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***Oil's Incompetent Journalists

by Starvid Fri Aug 18th, 2006 at 06:39:02 AM EST

Every now and then you read something so profoundly stupid that you just sit there as your jaw hits the keyboard. Like this article.

Natural petroleum is a limited resource, but producing synthetic petroleum in the lab is easy. The Germans were making synthetic diesel for military use in WW2. With enough cheap energy, it can be done with no raw materials but water and carbon dioxide.  Best yet -- the process is carbon neutral... the CO2 generated when the oil is burned is equal to the CO2 used to produce it.

Wow, yeah. Every one knows that when the oil crisis arrives (which won't happen, see above) energy will become so extraordinary cheap we will be able to extract coal from carbon dioxide in the air and make diesel out of it.

And they wrote that just after bantering about abiotic oil. Phew.

Promoted by Colman


The Germans didn't make diesel out of air and water. They made it out of fossil coal. Carbon neutral indeed.

Other times you just have the feeling the journalist in question had a deadline really soon or just didn't care about the subject. If you read the latest Newsweek ("the greening of America" or something like that) you'll know what I mean. Lots of pretty pictures, no graphs.

On top of that I just found another absurd Newsweek article, but this time the absurdity might well be some incredibly clumsy spin.

And as Jerome is not around at the moment I'll have to dissect the article by myself.

Why are oil prices so high? Partly because the industry is dominated by incompetent monopolies.

Remember the giant companies that once dominated the world oil market as the Seven Sisters? Of course, they have long since been expelled as owners from the Middle East to Mexico, and must now beg and barter for access to oil. The majority stake in world oil reserves that they held is now in the hands of nation-states. The result is a critically important anomaly: a vast global free market for oil, in which all the power players are nationalized, often highly inefficient state monopolies. One might call them the Seven (Or So) Sovereigns.

These new giants are far less controversial than the old ones. As oil prices continue to hover around record highs of $75 a barrel or more, the heated public discussion in the West still is focused on oil states and multinationals: Saudi Arabia and ExxonMobil, not Saudi Aramco. Yet, shielded from market forces, the state oil companies have a very clear impact on prices. In comparison with private companies like ExxonMobil, they pump a smaller share of their reserves, using less modern technology, with much more erratic management, and spend much less on finding new wells. All of this works to tighten supply, raise uncertainty and push up prices.


Obviously, a nation should consume it's finite resources as fast as possible. Then the current population can buy hamburgers and plasma TV's. Why care about future generations?

My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel.

From the market viewpoint, the problem with state oil companies comes down to "inefficiency," says Jean-François Seznec, an oil expert at Columbia University. "The market fears that there will not be enough oil in the future, that production will decline because of these inefficiencies, and prices react." From the largest (Aramco) to the smallest (the Libya National Oil Co.) the Seven Sovereigns face no shareholder pressure to maximize short-term profit and are husbanding their oil--pumping 4 percent of their proven reserves each year, half as much as the big multinationals.

Inefficiency = not maximising short term profit.

Husbanding one's oil to maximise long term profits is what I thought would be economically efficient in an era of rapidly increasing oil prices. Boy was I wrong!

Also note that the "market" is the buyers of oil. The sellers do not count, as it is a problem that oil prices rise. If I sold oil on the market, I would like oil prices to rise. But that's just me.

The stifling impact on supply is growing, as state oil companies are now often the winning bidders in the hunt for new reserves worldwide. Newly aggressive Russian and Chinese buyers are active from America to Africa, and even smaller state oil companies like Norway's Statoil are now regular players. As more reserves end up in the hands of state firms that are in no rush to deliver them to market, supply will be increasingly restrained.

Here I thought the problem was that State companies are in no hurry in pumping their own reserves, not that they were grabbing foreign contracts right in front of the nose of ExxonMobil.

Remember everyone, energy national champions are useless and should be privatized!

The Seven Sovereigns are also increasingly reluctant to open up at home. This is true for all of them from Russia, which has been blunt about its intention to protect oil as a national strategic asset, to Saudi Arabia, which in 1998 had signaled (under Western pressure) plans to release Aramco's grip on oil and gas reserves. Instead, they played the major bidders off one another and "dragged their feet until the big boys were no longer interested," says Edward Chow, an oil consultant and former Chevron executive who has worked closely with Aramco.

Now they have me confused again. If it's wrong (or "blunt") to consider oil a strategic asset, then what's the 5th fleet doing in the Persian Gulf area (together with more than 150.000 soldiers...)?

Many big state oil companies are equally slow to adopt the latest technologies, designed to suck crude out of the cracks and folds of aging shafts. Those in Libya, Venezuela and Russia are badly in need of foreign help to rebuild dilapidated infrastructure and upgrade technology. The result is that while private companies typically recover 50 percent of the oil in a well, national companies recover only 20 percent. "They had no reason to use advanced technology because they were blessed with such ample supplies," says Leonardo Maugeri, a senior vice president for the Italian energy company ENI. For example, the second largest oil well in the Persian Gulf--Kuwait's Burgan--is plumbed by derricks that were first erected by the original Seven Sisters in the 1950s.

"They had no reason to use advanced technology", but we think they should do that anyway. Can we buy those national oil companies by the way?

And no, Saudi Aramco does not posses any advanced technology. All those reservoir engineers with their 4-D goggles are just sitting around in Dhahran, doing nothing.

Often state oil companies confront nationalist opposition to modernizing, particularly if it means more foreign influence. The Kuwait Petroleum Co. has for years been promoting a $7 billion, 25-year plan to nearly double its capacity but has met resistance from politicians who fear foreigners out to "steal" Kuwaiti oil. So many skilled oilmen have left Iran since the 1979 revolution that President Mahmoud Ahmadinejad was hard pressed to find even one clearly acceptable candidate to become Energy minister last year.

Now say after me: energy is a commodity like any other. It is not in any way strategic. There is no reasons the government should have any kind of special influence over it.

And we should privatize la Force de Frappe.

It's also interesting that "modernizing" is the same thing as increasing oil production. Here I thought 50's vintage oil fields could be modernized while still husbanding their reserves.

National oil companies are also far more opaque than private companies, adding to uncertainty about future supplies. Few divulge detailed accounts of the size of their oil reserves, as publicly traded companies are required to do by stock-market regulations.

Yes, quite so.

Even Saudi Aramco, widely regarded as the most transparent of state-owned oil firms, is not entirely forthcoming about the size of its wells, fueling speculation about the sustainability of the world's oil supplies.

I have to say that "not entirely forthcoming" is a bit like one of those famous British understatements. "State secret" and "totally off limits to foreigners" is how I'd describe it.

Often the Seven Sovereigns are used as cash cows to bankroll social programs, not to reinvest in oil supply. Most state oil companies are obliged to send their revenue directly to the Finance Ministry. Venezuelan President Hugo Chávez, for example, is famous for using oil money to fund his socialist agenda, but the practice is now quite common, from Iran to Russia. With much of their revenue diverted to political ends, state oil companies spent about a third less on exploration in 2003 than the big multinationals did.

While this is certainly a problem in many countries, isn't it a bit hyporcritical to complain on how others deal with their own property, as property rights are supposedly the most sacred of all rights?

Consider Pemex of Mexico. The world's fourth largest oil and gas producer must transfer nearly two thirds of its $66 billion in yearly revenue to the government in royalties and taxes, supporting a third of the federal budget. Its total debt is four times that of ExxonMobil Corp., and output from its biggest oilfield will begin to taper off this year--by as much as 14 percent annually, according to some estimates. Fitch Ratings has warned that the company, threatened by debt and declining reserves, needs greater corporate autonomy and freedom to enter into joint ventures and partnerships globally.

Please observe how casually they mentioned that for "the world's fourth largest oil and gas producer [...] output from its biggest oilfield will begin to taper off this year--by as much as 14 percent annually". Also observe that they didn't mention that this field, Cantarell, is the second biggest field in the world and produce more than half of Mexico's ("the world's fourth largest oil and gas producer") oil.

Nor did they mention what would happen to the welfare of the Mexican people when a third of the federal revenue starts falling by 14 % on an annual basis.

"Pemex's job is to provide oil cheaply, not make money off it," says Manouchehr Takin, an analyst at the London-based Centre for Global Energy Studies. "It's more a civil-service organization.

Now, we mustn't let the Mexicans decide for themselves how the nation's oil riches should be distributed.

That's what happens when governments interfere beyond their regulatory responsibility."

Ah yes, where have we heard that before.

Get used to it. In the global oil market, the state--for better or worse--is the guiding hand. And it's going to cost you.

Aha. That was what it was really all about.

Now this became more of a rant than a real dissection so I am sure you all have smart and interesting comments on things I missed, misunderstood, miscalculated and so on and so forth. :)

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That's really quite special.
by Colman (colman at eurotrib.com) on Wed Aug 16th, 2006 at 03:49:50 AM EST

it's simple, really: free markets are good for suppliers, to bring prices down. The other kinds (notably competition amongst buyers) are not to be entertained as "markets" because they are a pain for "our" companies - those that influence what's in the papers...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Aug 16th, 2006 at 05:28:46 AM EST
I like this quote:

Price fixing reminds me of people that cry "price gouging!" when a hurricane comes through, knocks out power to the water pumping stations, and intelligent business men show up on the street corners hawking $30 bottles of water. Sorry, liberal hippies, but demand is demand and supply is supply! This guy has water, because he was smart enough to stock up. You have none, 'cause well, you weren't that smart! There's fifty people on this street wanting his water, but only enough for ten people. Obviously he's going to charge a high enough amount to maximize his profit!

The global economy is now being run by teenagers.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 16th, 2006 at 05:46:21 AM EST
I liked the bit about converting turkey waste to fuel:

There is actually one more method of producing synthetic petroleum using animal wastes. I recall reading recently about a process in which turkey waste was converted to petroleum when the waste products were mixed with water and subjected to moderate pressure. If I recall correctly, the process took onlyh several hours.

So much for a tiger in the tank. Cars of the future will run on poultry power!

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sapere aude

by Number 6 on Wed Aug 16th, 2006 at 08:39:27 AM EST
[ Parent ]
A whole new meaning for 'chickenhawk'.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 16th, 2006 at 11:20:29 AM EST
[ Parent ]
Oh, this one seems to be real, see Changing World Technologies.  Aapparently they have a process that converts practically any hydrocarbon based waste into oil at reasonable efficiency.  Only one plant is operating, though, and that uses turkey offal as feed stock.  

A German company named Alphakat is rumoured to have a similar, though a bit different process.  Last year, BILD (wrongly) titled that this man was converting deceased cats into fuel.  Yes, we know all the "put the tiger in the tank" jokes already.  

by ustenzel on Sat Aug 19th, 2006 at 04:42:58 PM EST
[ Parent ]
Starvid, if you don't stop thinking like this you're going to fail all your economics classes at university.

Nothing is 'mere'. — Richard P. Feynman
by Migeru (migeru at eurotrib dot com) on Wed Aug 16th, 2006 at 05:46:33 AM EST
Hey, if I get a frontal-lobotomy can I be a journalist too ?

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Wed Aug 16th, 2006 at 06:29:52 AM EST
Sorry, that's not enough. Your whole head needs to be moved from it's current location elsewhere.


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sapere aude
by Number 6 on Wed Aug 16th, 2006 at 08:25:10 AM EST
[ Parent ]
"Elsewhere"? Please specify.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 16th, 2006 at 08:46:23 AM EST
[ Parent ]
Uranus.

Nothing is 'mere'. — Richard P. Feynman
by Migeru (migeru at eurotrib dot com) on Wed Aug 16th, 2006 at 08:48:14 AM EST
[ Parent ]
Well, if I have to go that far, I might as well stick my head up...

No, forget I said that.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 16th, 2006 at 09:21:16 AM EST
[ Parent ]
Great stuff, Starvid. They keep setting up the pins, you keep knocking them down.


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sapere aude
by Number 6 on Wed Aug 16th, 2006 at 08:27:39 AM EST
It's interesting how the Newsweek article can be applied to the pro-free-market wishes of the European Commission re energy (any form, not just oil). The enemy (for ideological reasons) is of course state companies. But what's made clear in this article is a number of points about how free markets are supposed to function "properly":

  • husbandry of resources is wrong;
  • "shareholder pressure" is necessary;
  • the object of shareholder pressure is "to maximize short-term profit";
  • and, as you so rightly point out, Starvid, we are talking about a market that is organized in the interest of buyers only.

It's called an Organized-to-Suit-Us Free Market™.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 16th, 2006 at 09:18:08 AM EST
There's a lot of rubbish being put about by journalists etc who should know better.

This may be of interest.

http://uk.theoildrum.com/story/2006/8/13/71557/8571

Best Regards

Chris Cook

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Aug 16th, 2006 at 09:48:01 AM EST
This is interesting, thanks for posting.

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sapere aude
by Number 6 on Wed Aug 16th, 2006 at 11:37:03 AM EST
[ Parent ]
Amusingly, there's nothing factually incorrect in your first quoted item.

you are the media you consume.

by MillMan (millguy at gmail) on Fri Aug 18th, 2006 at 05:05:54 PM EST


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