The Geopolitics of $100 Oil

Here’s an interesting one about the oil price crisis from an American perspective at the Washington Post: So the tightened gap between supply and demand has shifted power to producers. “Will competition for scarce resources lead to political or even military clashes among major powers?” asks a report by the National Petroleum Council. “Will bilateral arrangements among nations become common as governments attempt to ‘secure’ energy supplies outside of traditional market mechanisms?” Here is what we might do: Raise fuel economy standards for new cars and trucks; gradually increase the gas tax (possibly offset with tax cuts) to induce people to buy those vehicles; expand oil and natural gas production in Alaska, the Gulf of Mexico, and off the Atlantic and Pacific coasts. These steps would, with time, temper the power of oil producers while also checking greenhouse gases. But many liberals, conservatives and environmentalists oppose parts of a sensible compromise. The stalemate hurts mainly us.

From Robert J. Samuelson in the Washington Post:

Oil is flirting with $100 a barrel. Do not think this just another price spike. It suggests a new geopolitical era when energy increasingly serves as a political weapon. Producers (or some of them) will use it to advance national agendas; consumers (or some of them) will seek preferential treatment. We already see this in Hugo Chavez’s discounting of Venezuelan oil to favored allies, China’s frantic efforts to secure guaranteed supplies, and Russia’s veiled threats to use natural gas — it supplies much of Europe — to intimidate its neighbors and customers.Since World War II, the United States has sought to keep energy — mainly oil — widely available on commercial terms. America’s foreign policy has been, in effect, to prevent other nations from using oil to advance their foreign policies. On the whole, this has minimized conflicts over natural resources and favored global economic growth. Producing countries focused on maximizing their wealth; consuming nations relied on the market to get their oil. But shifts in supply and demand now threaten this system.Just last week, the International Energy Agency in Paris projected that world oil demand would grow to 116 million barrels a day by 2030, up from 86 million in 2007. About two-fifths of the increase would come from China and India; other developing countries would account for much of the rest. The number of cars and trucks worldwide would more than double, to 2.1 billion. There’s only one catch: Oil supply probably won’t satisfy projected demand.The bottleneck is not scarcity of oil in the ground. Someday that will happen; it hasn’t yet. Proven oil reserves — discovered oil, deemed recoverable — total about 1.2 trillion barrels, says the National Petroleum Council, a U.S. government advisory group of industry and academic experts. That’s 38 years of supply at present consumption rates. Next is undiscovered oil; the NPC reckons another trillion barrels. Finally, there’s about 1.5 trillion barrels of “unconventional” reserves of heavy oil, tar sands and oil shale recoverable at higher prices.Producing this oil is another matter. Low prices in the past (1985-2002 average: $21 a barrel) discouraged exploration. Companies consolidated; Exxon merged with Mobil, Chevron with Texaco. Cutbacks have left shortages of drilling rigs, pipes, engineers, geologists and drilling crews. In the late 1990s, a deep-water rig could be leased for less than $200,000 a day, says Peter Robertson, Chevron’s vice chairman; now the cost can run $600,000.With time, these shortages should ease. A bigger obstacle is access to reserves. Government-owned national oil companies control perhaps three-quarters of proven oil reserves. But they often need private companies (the world’s Exxons and BPs) to explore and develop. Perversely, high prices make negotiations longer, harder. Governments already have more oil money than expected. In 2007, OPEC nations are projected to have revenue of $658 billion, up from about $195 billion in 2002. Governments can afford to be tough and patient.Indeed, higher prices have caused them to raise royalty rates and taxes on private oil firms. Some companies have pulled out rather than accept tougher terms. In the past year, Exxon Mobil and ConocoPhillips left Venezuela, reports analyst Simon Wardell of Global Insight. All these problems suggest that world oil output will advance slowly. For various reasons, Venezuela, Iran and Iraq are all producing below previous peaks and below potential.At some point, higher prices will dampen demand; changes in the weather and business cycle could also lead to lower prices. Still, a major turning point has been reached. Until now, oil’s main geopolitical threat lay in the concentration of reserves in the unstable Persian Gulf. Supply disruptions (1973, 1979-80, 1990) coincided with wars and revolutions. Otherwise, surplus capacity cushioned losses from accidents and weather. Now, most of that surplus has vanished. The pivotal year was 2004, when global demand, propelled by China, rose about triple the expected rate, says Larry Goldstein of the Energy Policy Research Foundation.So the tightened gap between supply and demand has shifted power to producers. “Will competition for scarce resources lead to political or even military clashes among major powers?” asks a report by the National Petroleum Council. “Will bilateral arrangements among nations become common as governments attempt to ‘secure’ energy supplies outside of traditional market mechanisms?”Here is what we might do: Raise fuel economy standards for new cars and trucks; gradually increase the gas tax (possibly offset with tax cuts) to induce people to buy those vehicles; expand oil and natural gas production in Alaska, the Gulf of Mexico, and off the Atlantic and Pacific coasts. These steps would, with time, temper the power of oil producers while also checking greenhouse gases. But many liberals, conservatives and environmentalists oppose parts of a sensible compromise. The stalemate hurts mainly us.