Coyote Blog

Over the last year or so, I have been relatively optimistic for a relatively significant drop in oil prices over the next 2-4 years followed by a number of years of price stability at this lower level.  This would be a direct analog to what happened in the 80's after the 1978 oil price spike.

One argument readers have made against this scenario is that a much larger percentage of the world's oil potential is controlled by lumbering state oil companies than was the case in 1978, particularly given the US Congress's continued cooperation with OPEC in keeping US oil reserves off-limits to drilling.  The theory runs that these state run oil companies have a number of problems:

• they move and react very slowly
• they don't have the technical competence to develop more difficult  reserves
• they don't have the political will to divert oil profits from social programs (including oil industry over-employment and patrimony) to capital spending

This latter issue is a big one - even keeping current fields running at a level rate requires constant capital and technological infusions.  I have written about this issue before, and I am sympathetic to this argument.  Here is Jim Kingsdale on this issue:

Events in Iran since the Revolution are an eery echo of what has
happened in Venezuela since the advent of Chavez.  Skilled workers and
foreign capital and technology have fled.  Corruption has become
rampant  along with incompetence.  Production of over 6 mb/d fell to
below 3 mb/d after the Revolution and is currently about 3.8 mb/d.  The
pre-revolutionary head count of 32,000 employees has grown to 112,000.

Since the Revolution Iran has exported $801.2 billion of oil but
nobody knows where that money has gone.  "Certainly none of it was
invested in Iranian oil infrastructure which badly needs renovation and
repair, upstream and downstream."  The author claims the Iranian
petro-industry is "on the brink of bankruptcy" although such a claim is
not documented.

It is clear that Iran, Venezuela, Mexico, Nigeria, and Iraq together
represent an enormous percentage of the world's oil deposits and
production that is being mismanaged.  The political and management
dysfunctions in all of these countries simultaneously is a major reason
for the world's current energy crisis.  If these countries all operated
in a standard capitalist mode, I suspect oil would be below $50 a
barrel and the ultimate supply crisis might be five or ten or even
fifteen years beyond when we will see it fairly soon.  There seems to
be little hope that any of these countries will make a dramatic change
in their oil productivity soon.

I am coming around to this argument.  I still think that oil prices are set for a fall, but lower prices may not last long if this analysis is correct.

Update: Of course Maxine Waters would like to add the United States to this list of countries with incompetent government management of oil reserves.