Pondering the Fate of an Oil Exporter: Squandering One's Inheritance Cheaply 14 comments
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The fate of an oil exporter is to have sold the bulk of one’s inheritance cheaply - only to live out the twilight years cramped for income, and worried sick about reserves. Of course, this would be less the case if one had converted the built-up years of oil revenue to new productive capacity in energy. If we consider both the UK and Indonesia in this regard, two oil-exporters who turned net importers this decade, scant evidence exists that such capital investment took place. Perhaps the more solemn fate of an oil exporter is to author a tale of resource mis-management.
For 25 years the UK exported oil. Roughly from 1980 to 2005. While the UK did enjoy relatively high global prices when the surge of North Sea Oil came on stream in the early 1980’s, the bulk of the UK’s exported oil was sold into a weak price environment up until 2002. In truth, the tipping of the UK and other countries like Indonesia into net oil importer status formed, in part, the structure of higher global prices post-2002. To export oil is to contribute to the downward pressure on the price of oil. And to stop exporting oil generates news headlines, and tighter supply.
What did the UK do with its oil revenues? Well, this post is not just about the UK. But I would point out that the bulk of the UK’s current nuclear power capacity, for example, was built prior to 1980. In addition, as I have written both on my blog and in a previous newsletter, the UK’s reliance on natural gas imports has risen also this decade. This is the nasty delta that has hit the UK energy balance sheet, therefore: falling supply, falling revenue from supply, and rising outlays for imported oil but especially imported natural gas. I will leave readers to ponder that the greatest expansion of (money) credit ever in the UK took place, just as these structural (energy) changes were unfolding.
The intriguing issue that’s raised here is why are oil producers price takers? Matt Simmons has recently given talks and presentations that confront this question. (see slide 12 in the Simmons .pdf presentation to the Houston Energy Institute) In addition, I would suggest readers get either acquainted or reacquainted with Hotelling’s views on resource pricing. The status quo viewpoint will maintain that of course oil producers are fated to be price-takers. I disagree. Instead, I would argue it’s the collective consensus reality still shaped by 20th Century fossil fuel oversupply, combined with the growing cost-disparity between OPEC oil supply and non-OPEC oil supply, that makes this question now more pressing than ever.
That oil is priced at the margin of the daily souk is no longer a satisfying answer. Just ask Indonesia. Or soon-to-be Mexico. Or watch how Middle East oil producers like Saudi Arabia and the UAE are now building massive solar utility capacity, and using their oil export revenues to do so.
Photo: Old Baku, Azerbaijan early 20th C.
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Mr. Rogers is correct - he is saying the UK will be a major permanent oil importing nation. They are already a net importer.
We have mismanaged opportunities here too. The US suffered England's fate years ago. The picture above could be 19th century Pennsylvania. We realized in the 70's that we desperately needed to reduce our dependence on imported oil. Haven't made much progress in that direction, and now we will suffer for it. Mexico provides 15% of our imported oil. What will happen to the price as their exports drop to nothing? What will happen to Mexico (and our border states) if they continue to export and neglect their domestic market?
All oil is priced in dollars. What will happen to the price here as that will inevitably change?
This creates all kinds of pernicious distortions in national economies -- the way to get rich in an oil exporter is to have some kind of political influence over oil. This is not a "capitalist" mind set, its a bureaucratic/political one. Oil wealth nations routinely produce "Mr %5" type "entrepreneurs"-- that's a better bet in, say, Nigeria, than is running a business.
The second pernicious influence is an over-valued currency. As oil exporters run trade surpluses -- or smaller trade deficits than they would have done-- their currencies become inflated, damaging their ability to compete in markets which employ more people and add more to national welfare. This problem seems quite acute in Canada, for example.
A final dynamic is that when oil wealth is truly vast -- as in Saudi-- the state has so much wealth that it need not tax citizens to provide services, rather it provides services "for free", and never is forced to have the hard political discussions that are negotiations with people's representatives over taxes. Bernard Lewis pithily called this problem "no representation without taxation"
One might reflect that some of the world's wealthiest nations and most competitive economies seem to have benefited from having little if any natural resources wealth. Germany, Japan, China, and India are all notable for their minimal levels of oil.
But this business with Indonesia and the UK is interesting. Both of these countries produced their oil too rapidly. Where Indonesia is concerned I remember a party in one of the up-market suburbs of Stockholm where my drinking and flirting was hindered by a gentleman from that country commenting on the arrogance of Americans. It seems though that he ended up with a few years in the slams for playing fast and loose in the oil market. My judgement here is that it was inevitable that they would produce as rapidly as they did as a result of certain people playing fast and loose.
The UK is different. At a conference several years ago a gentleman from Norway said that Norway was producing too much. The same argument he used applies to the UK, and it sums up to MORE MONEY - via a lower production - IS BETTER THAN LESS due to ending up as an importer..
By the way: Excellent article.
"if one had converted the built-up years of oil revenue to new productive capacity in energy."
The problem is that renewable energy is a myth.
Renewables yield electric energy and 80 years of trying and no easy way to convert this into powering tractors, combines, trucks, ships, and airplanes. Likewise, algae oil and veggie oils are a myth in terms of solving the liquid fuels crisis.
Wake up folks, time to prepare for Peak Oil impacts.
Documented here:
survivingpeakoil.blogs.../
www.peakoilassociates....
• Oil companies PAY the federal and state governments for the privilege of drilling offshore. That’s money going into the tax base that YOU don’t have to pay. The government uses those funds to build schools, roads and hospitals.
• Offshore drilling creates a huge number of high paying blue collar and white collar jobs. So YOU don’t have to pay for their unemployment benefits and they pay income taxes that eventually benefit you. Those same folks will be spending lots of money and buying lots of homes shore side.
• Economics 101 indicates that more supply = lower prices for the oil and natural gas that offshore drilling produces.
• More supply sourced domestically helps to insure that we have a more stable source of supply. This lowers the risk of being “cut off” by others. For the oil and gas market, this then psychologically serves to reduce the price of oil and gas and such will be reflected in how the commodity is priced.
• Offshore drilling is proven safe and clean. Probably much safer than the oil tankers that cruise in and out of the nations harbors daily.
So it’s no skin off your nose if the oil companies want to drill for oil. In fact, it benefits you directly and indirectly. It’s time that we get behind this for the good of the nation and the economy.
Professor Doctor Banks - please go away.
Mr Macdonald - thanks for another timely and informative article. I would appreciate any info you have on Russian production decline and oilfield maintenance issues.
Oil, not oil equivalents.