Is Another Oil Boom Coming ?

The price of petroleum has in the last five years been higher than it has been higher than the average in the earlier years. As usual, this gave the ammunition to people who maintain the idea that the world is consuming too much of the world's resources another opportunity to argue that the world had reached the Peak Oil. This is the imagined state where the demand for oil overtakes supply capability, with the result that oil prices rise to unprecedented levels. On its face, this theory appears as a sensible position simply because every natural resource that is not renewable is liable to depletion at some time.  Thus the dependence of the world on petroleum energy would be in peril if demand was to permanently outstrip supply.

And yet those who make this argument most forcefully fail to account for a couple of factors specific to the petroleum market and to other markets generally. Writing in the Guardian here, George Monbiot has come to the conclusion that most of the predictions on peak oil status have been proved wrong thus far. The more profound point that he makes is that the rise in the prices of crude petroleum led to the increased exploration and drilling and opened up new fields for exploitation. At the same time, rising prices provided ample incentives for the major crude oil producers to expand production and thereby ensure that supplies come to market.

Unlike the author, I am less saddened by the fact that supplies are available principally because the ability to utilize these resources for growth ensure that countries will be able to achieve income levels that demand cleaner energy and more efficient use of petroleum. Monbiot should perhaps recall that prices do not only work to regulate the supply of crude petroleum but that the same mechanism may be used for environmental protection. My hunch though is that the promoters of the peak oil theory will suspend it for another decade and dust it up again when prices go up momentarily. 

The Outlier in The Middle East

Governments in the Middle East and Northern Africa have approached the clamour for political and social change in very similar ways and with little success and at great cost to lives of innocent people. The exception seems to be the Kingdom of Saudi Arabia where the monarchy has responded by opening the treasury and expanded welfare programmes and redistribution of the rents from petroleum to citizens through a variety of methods. As Neil MacFarquhar of the NYT states, it is clear that the strategy is to disarm the calls for political reforms by redistributing oil money from the state to citizens through increased construction of housing, raises in pay and contributions to clerics who are friendly to the establishment.

This approach is understandable since Saudi Arabia has comparatively large oil reserves and receives substantial rents for that every year. It is therefore capable of maintaining this distribution to placate citizens and momentarily quell any rising discontent. It is less clear that this approach is bound to work for a long time especially as public expenditures must have a limit and affects the development of private sector. That aside, this political trick should worry watchers of the oil markets because if this approach is maintained into the medium term, then it affects the incentives in the country to play Saudi Arabia's conventional role as the moderator of oil prices. I hope that the monarchy sees this as an opportunity to buy some time and start its reforms because it is unlikely that perpetual appeasement is a good trade off for reforms.

Irrational Fear of Nuclear Energy

While it is true that the human being is a supremely intelligent creature, it is also clear that we make systematic and very basic errors in reasoning. More recently, the errors that one could point come from the radioactive leakage at the Fukushima Nuclear Plant following  the massive earthquake in Japan weeks ago. In addition to the many deaths that this event precipitated, it also led to the failure of safety systems for Japan's nuclear power plants with a couple of reactors suffering structural damage and causing radiation levels to rise above levels that are considered safe.  

One could easily have anticipated the flurry of activity around countries with nuclear energy plants about the levels of safety. To my mind, the damage caused to the reactors were on account of the intensity of the earth quake. In spite of the clear lesson about the fact that overall, the structures were fine save that an earthquake of that severity is of low probability, calls for a halt on all nuclear energy production work were heard from all over.  It is gratifying however that while this has been going on and those who support commercial development of nuclear energy have been on the defensive, some rare support has come from George Monbiot of the Guardian. 

That article by a convert is worthy of reading because it splits apart the claims of the anti-nuclear lobby at a time when the nuclear industry needed friends in influential media. Lobbies tend to be poor listeners but here s some good advise from a convert.  

Investments in Carbon-free Energy Sources

Few things are debated any more than the fact that there's need to reduce world dependence on fossil fuels. The reasons range from the strategic to the environmental ones but the quest for cleaner fuels is on. Elisabeth Rosenthal of the NYT and reminded me of that point poignantly in addition to disabusing me of the view that the countries of the Middle east would be surprised by a switch.

As the story states, the Persian Gulf country of the UAE is dedicating significant finances to research for alternative methods of energy generation. It is clear that the approach is well-though out because these countries have decided to develop research partnerships by buying some of the best brains in the area. Should some of these be successful, then the Persian Gulf countries may still hold significant power in the provision of alternative energy. However, it is not by coincidence that the United Arab Emirates and Qatar are at the forefront of this initiative because they are those very countries whose oil reserves have been depleted the fastest.

Whether petroleum is replaced as quickly as is desired or not, it is clear that the search for cleaner fuels is on. As this approach shows, the researchers are looking beyond automobiles and gadgets and focusing on city level energy demand. On a per capita basis, it appears that these Persian Gulf nations are investing more in finding alternative fuel sources that are not as carbon intense.

How US Protected Detroit to Death

During my brief visit to the Us a couple of years ago, I was on the watch for the kind of cars that were most available. The reason being that I had made crude comparisons and even after adjusting for PPP, determined that petroleum is incredibly cheap in the US as compared to Europe. I noted that there was a large and growing number of Japanese models side by side with the impressive looking but fuel guzzling SUVs.

I found this fascinating because the connection between the addiction to oil and security has been eloquently made by Thomas Friedman. Writing this piece in the NYT, he extends the theme by showing how the three main car manufacturers in the US relied on connections in congress to ensure that they would not adjust to Japanese competition and to provide more fuel-efficient vehicles. In spite of the heavy protection received from some congressmen, it is clear that the rise in petroleum prices has shifted demand away from the models that GM, Chrysler and Ford presently produce almost irreversibly. The managers of these corporations are compelled to plead for government subvention to ensure their survival. In essence, the car manufacturers are close to being nationalized.

The moral of the story is that government should not contemplate protectionism to begin with because it builds the power of corporations to ask for more help later. As their world unraveled, the corporations were so confident of their ability to manipulate congress that they refused to back a health care plan that would have substantially reduced their wage costs. In the writer's reckoning, the Detroit corporations now need an equivalent of or the real Steve Jobs and more competition from Japanese manufacturers. I would welcome an icar too.

Limits of High Oil Prices as a Political Tool

As crude petroleum prices climbed up over the last three years, this did not only make exporting nations richer but it also made some of them more politically aggressive. What with Iran being defiant about inspections to its uranium processing facilities, Venezuela flexing its political muscles in South America and Russia using petroleum and gas supplies as a weapon in foreign policy. Together with the use of petroleum as an instrument of foreign policy were populist measures that expanded public expenditures through subvention and direct cash transfers.

There's no doubt that this is a risky strategy predicated on a high oil price and therefore vulnerable to any downward price shocks. Since petroleum prices curves flattened and went downwards, these countries are not only compelled to review expenditure plans but may see their voices in international affairs substantially moderated.

As the IHT reports here, these countries have had to go back to the drawing board regarding their expansionist ambitions. To my mind, there is still scope for petroleum prices to rise but the important fact is the illustration that non-democracies waste resources in symbolic displays of defiance and ambition.The state of affairs for these economies will probably be worse when oil prices tank again. And for sure, those prices will come down.

Quote of the Day

"Why? Because renewable energy technologies — what I call “E.T.” — are going to constitute the next great global industry. They will rival and probably surpass “I.T.” — information technology. The country that spawns the most E.T. companies will enjoy more economic power, strategic advantage and rising standards of living. We need to make sure that is America. Big oil and OPEC want to make sure it is not". Thomas Friedman

I have eschewed quotations from popular writers but Thomas Friedman qualifies today because of this very profound sense of insight and the enormous bet that he makes here. In spite of the science some still claim that global warming is not proven and that there's no reason to change course, the quote suggests that future economic prosperity will come from identifying greener sources of energy. I can tell that the demand for the alternatives would be good because they would moderate the costs of petroleum in addition to reducing dependence of a single source that is largely available from member countries of a price fixing institution aka OPEC. Friedman however goes further by stating that it could be the precursor of the countries that would be dominant in the next phase of economic growth. I will keep watching.

High Petroleum Prices Not all Bad

This blog has in posts such as this lauded the decision by the former mayor of London in introducing a mechanism for charging vehicle owners for use of roads inn central London. As stated in on of the many posts here, the idea was not only successful, but it was was widely copied. The former mayor's counterpart in New York however failed in securing approval to introduce road pricing within Manhattan. This NYT piece now argues that the rise in the prices of gasoline seems to be having effects proximate to mayor Bloomberg's intention. William Neuman reports that the Metropolitan Transport Authority confirms that traffic reduced by 4.7% as a response to the price of gasoline passing the price of US$ 4 per gallon. Evidence for the claim that the rise in price is responsible for the changed behavior finds support in the concurrent increase in public transport.

Interesting as this unintended consequence of an increase of prices may be, it is still relevant that the effect is a reduction that is not confined to the more congested roads and bridges as the mayor's congestion programme had intended. Thus, the rise in gasoline prices affects all motorists in the same manner as it cannot be targeted to the most congested streets. the limits of the unintended consequence is also that any reductions in price would probably reverse the trends. Most important though is that the gains from congestion pricing are not only in the reduction of traffic and its effects on pollution but also that the revenue generated could be utilized to maintain infrastructure. this advantage is clearly not possible when reduction in traffic is driven by the rising prices of gasoline.

Suing OPEC A Waste of Time

As the prices for crude petroleum have finally risen to the highest levels in real terms, one is bound to see well-considered and less compelling arguments for a review of the harm that comes from the maintenance of the oil selling cartel OPEC. A reasonably argued piece by Thomas Evans appearing in yesterday's edition of the NYT here, explores the possibility for suing OPEC by the US government.

While it makes for a very tightly argued piece, I am less sanguine about the reliefs that would be sought at that trial. Granted that the price of petroleum is substantially above the extraction price but how would one determine what the fairer price ought to be? This would probably be a waste of public resources and qualify as an exercise in posturing. Many citizens of countries that are net importers of petroleum obviously have an interest in lower costs but the convoluted path to securing a judgment that is described in the article leads me to the view that it is not worth pursuing and is unlikely on its own to result in a price reduction.

So what gives? I think that the economics here is simple, a carbon tax would be able to achieve the desired result by providing the incentive for energy conservation and the rise of alternatives. A law suit is inappropriate against countries that already use petroleum exports as a political weapon. The desirable result is for an alternative and competing source of energy. Fixing the problem of rising energy prices is not about litigation.

Indonesia Quits the OPEC Club

Trust governments to reconsider their options when confronted with the facts and changing conditions. For a large number of low-income nations, one of the most annoying impediments is the existence of the oil producing and marketing cartel otherwise known as OPEC. This story on the CNN site shows that Indonesia's energy minister has given notice of its withdrawal from the organization by year's end.

This is an interesting phenomenon for the reason that the decision has been made because of the realization that Indonesia's oil supplies are insufficient to meet its internal demand. effectively therefore, it does not make sense for a net consumer of petroleum to be part of an organization that is committed to maintaining prices that allow for the extraction of large rents. To my mind, this reversal proves a couple of points. First, as a long-standing member of OPEC, Indonesia's leaders seem to be convinced that the coordinated action and allocation of supply results in increased prices for petroleum beyond what would be cleared by the market. The second is that it is probably possible to predict the degree of commitment to the organization based on observable factors as the size of reserves versus the domestic demand.

Not Ethanol But a Carbon Tax

There is understandable and altogether justified concern for global warming in many countries today. What one sees less of is well-considered arguments for the policy responses that individual governments may take or for a degree of coordinated action to respond sensibly to this issue. As this article by Jeff Jacoby of the Boston Globe reports, many people have considered that resorting to bio-fuels in general and ethanol in particular is one of the ways. Then things began to go wrong because the assumption was that corn growers must be granted subventions.

This would not be a defensible approach from first principle for many reasons but it has now turned out that the calculations were wrong and lots of public funds have gone to waste. Many politicians who supported this approach appeared to be merely intent on distribution of public funds to their constituencies. On the other hand, there was serious objection to the support for ethanol based on the flawed thinking that the rise in prices would lead to food shortages in low-income countries whose citizens would be priced out of the food market.

Since the piece is very well written, there's not much to add save that the approach to ensuring the reduction of use of carbon fuels is clear. It has been argued on this here before, a carbon tax would be a superior instrument.

Record Crude Prices: whose benefit?

Sometime this week the real price of a barrel of petroleum reached a new record when it momentarily surpassed the highest price set in 1980. Due to the fact that the main producers of crude petroleum are a concentrated club of countries, one sees this new price as a necessary boon to the countries and by extension, to their citizens. Yet it is not always so.

High prices may be good for producers but the economies of most petroleum producers are characterized by subsidies for petroleum fuels and other basic commodities. So while food prices have risen dramatically in countries that import petroleum fuels, these price increases have began to affect the economies of petroleum producing nations. This story in the NYT illustrates clearly the fact that producers of petroleum and other commodities are not immune from these dramatic inflationary pressures. The reason is simply because given its uses in industrial manufacturing and transportation, energy costs are a major driver of inflation in a large number of countries. Added to this is the tendency for most of the petroleum producers to peg their currencies to the US dollar which has been dominant world currency but is presently getting weaker relative to alternatives.

In order to forestall further unrest, the governments are taking the option of either extending the subsidies or raising wages for public sector employees. This is surely no solution because these subsidies can only be maintained for as long as the prices of crude petroleum remain high and the accumulation of reserves continues. What one can be certain of is that the prices cannot remain this high for the long term. Granted that there's no silver bullet, the solution lies in structural reform of these economies and yet this is unlikely when crude petroleum prices remains that high.

Has Google Heard of Steorn?

In spite of being a regular user of its technology products, I am still unable to define precisely what conventional category of corporations Google would fall in. What I am certain of is that to classify this immensely successful corporation as a provider of search and advertisement services is insufficient. Its interest go to beyond provision of information as evidence of the book digitization project shows and now into deploying the creativity of its human resources towards a search for energy sources that are cheaper than coal-generated power.

An article in the NYT reports that through its philanthropy subsidiary Google is pursuing investments in a number of promising start ups. Knowing that this is a corporation not given to a reckless approach in its business ventures, this search is probably well-considered hence could lead to very high returns.

However, considering the claims by the technology firm Steorn that it had discovered a mechanism for generating free energy, perhaps Google's advisors could consider a review of the ongoing validation of the firm's energy technology. Then again, Google's founders are capable engineers and understand that the claim by Steorn to generate free energy interminably is not only highly improbable but not worth a second look. When this blog first posted here on Steorn, the blogger considered the chances of its success at about 5% and since Google seems not have considered it, then perhaps it ought to be downgraded further. Otherwise, Google has missed the excellent opportunity for the acqusition of a firm that would not only supply the technology to ensure that it not only achieves the goal of renewable energy but limtless and free energy.

Brazil Discovers Oil and Opts for OPEC

Recent Media reports stated that the South American nation of Brazil discovered an appreciable amount of oil deposits within its territory. Estimated at between 5 to 8 billion barrels of crude petroleum and natural gas, this new find is important because it suggests that the peak petroleum supply hypothesis is not the last word yet. However, the reaction of the Brazilian president shows that its approach to this new find is typical of any developing nation that is lucky to discover viable deposits.

As this dated NYT piece by Alexei Barrionuevo confirms, the find has added a bounce to the gait of the Brazilian president and his comments suggest that besides the massive contribution to state revenues, petroleum will be an important factor in its foreign policy goals and public affairs in general. More interestingly, having been a victim of the use of energy fuels as a political weapon, President Lula has unequivocally stated that Brazil will join the OPEC. So much for solidarity among developing nations especially because it is such nations that are most affected by the cartel arrangement. It is commendable however that the commitment to alternative fuels has been retained. Discovery of the Tupi oil field should get Brazil thinking more like Norway and less like the members of that price fixing bunch known as OPEC.

How About a Carbon Tax?

In addition to having established the Pigou Club, Gregory Mankiw presents in this NYT article the most complete and concise argument for approaching the small matter of global warming. This blogger has mentioned this in a number of posts but nothing beats Prof. Mankiw's command of the applicable principles of economics on the one hand while identifying the trade offs and political mobilization that would be required on the other.

The world is obsessed with half developed and fantastic ideas such as bio-fuels, cap and trade arrangements and fuel economy standards. he exhausts the pros and cons and states that a carbon tax is the most efficient way to approach it. the difficult part is to convince governments to negotiate an international carbon tax regime. petroleum exporters and consumers obsessed with keeping nominal fuel taxes low would be difficult to win over. That though is not the work of the policy wonk and he leaves the rest to the lobby professionals and the politicians to cut the deal.

Who's Rationing Fuel in Iran?

Over the last few weeks, news reports such as this one on the BBC news site have recorded the incidences of public and violent protests by some citizens of Iran because of the institution of a rationing of fuel that will be provided at heavily subsidized prices. To this blogger, apart from the reasons given about the need to build new refineries to process more petroleum, it is a bit clear that the economists in Iran ought to use this mini-crisis as the opportunity to educate their garrulous president on price theory. They may start by making this simple statement: Any good or service that is provided below cost will eventually have to be rationed because it will be consumed at far higher quantities than is efficient. added to the inflation rate that is estimated at between 20-30% annually, something will eventually have to give. The violence and the queuing is part of that large cost.

Covering the same story, this article in the Houston Chronicle reports that the animated crowds seemed to blame it all on president Ahmedinejad and wondered why a nation that bears a large endowment of crude petroleum should have to ration fuel. This is not a serious question and to assign the fault to an individual is unfair because the heavy subsidies are not entirely his creation. It has merely unraveled during his watch, no doubt prompted by the fear of impending sanctions regarding the ongoing plans to construct a nuclear complex that could be used for weapons production. In all fairness too, that substantial subsidy estimated at close to US$ 10 billion per annum could have been better designed and issued in form of vouchers.

While the sanctions would probably be an ineffective and blunt political tool, the main lessons ought to be that the great revenues from the sale of petroleum are not used well in keeping petroleum prices artificially low and that industrial policy ought to concentrate on expanding refining capacity. The pursuit of a nuclear plant building plan seems throughly misplaced while the crowds are rioting because of the lack of fuel.

Silicon Valley Seeking Diverse Energy Sources

In spite of all its acclaim, many still associate Silicon Valley almost entirely with information technology products and software because these provide the bulk of the activity that is undertaken in that innovative circle. Biotech and pharmaceutical research also has developed within this technological and process innovation location. Firms in Silicon Valley are being established to add to the furious search for alternative energy sources. An article in the New York Times carefully compares the environment in the valley now to that which prevailed during the internet boom of the 1990s. The entrepreneurs though are aware that demonstrating the results by developing workable products are essential and that this time, few of these upstarts will survive for long merely on the basis of expected returns.

Interestingly, the research and development ideas that are being pursued are quite well-founded, judged by the fact that accountants, lawyers together with venture capitalists are reorienting firms towards participating meaningfully in the US$ 1 trillion energy market in the United States. Admittedly, there are no guarantees but with the money rushing into these firms, it is possible that the results may be just what is needed for diversifying the available sources of energy. for this blogger, the fascinating thing is how the accumulated knowledge and skills in the Valley is being deployed across several industries.