want to make sure that oil they may have paid $38 per barrel for
at Yanbu is not suddenly worth only $35 per barrel when it reaches LOOP.
Sellers like to make sure they get a cut if that $38 per barrel oil is
suddenly worth $40 when it arrives. Sharing part of that cut is the price
of doing business with a reliable, low-cost supplier.
- Some producers, like Mexico and Saudi Arabia, do not
sell their crude on international spot or futures markets, but instead
work very closely with buyers and every month announce the prices of their
different benchmark crude grades in a process called nominations. Saudi
Arabia, for example, has worked very hard over the years to prevent any
kind of spot trade in its crude (through contractual arrangements that
prevent resale or diversion of cargoes to alternative destinations) and
has historically discounted the prices of all its crude grades to US buyers
with refineries on the US East and Gulf coasts, as part an informal arrangement
with American governments going back a long, long way.
- The Evil Empire?
- Which brings us to the matter of OPEC, the Organization
of Oil Producing and Exporting Countries, the evil cartel I'm certain every
American has cursed a time or two. (For the record: Venezuela, Nigeria,
Algeria, Libya, Iraq, Iran, Saudi Arabia, Kuwait, Qatar, Abu Dhabi, Indonesia).
It's not the nastiest collection of governments in the world, but it is
not the Lutheran World Federation either.
- OPEC was created in 1960 in response to a major price
cut imposed upon oil-producing countries by the major Western oil companies,
which at the time controlled most aspects of this business, from upstream
production, to shipping, to refining, distribution and retail marketing.
In theory, the majors accepted government ownership of sub-surface mineral
rights (outside of Anglo-American common law, as I understand it, most
legal systems state that subsurface minerals rights are owned by the state,
regardless of who owns the land) but acted as if their concessions were
their private property. A bad move when that property is not really yours.
- OPEC was a fairly useless organization during its first
decade, though the late 1960s saw the beginning of the lengthy nationalization
struggle between governments and private oil companies - a struggle the
governments all "won" by the late 1970s. By creating huge national
oil companies to manage that resource, oil producing governments would
eventually discover how complicated and expensive effectively managing
that resource really is.
- Only one of OPEC's big state-owned oil companies is involved
extensively in exploration and production outside their home countries
(Algeria's Sonatrach is heavily involved in liquefied natural gas projects
across the Americas). All of them need the technological expertise of the
majors, whether it's Qatar Petroleum's joint venture with ExxonMobil to
expand the RasGas and QatarGas liquefied natural gas terminals, Aramco's
joint venture with Sinopec and Rosneft to develop natural gas in the Empty
Quarter, or Shell and ChevronTexaco's extensive involvement in developing
the tar sands deposits of Venezuela's Orinoco Belt.
- The great emotional issue for most oil producing states
is upstream investment - the actual poking of holes in the ground. This
resource is considered a hard-fought national patrimony in the way many
people in this country view the Panama Canal - very emotive and not terribly
rational. Saudi Arabia may allow foreign firms to drill natural gas wells,
but the drilling of oil wells in the magic petroleum kingdom is absolutely
out of the question. Even talking about it is haram.
- Ditto in Mexico, where the issue of declining production
threatens to turn our neighbor to the south into an oil importing country
in the next ten years (Mexico is the second largest supplier of crude to
the US). There's probably plenty of oil on Mexico's side of the deepwater
Gulf, but state-owned Pemex simply does not have the money to invest in
deepwater drilling. Mexico's Congress loots Pemex every year (Pemex provides
the state with about one-third of its annual revenue), leaving the company
with very little to invest in increased production, while the Mexican constitution
currently forbids direct foreign upstream investment of any kind in the
- While there have been times when OPEC members have been
disciplined enough to effectively leverage the market in their favor, the
organization doesn't really have the clout or the continued long-term discipline
(they cannot even agree on someone to head the organization right now!)
to do it constantly or consistently. A market mechanism, of sorts, works
between consuming and producing nations, especially with the coming in
the 1980s of the global spot market for crude oil.
- In addition, each producing country has its own strategy
to follow as well, because the size and quality of their reserves differ
as well. While the organization has had its hawks in the past, who believe
that consuming nations are hooked and can be gotten for all they are worth
(Qadhdhafiy's Libya was a good example of this in the 1970s, as was the
Shah's Iran), most understand the laws of economics: if a good is too expensive,
consumers will find an alternative. Not necessarily to oil, but to the
source of that oil. The price shock of the 1970s spurred development in
the North Sea, northern Alaska and Canada, and now everyone understands
the need for a very diverse resource base. Which explains why oil companies
- especially small ones - are drilling in such varied places as offshore
Mauritania and Papua New Guinea.
- The last few months provides a really good example of
just how little power oil producers have to dictate prices, even in a market
as hard pressed for crude as the world is right now. Recently, Ecuador's
Congress complained about the low prices received for the country's crude
oil exports (see above), and unilaterally vowed to raise the price by nearly
one-third. A price at which there were no takers. It quickly came back
- And anyway, a country with potentially long-lived reserves
- Abu Dhabi, Saudi Arabia, Kuwait, Venezuela - doesn't want or need prices
as high as they can go because they are more interested in market share
and ensuring a continued demand for their product. So, for example, some
years ago, Aramco and Texaco formed a joint US refining venture, Motiva,
which became a Shell operation when Chevron merged with Texaco. So if you
buy Shell gasoline on the East Coast of the US, there is a good likelihood
you are buying gasoline refined from Saudi crude.
- There are all kinds of marketing arrangements in the
US (and elsewhere), some much less secretive than Motiva (you'll notice
there is no Motiva-brand gasoline out there). Stop into a Citgo station
east of the Rockies and you are likely filling up with gasoline refined
from heavy sour Venezuelan crude (the Venezuelan state oil company PDV
owns Citgo). And you're helping out Hugo Chavez's "Bolivarian Revolution"
- OPEC's power has also been pretty thoroughly cut by the
large number of non-OPEC producers, like Russia, Norway, Mexico, Canada,
and up-and-coming producers like Brazil and Equatorial Guinea. Today, OPEC
only produces about 30 million barrels per day, less than half of the 80
million barrels consumed every day. The organization has very little "spare
capacity" - the ability to rapidly increase production to make up
for any unexpected shortfalls - outside Saudi Arabia and Abu Dhabi. For
the last year at least, virtually every nation that can produce crude oil
has been producing flat out. Which left markets very uneasy. In the event
of another significant crisis - say, a US attack on Iran or collapse of
the Saudi government - the price of crude oil would skyrocket.
- Consuming nations themselves hold a lot of power too;
we are not simply victims of the producers we like to think we are. After
the 1973 oil embargo, non-OPEC production expanded rapidly, responding
to higher prices that made higher-cost production economically viable.
Consumers can change their buying patterns, like the gasoline-to-diesel
switch going on in Europe (prompted by government action). Or they can
conserve. Or they can stick an aircraft carrier battlegroup offshore a
producing country and threaten it with mayhem and disaster if it doesn't
behave. There are all kinds of ways for consumers to influence contract
terms. This is why even today's price hawks like Venezuela and Iran are
seeking successful and stable long-term markets for their crude oil.
- Part of that long-term marketing effort is to build or
modify refineries so they can most efficiently process streams of crude
from particular producers. Close to three-quarters of refineries in the
US, especially those on the Gulf Coast, are optimized to use heavy crude,
to squeeze as much gasoline out of a sludgy barrel of Venezuelan, Ecuadorian
or Mexican crude as they possibly can. By applying heat, pressure, adding
steam and hydrogen, and using various catalysts, refiners can take low-gasoline
content heavy crudes and get as much gasoline out of them as they can.
But there's a trade off, because for every extra gallon of gasoline you
get, that means less kerosene and diesel fuel and more coke (near-pure
- In fact, refiners specializing in heavy, sour crudes
can fairly easily maximize their profits when prices for light, sweet crudes
and gasoline are high. And US refiners like Citgo and Valero have done
just that, making great hay out of the fact that they can extract as much
gasoline as possible from a barrel of sour crude.
- Refineries in Europe can do this too, only European governments
and automakers made the decision some time ago to rely more heavily on
diesel fuel. Diesel, a middle distillate like kerosene (jet fuel) and heating
oil, is easier and cheaper to refine from even sludgy oil. That allows
European refiners to diversify their crude oil sources and reduce dependence
on light, sweet crude. That lowers their costs, though tighter anti-sulfur
standards negate that somewhat. Because of this, Europe has been a significant
source of base gasoline blendstock for the United States, an important
development since it is unlikely that a new refinery will ever be built
anywhere in the US ever again.
- (Saudi Arabia has frequently noted - or taunted, depending
on how you want to look at it - that US refining capacity has not kept
pace with American demand for gasoline, diesel and heating oil. Recently,
Aramco offered to build and pay for two brand new refineries in the US
to help meet that demand - on the condition that someone else obtain all
the necessary environmental permits first or that the federal, state and
local governments involved fast-track the process and protect it from legal
challenges. It was a generous, unrealizable, and extremely cynical, offer.)
- However, nearly all Asian refineries outside of Japan
and South Korea - especially refineries in China and India - are incapable
of producing anything but straight-run gasoline, and are heavily dependent
on light crude to fill the gas tanks of the increasing numbers of vehicles
on their roads. A lot of that crude comes from West Africa, especially
- As demand in China has heated up, the price of light
crude zoomed to meet that demand, and the sweet-sour spread expanded considerably.
China did not need fuel oil for power plants (it can get plenty of crummy
crude for that). But Chinese motorists do want gasoline.
- Driving East
- In fact, 2004 could very be remembered as the year that
American consumption no longer drove the global crude market, while Chinese
- It isn't that America no longer matters. We are, and
will remain for some time, the world's largest oil consuming nation. Americans
use about one-quarter of the world's 80 million barrel per day output.
But the serious, money-making growth is no longer here in North America.
International oil companies see a US market that is already saturated by
automobiles (and increasingly interested in lower-mileage cars), while
an increasingly wealthy China is busily trading in its bicycles for cars,
light trucks and SUVs. ExxonMobil, the world's largest publicly traded
oil company, has already identified China as the growth market of the next
two decades, and believe China is ready for more complex refineries (that
can handle heavy, high-sulfur crude - a net plus for everyone, as it would
take pressure off high light, sweet crude prices), oil terminals and service
- The growing Chinese demand helped boost crude oil above
$40 per barrel earlier this year, and a combination of strong Chinese demand,
instability in Iraq, off-and-on unrest in Nigeria, labor problems in Norway,
the Russian government's vendetta against Yukos, and Hurricane Ivan's damage
to Gulf of Mexico production, propelled crude futures to their record late
October close of $55.17 per barrel. The pressure only began to relent when
US crude inventories figures began to rise (more government data), though
the bubble was really pricked by an announcement from China's central bank
raising Chinese interest rates - hopefully slowing the red hot demand for
everything from oil to wheat to steel - and smooshed flat by the collapse
of a major Chinese trading firm, China Aviation Oil.
- China Aviation Oil was the country's largest crude and
refined products trading firm, and while I don't know much of the story
about the company's demise, I roughly know that they put when they should
have called and called when they should have put. For anyone not familiar
with the language of commodities trading, that means they bet that prices
would go down when they went up and bet they would go up when they went
down. Upon its demise, brought on after the government in Beijing refused
to bail the company out (crony communist rulers willing to allow a big
company to go bust; would our crony capitalists be so bold?), the company
had staked out $500 million in bad positions, mostly in West African light,
- Some believe that when it is all over, China Aviation
Oil may rack up $1.5 billion in losses.
- A lot of crude oil traders, especially those east of
Suez, had to quickly unwind long positions designed to take advantage of
China Aviation Oil's rapacious need. A large number of tankers full of
West African crude were suddenly stuck without destinations. Those tankers
were not unwanted for very long, however, and most got snapped up and sent
to alternate destinations in the Americas and Europe.
- Logic dictates, however, that even with the demise of
China Aviation Oil, demand in China for gasoline has probably not really
fallen any. Eventually, West African crude exports to China will pick up
as other firms step in to fill that demand. Whether that will provide any
more oomph to crude markets in the coming year remains to be seen.
- The Iraq War
- Now, I know a fair number of people believe that the
invasion and occupation of Iraq was all about oil. Specifically, it was
all about making sure that exploration, production and development contracts
would go to the likes of ExxonMobil, ChevronTexaco, ConocoPhillips and
BP (which is as much an American company now as it is British, given it
annexed what used to be Standard Oil of Ohio and Standard Oil of Indiana)
as well as a handful of other "smaller" corporations (let's never
forget that wherever a taxpayer trough overflows, there's Halliburton ready
to gorge itself).
- (It doesn't help to think of the supermajor oil firms
as "American" companies. They are international oil firms with
US addresses, and they specialize in selling crude and refined products
to paying customers. Twenty years ago, even ten years ago, that was the
same as selling to Americans. It is not the same thing today.)
- I doubt very seriously anyone at Exxon called the White
House and said "invade Iraq for us so we can get exploration and production
contracts." If there were commercial quantities of oil in Hell, Exxon
executives would not call God and demand regime change. They would buy
an extremely nice lunch for the Devil, and they would talk contract and
concession terms. Several years ago, at an Iran-US relations shindig on
Capitol Hill, I ran into a senior Conoco executive who told me his company
spoke weekly with Iranian officials about possible investment in Iran.
I have no doubt that ConocoPhillips still maintains its access to Tehran
in the event that, someday, the sanctions come down and they are allowed
to work in Iran.
- (Does anyone remember how funny it was 20 years ago when
we all learned that Cuban soldiers fighting on behalf of the Marxist government
of Angola were guarding the Chevron concession - the concession that earned
Angola the hard currency to pay for those troops?)
- It isn't that any US oil company would say "no"
to Iraq contracts if the situation shaped up there and contracts came their
way. But Iraq is a mess right now, and is there is no security - political,
legal or physical - to guarantee a return on a multi-billion dollar investment.
It's unlikely that any of these companies asked for this invasion because
they all prize stability - the stability of contractual arrangements, of
a regular return on capital, of not getting their employees killed and
their equipment blown up - above nearly anything else. Even the stability
guaranteed by very nasty governments. Dealing with the "devil,"
whatever headgear it wears, is pretty common in the oil business.
- But there is an oil component to the invasion and occupation,
and I believe it is this: the United States, through invading and occupying
a nation with significant oil reserves, would show the world - especially
the up-and-coming consuming nations of China and India - that in the event
that push comes to shove, and this resource gets scarce, Americans come
- "Everyone else gets in line behind us. If there's
any left, we'll make sure you get some."
- Now, I'm fairly certain that a fair number of Americans
will high five and go, "Yeah dude, kick ass! That's our oil! We need
it!" But this muscular mercantilism is hardly the "rule of law"
we say we believe in and that we claim we're fighting for. Unless, of course,
the "rule of law" is whatever rules and laws give us whatever
we want at the time. Which is what I think it means sometimes.
- I could point out that crude oil formations underneath
the Saudi desert, or Lake Maracaibo in Venezuela, or wherever, aren't our
property - even if they aren't private property per se - and therefore
we are no more entitled to that crude than a ravenous fat man is entitled
to a free meal everywhere he goes. However, the militant mercantilist is
unlikely to care about
- such niceties, and is probably happy knowing his government
is willing to stick guns in peoples faces and demand they fork over their
property because "we need it more."
- If you are a Chinese oil company, trying to fuel one
of the fastest growing economies in the world, how do you deal with this?
The People's Liberation Army cannot hope to match US military power, not
now, and likely not in 20 years. If it comes to bullying for crude - high-stakes
commodities extortion - China simply won't be able to compete.
- I have every reason to believe, however, that the Chinese
are betting there will come a day when we are so bankrupt that we won't
be able beg, borrow or steal a junkload of lowland Vietnamese robusta coffee
and a container load of broken rice intended for Cuba. Or they are betting
that polite paying customers - customers with cash, as opposed to promissory
notes - will easily buy what a bully can only dream of stealing.
- Chinese oil and gas firms have been building extensive
business connections across the world, from upstream investment in Iran
to partnering with Brazilian state oil firm Petrobras to build natural
gas pipelines (China is already a major buyer of Brazilian crude). Chinese
firms are interested in building a crude oil pipeline across Colombia so
that Venezuelan crude can be loaded onto China-bound tankers at a Pacific
Ocean port. And Chinese firms are talking about investing $2 billion to
expand development of the Athabasca oil sands in northern Alberta. Hong
Kong tycoon Li Ka-shing already owns a huge stake in Canada's third-largest
oil firm, Husky Oil, and is thinking of buying more. They are doing this,
they say, to help secure future Chinese crude oil needs.
- Keep in mind that, right now, Canada is the largest supplier
of crude oil to the United States.
- Will We Run Out?
- So the question is not "when will the crude oil
run out?" but "how can we best use the petroleum we have until
other economically viable alternatives present themselves?" (I'm not
holding my breath for fuel cells any time soon.) That becomes what folks
here in Washington call a "policy question," which leads to think
tankery, publication of "papers" and funny little books called
monographs, conferences, government initiatives, and all manner of other
- We cannot ignore the fact that this an industry interlaced
with government from top to bottom, whether we are talking about the huge
state-owned firms of the big producing nations or our own heavily regulated
supermajors. That is the reality, lamentable and regrettable as it is.
- But we need to remember a few things.
- First, whatever ends up replacing petroleum will come
in its own good time, later than we'd like but probably sooner than we
expect. It will come because it stores energy and power better than gasoline
does and more cheaply to boot. It will come with some tremendous benefits
and some unfortunate drawbacks. Consider as you lament the evils of crude
oil: the fairly accidental discovery of kerosene and expansion of the refining
process in the second half of the 19th century saved whales from an early
mass extinction while at same time making nighttime light and winter heat
affordable to even the most impoverished parts of Asia, Africa and Latin
America. Gasoline itself was originally a waste product, largely unused
until the invention of the internal combustion engine, and automobiles
made for cleaner streets (no more manure) and safer farm equipment, given
that farmers no longer had to wrestle with motors that had minds of their
own. Kerosene itself languished as an unloved byproduct of refining for
several decades until the invention of the jet engine.
- Second, that new fuel will probably not come as the result
of government-sponsored research. Government efforts to target new development
- whether hydrogen fuel cells, hybrid engines, coal gasification, ethanol
subsidies - may contribute some, but the kind of thinking and investing
needed to find or make that new fuel probably cannot be done by government
bureaucrats, scientists or regulators, who can only think incrementally
and usually only consider efficiency and conservation, rather than entirely
new ways of doing things.
- I don't necessarily trust technology, but I do trust
human ingenuity. Civilization as we know it will grind to a halt without
the energy we derive today from crude oil, and that's in and of itself
is motivation enough to make sure that future energy is widely available
at prices people can afford.
- Charles H. Featherstone is a Washington, D.C.-based journalist
specializing in energy, the Middle East, and Islam. A version of this piece
appeared on LewRockwell.com.