10 March 2008

Why Sharing is good

As this was to be my first of a series of monthly postings for Economics International – or at least until I get fired – I was rather unsure what to begin with. The options were vast; there was whole world to write about out there: Sub-prime mortgage lending and its negative effects on Swiss banks (my most beloved of banks), the Bush tax cut – and the astronomic budget deficit, inflation, the economic effects of shutting-down of the greatest coffee shop in Utrecht… I could go on. But was I shocked yesterday when I was doing my daily quick check of the BBC website and read this article about oil prices reaching a record high.

It appears, that “A barrel of US light crude touched $103.05 during the day” on Friday, which alarmed me but at the same time I was not surprised. The article went on to quote Venezuelan president Hugo Chavez as saying "Everything indicates that the oil price will continue to get stronger". Well no surprise there, Mr. Chavez, of course oil prices will continue to rise if people like you keep holding the world’s oil consumers hostage!

Yes, I believe that one of the reasons oil and gas prices are so high is because big, populist, nationalistic governments are holding on to their oil and gas reserves and not sharing them with the rest of us.

We’re always hearing the phrase “it’s running out, it’s running out”. That may be true, but not to the degree that some scientists, and big governments, want you to believe. Geologists keep saying that the world’s oil reserves are running out, but I stopped believing them; they have been saying the same thing for decades. In 1974 M. King Hubbert said the “peak oil” would occur in 1995[1]. Laughable. Now, of course it is true that consumption patterns have changed since the 1970s but I still don’t think its fair to say that we are under an imminent threat of reaching peak oil. In fact, Abdallah S. Jum’ah CEO of Saudi Aramco, expects “fossil fuels to remain the dominant energy sources for the foreseeable future. In fact, the EIA (the Saudi Energy Information Administration) forecasts that the proportion of fossil fuels in the global energy mix will actually rise from 85.5 percent in 2001 to 87 percent by 2025”[2]. So not only is crude oil production going up, it will stick around with us for at least another century. And I have little reason to doubt Mr. Abdallah, he lives on top of the oil; he would know.

The problem here does lie with how much of it there is left, it’s who controls the oil and is refusing to share it with the consumers. According to Platts’ Middle East Editor Kate Dourian, “some countries are becoming off limits. Major oil companies operating in Venezuela find themselves in a difficult position because of the resource nationalism that's spreading. These countries are now reluctant to share their reserves”[3]. Yes it appears that Hugo Chavez, Evo Morales and the likes have begun to mix politics with crude oil, and although that may sound tasty I can assure you it’s not! It is because governments are nationalising their oil reserves that we are seeing such high prices.

We all remember in 2005 when Evo Morales used, or miss-used I should say, the Bolivian army to capture energy installations and claim them for the Bolivian state. In May 2006 he then signed a decree that said that all gas reserves were to be nationalized. Morales when on to say that "We are not a government of mere promises: we follow through on what we propose and what the people demand". This populism and demagoguery is not how you build an economy; bringing the army to capture and nationalize a gas plant may make hippies in the West smile adoringly, but it instills a false sense of hope in the Bolivian people and it contributes to high energy prices abroad.

The undemocratic governments of many of these oil-rich nations are enjoying very comfortable budget surpluses and from Caracas to Almati you are seeing hundreds of government officials spending their petro-dollars on Mercedes cars and Johnny Walker Blue Label. This is too much. I’m OK with governments wetting their beaks by taxing oil companies, but it’s when they deter private investment altogether and nationalize their oil fields that I get angry. I am sure that the world’s supply of oil and gas would increase incredibly if Shell and Total and Exxon were given access Russian, Venezuelan, and Kazakh oil fields.

[1] http://www.hubbertpeak.com/hubbert/natgeog.htm
[2] http://www.worldenergysource.com/articles/text/jumah_WE_v8n1.cfm

No comments: