Subkommander Dred speaks.

Not sure I agree with all this but it makes for an interesting discussion.  Lovely place Charlottesville.  I am going to the "Miller Center" at U. Va, next Monday to speak.

Pat Lang


"Charlottesville, Virginia

4 September 2006


I appreciate the invitation to expand further upon my view regarding the transformation of oil from commodity to strategic asset. Indeed, in much the same way quantum physics proposes that light behaves both as a particle (photon) and a wave (light wave), a duality that exists at a level I unfortunately do not understand all that well. But, the science of physics, being what it is, is an unforgivable one. Alas, every geophysical report, scientific paper and industry review I have read of late would reveal a significant and real worry amongst a number of policy makers in other countries regarding access to oil for their own domestic needs.

Further, I would like to mention some of the excellent work on this very subject of oil depletion with regards to fueling the major exporting nations own economies (and protecting a strategic resource that will be needed for their own populations) done by West Texas on The Oil Drum for a much more comprehensive and comprehensible view of decreasing exports from major oil producing regions over the next several years.

Which brings me back to Hugo and Vlad. Hugo is using his oil resources to fund his ‘Bolivian’ vision of Latin America and the Caribbean basin, which I would very well argue allow him to use his strategic asset in a very powerful way, economically. With regards to Vlad, I have to admit to a significant dislike of the man, mostly having to do with the fact that he was once a KGB goon (alas, poor Mother Russia, what cruelties and utter crimes you must suffer due to the lies and violence of little men). Reports regarding the gas crisis in Europe last year was directly related to the amount of natural gas, a fossil fuel often associated with petroleum, that Russia had shut in, off line or weren’t selling. This remains a very serious problem with both Ukraine and Georgia, and Moscow can use access to fuels as a strategic lever in the area, if they can maintain production. Given an aging and poorly managed energy supply (Soviet era fields and equipment are in great need of investment and repair, for starters). This is occurring while at the same time Russian domestic oil consumption is increasing, which is in itself a function of how the Russian economy is doing. If the price of fuel goes up, there is more money in the Russian economy, that money gets spent on, among other things, consumer goods. A lot of those consumer goods are cars…specifically, big cars…SUV’s…Hummvees…that sort of thing. Thus, the need for gas at home goes up as well.

It is in the interest of any country to husband their own fossil fuel resources. The role that these fuels play on an economic and financial level should not blind us to a strategic need to control a substantial resource for ourselves. We have allowed Market Forces to dictate the price of oil for so long because the world had relatively cheap and easy access to it. But the world’s, and in particular The United States, relationship to cheap oil is at an end. Though we do have huge reserves of hydrocarbons on this planet, there is still a finite supply of them, making their extraction or production increasingly expensive, in terms of money, environmental destruction and even blood.

A barrel of oil produced today in Kuwait is a barrel of oil they won’t have 10 years from now, when same barrel of oil will be so much more valuable. All things being equal, of course, assuming that modern society will continue to consume our resources at present rates. If there were to be a serious economic downturn (something the lines of a Depression, which may very well happen) that would naturally decrease the demand for oil, and with it, production. But that only stretches out the plateau of oil production.

Eventually, the production curve will begin to decline. That is only a matter of time.

North Sea oil production is a case in point. Last year, the UK nearly froze and was down to just a week’s worth of natural gas supplies. Businesses had to shut down and the cost of NG was upwards of (USD

equivalent) $40/ 1000 cubic feet, a huge increase from previous rates. The UK used to be completely self sufficient when it came to oil production, primarily from the North Sea oil fields produced along with Norway. However, North Sea production peaked in 1999, and is experiencing 8 to 15% decline rates on yearly basis. A lot of oil and natural gas was produced by the UK back when oil and gas was pretty cheap ($10-20/ barrel/ $3-5/ 1000CCft). If they had decreased exports and committed themselves to a program of energy self sufficiency, including significant conservation measures and investment in renewable energy during those years (late 70’s to 2000), they would still have a significant reserve of hydrocarbons for energy and industrial use that would be under their strategic control and allow their society to function without too much disruption, allowing some breathing room as a fossil fuel economy was changed to a sustainable, renewable energy economy.

We could have, should have, done the same thing here in our own country, but unfortunately, our democratic republic has been captured by a cadre of malcontents, miscreants and mental defectives. Those persons now in power, running our country (and the planet)into the ground (in much the same way a drunken frat boy from Yale would run his dad’s Cadillac into a tree at high speed) seems intent on following the "War at any price" doctrine (Neville Chamberlain’s government pursued "Peace at any price" using pretty much the same tactics). No, the pack of yapping mongrel curs that currently occupy the White House and Capital Hill are too busy growling, snarling and making lots of bad noise for the likes of Fox News to be of any use. The problems our country is facing is not the work of one person or party, and if blame needs to be affixed, we should blame only ourselves for the mess we are in. Our addiction to oil, cheap energy, indeed our very wasteful and destructive way of life that many in our country call "The American Dream" is, like any addiction, turning into a nightmare.

Your most humble servant,

Subkommander Dred"

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37 Responses to Subkommander Dred speaks.

  1. Babak Makkinejad says:

    Subkommander Dred:
    There are also the following considerations:
    There have been simulations under which Russian oil industry csan be bankrupted by cheaper over-production in the Persian Gulf.
    This over-production can be instigated through increased production by Saudi Arabia and/or in combination of other Persian Gulf states that are US allies.
    This, in my opinion, could be considered a significant threat to the Russian State.
    It follows then that Russia will have an interest to see the chaos in Iraq to continue and to look forward to an inconclusive war between Iran and the United States; thus indefinitelty postponing the possibility of the emergence of a price war against Russian oil.
    Furthermore, it is also plausible that Russian state will continue to cultivate men such as Chavez that maintain an independent oil policy vis-a-vis US & EU.
    I would also like to further observe that the current US & EU policy is incoherent: they are making certain that Russia will remain the only significant enerrgy supplier to Europe while isolating the only other laternative, Iran.

  2. Buce says:

    Not at all sure what Babak can be thinking of when he says that bankrupting Russian oil could be a threat to the Russian state. Bankruptcy does nothing whatever to change the asset side of the balance sheet; the resource is still there. It only changes the liability side–transfers ownership from equity owners to lenders. Could be a natural vehicle for a govt takeover, if there hasn’t been one already.

  3. Glen says:

    Oil was always destined to become a strategic asset at some point as scarcity drove up value. The current mess in the ME has accelerated this development. Bush’s plans to stake a place in Iraq’s oil fields are proving to be a chimera. The more he tries to secure this goal, the further it recedes from view.
    Technology for oil exploration and extraction is a moving target. Oil extraction also has a optimal pace (i.e. it is possible to try and pump too much oil, too fast, and end up leaving oil in the ground. There is some suspicion that this has happened at Ghawar.) Current technology leaves 60% of the oil in the ground as non-recoverable. Technology being developed improves extraction and can potentially pump carbon back into the ground so as to reduce greenhouse gases.
    This has ALWAYS been why it is best not to rush drilling in ANWAR (or any large national oil discovery for that matter). Not because I do not believe we should never drill, it’s just that drilling now to fill up gas hog SUVs is WASTING a precious national asset. The nation as a whole has a lower MPG average than it did twenty years ago – this is idiotic, given the situation we currently face.
    Technology being developed will allow for a more complete and cleaner use of energy. The nation must begin concentrating on the real low hanging fruit of energy which is a national effort at conservation. We are paying a price in blood because this is not happening now.
    Just my two cents,

  4. Babak Makkinejad says:

    Just my understanding that the health and wealth of the Russian State, for the foreseeable future, will depend crucially on the price of oil.
    Sorry if I was not more articulate.

  5. Freeman says:

    There is a possible improvement on the position described by Sub-Dred. This would be if some of the projections for availability of methane hydrates turn out to be anywhere near correct.
    According to the August edition of Trends magazine, there are vast quantities of methane trapped in a kind of water-ice at the bottom of many oceans, including the Gulf of Mexico. Total quantities being projected are some 80 times the reserves of natural gas, and which new recovery techniques will make available from about 2020.
    I don’t know how correct this information will turn out to be, but a couple of references are:
    1. US Federal News, November 7, 2005, “D.O.E. Announces $2 Million for Methane Hydrate Projects.”
    2. Gas Daily, May 31, 2005, “Gas Hydrate Production Not Far Away.”

  6. TDL says:

    I think Subkommander Dred should read a few economics books. Energy self-sufficiency is a silly concept to begin with. I am not textile or agriculturally self-sufficient, I go out and buy my clothes and food. If I were to attempt this I would become substantially poorer for attempting this, as is any nation that attempts “self-sufficiency”. On the national level, when energy becomes too expensive alternatives will supplant oil, we don’t have to husband the resource. Those who need the resource the most will pay the price, those who don’t will moderate their behavior or switch to another commodity. That is how prices work, the mechanism is simple (although the process of developing alternatives and modifying behavior might be difficult.) When we interfere in the market process bad things happen.
    Furthermore, Subkommander Dred’s assertion that oil has been allowed to move according to market forces is laughable. Oil has been politically manipulated since the end of World War I. The price of oil was held low for almost two decades (up until the turn of the century) for political reasons by the Saudis.

  7. Travis Miller says:

    Not sure how much you know about Peak Oil but here are a few links to PDF files with reports done for/by DoE and the DoD
    Energy Trends and Their Implications for U.S. Army Installations.
    this from Parameters: US Army War College Quarterly
    and a report put together for DoE:
    Hope you find them useful if you haven’t read them before. Thanks for this blog. I really enjoy reading the entries.
    Travis Miller
    formerly Cpl. USMC 1st Btl, 8th Marines

  8. Maggie says:

    OK, you found a subject where I’m not going to tick everybody off.
    I have heard some interesting speakers on this subject.
    Matthew Simmons “Twilight in The Desert”
    and Amory Lovins
    are two. How can anyone look at the currect situation and think that our energy plan should be in anyway related to oil? We need to go green. It’s the only answer. Even of we could secure oil, even if prices went down and they will in the short term because that is the Saudi plan… is finite. You have to look beyond the end of your nose on this one.
    This may be a stupid question……but do they do something to the methane so it doesn’t smell bad?

  9. Grimgrin says:

    TDL : “When we interfere in the market process bad things happen”
    “The price of oil was held low for almost two decades by the Saudis”
    In other words TDL you’re saying that we’re manipulating the oil market, but we can’t stop, because that would be manipulating a free market wich would be bad?
    It’s this kind of thinking that’s going to drive the U.S. off a cliff. This frankly infantile belief that if we just close our eyes and do nothing the market will take care of everything, and that anything we do to try and ease or hasten the transition off oil is both unessacary and wrong.
    Our transportation infrastructiure in North America was built around cheap oil. Switching to another commodity means we have to completely redesign it, since there is nothing else, either here currently or on the horision that delivers the same energy per unit cost as oil. That’s a task that is completley beyond the free market to accomplish.
    “If I were to attempt this I would become substantially poorer … as is any nation that attempts “self-sufficiency””
    Nations that attempt self sufficiency don’t wind up poorer because of some iron law. What they do wind up dooing is trading the cost of producing a good locally for the cost of purchacing a commodity on the open market. Since market costs those have been trending down thanks to improvements in shipping and manufacturing technology, you’re right, it traditionally hasn’t been worth the cost of setting up the domestic industry.
    If however, the cost of a commodity was likely to increase over time and keep going up, over the cost of producing it domestically, being self sufficient in that commodity would have the opposite effect. The catch is you need the infrastructure in place to produce it domestically, and in the case of energy that can take a long time.
    Put simply, if you have reason to belieive that supply of a commodity on the global market is going to be unreliable or is going to increase above the cost your economy can bear then taking steps to make yourself independant of the market for your supply of that commodity is a good thing.

  10. zanzibar says:

    Apologies for the long comment!
    Depletion rates and extraction percentages are dependent on the technology in use. More modern lateral drilling and water injection increase both depletion and extraction rates.
    US domestic (48 states) oil production peaked in 1970 at 10.5 mb/d. In 2005 this area produced 2.1 mb/d. The North Sea example you cite, Indonsesia which is an OPEC member, Cantarell field in Mexico, Samotlor & Romashkino in Russia and Prudhoe Bay in Alaska are all in decline. No super giant wells of light crude have been discovered recently and most of the new wells are deepwater. While an argument can be made that light sweet crude production is at or near peak levels in the world, the same cannot be said for oil in general when heavy oil and tar sand reserves are included. Venezuela has reportedly 270 billion barrels in heavy oil reserves. Canada also has reserves that rival Saudi Arabia in their tar sands in Alberta. Now we should take all these reserve projections with a grain of salt as it is more art than science and there are incentives to inflate.
    According to the Oil and Gas Journal (OGJ), Venezuela has 77.2 billion barrels of proven conventional oil reserves, the largest amount in the Western Hemisphere. In addition it has non-conventional oil deposits similar in size to Canada’s – i.e. approximately equal to the world’s reserves of conventional oil. About 270 billion barrels of this may be considered producible at current prices using current technology.
    “A barrel of oil produced today in Kuwait is a barrel of oil they won’t have 10 years from now, when same barrel of oil will be so much more valuable.” – Dred
    This assumes prices would increase. It would not have been a good bet from 1978 to 1998 when prices declined. Note the historical prices in real terms. After the run up in prices in the late 70s drilling exploded and by the 90s the E&P business collapsed. We’ve had a similar situation in many other resource sectors. In real terms many commodities were priced at historically low levels in 2000. This resulted in closure of many mines and even wells in that period. Current run ups in pricing reflect supply/demand imbalances. Today, in oil markets supply and demand are evenly balanced at round 85 mb/d. Naturally, if demand outstrips supply prices will escalate. The oil market prices also reflect speculation and fear due to the ME conflict and challenges with Venezuela. On the other hand recent transactions for drilling leases or oil assets are not priced as if there will be a major scarcity.
    IMO, as PL has pointed out in a comment on another thread, oil is a fungible commodity. Producers have to sell to recognize value and a barrel from Kuwait is interchangeable with another from Russia. Venezuela currently sells around 60% of its production to the US. They can of course sell it to China – but they have to sell it to someone to raise revenues. China then will buy less from Kuwait. The argument that oil is a “strategic” resource implies shortages and producers will only supply preferred customers and hence the need to control the well. I don’t believe we are anywhere near that situation. The challenge for pricing will be if demand gets to 120 mb/d in 2020 as projected and “new” production from heavy oil, tar sands, enhanced recovery, deepwater and offshore does not keep pace. However, there is a good likelihood that we’ll have a global recession sometime to reduce demand growth.
    The assertion that Putin has effectively “kremlinized” the Russian oil and gas industry has great merit. And no doubt the rise in oil and other commodity prices has substantially strengthened the Russian balance sheet and they now have $240 billion reserves which they have started to diversify at the margins into Euro and Pounds. Just in the last quarter their reserves grew $20 billion. High oil and commodity prices have been a boon to the Russian economy and to Putin. The Petro bloc has been raking it in and are keeping a lid on our long term interest rates through recycle in USD securities – treasury, agency, MBS, ABS. On the issue of gas price hikes in Western Europe last winter – Gazprom is trying hard to raise their supply prices to Ukraine and others to market prices. Ukraine obviously would like to continue at Soviet era prices and since the pipelines traverse their territory were happy to divert gas. Gazprom played a little hardball and western Europe caught the cold. On a strategic note, our intervention in Iraq and the general feeling of destabilization in the ME is adding several billion extra dollars to the treasuries of Iran, Russia, Venezuela and of course Saudi Arabia – who no doubt fund Sunni groups in Iraq and Lebanon.
    Having said all this Subkommander Dred, your key points are all well taken. Should we reduce our dependence on foreign oil? Absolutely. Should we increase the energy efficiency of our economy and lifestyle? Certainly. Do we need better leadership on these issues? Yes. I don’t want to open a can of worms on this thread but I believe “carbon-intensity” is a bigger challenge than peak oil and a problem that requires reduction in fossil fuel usage.

  11. Sonoma says:

    It was atop Jefferson’s Monticello one May afternoon 20 years ago, looking north, that I first truly understood why Virginia considered herself sovereign territory in 1861. Charlottesville is well beyond lovely..

  12. W. Patrick Lang says:

    Does this work for you?

  13. TDL says:

    Yes, manipulating a free market is bad. No, it will not drive the U.S. off a cliff. The reason we are so dependent on oil for transportation today was because of how cheap the commodity was kept for politcal (strategif) ends. The artificially low price allowed many to make certain decision on where and how to live. Now that the price of oil has nearly quadrupled in six years we are forced to alter our lifestyles. Furthermore, we will not switch (I never made such an assertion)to another commodity immediately, such a shift can only occur over time (barring some disruptive technology that makes all the models we use now obsolete.)
    Frankly, I do not see how belief and reliance on a free market is infantile or ultimately destructive. The reason we are in the predicament we are now is because the markets have continually been manipulated in order to allow for a certain lifestyle and to maintain a certain poltical equilibrium. This manipulation was politically (or stratgically) motivated, now the argument is for political (or strategic) reasons we should not rely on the free market. In order to “fix” this problem we should use the same methods that lead us to this problem? The free market does allow for solutions to problems. The solutions may not come immediately, but they eventually do come. The United States has had an off and on relationship with liberalized markets, the past 80 to 90 years has seen a decline in free markets (with a bit of a resurgence in the 1980’s and 1990’s.) It is hard to convince me that the problems we are seeing now in regards to energy needs stem from free markets and not from political decisions made by political elites to maintain the status quo.

  14. ked says:

    digression, & I realize this all a reach, but… is it just me, or could today’s announcement of a huge oil find under the Gulf (of Mexico!) be timed to drive oil prices down as the election season heats up? if so, can we get smart about ME geo-politics? maybe fight the GWOT?

  15. Eaken says:

    Side not regarding all this – many say that part of the strategic reason we are “embedded” in the ME is to keep China out. Funny enough our policy is achieving the exact opposite.
    We first blamed China for deflation earlier this decade. Now their appetite for raw materials has gotten so great we blame them for inflation.
    We seem to be misjudging lately and I surmise all this fear about Peak Oil is of the same artery.

  16. avedis says:

    Being one who has read many economics text books, I’m going to throw in with TDL.
    The concept of self-sufficiency is illusory at best in the real world. Any modern industrialized nation that actually attemped it would be doomed to economic collapse. It would akin to cutting off one’s nose to spite one’s face; a very inefficient repsonse.
    If country A produces a good at a lower cost than country B than country B will purchase that good from country A and redirect its capital to produce some other good in an industry sector where it can be globally competitive.
    This is econ 101.
    As for market failures being present in the oil sector…..this is a well known fact.
    If those failures were removed what would happen? Probably we’d be paying prices atthe pump similar to Europeans and we’d all be driving something that gets better mileage.
    There are other possibilities that would develop, but, as Kissinger said, “oil is to precious to be left in the hands of the Arabs” so we won’t be discovering those other possibilities any time soon.

  17. Peter says:

    I think one has to admit that the idea of any specific free market is dependent on social constructions. Perhaps all people could agree to these constructions but that doesn’t mean they are not constructions.
    I’m assuming you mean a free market simply by one lacking third-party(ie the government) interventions in people’s private person and property. That is, no coercion, no involuntary association.
    But in a most general sense there must be third-party intervention. How else would one decide who owns what?
    Take a reserve of oil for example. This oil was created by the earth over some period of time and existed for a long period of time before anyone “owned” it.
    How does the oil become owned by anyone in the first place? What is the origin of ownership? Certainly no one buys it, because there’s no one to buy it from. What gives anyone the right of ownership of this oil? There must be some social construction by which we decide who owns what in the original. Only then could a free market exist.
    And if societal attitudes change, then so can the idea of original ownership. And if the idea of original ownership changes, then so can subsequent ownership rights, despite any free market. Because if the former original owner’s claim to ownership is deemed to be invalid then all of his associations dealing with that which he was claimed to own would also be invalid.
    An example of this would be the American Revolution. At one point, all of New England was recognized to be owned, in the most complete sense, by the British Crown. But then societal attitudes changed and the claim of the British Crown to ownership was deemed to be invalid, ownership rights then passed on to others. American Revolutionaries throwing His Majesty’s tea into the ocean is not considered an involuntary association now in America, because societal attitudes are different and they deny that the Crown ever had true ownership over the tea.
    If Queen Elizabeth came to Boston she could not just go into anyone’s house and take up residence without getting permission from the “owner,” because the crown is not considered to own Boston anymore. That would be considered a breach of the free market, because it is an involuntary association between the Queen and the “owner.”
    But if you go back 300 years ago and Queen Anne did that, it would not be considered an involuntary association, because she would be considered the rightful sovereign over that property as it would be part of the crown colony of the Province of Massachusetts Bay which she “owned.”
    So, even though manipulating a free market may be bad, one does not have to manipulate the free market to change rights of ownership. One has to only come to new realizations of what ownership is.
    Perhaps Royal Dutch Shell “owns” that reserve of oil now. But if society decides that they are not the real owners, but some other group, then even in a free market, or, even, _because_ of a free market, posession changes hands.
    That that changing of hands is considered “free” and not involuntary, is a social construction, wether right or wrong, good or bad.

  18. hk says:

    My two cents on free markets and manipulations: as long as people have the means to distort markets–starting with the threats by bullies to beat a kid up for not handing over lunch money–the idea of free markets will remain a pipe dream. Free markets aren’t free–it needs guarantors who will make sure that goods will be delivered and payments will be made, and that these guarantors need to function free of overt and unpredictable corruption. Not that these need to hold all the time, but that often enough that people can trust that they won’t be ripped off. On matters of oil (and other “strategic assets”), this principle is always being violated–people are always looking to gain political manipulation by all manner of tricks–and seem to have little or no interest in helping maintain a “free market,” in the name of national interest, or energy security, or whatever, depending on which country they are in. It is, in many ways, suboptimal, certainly, but to pretend that the politics don’t trump economics in this process is being dangerously naive, I think.
    Just my two cents.

  19. parvati_roma says:

    Re the difference between US and European gasoline prices “at the pump” -I don’t quite understand the reference to market failures in this context, as I believe these difference are due almost entirely to the very heavy levels of fuel taxation imposed by European governments with the deliberate aim of inducing consumers to limit their gasoline consumption.
    “On average, 60 percent of the price European drivers pay at the pump goes to their governments in taxes.
    In Britain, the government takes 75 percent, and raises taxes by 5 percent above inflation every year (though it has forgone this year’s rise in view of rocketing oil prices, and the French government has promised tax rebates this year to taxi drivers, truckers, fishermen, and others who depend heavily on gasoline.) On August 8, for example, the price of gas in the US, without taxes, would be $2.17, instead of $2.56; in Britain, it would be $1.97, instead of $6.06.”

  20. John says:

    “The concept of self-sufficiency is illusory”
    Brazil would take issue. They saw the handwriting on the wall during the 1970’s energy crisis, and used leadership to actually do something. They are as energy self-sufficient as a country can make itself. I suspect that like war, economics can merely be policy through other means. Energy self-sufficiency boils down to will.

  21. confusedponderer says:

    re your comment on russia and price war: There have been reports that the US did just that to russia in the time of the cold war.
    To access a CIA study from 1977 on this, go to the web site In the document search field type er 77-10147.
    The question is ‘what was done with the information. Soon after assuming office in 1981, the Reagan Administration abandoned the established policy of pursuing détente with the Soviet Union and instead instituted a massive arms buildup; it also fomented proxy wars in areas of Soviet influence, while denying the Soviets desperately needed oil equipment and technology. Then, in the mid-1980s, Washington persuaded Saudi Arabia to flood the world market with cheap oil. Throughout the last decade of its existence, the USSR pumped and sold its oil at the maximum possible rate in order to earn foreign exchange income with which to keep up in the arms race and prosecute its war in Afghanistan. Yet with markets awash with cheap Saudi oil, the Soviets were earning less even as they pumped more. Two years after their oil production peaked, the economy of the USSR crumbled and its government collapsed.
    Did the Reagan administration base its Cold War strategy on the CIA study, in the expectation that a Soviet Union economically weakened by oil depletion would collapse if pushed hard on other fronts?’
    I lent that from one Mr. Richard Heinberg. Add to this some US dirty tricks that effectively sabotaged Russian oil production, iirc involving the Russians to stealing rigged chips meant to control their oil flow, resulting in the largest oil fire in Russian history.
    Oil was certainly not the deciding factor in winning the cold war (I doubt it was ‘won’, rather the Russians only went bankrupt first), but it sure contributed to Russia’s economic collapse.
    During this time the people now in power were actively involved in policy and policymaking. They are certainly aware of the value of the oil market as a strategic asset. If they believe to be able to pre-empt a coming WW-IV by making use of superior US power now, they will try to make use of this asset.
    Ironically, the instability they created in the process, makes it much more difficult for them to utilize oil to such an effect.

  22. Got A Watch says:

    “Venezuela has reportedly 270 billion barrels in heavy oil reserves. Canada also has reserves that rival Saudi Arabia in their tar sands in Alberta.”
    Too bad the truth is, these heavy oils are of very little use – latest word out of Alberta is it takes a large volume of water and heating the tar twice with natural gas to break down the heavy oil to light crude, at a rate of 2 tons of heavy tar sands = 1 barrel of oil. If this were to be done, western North America would be drained dry of water and all natural gas in 8-10 years, according to one projection I read. Heavy tar sands are also contaminated with sulfur, heavy metals and impurities which are expensive to remove, and very few refineries have the capability to do this.
    The problem is we are running out of light sweet crude, and THERE IS NO SUBSTITUTE for it. Heavy oil is not the answer, and the the resources consumed to extract it make it virtually uneconomical.
    Without a technological miracle to replace light sweet crude, the Western way of oil-dependent life is doomed, and will be gone in 20 years or less. You are witnessing the End of the Oil Age in real-time, and it won’t be pretty. Historians in the future will wonder how we could have been so stupid.

  23. tdl says:

    I am refering to voluntary association. Yes, the free market is a social construction. I think often people hear the term “free market” and think of some undefined concept that is entirely controlled by large corporations. A market (whether free or controlled) is comprised of self interested individuals coming together to trade goods and services. As to the property rights issue, I would argue that original ownership stems from the individual (group of individuals, or any form that group takes) who initially find the land and work it. This is the homesteading principle and does not necessitate a government entity. The basic purpose of government is to ensure that these pre-existing property rights (as well as other rights) are protected. In other words, these rights pre-exist government and are not granted or created by government.
    I agree that there will always be those who attempt to manipulate markets in their favor, whether through force of arms or manipulation of a regulatorty regime. Successful businessmen and large corporations are not necessarily pro-free market (although it is in their long term interest to be, it is much easier to secure short term or intermediate term profits by rigging the system in your favor; eventually economic forces and short term political forces will overtake a company that becomes complacent, however.) I agree, politics in the short term do overtake economics. In the long term, however, economic forces can not be controlled. Attempting to control economic forces will eventually lead to privation (whether this takes a generation or ten can not really be predicted.)

  24. Babak Makkinejad says:

    Thanks for the reference and the supporting arguments. So one has to surmise that there are analysts in Russia who have read these and similar documents and have decided: “Never Again”.
    I think that the Soviet economy had also very serious problems with productivity. The way they increased productivity was to add to machines, instead of one, to the production line. I aslo have gathered that there was almost no work ethic (excepting perhaps some special sectors).

  25. super390 says:

    Now that the question of Peak Oil has been brought up here, I would like to broach a related question, though I see this is a pretty skeptical audience.
    What will war be like after energy becomes scarce?
    Whether you accept the idea that oil will cease to be fungible and will be fought over (the article “THE STRATEGIC COMPETITION FOR THE CONTINENT OF AFRICA” by Lieutenant Colonel Gregory C. Kane at the War College seems to assume it will), I wonder if the American way of war is about to be overthrown by a new form that happens to rely a lot less on oil. DARPA is doubtless working hard on killer robots to replace all the Americans who support war but refuse to enlist. I think, though, that a time may come when a vast infantry of poor people will defeat our intricate machinery, as the conscripted mobs of 1793 France crushed the armies of all the crowned heads of Europe. The People’s Army of Vietnam and Hezbollah are harbingers.
    The real revolution will come, though, because we are so decadent that we rely on people making $2 a day for all our technology. They perform the same jobs as Rosie the Riveter in the Arsenal of Democracy 65 years ago. What kinds of weapons could countless Chinese factories mass-produce the way Ford once mass-produced B-24s and Henry Kaiser mass-produced escort carriers? Will their soldiers carry tiny missiles guided by $5 micropulse radar chips? Will they build 50 times as many biodiesel-powered Shturmoviks as we have F-16s and accept their losses? Will they dump thousands of robot torpedoes into the ocean currents? Can those little chips in your $20 DVD player be turned into weapons of 4th Generation warfare?

  26. TDL says:

    It is my understanding that Brazil was unable to create an economical ethanol gas up until recently. For almost 20 years the ethanol project in Brazil represented nothing more than a transfer of wealth from tax payers to farmers and those involved in ethanol production/research. This means the capital was being diverted from more productive sectors of the economy to less prodcutive and on an aggregate basis Brazil was poorer for it. The recent success is more of a testament of technological innovation that has spurred recent success in Brazil. Interestingly enough, I believe that Brazil is no longer subsidizing in the ethanol market; it is a genuinely productive and successful industry (too bad the sugar lobby has kept tariffs so high in the U.S. that we can not gain access to cheap sugar cane.)
    Got A Watch,
    All commodities can be substituted. It may take a lot of technological innovation, but eventually every commodity can be substituted. Your assesment of the various types of crude oil are accurate, but I do not think that a “miracle” is necessary to make the different types of crude economical. What is simply required is an extended period of high sweet crude prices in order to make investment in alternative technology economical (a situation, even with the most recent discovery of a massive sweet crude deposit, that we are in at the moment.)

  27. avedis says:

    John, Brazil is hardly a good example of a “self sufficiency” success story. It has – and continues to – suffered from every thing from 5,000% inflation, to a per capita GDP that is a fraction of the that of the US and other industrialized nations, to painful income disparity (gini co. of around 60 I believe).
    The Brazilian economy also suffers from a number of structural deficits; one of which just happens to be oil production/consumption rate. Brazil consumes a little more oil than it produces and has only managed to maintain by dipping into reserves. This arrangement can’t last another ten years.
    As far as an oil tax in Europe accounting for a portion of the higher orice at the pump….that is true. European policy is more intelligent than ours. It factors in the externality costs (e.g. the cost of military costs that are directly accrued from implementing oil related policies). We may not pay a consumption tax at the pump, but we do pay in income tax, etc. Unfortunately, this lowers the price of oil at the point of consumption and causes the true cost of oil to be less salient to citizens.
    Totally free markets as a reality? Never truely. The presence of various market failures precludes that possibility. An important role of gov’t – in my humble opinion – is to alleviate those inevitible failures with as lite a touch as possible so as to maintain the closest possible semblance of a “free” market.
    Oil as a strategic assett? Short term this is likely. However, again, there is more to cost than what is paid “at the pump”. Once the price (including all externalities, shadow prices, hedonic prices, etc, etc) of oil exceeds the cost of alternatives, alternatives will flood the market. There will painful shifts in the economy – winners and losers….but the economy will adjust.
    Then Iraq and Iran (and maybe Israel) will be merely sandy BFEs with significance only to religious literalists.

  28. zanzibar says:

    “Heavy oil is not the answer, and the the resources consumed to extract it make it virtually uneconomical.” – Got a Watch
    Syncrude Canada Ltd. is the world’s largest producer of crude oil from oil sands and the largest single source producer in Canada. We currently supply 13% of the nation’s petroleum requirements.
    We operate the largest oil sands crude oil production facility in the world and produce over 13% of Canada’s total oil requirements. To do this, we surface mine oil sand, extract the raw oil known as bitumen from the sand using water-based processes, and upgrade that bitumen into sweet light crude oil by fluid coking, hydroprocessing, hydrotreating and reblending.
    Our final product, Syncrude Sweet Premium (SSP), is sent by pipeline to three Edmonton area refineries and to pipeline terminals which ship it to refineries in Canada and the United States.
    Public investors can participate in the revenue stream of Syncrude through the Canadian Oil Sands Trust which is growing distributions to unit holders.
    Heavy oil and tar sands oil extraction are resource intensive and as a result more expensive – in more ways than just monetary costs. However, at current crude prices they are economical and as the scale and technology improves margins will also improve. Commercial companies are investing significant capital in these projects and their shareholders are expecting positive returns. IMO, private market financial investors involved in relatively “illiquid” transactions tend to be more sceptical to provide a margin of safety for their investments. Current asset transaction pricing does not reflect near term scarcity.

  29. zanzibar says:

    “Then, in the mid-1980s, Washington persuaded Saudi Arabia to flood the world market with cheap oil.” – confusedponderer
    I am sceptical about this thesis. Can countries like Saudi Arabia be so easily manipulated?
    There was an explosion in drilling after the late 70s oil price increases. These rig count graphs exemplify the drilling boom and bust between 1979-1983.
    The Russian economy which is primarily a resource economy got hammered by the long bear market in commodities – oil to metals. Add to that low productivity. The bottom just fell out.

  30. confusedponderer says:

    Good point. your scepticism is warranted. I simply can’t say if there has been causality. Things rarely are mono-causal. It might just have been lucky coincidence.
    What I understand is this: That dumping prices for oil had a dual advantage then: Denying Iran oil revenues during their war with Iraq (and of avenging the hostage crisis), while hitting Russia at the same time – both times aiding goals of Reagan’s policy. Must have had an irresistible appeal on the cold warriors.
    The Saudis had excellent relations with the Reagan administration. They could have been pressured/ persuaded, after all they also helped the Reganites actively on Afghanistan. And while they would have suffered from selling out their oil cheap, cheap prices kept the global economy going. That might have made their investments in things other than oil more profitable, and made up for the loss of direct oil revenue. But then, I frankly admit I’m just guessing there.

  31. Jonathan says:

    A good brief article on EuroTrib on Recent trends in oil supply and demand

  32. Got A Watch says:

    “Heavy oil and tar sands oil extraction are resource intensive and as a result more expensive – in more ways than just monetary costs”
    You refute your own argument with that comment. The amount of fresh water polluted and air pollution emitted and global warming effects from the burned hydrocarbons (natural gas) needed to process the heavy oil add up to “uneconomical” for those who like to breathe the air and live in a climate that can support life. Probably not a concern for you, judging by your post. Enjoy the bottled air in your climate-controlled bunker.
    “All commodities can be substituted.” Indeed, but at what cost? Now I am no petro-engineer, but I have read many discussions on The Oil Drum about this, and it is not that simple. The energy density and convenience of fuels derived from light sweet crude cannot be easily substituted, and its not for lack of trying. In the long term (20-50 years out) a technological solution will likely be found, but at that point, it may well be too late. With the world set to run short of oil any year now, we don’t have the 20 years to make a switch over, we would have had to be doing it already for the past 20 years like Brasil. It will also require national will, and a vast infrastructure restructuring – see anybody out there taking any action on this scale now? No one is seriously talking about this now, never mind taking action (Bush speech rhetoric aside).

  33. TDL says:

    I wonder if you could provide an example of “market failure.” My guess would be, before the market “failed” there was some type of government intervention that occurred, or an expected change did not occur fast enough for the politically connected/powerful (free markets do not always provide immediate results, but eventually results are produced.) It is hard for me to understand how politically motivated, short term oriented actors can make necessary and appropriate changes for long term economic goals; especially when these short term actors do not have all the necessary information and often shut out contrary opinion (or demonize contrary opinion.) Free markets also act as mechanism for discovery, bureaucratic institutions do not (and bureaucrats are more often, than not, motivated by expanding funding, power of their agency/department, and prestige.) I believe “market failure” is a myth, just because the results of market activities are not exactly how we would like them or in the time frame we would like them does not mean a failure has occurred.

  34. zanzibar says:

    Got a Watch
    My point was financial. Some heavy oil and tar sand extraction is economically viable at current crude prices. And assets are not being priced to reflect scarcity.
    That fact that I raise the issue of “other costs” shows that I am not oblivious to these issues. If you have read my comments on this thread you would realize that I share your sentiments about environmental concerns. Obviously this is an emotional issue for you from your response.
    Brazil and ethanol have its own share of environmental issues. Sugar cane is water intensive and requires heavy fertilizer usage. Brazil is also engaged in massive deforestation to create acreage for commercial agriculture. Large scale corn cultivation here in the US poses the same issues. There are no easy solutions in the short term but the quickest is increasing usage efficiency.

  35. avedis says:

    ah…. TDL, are you a strict libertarian?
    Market failures are well known. Some examples are externalities (both negative and positive), monopolies, public goods, etc. You can look up market failures….probably google. Generally they are naturally occuring situations that will not resolve with a positive outcome. They, by definition, are situations in which the free market is not functioning; cannot function.
    These failures occur not because of govt interventions, but often due to the lack of govt intervention. They are corrected by gov’t intervention.
    Also, my last word on the oil situation is “perspective”.
    This is a society/economy that went from horse and buggy to massive fossil fuel infrastructure in a scant 50 years. And this without the benefit of modern communications, computing power, or modern corporate structure and financing mechanisms.
    The switch to an alternative will happen in the blink of eye once the benefits outweigh the costs and once the current fossil fuel infrastructure begins to reach the end of its current productive life (e.g. needs to be replaced, upgraded, maintenance).
    This is why the oil as strategic asset argument is short term true, if at all.

  36. avedis says:
    My firsttime using Wiki as a reference, but I’ve seen it done elsewhere around here and this seems to be a reasonable basic description of market failures.
    Hope it helps.

  37. TDL says:

    I do not care much in labelling myself, but I would agree with your assumption of my point of view on markets (so in answer to your question, yes.) I do believe that externalities can be resolved in a strict propertarian system without government. As for monoplies, I would argue that they are temporary (it might at times take longer than one would like to draw in competitors or new technologies, but they will come.) As for public goods, I believe that they can be provided privately. My guess is that our debate would go on for some time on these points, however.
    As for the points on the oil situation, I completely agree with you. Excellent point about the transitory period between horse & buggy and oil. I also believe that something (or even many somethings) will come along and change the energy industry in a rapid fashion. If I knew what that something was I don’t think I would be here debating economics 😉

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