Thursday, February 10, 2011

Peak Oil Represents Government Failure

The beauty of the internet is that it has been leveling the playing field between the public and the governments in terms of information.

The web has placed much of government’s stealth activities in jeopardy.

A good example is the controversial Wikileaks which has recently revealed that Saudi Arabia could have been exaggerating the declaration of her oil reserves. Translation: Expect higher oil prices soon.

The Business Intelligence reports,

Saudi Arabia, the world's largest crude oil exporter, is unable to pump enough oil to keep prices from rising, the Guardian reported, citing confidential cables from the US embassy in Riyadh.

The cables from 2007 to 2009 made public by the website Wikileaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300 billion barrels, nearly 40%.

The report cites comments attributed to Saudi Aramco geologist and former exploration chief, Sadad al-Husseini, that Aramco couldn't reach the 12.5-million-barrel daily capacity needed to keep prices from rising.

According to the cables, which date between 2007-09, Husseini said "Saudi Arabia might reach an output of 12 million barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point." This crunch point is known as "peak oil".

Peak oil adherents may be quick to say “I told you so”.

However as we previously said,

While peak oil (via Hubbert Peak Theory) may be a valid engineering theory, it is a poor economic concept for the simple reason that engineering theories (like quant models) do not capture people’s behaviour.

The Wikileaks exposé only serve as a concrete example of how governments have steadfastly tried to manipulate every politically sensitive markets...and this includes the oil markets.

To consider, given the stranglehold control over oil supplies by different oil producing states, which accounts for more than 80% of the world’s proven reserves, if governments had the ascendancy to establish “equilibrium” then we won’t be bothered by prospective risks of shortages (via “Hubbert Peaks”) or suffer from elevated oil prices at all.


Graphs from the US EIA (includes BP Statistical Review and PRC Energy)

But obviously this hasn’t been the case.

Since governments are comprised by people—only that these elites have been politically mandated (which means they hold the barrel of the gun on us)—they suffer from the same frailties as anyone else.

Yet governments have been demonstrated:

-to lack access to the technology required to efficiently and productively utilize their oilfields,

-have had inadequate financing to invest to satisfy consumer demand,

-has revealed administrative incompetence in operating national firms or in the supervision of the 'choked’ industry, and

-most importantly, had been exposed for the paucity of knowledge to implement “equilibrium”.

It is worth emphasizing that with over 80% of proven oil reserves (supplies) controlled by global governments, this means there has hardly been a functioning free market in oil!

If Saudi officials are indeed guilty of withholding information then this reinforces the problems of the massive distortions in the oil markets which would likely implode on our faces-a negative externality as a result of government failure.

Otherwise, dynamic price signals in a free market would have reflected on the balance of demand and supply from which the marketplace would have adjusted accordingly.

What you have, instead, are vastly distorted oil markets that has been amassing intensive structural “supply-side” imbalances compounded by the manipulation of money supply by global central banks that has been contorting the “demand side”. A perfect storm in the making.

So what elevated oil prices suggest is not a validation of peak oil theory but one of the massive failure of government intervention or controls.

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