Altes Elliott-Wellen-Forum - The Myth of 'Peak Oil'

The Myth of 'Peak Oil'

verfasst von - Elli -, 12.01.2005, 14:41

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<h3>The Myth of"Peak
Oil"</h3>
<h4 class="MsoBodyText">by Charles Featherstone</h4>
[Posted
January 12, 2005]

<img alt src="http://www.mises.org/images2/oil.gif" align="right" border="0" width="200" height="137">I
often asked about the"peak oil" theory. I've even had some
people send me junk mail predicting when the date would come. Sometime in June,
2006, I recall. (Unsolicited investment advice: go very long!) I didn't really
pay attention. And yet many do. There are websites, books, email lists,
conferences, and tracts of every sort promoting this doomsday theory (here is a google of
the subject, and, yes, the domain name peakoil.com is taken).
In millennialist language, these people say that the human race is on the verge
of a massive turning point because oil is nearly depleted. You can fill in
the rest.

The last year has been
a good year for those inclined to fear the end of oil. High prices usually bring
the worst out, and it doesn't help that Royal Dutch/Shell reduced its stated
reserves by the equivalent of 4.5 billion barrels of oil (that's Saudi Arabia's
total production for 16 months - an"accounting error" that has made
Shell the poster child for how not to run an oil company) and that a couple of
wise analysts have accused the ever-secretive Saudis of improperly managing
their reserves to the point of exhaustion. But every since OPEC gained its feet
and was able to exercise some power in the market beginning in 1973, high prices
have always prompted panic that the global oil tank is running on empty.

I'm not a geologist or
a geophysicist, so I do not know whether crude oil and natural gas are made from
biomass - the result of time, heat and pressure acting upon tons and tons of
dead things, mostly algae and phytoplankton - or whether the complex
hydrocarbons we extract from the earth are"inorganic" - the result
of time, heat and pressure acting upon chalk, water and a few other odds and
ends chemicals. I do know that the theory of inorganic crude oil and partially
renewable reserves is not widely held outside of Russia, and that the Western
majors all"publicly" base their estimates of reserve life on the
assumption that petroleum is a very finite resource, and expect current world
reserves to last between 40 to 80 years, given improved field management,
recovery techniques and relatively constant development.

There's an estimated
1.2 trillion barrels of liquid crude oil in the world - about 40 years
reserves at the rate they are currently being used (80 million barrels per day).
Of this, about one-quarter lies under the deserts of Saudi Arabia. Iraq's
reserves could be larger, but no one really knows and the Saudi reserves are
well explored. Most forecasts expect that demand to rise by 50 percent to 120
million barrels per day by 2020, though anyone who works with statistical data
will tell you that forecasts more than a year or two out are, at best, simple
guesswork. In the 150 years human being have drilled for and refined petroleum,
it's estimated we've used about 1 trillion barrels.

However, As Nymex and
Brent prices were bid up past the $50 mark last autumn, producers were pumping
about 1 million barrels per day more than consumers were using, though it is
clear that some of that"surplus" can be accounted for by undocumented
use in China and Russia. The price rise was not the result of an overall
shortage of crude, but a lack of light, sweet crude for gasoline in China.
There's a lot of sour crude in the world, more than anyone can use. More than
anyone wants right now.

Hardly empty.

It is also generally
accepted in the industry, as I understand it, that we have probably found all of
the major oil reserves that we are going to find. That doesn't mean there aren't
major reserves out there to develop - such as offshore Sao Tome or deep in
Siberia. It does mean that, most likely, knowing what we know about the Earth's
geology, there probably is not another Ghawar formation (the world largest
petroleum deposit, located in eastern Saudi Arabia) lurking out there yet to be
discovered.

This, of course, could
be very wrong. But the bet, right now, is that it is not.

But as demand across
the world rises, and the call on the resource increases, the price will likely
slowly but inexorably rise. Efficiency and conservation will buy room, but the
economic affect of using less and using more efficiently is equivalent to
increased production, and those extra barrels will be used by someone somewhere.
And for those wishing for an end to Saudi influence on the oil market, officials
with the Bush Administration have said that a 120-million-barrel-pay day world
is going to need 20 million barrels each day from Saudi Arabia, making the world
more, and not less, dependent on the Gulf kingdom. (One former Aramco executive
said 20 million barrels per day will be impossible to reach.)

Sure, there are
alternatives. There are huge bitumen deposits in Venezuela and Alberta, tar
sands that combined hold more than twice the current estimated world reserves of
liquid crude oil. But bitumen is costly to refine, a potential environmental
nightmare to extract, and right now, only a tiny fraction of the crude in either
the Athabasca oil sands or the Orinoco Belt can be recovered.

There's a lot of shale
in North America, and the process to synthesize crude from shale is fairly old
and well known. It is also water intensive, and not terribly economical right
now (because most of the shale is buried out West, where there is very little
water). The technology is pretty well established to make synthetic crude oil
from coal (lots of North American coal too) or natural gas, or even turkey guts
or pig manure - if the price is right.

But none of that
matters, because while synthetic crude, whether made from bitumen or natural
gas, makes great diesel fuel, kerosene and fuel oil (some buses in Washington,
D.C., for example, are powered by diesel synthesized from natural gas), it tends
to make really lousy gasoline. Or very little gasoline. And I cannot emphasize
enough - right now, gasoline is what everyone wants. Gasoline is what makes
the world go round.

First Things
First

The first thing to
understand about petroleum is this: crude oil is only valuable because it can be
made into other things. By itself, petroleum is virtually useless. There's very
little call to seal and waterproof wooden galleons or hurl Greek fire at one's
opponents. Now, all the products we distill and refine from crude oil -
liquefied petroleum gas (LPG or condensate, stuff like propane and butane),
gasoline, diesel, kerosene, heating oil, fuel oil, asphalt and coke - can be
derived from every grade of crude pumped out of the ground. But not every grade
of crude can be refined into the same spread of substances. Without a lot of
work, heavier, thicker, higher sulfur grades of petroleum (the bulk of the
world's crude oil, including that produced by most OPEC countries) yields very
little gasoline, while lighter, low-sulfur crudes yield substantially more
gasoline.

And gasoline, the motor
fuel of choice for most of the world's passenger cars, is what matters. The more
gasoline you can squeeze out of a barrel of crude, the greater the value of the
crude.

(Petroleum with less
than 1 percent sulfur in it is"sweet," while crude with a higher
sulfur content is"sour.")

The price you usually
see quoted for a 42-gallon barrel of crude oil - what got wound up to $55.67
per barrel in October - is the New York Mercantile Exchange (Nymex) contract
and spot price for West Texas Intermediate, a fairly low-sulfur, high-gasoline
content crude that is one of three major global benchmarks used by oil producers
as the basis for pricing. (The other two are Dubai, which is the benchmark for
fairly heavy and high-sulfur crude oil shipped, generally, to Asia; and UK
Brent, which is pumped from the North Sea and is the price benchmark for roughly
40 percent of world's crude grades.) The lighter the crude and lower the sulfur
content, the more gasoline you can get, and the higher the price the crude
commands on the market. Conversely, the heavier and higher in sulfur the oil is,
the lower its price.

For example, Light
Louisiana Sweet - a grade of crude pumped from the Gulf of Mexico - usually
costs slightly less than West Texas Intermediate (WTI), while Mars - Royal
Dutch/Shell's unofficial Gulf of Mexico sour crude - sells at a substantial
discount to WTI, what is called the sweet-sour spread.

On Tuesday, December
28, the New York Mercantile Exchange price for WTI delivered in February (the
contract month) closed at $41.77 per barrel (while the WTI spot price for
delivery at the huge oil terminal complex in Chushing, Oklahoma, was $41.75 per
barrel). That same day, Light Louisiana Sweet traded at $41.68, Mars from the US
Gulf at about $33.30 per barrel, Alaska North Slope crude (which has a fairly
high sulfur and heavy metal content) for delivery to California traded at $34.97
per barrel, low-sulfur Nigeria Bonny Light posted $40.08 per barrel, high-sulfur
Dubai finished at $35.63 and Russian Urals (another moderately high-sulfur
grade) closed at $37.08.

Why buy Light Louisiana
Sweet when Nigeria Bonny is $1.60 cheaper? Simple. It will cost more than $1.60
per barrel to get that Nigerian crude to the US - possibly much more.

I have to admit at this
point, I know very little about how the actual shipping of petroleum - and,
more importantly, what it costs - works. In most non-term transactions, the
buyer takes title of the oil at the producer's oil port, puts it on a tanker,
and is at the whims of the market all the way home. In some instances, the
seller assumes the cost of shipping and insurance as a way of encouraging sales.
On December 28, Ecuador Oriente high-sulfur crude for shipment to the Gulf Coast
was quoted at a bid-ask (the lowest price a buyer was willing to pay versus the
highest price the seller wanted; it does not mean the crude actually traded) of
$29.94-$30.09, with the buyer assuming all the additional costs of shipping
and insurance. That same day, the same grade of crude for delivery to the US
West Coast quoted at a bid-ask of $29.77-$29.87, with the seller picking up
the cost of freight and insurance. That difference could mean a couple of things
- Oriente is more useful in a Texas refinery than it is in a California one;
or, possibly, the Ecuadorians are much more interested in cultivating California
customers.

Just about everything
that can be traded in this market is: the crude itself, oil contracts, gasoline,
heating oil, jet fuel, residual fuel oil, asphalt, coke, tanker space, and any
kind of derivative or spread between two or more types of contracts. This is the
real work of civilization, the trading of commodities. It's the work that makes
all others possible. Virtually everything in your home is made from something
that has been bartered, brokered or bet on by someone somewhere.

The difference between
a futures market, like the Nymex or the International Petroleum Exchange in
London, and a forward market is that most of the trading on a futures market is
speculative, with very few contract traders seeking actual delivery of actual
oil at the end of the month when contracts settle. In fact, as speculative
ventures, more paper contracts trade than available oil. This is a money-making
venture, used by investors, funds, oil companies and governments to hedge their
bets and cover any possible losses they might incur elsewhere in the supply
chain. Forward traders, however, are actually hedging future production or
demand and hope to take possession of real oil (or sell real oil) - or
soybeans, or cocoa, or electricity, or whatever - at a later date. Speculators
are important to a market because they bring liquidity and information as they
place their bets on whether a commodity will increase or decrease in value.

Hedging is even an
issue with long-term contracts. It takes about eight weeks for a great big boat
(a technical term) full of Arabian crude to reach the Louisiana Offshore Oil
Port (LOOP) from the Arabian Peninsula. Eight weeks, in the market we have today,
is an eternity. Buyers want to make sure that oil they may have paid $38 per
barrel for at Yanbu is not suddenly worth only $35 per barrel when it reaches
LOOP. Sellers like to make sure they get a cut if that $38 per barrel oil is
suddenly worth $40 when it arrives. Sharing part of that cut is the price of
doing business with a reliable, low-cost supplier.

Some producers, like
Mexico and Saudi Arabia, do not sell their crude on international spot or
futures markets, but instead work very closely with buyers and every month
announce the prices of their different benchmark crude grades in a process
called nominations. Saudi Arabia, for example, has worked very hard over the
years to prevent any kind of spot trade in its crude (through contractual
arrangements that prevent resale or diversion of cargoes to alternative
destinations) and has historically discounted the prices of all its crude grades
to US buyers with refineries on the US East and Gulf coasts, as part an informal
arrangement with American governments going back a long, long way.

The Evil Empire?

Which brings us to the
matter of OPEC, the Organization of Oil Producing and Exporting Countries, the
evil cartel I'm certain every American has cursed a time or two. (For the record:
Venezuela, Nigeria, Algeria, Libya, Iraq, Iran, Saudi Arabia, Kuwait, Qatar, Abu
Dhabi, Indonesia). It's not the nastiest collection of governments in the world,
but it is not the Lutheran World Federation either.

OPEC was created in
1960 in response to a major price cut imposed upon oil-producing countries by
the major Western oil companies, which at the time controlled most aspects of
this business, from upstream production, to shipping, to refining, distribution
and retail marketing. In theory, the majors accepted government ownership of
sub-surface mineral rights (outside of Anglo-American common law, as I
understand it, most legal systems state that subsurface minerals rights are
owned by the state, regardless of who owns the land) but acted as if their
concessions were their private property. A bad move when that property is
not really yours.

OPEC was a fairly
useless organization during its first decade, though the late 1960s saw the
beginning of the lengthy nationalization struggle between governments and
private oil companies - a struggle the governments all"won" by the
late 1970s. By creating huge national oil companies to manage that resource, oil
producing governments would eventually discover how complicated and expensive
effectively managing that resource really is.

Only one of OPEC's big
state-owned oil companies is involved extensively in exploration and production
outside their home countries (Algeria's Sonatrach is heavily involved in
liquefied natural gas projects across the Americas). All of them need the
technological expertise of the majors, whether it's Qatar Petroleum's joint
venture with ExxonMobil to expand the RasGas and QatarGas liquefied natural gas
terminals, Aramco's joint venture with Sinopec and Rosneft to develop natural
gas in the Empty Quarter, or Shell and ChevronTexaco's extensive involvement in
developing the tar sands deposits of Venezuela's Orinoco Belt.

The great emotional
issue for most oil producing states is upstream investment - the actual poking
of holes in the ground. This resource is considered a hard-fought national
patrimony in the way many people in this country view the Panama Canal - very
emotive and not terribly rational. Saudi Arabia may allow foreign firms to drill
natural gas wells, but the drilling of oil wells in the magic petroleum kingdom
is absolutely out of the question. Even talking about it is haram.

Ditto in Mexico, where
the issue of declining production threatens to turn our neighbor to the south
into an oil importing country in the next ten years (Mexico is the second
largest supplier of crude to the US). There's probably plenty of oil on Mexico's
side of the deepwater Gulf, but state-owned Pemex simply does not have the money
to invest in deepwater drilling. Mexico's Congress loots Pemex every year (Pemex
provides the state with about one-third of its annual revenue), leaving the
company with very little to invest in increased production, while the Mexican
constitution currently forbids direct foreign upstream investment of any kind in
the energy sector.

While there have been
times when OPEC members have been disciplined enough to effectively leverage the
market in their favor, the organization doesn't really have the clout or the
continued long-term discipline (they cannot even agree on someone to head the
organization right now!) to do it constantly or consistently. A market mechanism,
of sorts, works between consuming and producing nations, especially with the
coming in the 1980s of the global spot market for crude oil.

In addition, each
producing country has its own strategy to follow as well, because the size and
quality of their reserves differ as well. While the organization has had its
hawks in the past, who believe that consuming nations are hooked and can be
gotten for all they are worth (Qadhdhafiy's Libya was a good example of this in
the 1970s, as was the Shah's Iran), most understand the laws of economics: if a
good is too expensive, consumers will find an alternative. Not necessarily to
oil, but to the source of that oil. The price shock of the 1970s spurred
development in the North Sea, northern Alaska and Canada, and now everyone
understands the need for a very diverse resource base. Which explains why oil
companies - especially small ones - are drilling in such varied places as
offshore Mauritania and Papua New Guinea.

The last few months
provides a really good example of just how little power oil producers have to
dictate prices, even in a market as hard pressed for crude as the world is right
now. Recently, Ecuador's Congress complained about the low prices received for
the country's crude oil exports (see above), and unilaterally vowed to raise the
price by nearly one-third. A price at which there were no takers. It quickly
came back down.

And anyway, a country
with potentially long-lived reserves - Abu Dhabi, Saudi Arabia, Kuwait,
Venezuela - doesn't want or need prices as high as they can go because they
are more interested in market share and ensuring a continued demand for their
product. So, for example, some years ago, Aramco and Texaco formed a joint US
refining venture, Motiva, which became a Shell operation when Chevron merged
with Texaco. So if you buy Shell gasoline on the East Coast of the US, there is
a good likelihood you are buying gasoline refined from Saudi crude.

There are all kinds of
marketing arrangements in the US (and elsewhere), some much less secretive than
Motiva (you'll notice there is no Motiva-brand gasoline out there). Stop into a
Citgo station east of the Rockies and you are likely filling up with gasoline
refined from heavy sour Venezuelan crude (the Venezuelan state oil company PDV
owns Citgo). And you're helping out Hugo Chavez's"Bolivarian
Revolution" too. OlÃ©!

OPEC's power has also
been pretty thoroughly cut by the large number of non-OPEC producers, like
Russia, Norway, Mexico, Canada, and up-and-coming producers like Brazil and
Equatorial Guinea. Today, OPEC only produces about 30 million barrels per day,
less than half of the 80 million barrels consumed every day. The organization
has very little"spare capacity" - the ability to rapidly increase
production to make up for any unexpected shortfalls - outside Saudi Arabia and
Abu Dhabi. For the last year at least, virtually every nation that can produce
crude oil has been producing flat out. Which left markets very uneasy. In the
event of another significant crisis - say, a US attack on Iran or collapse of
the Saudi government - the price of crude oil would skyrocket.

Consuming nations
themselves hold a lot of power too; we are not simply victims of the producers
we like to think we are. After the 1973 oil embargo, non-OPEC production
expanded rapidly, responding to higher prices that made higher-cost production
economically viable. Consumers can change their buying patterns, like the
gasoline-to-diesel switch going on in Europe (prompted by government action). Or
they can conserve. Or they can stick an aircraft carrier battlegroup offshore a
producing country and threaten it with mayhem and disaster if it doesn't behave.
There are all kinds of ways for consumers to influence contract terms. This is
why even today's price hawks like Venezuela and Iran are seeking successful and
stable long-term markets for their crude oil.

Part of that long-term
marketing effort is to build or modify refineries so they can most efficiently
process streams of crude from particular producers. Close to three-quarters of
refineries in the US, especially those on the Gulf Coast, are optimized to use
heavy crude, to squeeze as much gasoline out of a sludgy barrel of Venezuelan,
Ecuadorian or Mexican crude as they possibly can. By applying heat, pressure,
adding steam and hydrogen, and using various catalysts, refiners can take
low-gasoline content heavy crudes and get as much gasoline out of them as they
can. But there's a trade off, because for every extra gallon of gasoline you get,
that means less kerosene and diesel fuel and more coke (near-pure carbon ash).

In fact, refiners
specializing in heavy, sour crudes can fairly easily maximize their profits when
prices for light, sweet crudes and gasoline are high. And US refiners like Citgo
and Valero have done just that, making great hay out of the fact that they can
extract as much gasoline as possible from a barrel of sour crude.

Refineries in Europe
can do this too, only European governments and automakers made the decision some
time ago to rely more heavily on diesel fuel. Diesel, a middle distillate like
kerosene (jet fuel) and heating oil, is easier and cheaper to refine from even
sludgy oil. That allows European refiners to diversify their crude oil sources
and reduce dependence on light, sweet crude. That lowers their costs, though
tighter anti-sulfur standards negate that somewhat. Because of this, Europe has
been a significant source of base gasoline blendstock for the United States, an
important development since it is unlikely that a new refinery will ever be
built anywhere in the US ever again.

(Saudi Arabia has
frequently noted - or taunted, depending on how you want to look at it -
that US refining capacity has not kept pace with American demand for gasoline,
diesel and heating oil. Recently, Aramco offered to build and pay for two brand
new refineries in the US to help meet that demand - on the condition that
someone else obtain all the necessary environmental permits first or that the
federal, state and local governments involved fast-track the process and protect
it from legal challenges. It was a generous, unrealizable, and extremely cynical,
offer.)

However, nearly all
Asian refineries outside of Japan and South Korea - especially refineries in
China and India - are incapable of producing anything but straight-run
gasoline, and are heavily dependent on light crude to fill the gas tanks of the
increasing numbers of vehicles on their roads. A lot of that crude comes from
West Africa, especially Nigeria.

As demand in China has
heated up, the price of light crude zoomed to meet that demand, and the
sweet-sour spread expanded considerably. China did not need fuel oil for power
plants (it can get plenty of crummy crude for that). But Chinese motorists do
want gasoline.

Driving East

In fact, 2004 could
very be remembered as the year that American consumption no longer drove the
global crude market, while Chinese consumption did.

It isn't that America
no longer matters. We are, and will remain for some time, the world's largest
oil consuming nation. Americans use about one-quarter of the world's 80 million
barrel per day output. But the serious, money-making growth is no longer here in
North America. International oil companies see a US market that is already
saturated by automobiles (and increasingly interested in lower-mileage cars),
while an increasingly wealthy China is busily trading in its bicycles for cars,
light trucks and SUVs. ExxonMobil, the world's largest publicly traded oil
company, has already identified China as the growth market of the next two
decades, and believe China is ready for more complex refineries (that can handle
heavy, high-sulfur crude - a net plus for everyone, as it would take pressure
off high light, sweet crude prices), oil terminals and service stations.

The growing Chinese
demand helped boost crude oil above $40 per barrel earlier this year, and a
combination of strong Chinese demand, instability in Iraq, off-and-on unrest in
Nigeria, labor problems in Norway, the Russian government's vendetta against
Yukos, and Hurricane Ivan's damage to Gulf of Mexico production, propelled crude
futures to their record late October close of $55.17 per barrel. The pressure
only began to relent when US crude inventories figures began to rise (more
government data), though the bubble was really pricked by an announcement from
China's central bank raising Chinese interest rates - hopefully slowing the
red hot demand for everything from oil to wheat to steel - and smooshed flat
by the collapse of a major Chinese trading firm, China Aviation Oil.

China Aviation Oil was
the country's largest crude and refined products trading firm, and while I don't
know much of the story about the company's demise, I roughly know that they put
when they should have called and called when they should have put. For anyone
not familiar with the language of commodities trading, that means they bet that
prices would go down when they went up and bet they would go up when they went
down. Upon its demise, brought on after the government in Beijing refused to
bail the company out (crony communist rulers willing to allow a big company to
go bust; would our crony capitalists be so bold?), the company had staked out
$500 million in bad positions, mostly in West African light, sweet crudes.

Some believe that when
it is all over, China Aviation Oil may rack up $1.5 billion in losses.

A lot of crude oil
traders, especially those east of Suez, had to quickly unwind long positions
designed to take advantage of China Aviation Oil's rapacious need. A large
number of tankers full of West African crude were suddenly stuck without
destinations. Those tankers were not unwanted for very long, however, and most
got snapped up and sent to alternate destinations in the Americas and Europe.

Logic dictates, however,
that even with the demise of China Aviation Oil, demand in China for gasoline
has probably not really fallen any. Eventually, West African crude exports to
China will pick up as other firms step in to fill that demand. Whether that will
provide any more oomph to crude markets in the coming year remains to be seen.

The Iraq War

Now, I know a fair
number of people believe that the invasion and occupation of Iraq was all
about oil. Specifically, it was all about making sure that exploration,
production and development contracts would go to the likes of ExxonMobil,
ChevronTexaco, ConocoPhillips and BP (which is as much an American company now
as it is British, given it annexed what used to be Standard Oil of Ohio and
Standard Oil of Indiana) as well as a handful of other"smaller"
corporations (let's never forget that wherever a taxpayer trough overflows,
there's Halliburton ready to gorge itself).

(It doesn't help to
think of the supermajor oil firms as"American" companies. They are
international oil firms with US addresses, and they specialize in selling crude
and refined products to paying customers. Twenty years ago, even ten years ago,
that was the same as selling to Americans. It is not the same thing today.)

I doubt very seriously
anyone at Exxon called the White House and said"invade Iraq for us so we
can get exploration and production contracts." If there were commercial
quantities of oil in Hell, Exxon executives would not call God and demand regime
change. They would buy an extremely nice lunch for the Devil, and they would
talk contract and concession terms. Several years ago, at an Iran-US relations
shindig on Capitol Hill, I ran into a senior Conoco executive who told me his
company spoke weekly with Iranian officials about possible investment in Iran. I
have no doubt that ConocoPhillips still maintains its access to Tehran in the
event that, someday, the sanctions come down and they are allowed to work in
Iran.

(Does anyone remember
how funny it was 20 years ago when we all learned that Cuban soldiers fighting
on behalf of the Marxist government of Angola were guarding the Chevron
concession - the concession that earned Angola the hard currency to pay for
those troops?)

It isn't that any US
oil company would say"no" to Iraq contracts if the situation shaped
up there and contracts came their way. But Iraq is a mess right now, and is
there is no security - political, legal or physical - to guarantee a return
on a multi-billion dollar investment. It's unlikely that any of these companies
asked for this invasion because they all prize stability - the stability of
contractual arrangements, of a regular return on capital, of not getting their
employees killed and their equipment blown up - above nearly anything else.
Even the stability guaranteed by very nasty governments. Dealing with the"devil,"
whatever headgear it wears, is pretty common in the oil business.

But there is an oil
component to the invasion and occupation, and I believe it is this: the United
States, through invading and occupying a nation with significant oil reserves,
would show the world - especially the up-and-coming consuming nations of China
and India - that in the event that push comes to shove, and this resource gets
scarce, Americans come first.

"Everyone else
gets in line behind us. If there's any left, we'll make sure you get some."

Now, I'm fairly certain
that a fair number of Americans will high five and go,"Yeah dude, kick ass!
That's our oil! We need it!" But this muscular mercantilism is hardly the
"rule of law" we say we believe in and that we claim we're fighting
for. Unless, of course, the"rule of law" is whatever rules and laws
give us whatever we want at the time. Which is what I think it means sometimes.

I could point out that
crude oil formations underneath the Saudi desert, or Lake Maracaibo in
Venezuela, or wherever, aren't our property - even if they aren't private
property per se - and therefore we are no more entitled to that crude
than a ravenous fat man is entitled to a free meal everywhere he goes. However,
the militant mercantilist is unlikely to care about such niceties, and is
probably happy knowing his government is willing to stick guns in peoples faces
and demand they fork over their property because"we need it more."

If you are a Chinese
oil company, trying to fuel one of the fastest growing economies in the world,
how do you deal with this? The People's Liberation Army cannot hope to match US
military power, not now, and likely not in 20 years. If it comes to bullying for
crude - high-stakes commodities extortion - China simply won't be able to
compete.

I have every reason to
believe, however, that the Chinese are betting there will come a day when we are
so bankrupt that we won't be able beg, borrow or steal a junkload of lowland
Vietnamese robusta coffee and a container load of broken rice intended for Cuba.
Or they are betting that polite paying customers - customers with cash, as
opposed to promissory notes - will easily buy what a bully can only dream of
stealing.

Chinese oil and gas
firms have been building extensive business connections across the world, from
upstream investment in Iran to partnering with Brazilian state oil firm
Petrobras to build natural gas pipelines (China is already a major buyer of
Brazilian crude). Chinese firms are interested in building a crude oil pipeline
across Colombia so that Venezuelan crude can be loaded onto China-bound tankers
at a Pacific Ocean port. And Chinese firms are talking about investing $2
billion to expand development of the Athabasca oil sands in northern Alberta.
Hong Kong tycoon Li Ka-shing already owns a huge stake in Canada's third-largest
oil firm, Husky Oil, and is thinking of buying more. They are doing this, they
say, to help secure future Chinese crude oil needs.

Keep in mind that,
right now, Canada is the largest supplier of crude oil to the United States.

Will We Run
Out?

So the question is not
"when will the crude oil run out?" but"how can we best use the
petroleum we have until other economically viable alternatives present
themselves?" (I'm not holding my breath for fuel cells any time soon.) That
becomes what folks here in Washington call a"policy question," which
leads to think tankery, publication of"papers" and funny little books
called monographs, conferences, government initiatives, and all manner of other
sundry evils.

We cannot ignore the
fact that this an industry interlaced with government from top to bottom,
whether we are talking about the huge state-owned firms of the big producing
nations or our own heavily regulated supermajors. That is the reality,
lamentable and regrettable as it is.

But we need to
remember a few things.

First, whatever ends up
replacing petroleum will come in its own good time, later than we'd like but
probably sooner than we expect. It will come because it stores energy and power
better than gasoline does and more cheaply to boot. It will come with some
tremendous benefits and some unfortunate drawbacks. Consider as you lament the
evils of crude oil: the fairly accidental discovery of kerosene and expansion of
the refining process in the second half of the 19th century saved whales from an
early mass extinction while at same time making nighttime light and winter heat
affordable to even the most impoverished parts of Asia, Africa and Latin
America. Gasoline itself was originally a waste product, largely unused until
the invention of the internal combustion engine, and automobiles made for
cleaner streets (no more manure) and safer farm equipment, given that farmers no
longer had to wrestle with motors that had minds of their own. Kerosene itself
languished as an unloved byproduct of refining for several decades until the
invention of the jet engine.

Second, that new fuel
will probably not come as the result of government-sponsored research.
Government efforts to target new development - whether hydrogen fuel cells,
hybrid engines, coal gasification, ethanol subsidies - may contribute some,
but the kind of thinking and investing needed to find or make that new fuel
probably cannot be done by government bureaucrats, scientists or regulators, who
can only think incrementally and usually only consider efficiency and
conservation, rather than entirely new ways of doing things.

I don't necessarily
trust technology, but I do trust human ingenuity. Civilization as we know it
will grind to a halt without the energy we derive today from crude oil, and
that's in and of itself is motivation enough to make sure that future energy is
widely available at prices people can afford.

__________________________




Charles H. Featherstone
[email]
is a Washington, D.C.-based journalist specializing in energy, the Middle East,
and Islam. He lives with his wife, Jennifer, in Alexandria, Virginia. A version
of this piece appeared on LewRockwell.com.
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