oil

Jad Mouawad and Andrew Revkin report in the New York Times on just the most darling Saudi proposal for how to help solve the global warming problem: 

Saudi Arabia is trying to enlist other oil-producing countries to support a provocative idea: if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers....

The chief Saudi negotiator, Mohammad al-Sabban, described the position as a “make or break” provision for the Saudis, as nations stake out their stance before the global climate summit scheduled for the end of the year.

“Assisting us as oil-exporting countries in achieving economic diversification is very crucial for us through foreign direct investments, technology transfer, insurance and funding,” Mr. Sabban said in an e-mail message....

A recent study by the International Energy Agency, which advises industrialized nations, found that the cumulative revenue of the Organization of the Petroleum Exporting Countries would drop by 16 percent from 2008 to 2030 if the world agreed to slash emissions, as opposed to the projection if there were no treaty.

But with oil projected to average $100 a barrel, the energy agency estimated that OPEC members would still earn $23 trillion over that period.

If Saudi Arabia was serious about diversifying its economy, it would open up its spigots and let the price of oil fall to the point where there were market incentives for economic diversification.  Somehow, I don't see that happening.   

So, this isn't really going to go anywhere -- but what I do find particularly amusing is that if one thought about compensating dirty energy producers for the costs of climate change mitigation, then oil producers would be close to the back of the line.  Coal-producing economies -- like China and the United States -- would be justified in demanding much greater levels of compensation, since coal is a much dirtier energy source.  Oil would be in front of natural gas producers, and that's about it. 

Readers are encouraged to proffer their own proposals in the comments that would seem more outlandish than the Saudi one.  Creativity counts!!

In the New York Times, Alexei Barrionuevo has a long story on Brazil's renewed oil nationalism.  Some highlights: 

Faced with the world’s most important oil discovery in years, the Brazilian government is seeking to step back from more than a decade of close cooperation with foreign oil companies and more directly control the extraction itself.

The move is part of a nationalistic drive to increase the country’s benefits from its natural resources and cement its position as a global power. But it could significantly slow the development of the oil fields at a time when the world is looking for new sources, energy and risk analysts said....

For Brazil, the stakes are high. Many here see the oil as a magic bullet for tackling the country’s biggest social challenges. Luiz Inacio Lula da Silva, Brazil’s popular president, wants to alter energy laws to funnel more revenue from the undeveloped fields to government coffers and set up funds to improve education and health care. His proposal will be delivered to Congress sometime next week, one of his aides said Monday.

Despite its recent economic boom, Brazil still struggles with extreme poverty, inequality and an illiteracy rate over 10 percent.

Government officials here insist Brazil will not be swept up in the sort of nationalistic fervor that has washed across Latin America in recent years. As Mexico did in the late 1930s, Venezuela, Bolivia and Ecuador have reduced the presence of foreign energy companies, only to have their production of oil and natural gas stagnate or decline....

With Brazil’s green and yellow flag draped over the stage, oil union members watched a new documentary here last month, “The Oil Must be Ours — Ultimate Frontier.” In the film, geologists, union leaders and even a 92-year-old physician, Maria Augusta Tibiriçá, discuss how the new fields could generate “trillions of dollars” and transform Brazil’s future.

A dozen union members led off the evening with a rendition of Brazil’s national anthem, then “It Will Happen,” a song written for the movie that blends bossa nova and samba rhythms.

If oil “is very deep under the sea,” they sang, “will we play to win?”

The new nationalistic fervor recalls the 1970s and 1980s, when Brazil’s military government declared that “the Amazon is ours” to ward off foreign encroachments on the rain forest. 

Hmmm..... it is certainly possible that Brazil can avoid the Bolivarian conundrum.  Many national oil companies (NOCs) are as well-run as private oil companies and with strong anti-corruption controls.  

Those NOCs are the exception rather than the rule, however -- and the history of Brazilian governance does not fill me with confidence (the fact that Lula's choice to succeed him is also "the chairwoman of the Petrobas board of directors" could cut both ways as well).

The use of nationalism to gin up support for this strategy is also worrisome.  Nationalism is a powerful force, and to be fair to Lula, there's no evidence that he's whipping up nationalist fervor to support aggressive foreign policy actions.  In my experience, however, nationalism provides excellent political cover for all kinds of institutional and economic chicanery.  Which means that the odds of the best-laid intentions going awry in this oil project seem pretty damn high to me. 

Developing......

The New York Times' Simon Romero reports that Venezuelan leader Hugo Chávez is doing a 180 on allowing investment from evil rapacious capitalist pig-dogs Western oil companies:

President Hugo Chávez, buffeted by falling oil prices that threaten to damage his efforts to establish a Socialist-inspired state, is quietly courting Western oil companies once again.

Until recently, Mr. Chávez had pushed foreign oil companies here into a corner by nationalizing their oil fields, raiding their offices with tax authorities and imposing a series of royalties increases.

But faced with the plunge in prices and a decline in domestic production, senior officials have begun soliciting bids from some of the largest Western oil companies in recent weeks — including Chevron, Royal Dutch/Shell and Total of France — promising them access to some of the world’s largest petroleum reserves, according to energy executives and industry consultants here.

Their willingness to even consider investing in Venezuela reflects the scarcity of projects open to foreign companies in other top oil nations, particularly in the Middle East.

Chávez's actions pleasantly surprise me, because retrenchment and realpolitik were not the only option.  One could have envisioned Chávez reacting by ratcheting up tensions with neighbors as a short-term solution.  Although I suspect most Americans would prefer to see the back of Hugo, this kind of behavior suggests that Venezuela is never going to rise to the problem level of, say, Iran. 

The willingness of the oil companies to re-enter the fray in Caracas is more intriguing.  In recent years there has been a lot of loose talk about how holders of capital also hold the levers in a bargaining situation with debtors, because the latter must do what they can to please the former. 

In fact, recent research suggests that when debtors violate their contracts, the price to be paid is often much less than anticipated.  Chávez certainly seems quite aware of this fact. 

What puzzles me is that Chávez's reputation does suggest that the moment oil prices go up again, he'll reverse course yet again and put the screws on his foreign investors.  In understand that exploration opportunities are scarce, but the willingness of these firms to go back is item #345 on Things I Do Not Understand About Energy Markets. 

The New York Times' Jad Mouawad reports that falling oil prices is putting a crimp in oil exploration: 

From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets. In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling. But the project delays are likely to reduce future energy supplies — and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.

So, let me see if I have this right:

1. If oil prices are sky-high, the energy sector explains that it will be slow to develop new fields, because exploration requires massive fixed investments and no one knows what the price of energy will be 5-10 years from now;
2. If oil prices are low, the energy sector explains that it is unprofitable to develop new fields because... energy prices are low.

Seriously, am I missing something here?  Given lag times and the natural propensity to consume more of something when prices are low, doesn't it make sense to "drill, baby, drill" when the price of energy is low?  Questions like this are why I could never hack it as an economist.  UPDATE:  Kevin Drum and Andrew in the comments section provide some cogent, but hardly reassuring, replies. 

Hey, remember the last few years, when some Iranian leader would issue a bellicose statement and oil prices would rise by $10?  IAh, the good old days of 2006 2007 early 2008.  In 2008, tactic doesn't seem to be working .  Consider the following sequence of events.  First, there's the bellicose Iranian rhetoric: 

Iran warned Monday that it could easily close a critical Persian Gulf waterway to oil shipments and said that it had a new long-range naval weapon that could sink enemy ships nearly 200 miles away. The warning, by the head of Iran’s Revolutionary Guards, followed the weekend expiration of an informal deadline for Iran to respond to an offer of incentives from six world powers to stop enriching uranium.

The United States, which has warships deployed in the Persian Gulf, has said new sanctions should be imposed on Iran for failing to respond to the deadline. On Monday, a State Department official said the six powers — the United States, Russia, China, France, Britain and Germany — had agreed to pursue new sanctions, but it remained unclear what they might be or which nations would take part. In comments carried by the semiofficial Iranian news agency, Fars, Gen. Mohammad Ali Jafari, the head of the Revolutionary Guards, said Iran was capable of imposing “unlimited controls” at the Strait of Hormuz in the Persian Gulf, an important oil route. “Closing the Strait of Hormuz for an unlimited period of time would be very easy,” he was quoted as saying. “The Guards have recently tested a naval weapon which I can say with certainty that the enemy’s ships would not be safe within the range of 300 kilometers,” General Jafari was quoted as saying. “Without any doubt we will send them to the depths of the sea.” General Jafari gave no details about the type of weapon tested, but he said it was Iranian-built and “unique in the world.”

Sounds pretty scary, right?  In fact, this kind of threat is much more oil-specific than the generic "come and get us" rhetoric that Iranians have been using for a while.  Oil markets must have trembled, right?  Not so much: 

Crude oil fell to $118 a barrel on speculation Tropical Storm Edouard will leave U.S. oil rigs and refineries undamaged and as commodities prices tumble because of the slowing U.S. economy.

Iran is not mentioned anywhere in the article.  This is a good news/bad news kind of story.  The good news, as David Victor points out in Newsweek, is that there are hard limits on what oil-producing countries can do to influence energy prices.  The bad news is that the reason oil prices have been falling as of late has to do with declining demand.  Part of this is a substiution effect -- consumers choosing to spend/save money on different things rather than energy.  Part of it is clearly an income effect -- in an economic downturn, people can't afford the energy.