Oil is obviously a finite resource. However, contrary to what you hear from subscribers to the ‘Peak Oil’ theory, this is not the reason the price is sky high at the moment.
The real reason was that the prolonged period of $22 oil that ended in 2001 led to significant under-investment right across the industry. So, when there was a surge in demand from emerging markets including China and India after that date, it couldn’t be met from the world’s existing wells, pipelines and refineries, creating a huge capacity crunch.
This was exacerbated by shortages of rigs, infrastructure and trained petroleum geophysicists — shortages which were themselves a legacy of the prolonged period of cheap oil.
In this context, countries with plentiful and accessible reserves of oil and gas are holding more and more of the aces. Often they will seek to increase the tax burden on existing external players exploring or producing in their territories, or even — as we’ve seen in Russia, Kazakhstan and Venezuela — expropriate some of their assets. Given the way some such countries have been taken for a ride by Big Oil in the past, their behaviour is perhaps understandable.
Nowadays, when a company such as ExxonMobil enters a country where there is acreage it would like to explore, the country’s oil minister sits back in his chair and looks at them with a wry smile and says: “Yes, but how much are you going to pay for it”. Ten years ago the minister would have welcomed them in with open arms — and probably not even bothered to haggle over the tax take or the conditions. This enabled the oil majors to obtain some remarkably favourable concessions.*
Now the boot is on the other foot. Oil-rich countries such as Russia, under president Vladimir Putin, Venezuela, under president Hugo Chávez and Saudi Arabia , under King Abdullah bin Abdulaziz, effectively have the majors, and by extension some of the world’s developed economies, over a barrel.
For example, the seven-strong Kashagan consortium that plans to operate a highly complex but potentially huge field in the Caspian Sea recently experienced some problems along these lines. Project delays prompted the government of Kazakhstan to demand compensation from the oil firms and a greater share for its state-owned oil company.
The dangers of this new era of resource nationalism were recently highlighted by Royal Dutch Shell chief executive Jeroen van der Veer, in an interview given to Shell’s in-house magazine.
Van der Veer said: “It’s clear that the active interest shown by governments is delaying projects. They are negotiating longer than they used to over their share in revenues . . . Over time, that will influence the pace at which new projects can start producing.”
Sometimes, I wish the “peak oil” brigade would get off their hobby horse and accept that there are other factors – including nationalism, protectionism and greed – that are causing the high price of oil at the moment.
* I owe some of the ideas explored here came from an interview I did with Peter Cawston, fund manager at Edinburgh-based asset managers Baillie Gifford & Co for Trust Magazine.
This blog post was published in 9 January 2008
I understand that peak oil is accurate and that we are now past the point of peak oil. I believe many of the current events have to do with this senerio and it won’t be long before the main stream media and population wake up and understand what is going on. For me and my family, we are preparing for the next generation.