Sunday, July 30, 2006

Black Gold

Oil WellsIn a couple of posts last week, when I was feeling cynical, paranoid, and pessimistic, I wrote about the possibility that the Saudis had shortened the Bush administration’s chain, and that the fix was in: a deal was being cut on Lebanon to satisfy the Desert Masters, and the screws were thus being appropriately applied to the Israelis by the Secretary of State.

My supposition was that the Saudis can control the price of oil at the margin by a modest lowering of their production, and the threat of such an action is enough to bring the leaders of the West to heel.

This assertion brought in a lot of interesting comments. One of our new commenters, “Economics” Scott (to distinguish him from “Armchair General” Scott), is entertaining and well-informed on the topic of oil production and distribution. I’m reproducing his various comments here, with some redaction for clarity:

Market Economics (more Saudi Royal Greed) don’t work on Paranoia Theory.

The Russians have been outproducing the Saudis 3 to 1 since the mid 1970’s.

Add in every tinpot dictator with oil, and the now, domestic concerns for drilling, They would all LOVE to get ahold of $5 per gallon gasoline and drill like hell.

Saudi Arabia oil ministers now, were alive in the kingdom the last two “World Oil Shortage Crises” 1979 and 1985 and weren’t really happy with the three stage outcome,

a) retooling to more fuel efficient automotive/transport fleets by 250%
b) Near unrestrained oil drilling wildcatting worldwide that more than doubled output/reserves
c) switching to other fuels, coal, wood, co-generation, bio as in the case of Brazil, and the west & east diversifies its fuels and become less dependant.

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Oil margins are volatile, so are the market economies of the west. Inflation adjusted, we are just getting back to market prices for oil we had in the early 1980’s $28/bbl in 1983 translates to $68-$70 barrel today.

The price in 1983 supported enormous wildcat exploration and brought known marginal fields BACK into production.

U.S. may have 30 billion barrels in known offshore fields yet to be drilled not to mention what is in the Santa Barbara Channel and the one year supply in Alaska.

Having said that, If the price is right worldwide, IT will be drilled. And the push worldwide for energy diversification would accelerate and cut into oil by up to 30% just that much faster — ultimately what the Saudis fear, (expect the 25,000 member Saudi Family to take up residence in the West sometime in the next half century)

Those who fear (the appeasers) an economic crisis like the early 1980s, the Saudis included, are mainly the bankers, investment houses, and those who trade in short term fear politically.

A deep recession of about a year, a lot of bankruptcies to squeeze out the record personal and business debt of the west would do a lot of good in the long run provided inflation could be held in check.

If Iran’s oil production could be destroyed as new oil fields come online at the end of that shortage, it would be beneficial.

Then Hezbollah gets starved, the Mullah thuggocracy gets starved, and there would likely be a short nasty civil war in Iran between elements of the Iranian Revolutionary Guard and the Regular Military for control of the nation’s internal assets. It might turn out good or bad. The Pasdaran has a lot of weapons.

But high oil prices are not a bad thing, just painful in the short run… like everything that is ultimately good for you after a hangover, like eating right and regular trips to the gym, it hurts but it does a world of good.

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My Good Baron Bodissey —

You are fixated on this year’s “Spot Market Price”.

Lots of OIL, most, bbbbbbillions and bbbbillions will be bought and sold on long term contracts, not month to month, based on today’s tight supply price, which could stabilize at a higher price yet.

True, quintupling the price of the “marginal oil sold outside” long-term price would make it just too costly for those buying at their maximum energy budget to pay.

This would ease demand, prices would stabilize or moderate, find another 20% world reserve in oil supply and Iran is irrelevant. If you like then Dear Baron, invade or bomb them in the short run it won’t affect price as long as those Hormuz straits are secure.

But fear not, we lived through the “Peanut Farmer from Hell as President” who fired his whole cabinet in one night, Sheesh! then the next week… double digit interest rates, double digit inflation… and the rousing “Malaise Speech” and his Malaise Index because you weren’t feeling guilty enough for being an American. Leadership does matter, it IS the economy stupid.

Fear not! In four years, billions and billions of new reserves will have been found, drilled.

AND even more oil “reserves” engineered, I hear those Japanese hybrid cars are getting 50 mpg and they’re selling them to us at a loss, and still putting on a third shifts in that production line.

Here’s your back of the napkin Int’l Oil Supply and Demand lesson from Business Week.

World excess capacity at 2%? No wonder price is high and will stay there (dang that new Chinese Middle Class and Indian Yuppies discovered Toyotas and Hondas and Beemers).

New drilling will occur on a MASSIVE basis worldwide, want to get the HIGHEST paying Master of Science in the next five years, young man?

Drill West, young man.

If you’re truly so “werry worrwied”, you may want to learn how to farm forty acres; get a draft horse and a good mule …. as a personal economics go, consider it a long term investment in the future.

Oh, and be sure to stock up on NATO 7.62 ammunition, a few thousand rounds in your personal wine cellar ought to save you a lot of money when DEMAND goes way up.

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My Dear Baron Bodissey;

You think capitalist pig democracies will cry uncle with a little too much pain.

Get ready for some more oil price pain — Short term that is …

Hugo is ruining some of the best reservoirs in the world … Through “Socialist Command Oil Engineering” e.g. he commands it to come out of the ground and to increase !

“From monitoring El Universal, A.M. Mora y Leon @ Publius Pundit surmises “that the U.S. needs to prepare for an oil cutoff from Venezuela” due to the “socialization” of that country’s oil industry, courtesy of Hugo Chavez: “[T]he country [is] running its oil industry into the ground with fires and accidents, something that’s never occurred until these Chavista years, a result of the firing and blacklisting of all of Venezuela’s talented and dedicated engineers and managers — who have since been replaced by Chavista operatives known for their political loyalty and not their expertise…”


Expect wars and higher oil prices before they moderate.

Expect massive worldwide drilling. Prices have supported wildcatting for 6 months with only a 2% world pumping capacity as a buffer.

Dear Baron, sometime between 2010 and 2012 Expect 20% Excess Worldwide reserve capacity, then you can do anything your imperialist heart desires to Hugo Chavez and Mad Jad of Tehran as long as you keep those Straits of Hormuz open; it won’t affect oil prices or what the Saudis want much at all.

I’m a layman in economic matters. Although I have read Friedrich Hayek and Thomas Sowell and Walter Williams extensively, my eyelids droop and I tend to drowse off when the text drifts into heavy economic nomenclature.

As a result, all my assertions and opinions are inherently questionable.

Fortunately, we have some experts among our readers, including the formidable Starling David Hunter, so I am sure that my mistakes will be detected and corrected very quickly.

As far as the price of oil is concerned: Scott, I’m with you. Let it rise to the point that the market will bear, and then there will be enough to satisfy the demand. New reserves will be drilled or extracted from shale, or we’ll start converting garbage to fuel, or we’ll find alternative sources of energy. Things will be rocky for a while, but in the end we’ll all be better off.

But that’s from an economic standpoint. If economics were all that had to be considered, we would never have had subsidized ethanol, or oil price controls, or “windfall” taxes, or any of the other stupid productivity-suppressing stunts that the politicians are always foisting on us.

My point solely concerned the political impact of massive increases in gasoline prices.

Salaam, o Great Master!Come the first week of November, this Administration does not want voters to be paying $10 a gallon for gas. No incumbent congressman wants his constituents pulling the lever after paying $150 for a fillup in order to get to the polling station. A politician who allowed that to happen would be forcing himself into early retirement.

So, if I’m right about the Saudis being able to drive up the price of oil significantly by modest production cuts at the margin, and if they were to make not-so-subtle hints to the Bush administration that this was about to happen if the Israelis were to overrun Lebanon and destroy Hizbullah and the Assad regime, then… Well, I suspect that a “peace” deal would be cut rather quickly.

The Israelis lose another pound of flesh; Kofi Annan presides over the process; smiling photo-ops are put together for all the leaders involved; the NYT gives it breathless coverage — you know the drill; we’ve been through it all so many times before. It makes me sick to my stomach just imagining it.

I’m mad as hell!Now: if something like this is not going on, then:

  • Why is this administration so embarrassingly obsequious towards the Saudis?
  • Why do our tough-on-terror leaders gush over those disgusting thugs?
  • Why does Karen Hughes humiliate herself (and our country) by her supplications?
  • Why did Secretary of State Condoleezza Rice call Islam “the religion of peace and love”? That was excessive behavior, way beyond any requirement of diplomatic tact.
  • Why did it take so long to get rid of the Wahhabist chaplains in the military?
  • Why did some of the most odious “charities” retain their White House access long after 9-11?
  • Why no public denunciation of Saudi Wahhabist funding of anti-Semitic and anti-Christian propaganda in mosques in the USA?
  • And, maybe most importantly: why did the entire bin Laden family get a free ride out of the country on 9/12, with barely a question asked of them?

I’m willing to entertain some rational and diplomatically expedient reasons for the above behavior. But Occam’s razor tells me that it must be the ability of the Saudi regime to put a thumb on the jugular of the world’s oil supply.

And, contrary to what the Halliburton-hating moonbat Left would have us believe, high oil prices do not appreciably benefit the oil companies. They do not make significant additional profits, because most of the extra money goes into the pockets of King Abdullah and Mad Jad and Prince Hugo. The constriction of demand that accompanies higher prices is not useful to businesses that sell oil for a living.

What the oil companies (and governments and banks) want is price stability. Let the price go up if it needs to, and then stay there for a nice long time. Price fluctuations discourage investment, exploration, and new technologies, because nobody has any good idea whether the expenditures will bear fruit when they mature in two or five or ten years’ time.

And price stability is what the nutcase Islamist regime in Iran seems determined to prevent. My guess is that the Saudis would like nothing better than nice, stable, moderate oil prices, so that they can continue to buy their booze and their blondes and their Ferraris without worrying that some wildcat Texan is going to figure out how to extract oil from sand in a cost-effective manner and put them right out of business.

OK, boys: now tell me all the different ways I’m wrong. I’m ready to hear it.


Freedom Fighter said...

Hello Baron, Davidal, Dymphna, And Scott.

For what it's worth here's my take on it.

I don't think the Saudis are pulling W's chain. There's no need. He and his family have been friends of these people for years and Bush has known many of the Saudi kingpins since he was a child.

In any event, at this point it's a symbiotic relationship. A lot of those petrodollars end up invested in T-bills and other government securities here in America.

Neither this current administration nor the Saudis have any interest in upsetting that particular applecart.Dubbyah fights half of the war on Jihad while ignoring the wahabi radicalization of American Muslims through Saudi control of the mosques and madrassahs.

The Saudis fight only that part of the `war on terror' that directly threatens them and pretend to be against Islamic terrorism, while funding the seeds of it outside their own backyard.

The Saudis would have actually liked nothing better than for Hezbollah to be destroyed. Israel has the MILITARY capability, but lacks the leadership, sad to say. The IDF was sent in piecemeal, in small units and airpower was supposed to make up the slack.

When Sharon invaded Lebanon to take out the PLO, he sent in 30,000 troops and 4-500 tanks. The Olmert government sent in 3,000 or so and about 100 tanks, against an entrenched, heavily armed enemy.

Any wonder the IDF was unable to break Hezbollah's back in 18 days of combat?

Olmert is a political hack thrust into prominence by an accident, and dependent on the lefties in Labor to be able to function as a coalition government. You could have knocked me over with a feather when Amir Peretz, a Labor apparatchnik withzero military command experience was named defence minister!

The ceasefire will come about because the Israeli government wants out and lacks the will to allow the IDF to do its job...and that's not Bush's fault.

The Kadima government is on its way out and will be gone within a year's time, especially if Lebanon ends with a `ceasefire' that leaves Hezbollah armed and crowing about their `victory'.

Scott talks a great deal of sense about oil markets and prices, and his solution to the little problem we have with Iran is exactly like my own:

J O S H U A P U N D I T: Time to do the mullah dance

While can appreciate the Baron's remarks about the political realities of rising oil prices, the fact is that ultimately we have no choice...we may either control the situation willingly and plan for rationing, implementing new technologies, etc. or we can be subject to endless and ever increasing blackmail.

That's how I see it.

Eric said...

I think the most persuasive fact supporting the idea that developing an alternative fuel economy is a very difficult problem (see Stephen Den Beste's analysis of a few years ago) is the fact that Israel hasn't managed to create one, despite possibly the world's best motivation, and the famed Israeli high-tech innovation.

Gordon Pasha said...

Dear Baron, take heart, the issue here really is short term versus long term. Dubya and Condi may kowtow a bit. As to why, it's because politics is short term in tactics, even if it may be long term in strategy. I am not an expert in hydrocarbon economics, but as a geologist, I do have some superficial familiarity with oil issues. It truly is important to keep the Saudi oil flowing for now, but that is the short term economic-political tactic. The long term strategy is to re-engineer the way we consume the stuff and also how we produce it (drilling technologies, tar sands). We will endure, and in a couple of decades, the oil sheiks will be munching dates in their oases while their Nubian slaves tend the camels, and they'll be talking about the good old days, staring loningly at the rusted out Mercedes, Beemers and Toyotas, strewn about the desert. We, the West, have one advantage on them that they will never, never, overcome. We have science and engineering and a free market, and, unlike them, we are not afraid of work. Best wishes.

Gordon Pasha said...

Scratch that last bit, it's not that the Saudis and their ilk are afraid of work, it's that they haven't the slightest clue what work is.

Baron Bodissey said...

Davidal & Freedom Fighter,

Yes, I know about the wussiness of Olmert and Peretz. I read about them on the right-wing Israeli blogs.

But I hesitate to draw a bead on Israeli politicians, because I'm just not informed enough. Besides, it makes me depressed to consider all the ways that Jews can be their own worst enemy.

I hope I'm not annoying our Jewish readers by saying that.

Baron Bodissey said...

Freedom Fighter --

The problem with oil is a political one. What needs to be done is to either allow the price to rise until the new technologies and energy sources become profitable, or for the West to take the oil fields away from the thugs and despots who control them.

Neither is politically possible (and the latter is probably a recipe for disaster). But someday the crisis will have to come. After having been postponed for decades by short-term political calculus, it will bite us hard.

All that money pouring in to corrupt the regimes and arm the most violent and degraded cultures -- eventually we will have to deal with it.

But, in terms of democratic politics, it can only be postponed, and never faced, until the explosion comes.

And this has nothing to do with whether we eventually drill in ANWR or get oil out of shale, because the damage (in terms of funding the jihad) will already have been done.

Tom Paine said...


W. sucks up to the Saudis because he fights one battle at a time -- and he wants KSA sittin' on the sidelines (or even helping) during next year's confrontation with Iran.

Hillary can deal with KSA after Bush finishes with Iran.

Baron Bodissey said...

Tom Paine et al. --

It's not just that Bush & co. suck up to the Saudis, it's the massive overkill of the sucking-up, laying suck-up on with a trowel until it's 10 feet thick. That's what bothers me. Why can't he just be friendly and polite?

To quote Shakespeare (Henry IV Part 1 Act III Scene 2), I was...
...surfeited with honey and began
To loathe the taste of sweetness, whereof a little
More than a little is by much too much.

Papa Ray said...

Scott says: "To prevent this we need to place a
moving tariff on imported oil to
keep the domestic price of oil high
enough to make these alternative
fuels economic."

Scott knows what the hell he is talking about, I hear it all the time in the coffeeshops I go to.

Someday, we will have the right people in the right place at the right time and they will make it so.

Until then, well, get a smaller car, eat pork, stop smoking, ride a bike more, play with your kids and grandkids more and keep our troops knowing that they are respected and loved.

Oh, and as someone above said, stock up on ammo and emergency supplies. BTW, 7.62 ammo is already on short supply, I've had an order on backorder for three months. But, I have plenty of other calibers in my stockroom, along with a few other surprises.

Papa Ray
West Texas

Voyager said...

Well in Europe where oil is so heavily taxed that 85% pump price petrol is tax and $7/US gallon it takes a lot of OPEC to raise pump prices much.

The fact that China and Indonesia both SUBSIDISE kerosene for cooking is perhaps one reason why their demand increases so much; another being the trade deficit the West runs with China to encourage them to take over our manufacturing.

It seems a weird world when it is too expensive to make plastics in Europe because of social and environmental taxes and regulation, but we can let the Chinese ship it to us and we ship it back to them as so-called "recycling" waste.

If we wanted to bring Venezuela, Iran, China etc al to their knees it only takes Wal-Mart to run down its inventories.

Voyager said...

I never understood why Bush didn't use 9/11 to put on a Federal Emergency Security Tax on gasoline/kerosene to pay for the military. He could have reduced it before each election.............

Don Miguel said...

"And, contrary to what the Halliburton-hating moonbat Left would have us believe, high oil prices do not appreciably benefit the oil companies."

And let me add the MSM in general and Bill O'Reilly specifically to the list of those who agree with the moonbat left.

X said...

Scott, you forgot refinery capacity.

Baron Bodissey said...


I knew that was you. Armchair-Scott uses that peculiar text folded into narrow lines. Thank goodness, otherwise how would we know?

Actually, your style is distinctive, too... :)

Voyager said...

Hayek and his economics nemesis Keynes, were both Air Raid Wardens on the Roof of Kings College in 1940.

Keynes had also been at Versailles with Lloyd George and highly critical of the treaty

Ted Seay said...

V-ger: Keynes had also been at Versailles with Lloyd George and highly critical of the treaty

Ah, but that was when Keynes was still young and reasonably rational...

unaha-closp said...

2 points:
1 - The Sauds are evil and have the most profitable oil economy. The Sauds were the sponsors of Islamism when oil was $20 a barrel and are sponsors now that oil is $70 a barrel. The Sauds produce crude for $6-$8 per barrel, the rest is in profit. The price of crude is irrelevent for as long as it is over $20 per barrel it is sufficient for the Sauds and the Mullahs to spread their evil religion.

What Scott says is true, but even in a best case scenario the result is a stabilisation of oil price in a range above historical levels and below current price. That is to say after the correction the Sauds can still produce their evil religion.

With respect to terrorism the problem is not a high oil price that needs correcting, the problem is a bunch of vicious thugs spreading an evil religion.

2 - "A deep recession of about a year, a lot of bankruptcies to squeeze out the record personal and business debt of the west would do a lot of good in the long run provided inflation could be held in check."

WTF. This minor blip, could be a minor blip. Or it could destroy the value of the American dollar and American economy "provided" inflation runs wild. This recession thing is the kindest plausible reason available as to why the evil Saudis are friends of America. The Sauds are evil, but they also good stable suppliers of oil.