Arnold Kling  

Who Owns Oil

Life Under Socialism... Security Symbolism...

Nansen G. Saleri writes,

Modern science and unfolding technologies will, in all likelihood, double recovery efficiencies. Even a 10% gain in extraction efficiency on a global scale will unlock 1.2 to 1.6 trillion barrels of extra resources -- an additional 50-year supply at current consumption rates.

...The national oil companies that hold over 90% of the earth's conventional oil endowment will be pressed to adopt new and better technologies.

That last sentence may contain the most important fact about oil, which is that 90 percent of the oil reserve is owned by national oil companies. In other words, 90 percent is insulated from competitive pressure to invest in new technology.

Having oil in the public sector means that

1. Ambitious people want to take over governments, in order to have economic as well as political power.

2. There is less incentive to maximize the efficiency of oil extraction.

One of the sad things about biofuels, plug-in cars and what have you, is that we may only need them because governments are in charge of the world's oil reserves. If a free market operated we could find advances in technology reducing the cost of oil over the next few decades.

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COMMENTS (7 to date)
dearieme writes:

It's time to steal them back again.

Jim writes:

I had a tough time with the WSJ article. Please advise whether I am getting this right or the WSJ article has it.

Point 1. MATH
According to the writer we have consumed one trillion out of 12 to 16 Trillion Barrels (TB). Leaving 11 to 15...
According to the writer the average recovery is 1 out of 3 barrels.
Thus we should be expecting to get 3.66 to 5 TB out once we Discover the oil.

So how does a "10% gain in extraction efficiency on a global scale will unlock 1.2 to 1.6 trillion barrels of extra resources -- an additional 50-year supply at current consumption rates"?

In 50 years at current rates (no growth?) we consume 1.5 trillion. (my math is below)

Point 2: Peak Oil
The writer seems to define Peak Oil as: 50% of ultimately recoverable resources consumed...

I think Peak Oil is the point of maximum production on a daily, monthly, or yearly basis depending how you want to look at it.

Jim's math:
The world consumes about 85 million b/day or 31 billion b/year. 50 years is 1.5 trillion.

spencer writes:

you are a very good economist with a PhD from a top-notch school.

how can you discuss supply without discuss price.

The oil that has been left in the ground is there because at market prices it was not worth extracting that oil. the Saudi government or Exxon would have done exactly the same thing. At higher prices it becomes economic to go back and extract that oil.

but that does not mean that at the higher price required to extract that oil that alternative energy sources or greater efficiency in energy use will not also be economic.

Yes, Saudi oil is owned by the state of Saudi Arabia. But what evidence do you present that the government of SA act significantly different then EXON are other large scale multinational oil companies.

bartman writes:

Having worked for a middle-east NOC, I find the claim that they have no incentive to maximize efficiency laughably ill-informed.

Jim writes:

Way back in 2003 Warren Buffett laid out his Thriftville and Squanderville theme in Fortune magazine. His point being that eventually the folks taking Squanderbucks in payment determine the bucks are not worth too much and they try to buy the hard assets of Squanderville.

Thinking about the notion that 90 percent of oil is controlled by National Oil Companies and trying to add to the two points AK makes above.

Saudi Arabia is experiencing much inflation partially due to tying their currency to the U.S. Dollar.

Clearly they can see that few countries can raise their oil output. Indeed most oil producing nations are already seeing production declines.

They also may see that building up a bigger stack of U.S. Dollars gets them little additional buying power. The USA has already blocked some foreign asset purchases and there are all sorts of places they can shop for goods and services that are not the USA. So why sell so much oil for more U.S. Dollars?

The wars in Iraq and Afghanistan have eliminated Saddam Hussein and has also shown that the USA is not able to crush the Taliban or the residual mess in Iraq.
Meanwhile both China and Russia show increasing strength and are both closer neighbors.

Saudi Arabia has made the mistake of subsidizing gasoline and food at home. Among other things per capita demand for gasoline is higher in Saudi Arabia than the USA. Also population has grown way beyond what local rainfall and farming could ever sustain.

They may now realize that their best goal is to sell enough oil to keep the home situation "OK" and only that much more to keep the world from going to heck in a handbasket and/or keep China and the USA from invading....

So why invest too much to increae oil production?

Lord writes:

The one thing I think OPEC has made clear is that production will be capped at current levels and the price will be allowed to go higher to limit demand, but not much lower without reducing production. Higher prices will not be allowed to increase production, so for all practical purposes we are at peak oil production now though the decline may not be as rapid as would otherwise be the case.

Nick Pell writes:

What about global warming? Don't we need to develop cleaner energy sources? Plus, there are too many vehicles on the road. It is well known that we lose billions a year in lost productivity due to traffic. Our road/ highway infrastructure can't keep up, either. And, no, privatized highways are not the answer. Just look at the mess Texas DOT is creating.

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