Oil and its peaks
Peter Foster, Financial Post
Published: Friday, November 02, 2007
About 25 years ago (my God, I'm old!) I was having dinner in New York with a stockbroker friend who was telling me that oil was headed for US$100 a barrel. I said that I didn't think it would ever see US$40 again in real terms. As of yesterday, I'm still right (and my friend is still rich, which proves that it's better to be a stockbroker than smart, although both is preferable).
The peak in real oil prices occurred in April of 1980, when the price hit just over US$100 in today's dollars. That peak followed the Iranian revolution and the second so-called OPEC crisis. Iran is still scimitar rattling, but, unlike in 1980, it is not geopolitical uncertainty that is the primary current driver of oil prices, although political control of oil is certainly a major factor. Nor is it that the world is about to run out of petroleum. The driver is the stunning and largely unexpected growth in demand for oil in an increasingly globalized and prosperous world. The surest indicator that the oil price is being driven by demand is that the stock market has been soaring too. Another sign is that high oil prices have not triggered recessions, as they did in 1973, 1981 and 1990.
While the partial removal of the yoke of socialism has led to a global boom, politics is still very much around. Last week's populist royalty increases in Alberta indicate that the politics of envy is alive and well even in the most "advanced" of jurisdictions. On the brighter side, however, the Conservative government of Stephen Harper this week stepped in with a corporate tax cut whose impact will, it is estimated, swamp that of the royalty increases. This amounts to a Bizarro replay of the NEP, with Ottawa riding to the rescue of oil companies battered by Edmonton.
While Canada is still plagued by a convoluted approval process for new energy megaprojects (Will a Mackenzie pipeline ever be built?), by local benefit finagling (You go, Danny!), and by climate-change pretense (pass the ethanol), its energy regime is blessedly market-oriented, in stark contrast both with the bureaucratic pretensions of 1980 and what is going on in the rest of the world.
As in Canada in 1980, higher prices are being followed worldwide by state seizure. Two leading examples: Vladimir Putin has decided to grab the commanding heights of Russian energy; Hugo Chavez is taking control of Venezuelan oil "for the people."
Meanwhile, when it comes to potential sources of lousy policy, Malthusian fears of resource depletion never go away. They were present in Club of Rome thinking even before the first OPEC crisis. They are still with us in "Peak Oil Theory." The mystical twist of Peak Oil is that it will allegedly be followed by the "end of economics," which sounds awfully like the End of Days.
Certainly the majority of the world's big fields are very mature, but the main problem with future conventional supply is not the absence of geological potential but the dominance of state-controlled oil companies, which shun foreign investment, or frighten it away.
Oil and its peaks
Peter Foster, Financial Post
Published: Friday, November 02, 2007
Another variant of fearful anti-economism is the constant plaint that there is no way that oil supply can "keep up with" demand. But that's what prices are there for.
The greatest piece of anti-economic mysticism to befall the world of petroleum is the theory of catastrophic climate change, whose proponents demand that unless we overhaul our sinful materialistic lifestyles, we are condemning our descendents to an overheated globe. As Bjorn Lomborg pointed out in an excerpt from his new book in yesterday's National Post (and in contrast to that great Alberta bumper sticker of the 1970s/80s), it beats freezing in the dark.
Moreover, those draconian controls aren't going to happen, and wouldn't do any good if they did.
Yet another political factor that artificially tightens markets is continued price controls. In a reflection of Jimmy Carter's America, a man was killed in China this week for jumping a gasoline line. This wasn't a function of high prices, but of controls, which China this week eased with some trepidation. Myanmar's recent problems started after the military government raised local petroleum product prices. In Tehran last summer, a 25% increase in state-controlled prices led to riots.
Oil importers that subsidize prices get into trouble when prices rise (as Joe Clark's short-lived PC government discovered in 1979). Price subsidies -- or their removal -- are wreaking havoc in countries such as India, Indonesia and Malaysia, where governments are still inclined to intervene in the name of economic "justice" and/or winning votes. Some studies have estimated that global subsidies for oil products have led to "excess" demand of some three million barrels a day.
What with both US$100 oil and climate hysteria, you would imagine that "alternatives" would be hot, and indeed they are, but more because of government support than economics or technological promise (see ethanol). Moreover, their share of global energy demand will be minimal for decades to come.
The overarching irony remains that the world's most versatile mineral, which has been brought to the service of humanity by some of its greatest businessmen and technical geniuses, continues to fuel and inspire political lunacy, even as it helps lift billions out of darkness and poverty.
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© National Post 2007
