About Oil

Since the war in Iraq began, oh so many years ago, I have often heard it asserted that this was, ultimately, a war about oil. I assumed that meant that this was an imperialist grab for Iraq’s oil resources, which, considering how things have turned out thus far, was a remarkably stupid move.

The other day I was talking to a friend, a technical consultant, in the oil business, and I asked him, about as incoherently as possible, what he thought of peak oil. He told me that throughout his career he had been spec'ing and subsequently shelving hundreds of small projects that were just too expensive to do—they all required $80 a barrel oil in order to be profitable. Now that prices have reached $80 a barrel, all those little projects are coming off the shelf. So yes, he did believe in peak oil, and watching all those expensive projects finally pop into existence was proof enough for him. He believes we will always have a petrochemical industry, but that soon we’ll be hitting ourselves over he head for doing stupid things like turning natural gas into fertilizer. I thought that was a good point since natural gas becomes irrecoverable after being turned into corn and algae.

Later on, the next day or so, I was listening to some of the dire predictions about the consequences of a war with Iran, including $100 a barrel oil. That lead me to the following, rather sinister conclusion: what if the war in Iraq, rather than being a bungled attempt to appropriate Iraqi oil, is a actually a brilliant scheme to keep some Middle-Eastern oil off the market for a while, raise the price of oil over all, thereby generating revenue to develop projects that would previously have been unprofitable. I’m sure this has occurred to someone somewhere already, and Mark L. could probably tell me exactly why I’m wrong, but the thought seemed novel enough that I thought it worth publishing to my glorious audience of three and a half people.

24 October 2007

True to form, ML knows exactly why I'm wrong. Here's what he has to say:

Dane,

I am glad to see that your blog is back up and running. I also appreciate the "shout out".

I don't know why we went to war with Iraq, but I wish the Bush administration had used oil as a justification. I think Bush had a strong desire to invade Iraq, so he looked for intelligence that would enable him to realize his dream. I guess he sort of data mined intelligence to support a war. Data mining in research generally produces flawed results and Bush showed that data mining in foreign policy produces equally erroneous results. I know I voted for George Bush and before we invaded Iraq I told everyone, probably you as well, we should just invade Iraq now because Bush is going to do it anyways. I think I was right.

There is a great justification for the invasion had the war been about oil (Al Greenspan revealed the justification in his new book). Before the invasion, Saddam was trying to control of the Strait of Hormuz and as a consequence of that, a huge portion of the world oil market. About 20% of the world's oil supply is shipped through the straight and had Saddam stopped shipments, the price would have most definitely sky rocketed. People around the world would suffer extreme economic and physical hardships. Can you imagine the world-wide hardships created by another depression in the United States? I know the atrocities of the war in Iraq are absolutely deplorable, but the alternative is far worse.

On as side note, I really believe the diversification and interconnection of the US and world economies make the US economy some what depression proof to anything but a large and sustained spike in energy prices, specifically crude oil.

I disagree with any assertion that the Iraq war is about stealing natural resources. Most undeveloped countries have strict production sharing agreements with large oil corporations that are very favorable to the undeveloped countries. Oil companies almost act as consultants and get a percent of the revenues from the production. Without the oil companies, the undeveloped nations would never be able to realize the value out of their reserve base that is technically feasible because they lack the expertise. Venezuela is a great example of why undeveloped nations need large oil companies. Production in Venezuela has dropped off significantly over the past several years as Chavez has moved to nationalize all oil and gas assets. Venezuela might be getting 100% of a 100 Million barrels of oil produced a year, but that number will decline and it is much less than the 50% of 500 million barrels of oil they could receive (I made those numbers up. I know production has fallen off to the point where the example applies, but I am not aware of the actual numbers). Any oil contract that a large oil company receives in Iraq will benefit the Iraqis much more then if they tried to develop their own fields. They will never have the expertise of an exxon mobile. It is a good socialist rallying cry, but is highly illogical from an economic stand point.

I also disagree with your notion that the US invaded iraq to remove its oil from the market and artificially inflate prices. You obviously understand the economics of oil. It is a world-wide traded commodity that is priced almost exclusively based on supply and demand. Macro issues in any nation around the world have little bearing on the actual price of oil (ie, inflation in the US does not affect the price of oil like it would the price of a car. Inflation would only affect the price of oil if it affected demand or supply). When politicians speak of charging oil and gas companies a windfall tax because americans feel that oil companies are gouging consumers, I usually get sick to my stomach thinking about how imbecilic the leaders of our nation are. Most of Iraq's oil production was offline at the time of the full scale invasion of Iraq. Iraqi oil entered the market through the UN oil for food program and black market activities, but Iraq did not have the technical expertise required to realize a significant level of production. If anything, the Bush administration believed that oil production in Iraq would increase shortly after the invasion, which would decrease the price of oil. Large oil companies would be able to enter the country, develop their oil fields, and bring production back online. If you recall, many of the budget projects for the Iraq war assumed that the government would be able to fund itself shortly after the war because of increased oil production. Obviously the instability in the country has prevented any effort to increase production.

I do not think the US is motivated by oil to invade Iran. Iran is a destabilizing force in the dead sea region and has caused the death of many innocent iraqis and americans. Iran also has the stated objective of wiping out one of the US' most important allies. Maybe I am drinking bush's Kool-Aide, but I believe any attack on Iran will be based on saving innocent lives.

On a side note, if you are interested in the concept of peak oil, I suggest you check out a book by Matthew Simmons called "Twilight in the Desert".

Simmons is LDS (his family owns Zions Nation Bank) and has an investment bank in Houston named after him.

I enjoyed your post and hope you keep writing. Sorry if my email was a little windy, I didn't have enough time to chop it down.

Regards,

Mark


And I had this to say:

Mark-

I knew you'd set me straight, though I hope I made it clear that the notion that the war is about stealing resources is not my idea, just a distillation of what I think people mean when they say, "yeah, it's all about oil, man." I think Bush took us to Iraq because he imagined it was his destiny, the data mining and phantom WMDs were just to justify what he would do no matter what--like you said.

Do you really think the Strait of Hormuz was actually in that much danger? I can't imagine Iran, the U.A.E, or Oman would have let it happen. And if Saddam had made a military move on the strait, well, we would have had a real reason to attack, an actual objective, like the liberation of Kuwait. The administration's justifications for the war seem to change monthly, and I am left with the suspicion that Bush's willingness to jump in there was an easy cover for something else. Personally I couldn't have been happier if the NeoCons had been right, and Iraq was booming right now. We wouldn't be breathing down Iran's neck, they might not have elected that idiot Ahmadinejad (we had a lot of support there after 9/11, all of which we've squandered in Iraq), we might have had the resources to finish off Al Qaeda properly, and who knows what else. But I suspect that someone was going to be pleased no matter how things worked out, and that even the mess we are in now is working to someone's advantage.

Of course I realize the price of oil has to do with increased demand (China, India, everybody else), but markets also responds to perceived threats to supply, like a destabilized middle-east. Naturally I have no proof, but I can imagine someone devious enough to manipulate the perception of risk. The fact that Iraq was largely off-line only convinces me more, since its continued absence doesn't effect actual supply, while violence in the region reinforces the notion of risk to continued production. And facts are facts, even if none of the major decision makers going into the war were hoping that oil prices would quadruple for the sake of further exploration, the current prices are having that effect, allowing companies to access smaller and deeper deposits.

So now that we are seeing a sustained spike in oil prices (the predicted outcome of Saddam grabbing the Strait of Hormuz, and, by the way, wouldn't a pissed off Iran be more of a threat to that particular bit of geography?), what happens? I see that predictions a year from now have the price at over $100 bbl. Does that mean we get a depression, or will it take more than that? Personally, I welcome high oil prices. It means more r&d will go into alternative, hopefully sustainable, energy sources. And if we stumble a little as a result, well, sucks for us, but I don't think the outcome will be as devastating as we imagine for the rest of the world (J and I will just move to France or something like that). Means of production are much more equitably distributed than they used to be, so I don't think things slowing down a bit would automatically plunge us into a dark age. Some countries might actually benefit from a more hands-off policy on our part, allowing them to trade more with each other, creating a more robust network in the long term.

I'll look for that book when I'm back in the States and earning dollars again (they're better than Baht, even if they are worth less than loonies now). And thanks for making me rethink my groundless assertion. Do you mind if I add the text of your email to that post? I enjoyed it.

How's your art collection coming?