With the cost of a barrel of oil still at historically high levels, books and studies are beginning to be released concerning what it all means, will we run out, and are there alternatives to what some term "black gold." While the weak dollar's role this decade in the spike of oil is rarely discussed, analysis of what's happened and what's ahead is anywhere and everywhere.
Peter Maass, a writer for the New York Times, takes a somewhat different angle in his book, Crude World. Working from the basic premise that most oil-rich countries are in fact "not rich, that their oil brings trouble rather than prosperity", Maass, though far from a libertarian, in some ways seeks to forward a long-held libertarian belief that oil is a problem for countries rich in its supply, that oil is the "resource curse."
So while there's a great deal more to disagree with in Maass's book than there is to agree with, those interested in the often corrupting influence of oil might find it an interesting read. It's quite simply too bad that so much of his analysis didn't match his impressive reporting skills.
Arguably the greatest theme in Maass's book is the one concerning who or what controls oil. As he notes so importantly, the bulk of the world's oil "is now in the hands of state-controlled companies like Saudi Aramco, Gazprom, Petroleos de Venezuela, National Iranian Oil Company, and China National Petroleum Corporation." ExxonMobil, while the largest oil company in the U.S., is not even among the top 10 largest oil companies globally.
So with oil largely owned by frequently corrupt governments, in order to extract it, it's almost always the case that this is done "with permission from host governments." The result is that the search for oil involves a great deal of corruption for geology, as opposed to talent, determining where this form of "wealth" is found.
In short, with oil being of the earth as it were, and with it impossible to move, oil serves government expansion for access to it in many ways being a function of ties to important government officials. This basic truth is too often forgotten by the "Drill Baby, Drill!" crowd in the U.S.
While comparative advantage will be discussed in greater detail later on, the mercantilist desire among some in the States for the U.S. to push limited human resources into all manner of oil searches, is for those same individuals to hand a lot of power over to governments. Google is a mostly intellectual concept that has ease of movement thanks to its assets largely being human. Oil, however, is once again immovable, so if intellectual concepts are sacrificed on the altar of energy "independence", the result will be more, not less in the way of corruption that invariably results from governments being handed too much power, mineral or otherwise.
Maass reveals this most impressively in his description of the debacle underway in Venezuela under strongman Hugo Chavez. Since Chavez's rule began, Maass reports that while the Venezuelan government used to confiscate 40% PDVSA's revenues, now it takes nearly 70 percent.
But despite the massive increase of oil revenues due to Chavez's decree, Maass quotes an economist who observes that watching Venezuela is "akin to watching a car speed toward a wall that it had smacked into not so long ago." The wall was smacked the last time a collapsing dollar made oil nominally expensive, such that a lot of soggy dollars fell into the hands of inept country heads globally, including Venezuelan leaders.
While Venezuela could claim the strongest growth of any South American country from 1920-80, now it's a largely poor country with a very rich government. The "wealth" that some equate with oil is largely a mirage, and one that enables delusional rulers like Chavez to make friends Venezuela can't afford within other governments eager to benefit from the country's largesse. Oil wealth is government wealth, as opposed to the individual wealth regularly achieved in countries that are mostly energy "dependent."
For evidence, we need only look to countries like Switzerland, South Korea and the city-state Hong Kong, versus "oil rich" nations such as Iran, Nigeria, and Equatorial Guinea. The latter country merits special mention here considering Maass's statistic showing that ten years after oil was discovered in bulk off of Equatorial Guinea's coast, nearly half of the children there remain malnourished. Though it would be foolish to draw a direct correlation between the historically corrupt governments described here, and what might happen if the U.S. were to become "oil rich", the extreme poverty experienced in countries with governments enriched by oil is yet another sign that the faux populist drive among certain Americans for energy independence is not just unrealistic, but also dangerous for empowering politicians many don't trust irrespective of political affiliation.
Looking at energy independence through the lens of comparative advantage, Maass helpfully notes that in Saudi Arabia, the country with the most proven reserves, the oil "reservoirs tend to be large and close to the surface." To put it very simply, whatever the ease of extracting oil from untapped regions in the U.S., at least now it's easiest to extract crude in Saudi Arabia, in which case we defy basic, and economy-enhancing laws of comparative advantage when we seek government policies meant to promote exploration stateside.
While the government policies in existence that ban drilling for environmental reasons are foolish, not discussed enough is how economically unstimulative it would be if we made it policy to commit resources to oil extraction in the U.S. when it's so much easier to access the oil from outside our borders just as other "dependent" countries do. Whatever Maass's own opinions on the false notion of energy independence, his book at least anecdotally makes a strong case for oil refiners to continue to purchase oil without regard to its country origin.
The disagreements with Maass, however, are many. Perhaps most notable is the question he poses early on in the form of, "At times of economic expansion, why does oil cost so much?" What could he possibly mean there? Indeed, the â??70s and the decade just passed were economically nothing to write home about, yet oil was nominally expensive, whereas the global economy boomed in the â??80s and â??90s and oil was cheap. The weak dollar's historical role in oil spikes was never mentioned once in the book, Maass never acknowledged that oil was flat during the last period of dollar-price stability from 1947-1971, so the book's analysis was greatly weakened on account of this glaring omission.
Maass goes on to assert that "We face an era of scarcity that involves higher prices for oil and fiercer competition for what's left." So if we ignore the dollar's role once again here, it's easy to argue that Maass misunderstands his own, important point that the world of oil is as much intellectual as it is physical. In this case he acknowledges the existence of hard to get, unconventional oil in countries such as Canada and Venezuela, but seemingly forgets that as recently as the 1940s, it was said that the technology necessary to drill offshore would never exist such that there was no point in concerning ourselves with offshore oil. Seventy years later it's quite conventional to drill offshore, and if intellectual history is any kind of indicator, soon enough what's unreachable in Canada and Venezuela will be quite so.
No fan of the military apparently, Maass mentions in passing that the "U.S. Navy patrols the Persian Gulf and other sea lanes to ensure the safe passage of supertankers that deliver much of the oil we consume." The problem with this assertion is that in the book's appendix, it's clear that the top two country exporters of oil to the United States are Canada and Mexico.
While describing the early â??70s oil spikes, which were really nothing of the sort considering all commodities priced in dollars went skyward due to the weak dollar, Maas attributed them to the Saudis and their allies in OPEC realizing "that their customers could be made to pay far more for the oil their economies were addicted to." To believe Maass, an embargo along with the desire of oil-producing nations to get more for their product made oil more expensive. Maass added a quote from Saud oil Sheikh Yamani, who said "The moment has come. We are masters of our own commodity."
If we leave out what little control OPEC and the rest had over the price of oil when the strong dollar made it nominally cheap in the â??80s and â??90s, Maass omits what Yamani also said about the power of OPEC and mythical "embargos" way back when. Specifically, Yamani said that the 1973 embargo "did not imply that we could reduce imports to the United States ... the world is really just one market. So the embargo was more symbolic than anything else." So true, just as it's true that we imported just as much oil post-embargo as we did before its imposition given the basic truth that no producer can control the ultimate destination of that which is exported.
Oil executives for U.S. energy firms naturally take a beating in the book, as to do the government officials who supposedly bend over backwards to ensure reliable oil supplies from corrupt governments the world over. The supposition here seems to be that absent U.S. willingness to lie down with corrupt dictators of oil-producing nations, we wouldn't have much to consume.
But in a book full of contradictions, Maass contradicts himself on this very important non point. As he states clearly, "In the Middle East, a king without money is not king for long." Great point by Maass, but probably one he didn't mean to make, nor is it one that will comfort the oft-mentioned mercantilists in the U.S. who assume absent our "own" supply of oil, we'll have very little. In truth, Maass's point makes plain that oil from the Middle Eastern countries and from every other corrupt oil-producing nation will continue to reach us as though the petroleum had bubbled up from the ground in West Texas. It will because they need our dollars far from than we need their oil.
In describing what led to the ill-fated invasion of Iraq, Maass quite predictably reduced it to a "war for oil" thanks to the "Texans in the White House" who "wanted to control Iraq's 115 barrels of crude." So while Maass would likely more than meet his match with this writer when it comes to laying out the sheer incompetence of the Bush administration (albeit for different reasons), what's remarkable about his attempted takedown concerns how quickly he contradicted his own, non-original view that would surely win him converts in college dormitories across America.
Indeed, while Baghdad fell within weeks of the March 2003 invasion, Maass notes that it "wasn't until early May that Philip Carroll, a former chief executive of Shell, was named as the top American oil adviser, and he didn't get to Baghdad until weeks after that." Recounting his conversations with an Iraqi official in the country's oil ministry named Aboush, according to Maass, his main fear "wasn't that Iraq's petroleum would be owned by Halliburton but that it would be ignored by Bush." As Aboush found further, he was only required to take a "short and dodgy drive to see that Iraq's oil sector" was "starved of attention from its occupiers."
Maass asserts that Dora was the most important Iraqi refinery, and "an industrial crown jewel", but according to him it was ignored post-invasion, and was running at 1/3rd capacity. This writer opened the book thinking the Iraq invasion was at least partially about oil, but in a book somewhat meant to prove that point, the only thing that could reasonably be concluded from the facts perhaps unwittingly presented by Maass is how very little oil factored into the invasion.
Throughout the book, Maass writes as though the theory that is "global warming" is proven. In his defense, the book likely went to print well before the latest scandal about fudged temperature data among the leading "global warming" insiders, but even without that damning information, the very notion of a warming earth is far from proven, not widely agreed upon, and as time goes by the individuals who will suffer policies meant to eradicate what may not even exist grow increasingly skeptical.
Despite the various factual and analytical frailties within the book, there's good learning in all reading, and there's certainly much to learn from Crude World. So while it would be dishonest to highly recommend the book, it has some good analysis, and is short enough that it would redound to any reader's oil knowledge to give it a thorough, and yes, skeptical, read.
John Tamny is editor of RealClearMarkets, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.
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