The Petroleum Century - Houston Business Journal, December 27
Editorial
Michael Economides and Ronald Oligne
It is fitting that the end of the millennium is crowned with a flurry of
activities about oil.
This century, arguably the century of petroleum, is going out with a
resurrection of old demons and the re-casting of shadows from
international to internal conflicts.
The events of recent weeks included the deteriorating war in
Chechnya; the decided cooling off of U.S. relations with Russia; the
ongoing hostility with Iraq and its rapprochement with Russia; and the
run-up in oil prices and statements about them being "dangerously
high" by the U.S. Energy Secretary. These events again spotlight the
pervasive importance of the energy industry, its subtlety in the face of
its overwhelming role, and a government reaction that is always
retarded and often misguided.
In times such as these, the subtlety of the modern petroleum industry,
coerced by a historically bad image and abetted by the ignorance of
the general public, becomes a considerable problem. This ignorance
takes many shapes, most of which would be amusing if they were not
also potentially dangerous to the economic health of the United States
and the world.
Ignorance spans a wide spectrum:
The "experts" and "analysts" who disregard the fact that oil is a
depletable resource and that there is no such thing as "opening the
Saudi taps," akin to the kitchen faucet.
The 40 percent of the public that believes that electricity is a form
of energy (when, in fact, 90 percent of energy comes from
hydrocarbons and less than 0.5 percent from "renewables").
The pseudo-scientists and pandering politicians who presume that
global warming is a hydrocarbon-induced-man-made-catastrophe
waiting to happen.
The tree-hugging, rioting crowd in Seattle that gained international
notoriety and a presidential nod of tacit approval while suggesting a
back-to-the-woods lifestyle while railing against the "dictatorship of
the market."
And lest it appear that we are leaning toward a certain party, we do
not think that Gov. George W. Bush showed much knowledge in
answering the question posed earlier this month on CNN: "What
would you do about high oil prices?"
His clich‚-level answer, "exploration," with results appearing from one
to several years from now, is no solution to the problem.
Here are some crucial issues:
Last year's oil prices of as low as $11 per barrel were non-sustainable
aberrations, which could not support petroleum production in Saudi
Arabia or anywhere else. More important, the price collapse of 60
percent, based on 1 percent in excess supply that was precipitated by
the Asian economic crisis, clearly demonstrated a very flawed and
destabilizing system of speculative traders.
That one-year situation sapped three to five years of investment in the
industry. It also took OPEC and other producers, public
pronouncements notwithstanding, as far away from a mood to
cooperate with the consuming world as they have been since the
1970s. We predicted last April that the oil price would climb to $30
within a year. Now it appears that we were conservative. There will
be spot shortages of oil over the next few months, with prices
breaking through the $30 barrier.
Based on our in-depth examination of worldwide production
capabilities, costs and consumption, the equilibrium oil price is around
$20 per barrel. However, the route to this price will be excruciating
and lengthy, affected by the physics of depletion, the escalating costs
of production "activation" or "re-activation," the already ongoing
conversion of the United States economy to natural gas and, to a
lesser extent, the politics of OPEC, the United States and Wall Street.
The recent statements by U.S. Energy Secretary Bill Richardson will
have only a temporary and insignificant impact. The Strategic
Petroleum Reserve poses a more substantive form of saber-rattling.
Use of this highly strategic asset will, of course, have international
repercussions and could also rile the independent petroleum producers
in the United States. Yet, even such a measure will have only a
furtive influence.
The De-partment of Energy's credibility to play a strategic role in the
petroleum industry today is, at best, ludicrous. Use of the term
"Energy" in this department's name is a misnomer. Of its $18 billion
budget, about $100 million goes to oil and gas and the securing of
petroleum resources. The vast majority of the rest goes to clean the
government's nuclear wastes from the Cold War. The DOE is a giant
garbage dump, and not a player in the energy scene.
Very worrisome for our energy security and the future world
petroleum supplies should be the war in Chechnya and the Russian
incursion into the Caucasus. Other former Soviet Republics in the
area, such as Georgia, are feeling the breath of the Russian bear all
too close.
Boris Yeltsin's push towards Grozny should not have caused much
surprise. The Russian reaction to U.S. and international criticism
should also be expected. Chechnya's own importance in oil production
-- but, even more important, its proximity to Azerbaijan and the
Caspian Basin, and a clear subsequent access to Iran and Iraq oil --
attracted another superpower and its leader earlier in this century.
Nazi Germany and Adolph Hitler's military campaign into the Soviet
Union in 1941 had only one real aim, access to oil. Stalled at
Stalingrad in 1943, the campaign never reached its goals, and Grozny
was never taken. (Is there a hint here for Yeltsin?) There is another
eerie similarity. During the war, Hitler made very direct overtures to
Persian and Arab leaders in what are now Iran and Iraq.
Tariq Aziz, Saddam Hussein's deputy, was lavishly and all too publicly
received in Moscow recently. Russian support for
Iraq today is solid. Iraq has uttered no support for their Moslem
Chechnyan brethren.
If there is one thing in this petroleum century that is stable, beyond the
obvious huge dependency of the world on oil, is that oil price cycles,
booms and busts, and history always repeat themselves.
_____________________
Economides and Oligney are professors at the University of Houston
and authors of the upcoming book, "The Color Of Oil: The History,
the Money and the Politics of the World's Biggest Business." Their
book is due out in January 2000.
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