A New World Order?

Hugo Chavez says Venezuela's way of doing things is the wave of the future. But is there a place for large international oil companies that are NOT government-controlled? This article appears in the September 2008 issue of Oilweek magazine.

By Peter McKenzie-Brown “Alberta became the Bolivarian province of Alberta when you decided to take more royalties from the oil companies,” Luis Vierma told a scowling crowd from Calgary’s petroleum community last June. “This made Venezuelans very happy.” The reference, of course, was to Simon Bolivar – the 19th century revolutionary whose leadership helped to liberate much of South America from the Spanish monarchy. The speaker was the E&P vice president of a national oil company – specifically, that of the Bolivarian Republic of Venezuela. Vierma’s cheeky comment garnered a few chuckles from his audience, but not many. This articulate man – he was educated and for some years worked in the United States – described a world order which at first blush doesn’t seem to suggest a happy future for western-style international oil companies. However, this commentary suggests that it may not be all that bad for private-sector oil companies, and that the changing world has huge implications for the oilsands. The United States is clearly worried about Venezuela. The CIA’s 2008 World Factbook, for example, offers a litany of indignant complaints about the South American nation. “Hugo Chavez, president since 1999, seeks to implement his ‘21st Century Socialism,’ which purports to alleviate social ills while at the same time attacking globalization and undermining regional stability. Current concerns include: a weakening of democratic institutions, political polarization, a politicized military, drug-related violence along the Colombian border, increasing internal drug consumption, overdependence on the petroleum industry with its price fluctuations, and irresponsible mining operations that are endangering the rain forest and indigenous peoples.” Vierma’s audience was also concerned, but their concerns were much narrower. They were well aware that Petróleos de Venezuela S.A. (PdVSA) was the beneficiary of Chavez’s large-scale nationalization of assets held by international oil companies. They were also aware that the company holds the keys to Venezuela’s Orinoco heavy oil belt. Named after the nearby Orinoco River, these deposits are roughly comparable in terms of in situ volumes to those in Alberta’s oilsands. On the global stage, they are the province’s only serious competitor. New World Order: This commentary explores Vierma’s suggestion that recent decades have seen the creation of a new world order that is now entrenched and becoming more pronounced. It is an idea that is getting ever-wider acceptance. “In the new international energy order, countries can be divided into energy surplus and energy-deficit nations,” writes Michael Klare, an American academic who specializes in the geopolitics of energy. “Deficit states like China, Japan and the United States are compelled to pay ever higher prices for imported fuels as they compete with one another for those materials the surplus states are prepared to supply. The surplus states, on the other hand, are sure to become richer as they parcel out their increasingly valuable commodities at whatever prices the markets will bear.” As Klare observes, national oil companies (NOCs) are increasingly dominating global oil supply. Of the 15 oil producers with the greatest reserves, only two are privately owned – Russia’s Lukoil (#9) and Chevron (#15.) Between them, they control 2% of the world’s proved conventional reserves – compared to 77% for the other 13 companies, combined. PdVSA’s Vierma – his company is the beneficiary of a highly contentious nationalization of the petroleum industry by the Venezuelan government – is a strong believer in the new world order. “The whole industry of the last century is completely different from the industry of today. In the 1970s, 85% of the (world’s) oil reserves were managed by international oil companies, the Seven Sisters. Today the situation is completely different. Most reserves are now managed by national oil companies, and everything now gravitates around (them). At the beginning of the 21st century, national oil companies turned into the principal actors in the petroleum sector.” Petroleum “is the backbone of the economy in Venezuela,” he added. And according to the vision of Venezuela’s socialist government, the country’s NOC has a responsibility “to ensure our shareholders get enough of our revenue, and we have 27 million shareholders, the Venezuelan people. We have a responsibility to develop our reserves to allow them to have a better life. This is the main difference between how the industry was managed in the past and how it will be managed in the future.” Being a national oil company brings a lot of responsibilities. Perhaps the most important of these are social responsibility and how we take care of the environment. Last year PdVSA invested $14 billion in social programs, and after paying taxes and royalties still made US$6.27 billion in profit. “This proves that we can be a profitable oil company with a lot of social responsibility.” This is the vision of the future, he said: “Oil companies around the world will do the same.” Competition and Cooperation: “We believe the work here will involve cooperation instead of competition,” he said. “Even though some competition will be there, but cooperation is an important issue to be considered.” By his analysis, national oil companies fall into three groupings. The first are those that can meet their own needs plus export – for example, Saudi Aramco, PdVSA and the National Iranian Oil Company. Another category includes national oil companies in consuming countries, like China’s CNPC and India’s ONGC. These companies can’t meet internal demand, and are looking for opportunities overseas. Finally, there are NOCs in countries that can satisfy internal demand and could, with development, become important exporters; these include Mexico’s Pemex and Brazil’s Petrobras. This latter group of countries, Vierma suggested, “are going to become important sources of primary energy” to the rest of the world. PdVSA has formed alliances with NOCs throughout the world, and owns a substantial American subsidiary – CITGO, an integrated oil company in its own right, and the vehicle through which PdVSA exports oil to the US. “All these companies are participating in projects with us either upstream or downstream,” said Vierma. “The magic word is how we can establish cooperation with their regimes so these companies can be successful and sustainable over time. We believe cooperation (not competition) is the key word to establish business relationships with these companies.” Oh, Canada: According to academic Michael Klare, PdVSA is number six among national oil companies, with control of 6.6% of the world’s proved reserves. However, that number does not take into account the vast potential of the Orinoco oil sands. When you factor in the oilsands, the numbers become staggering. Start adding the resource potential of bitumen and heavy oil from Canada and extra-heavy and heavy crudes from Venezuela and, Vierma said, “(between us,) Canada and Venezuela will have more than half of the oil reserves around the world.” How can Canada benefit by working in Venezuela? The country is looking for foreign partners to develop offshore properties that are prospective in terms of both oil and natural gas. In the oilsands, the two countries need to share oilsands technology. According to Vierma, “Venezuela now has 1.3 trillion barrels in situ. With 20% recovery we believe 235 billion barrels of heavy and extra-heavy crudes are now (technically) producible from (our oilsands area), and 17 NOCs are working with PdVSA in that area. By October 2009 we plan to certify those 235 billion barrels that are going to be recovered.” In a proposal that is unlikely to draw much interest from Canadian firms, PdVSA suggests using cooperation rather than competition to create global market efficiency. “In terms of heavy oil production and heavy oil markets we need to share our learning lessons, experiences and challenges with Canadian companies. Canada and Venezuela will share the same markets as well as the same challenges. Why not cooperate to make the markets more efficient?” He suggested, for example, that Canadians focus on developing markets in Asia, while Venezuela develops markets in the Atlantic basin. How else could Canada and Venezuela cooperate to develop those resources? PdVSA obviously wants access to Canada’s oilsands technologies. But the country’s conventional resources are also considerable – don’t forget that PdVSA controls 6.6% of the world’s oil reserves – and these resources also need to be developed in a hot global economy – hot, at least, in terms of petroleum exploration and development. Like other producers around the world, Venezuela needs infrastructure, including rigs for conventional oil and gas drilling, and that “provides tremendous business opportunities for Canadian companies.” The Human Factor: As he closed his presentation, Vierma made a plea for help in education and training. “We need human resources, skilled people, and we are here to tell you this is another area where there are opportunities for the people of Alberta,” he said. “We are aware that the level of education in this province is very good, and we want to retake the bridges that we have burned in the past.” The irony of this comment, of course, is that Venezuela’s 21st century socialism has helped reduce the talent available to Venezuela while increasing that in Canada. Last year both Exxon Mobil (the parent of Imperial Oil) and Petro-Canada fled Venezuela because of the shenanigans of Hugo Chavez. Both companies were investigating extra-heavy projects in Venezuela, and both transferred technical expertise and field workers to Alberta as a result. According to CEO Ron Brenneman of Petro-Canada, “We are finding that some pretty good technical people are coming available (directly) out of PDVSA as a consequence of what’s going on down there.” He adds, though, that “I don’t think this will affect (Alberta’s) labour pool to a large extent.” But what about the new world order? The argument that the world has fundamentally changed is very strong. NOCs are unquestionably dominant in the politically risky parts of the world, and that trend is unlikely to change. In addition, geopolitical considerations (including human rights issues, corruption and worries about Venezuelan-style nationalization of assets) are keeping international oil companies away from many of the regions that are left. Does this mean the future belongs to PdVSA and other NOCs, as Hugo Chavez and others have suggested? The answer is almost certainly no. Rather, international companies will increasingly focus on development in areas where risk is minimal and potential is large. Clearly, much of that activity will take place in Alberta’s oilsands. To use Shell as an example, its Canadian oilsands potential is in the 40-billion-barrel range – volumes that dwarf the rest of its oil assets world-wide. Remember that list of oil reserves of the world’s top 15 companies? Such a resource would place Shell in seventh place – ahead of the National Oil Company of Libya, behind PdVSA. This reality suggests another vision of the new world order. Increasingly, perhaps, international oil companies will need to retreat to low-risk, high-potential areas like Alberta in North America, Europe, Australia, India, parts of Southeast Asia and South America and other “safe” parts of the globe. In a future of declining conventional production, they will prosper by applying their considerable intellectual, technical and capital resources to oil sands and shale oil development, and to the production of gas from tight sands, shale and hydrates. The service sector could also do well in such a world order. Unconventional development requires a lot of support from service providers. Supplying expertise to inefficient national oil companies could offer (just as Vierma suggested) “tremendous business opportunities.” Indeed.

China: Panda or Dragon?

This article appears in the August 2008 issue of Oilweek.

By Peter McKenzie-Brown

A symbol of unrivalled wisdom and power, China’s dragon is a long, scaly, snake-like creature with the paws of a tiger and the claws of an eagle. This chimera is an emblem of ancient imperial power. Indeed, the dynastic emperors were known as dragons.

The revolutions of the twentieth century made a break with the past, and the present regime does not think the dragon is a proper symbol of China. Instead, the country’s rulers prefer to use the giant panda – that loveable, bamboo-eating member of the bear family – as the national emblem. By tradition a rare and noble creature, the panda has been part of diplomacy since 685 CE, when an emperor of the Tang dynasty sent a pair to his counterpart in Japan.

As the world sets its eyes on Beijing, where the Olympics will showcase progress since the death of Mao Zedong two decades ago, this commentary asks a simple question. Is the panda in charge of Chinese energy strategy, or is it the dragon? From the security of its bamboo forest, the gentle panda would stress comparative advantage. The dragon would rely on cunning, speed and power.

The charts below show growth in China’s oil consumption (top) and the country's oil production - both since the death of Chairman Mao

Until 15 years ago, China exported oil to neighbouring countries. Today, it has an almost insatiable appetite for the stuff. Since the Great Helmsman’s death in 1976, the People’s Republic has become the world’s second largest oil consumer (behind the U.S.) During those years Chinese consumption has quadrupled to about 7.7 million barrels per day while production – about 3.7 million barrels per day – has barely doubled.

The International Energy Agency thinks China will burn 16.5 million barrels per day by 2030, after buying 13.1million barrels abroad. Think about it: Saudi Arabia’s total output is now less than 11 million barrels per day.

Thrift: This article suggests that such parabolic growth requires the skills of the dragon to survive. In that spirit, China is now applying its extraordinary energy in four ways to meet its petroleum and other resource needs. The first is domestic resource development. Diplomatic manoeuvres on behalf of its petroleum industry are the second. The third involves partnerships with Western companies. Last is what the mandarins call “thrift.”

Based on efficiency, conservation and innovation, thrift is sometimes called the fifth form of energy.

China’s rise is making the world a more energy-efficient place. The country’s energy intensity – the amount of energy it uses per unit of GDP – has dropped by about 75% in the last 20 years, largely because of more efficient industry. Its energy intensity higher than America’s but lower than Canada’s, in 2006 China adopted the slogan “Save energy, cut emissions” as part of a drive to cut energy intensity even further. The country is thus improving its energy efficiency while increasing its energy-intensive role as workshop of the world. So don’t blame the Chinese for the world’s energy woes. They are doing an effective job of managing energy.

A latecomer to the world’s petroleum stage, China is now simultaneously the world’s second-largest oil consumer, the third-largest net importer, and the fifth-largest producer. In the last 15 years the dragon has been sending its agents into the world to secure the new energy supplies it desperately needs. Compared to the West’s international producers, China’s national oil companies arrived late to the petroleum Olympics, and they are not large contenders. The prizes left in play are expensive, and often in countries where Western companies refuse to operate because of human rights issues and geopolitical risk.

Through petroleum-related state-owned enterprises (SOEs) – China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and China Petroleum and Chemical Corporation (Sinopec) – China started investing outside the country in 1993, just as the country became a net oil importer. China’s first petroleum acquisition was in Thailand, but CNPC acquired exploration acreage in Canada and Peru the same year. The amount of equity oil generated by those projects was relatively insignificant, and this remained the case for several years.

In terms of Canada’s ties with China, 1997 was an important year. As the British were preparing to return Hong Kong to China, Sir Li Ka-shing, the colony’s richest man and chairman of the Hutchison Whampoa conglomerate, became the owner of Husky Energy. Husky’s headquarters continued to be in Calgary, and the acquisition did not affect the company in the short term. However, Husky has since expanded its assets offshore China, and is now the largest foreign owner of exploration blocks there. All its holdings there are in the South China Sea.

Since 2001 Husky has signed eleven production sharing contracts in collaboration with the China National Offshore Oil Company (CNOOC) – now publically listed, but 70% owned by the government of China. Husky can participate in these projects up to 51%, and the company describes its entry into China as part of a strategy to develop conventional oil and gas outside North America. Certainly the company is also part of Chinese strategy, also. It is one source of capital for mandarins focused on securing energy supplies by developing the Middle Kingdom’s domestic resources.

The Venezuela Card: China cannot secure Canadian oil supplies as long as the only export pipelines from Alberta lead into the United States. Especially after the two countries announced in 2005 an agreement on energy cooperation, it was therefore astonishing when CNPC announced last year that it had pulled out of an agreement to take a 50% stake in the proposed Enbridge-operated Gateway Pipeline. When completed, the pipeline will transport 400,000 barrels of oil per day to Kitimat BC for overseas export. According to the terms of the original deal, CNPC would take 200,000 barrels per day of throughput, with the balance being exported to refiners in California. If the line had been expanded to 800,000 barrels per day capacity, CNPC could have acquired a larger stake.

For a country with rapidly rising oil demand, what’s not to like about this deal? When PetroChina vice president Song Yi-wu announced the dragon’s decision, he put it in the political context of a nation re-evaluating its commitment to Canada’s oilsands.

Projects take too long to get off the ground here, he said, and the political environment “frustrates” Chinese investors. Song said China would slow down its involvement in the Canadian oilsands business, give up its involvement in the Gateway pipeline project and wait for better investment policies and politically friendly opportunities in the future. Translation: Chinese policy-makers were frustrated over the unwillingness of Canadian producers to partner with CNPC in a production/refining venture that would see Canadian bitumen and heavy oil sent to Asia for processing.

Forecasting that CNPC couldn’t begin to produce bitumen from the oilsands for at least another decade, he made it clear that China’s near-term heavy oil strategies were pointed directly at Venezuela, where a “warm-hearted” President Hugo Chavez has taken steps to nationalize oil operations. Song said China is building energy security for its people in “politically friendly” countries, which include Venezuela, Saudi Arabia, Russia and a host of Asian and African nations – Burma, for example, and Sudan. Call it the Venezuela card.

The Venezuela card suggests a competitive advantage for China that Western countries often will not play. The dragon sees oil security as an urgent need, and is willing to exert whatever cunning, speed and power it must to meet its future needs. Not surprisingly, given its political structure and domestic situation, China will not let issues like liberal democracy and human rights stand in the way of its quest for energy.

Do Western oil companies let political and human rights niceties stand in the way of business? It’s a matter of degree, of course, but it is not difficult to find examples of North American and European companies pulling out because of political risk and public pressure based on human rights abuses. In Canada the most famous case is that of Talisman.

Ten years ago the company acquired a 25 percent interest in a developing oil project in Sudan. The production facilities, pipeline and offshore loading terminal were being built and the wells were being drilled. By the summer of 1999, oil was flowing and being exported. By 2002, the project was producing 240,000 barrels of oil a day, with the equity oil being distributed to the project’s participants, three of which were subsidiaries of state-owned oil companies from China, Malaysia, and Sudan. The only privately owned company in this consortium, Talisman bowed to public pressure based on Sudan’s human rights record and sold its 25% interest to an oil company owned by the government of India.

The pattern is clear. The Asian players were unconcerned about human rights. There is a subtext here about Asian strategies toward energy. Especially in the face of a high-profile divestment campaign like that launched against Talisman, Western companies will buckle in the face of pressure related to human rights, environmental integrity and so on. Chinese and other Asian companies will not. For example, all three of China’s oil and gas SOEs are active in Burma. Latecomers to the petroleum Olympics, they measure petroleum victory in terms of land, reserves and production.

Comparative Advantages: Chinese industry’s willingness to overlook “soft” issues like human rights gives it a distinct comparative advantage. China’s willingness to bring diplomacy to bear on behalf of its SOEs gives it another. These advantages are rebalancing the planet toward East Asia. The dragon is rising.

Chinese energy policy is directed by government, and some 70% of the world’s petroleum resources are now controlled by national oil companies like Saudi Aramco and Petróleos de Venezuela. State-to-state negotiations are especially important when one of the participants is an emerging superpower.

Much of China's efforts are directed to the energy-rich nations of Central Asia, which can deliver energy overland instead of by tanker. For example, a trans-Kazakhstan pipeline is already delivering oil from the Caspian Sea.

Two other factors in China’s favour deserve mention. One is that Southeast Asia is home to many in the Chinese Diaspora – the descendants of the many waves of migration from China over the last millennium. Particularly as colonialism collapsed after the Second World War, they came to control great assets and even some national economies. By some estimates the third largest economic entity in the world, the Overseas Chinese began repatriating capital to China in the 1990s, thereby igniting the Chinese miracle. Today they occupy key positions in Southeast Asian business and government, and strengthen local ties with China.

Another factor working for China began during Cultural Revolution – that decade of social, political, and economic madness from 1966 until the arrest of the Gang of Four. Despite mutual fascination and incomprehension, during those years black African governments and African revolutionary movements were the recipients of Chinese aid (both military and economic) and other diplomatic efforts. African governments – many of them successors to those revolutionary movements – remember China’s efforts during that time. That diplomacy is now paying off with preferential access to petroleum leases and production sharing contracts.

A classic example is Angola, in West Africa. Mainly because of the expansion of its oil industry that country has the fastest-growing economy in the world, and its growth is mainly driven by Chinese explorers and producers. China’s SOEs got access to Angola’s offshore as a ‘Thank you’ to the People’s Republic of China. Despite desperate poverty at home during the Cultural Revolution, the dragon still found the wherewithal to support Angola’s independence movements during those critical years.

China’s Peaceful Rise: A final point deserves comment. In the late 1990s, China’s central government developed what it called “the new security concept.” The idea is that the Cold War mentality of antagonistic blocks no longer makes sense. In a globalizing world, nations can increase their security through diplomatic and economic interaction. This notion has become part of a foreign policy doctrine known among diplomats as “China’s peaceful rise” – a policy that, for example, encourages Chinese businesses to form partnerships with Western firms. For Canada, which is one of the few countries likely to increase production in the coming decade, it has important implications.

Consider, for example, that Enbridge is undeterred by CNPC’s decision to pull out of the Gateway Pipeline. “The appeal (of this pipeline) to Canadian producers is that you would get another bid on the crude oil from somewhere other than the United States,” said Enbridge’s executive vice president, Steve Wuori. Also, of course, pipeline costs would be less.

“When (Enbridge) first started we were aiming (to complete the project in) 2011,” Wuori says. “But now we are targeting 2012-2014.” Will Canada be able to supply new markets with heavy? Wuori thinks so. “Production forecasts up to 2020 for the oil sands support that kind of growth potential, even if you risk it for economics and environmental concerns.”

Although China has placed less than 1% of the $50 billion investment in the oilsands since the early 1990s, it is still part of the equation. China’s most significant direct investment has been the SinoCanadian Petroleum joint venture, through which Sinopec owns a 40% stake in Synenco’s Northern Lights project. CNOOC made its presence known with the acquisition of a small interest in MEG Energy, which is focusing on a project at Christina Lake.

Obsessed with diversifying its oil sources and avoiding dependence on a single supplier, Beijing sees Canada as a country in the U.S. sphere of influence, a country where oil could be held hostage to political concerns. It has little enthusiasm for multibillion-dollar oil deals in a country whose relations with China have been soured by human-rights disputes. Think Tibet.

“China doesn’t want to make a multibillion-dollar commitment to a country where the political contacts are constrained,” says Jiang Wen-ran of the University of Alberta’s China Institute. Professor Jiang adds that the Middle Kingdom worries about Canada’s business practices. Canadians can’t explain how they will triple production from the oilsands given environmental constraints. The costs of environmental protection seem out of control. Labour costs are reaching the moon.

The Panda Speaks: This article has focused on the areas of Chinese petroleum development where Westerners are more likely to see a dragon than a panda. Of course, in modern China it is the giant panda that speaks for the neo-imperial court. To conclude, let’s listen to what this species has to say.

According to China’s State Council, a policy-making arm of the People’s Republic, “The basic themes of China’s energy strategy are giving priority to thrift, relying on domestic resources, encouraging diverse patterns of development, relying on science and technology, protecting the environments, and increasing international cooperation for mutual benefit.”

The panda adds that its energy development is based on “the principle of relying on domestic resources and the basic state policy of opening to the outside world.” In its efforts to ensure a stable supply of energy, the country wants “a steady increase in domestic energy production.” It also wants to “promote the common development of energy around the world.” China’s energy development “will bring more opportunities for other countries.” It will “expand the global market, and make positive contributions to the world’s energy security and stability.”

All this will help perfect the national system of “socialism with Chinese characteristics.”

Damage Control

Gasoline and other fuel prices are subsidized in the three representative oil-producing countries graphed on the top right - to the point that gasoline costs $0.12 per gallon in Caracas.

Compare the growth in oil consumption in those countries to growth for the world as a whole. Did you notice a pattern?

By Peter McKenzie-Brown

The world has two kinds of energy-consuming jurisdictions: Those which respond to high oil prices, and those which don’t. In this post, I want to help define which is which. I also want to offer a few explanations why dramatic increases in energy prices have not yet damaged the world economy. These are intimately related issues.

I recently had an interview with Marcel Coutu, the chair of Syncrude – the world’s largest oil sands plant. Syncrude has been in operation for 30 years, and it has gone through a great deal of debottlenecking and expansion. It now produces 350,000 barrels of light, synthetic oil per day.

I asked Marcel for his thoughts on peak oil, and he gave me a few comments that summarize things precisely.

All OPEC can now do is raise prices by cutting production. They cannot lower prices by increasing production because they don’t have the capacity. We are in a very pure free market situation, with prices being set by supply and demand. When I look at that dynamic, I have stopped worrying about the demand side. No matter how much the US goes into recession, for any period that is important to any of us, any decline in consumption there will be offset by increased demand elsewhere – in China and India, but also in developing countries that produce their own crude oil. Those countries generally subsidize oil products, and subsidies accelerate demand growth.

At these prices you are seeing some conservation somewhere, but it is being more than offset by increased demand somewhere else. Whether people are still going to be buying at $200 a barrel I don't know, but by the time we get to $200 it will be the supply side that will keep things tight and moving upward.

He didn’t seem to think this was a major global problem, and I wish I had asked why not.

Three Theories: Historically, rapid increases in oil prices have led to global recession. This certainly applies to the stagflation that influenced the decade after the energy crisis of 1973. The terrible recession of 1982 was without doubt related to the energy crisis of 1979-80. And the long, gradual boom that began in ’83 was closely tied to declining oil prices, and accelerated by their collapse in 1986.

What I think we need to ask ourselves is why high oil prices don’t seem to be doing a lot of damage to the global economy. According to The Economist, there are three possible explanations.

An important and interesting idea is that high oil prices are not hurting the economy simply because they themselves are the result of rapid economic growth around the world. “Rather than oil harming the global economy, it is global expansion that is driving up the price of oil” says the world's great champion of liberalism.

Another explanation is that developed economies are more efficient in their use of energy, thanks partly to the increased importance of service industries and the diminished role of manufacturing. For example, the EIA has calculated that the energy intensity of America's GDP fell by 42% between 1980 and 2007.

A third notion is that the oil price rise has been steady, not sudden. This has given the economy time to adjust. The Economist writes, “Giovanni Serio of Goldman Sachs points out that in 1973 there was a severe supply shock because of the oil embargo, when the world had to cope with 10-15% less crude almost overnight. Not this time.” It’s worth adding that during 1979-80, the percentage increases in oil prices were not as great as they were in the early 1970s, but in absolute terms those increases were greater by far.

The Role of Emerging Economies: As Marcel Coutu explained at the beginning of this article, the most important factor for higher prices has been the shift toward greater consumption by developing economies.

The US, for example, has responded to high prices by cutting consumption slightly. According to one source, the decline will be 1.1% this year, such that American consumption next year will be no higher than it was in 2004. Given such a niggardly response, growing demand from China and other emerging markets will be more than enough to offset this shortfall. With supply growth slight to neutral, the steady increase in demand is hauling prices remorselessly higher. It would take a recession in emerging markets to drive commodity prices substantially lower, and to date recession in those economies is not in the cards.

A couple of points deserve comment here. One is that the achievements of Western nations in reducing energy intensity are nothing compared to the achievements of China. According to an excellent paper on China’s energy consumption and demand , since 1980 China’s energy intensity has dropped by about 75% – nearly twice the drop in the US. The reason is that in every way the world's next superpower has become far more efficient.

Of course, I am raising this point because it suggests a very deep irony: Exporting the world’s manufacturing sector to developing countries has not only enabled the West to become a more efficient energy consumer. It has also helped those countries to become more efficient. Don’t blame the Chinese, in other words: They are doing a far better job at using the world’s resources efficiently than the West can even imagine.

Final Thoughts: These ideas, too, hark back to Marcel Coutu’s earlier comments. By subsidizing energy consumption within oil exporting countries, the world is contributing to inefficient energy consumption. Some of the cheapest gasoline prices in the world are in Saudi Arabia, Kuwait and Venezuela – the last being the all-out winner, with gasoline selling for $0.12 per gallon. The economies of these countries are not known for their gathering efficiency, yet the charts illustrate how much more dramatically oil consumption accelerates when prices are subsidized than when they are not.

The plain truth is that energy importers are subsidizing the inefficient consumption of oil in these countries because of the geographical reality that they have oil to export. Yet the countries we are most anxious about - China and India, for example - are the ones that are increasing their energy consumption not because of large subsidies, but because they are able to provide goods and services with greater energy efficiency than the rest of us.

Bedfellows: The Prices of Gold and Oil

By Peter McKenzie-Brown I’ve been a gold bug since the beginning of 2001, and you will probably notice on this chart that my timing was pretty good – especially so since the market in gold shares turned before the price of bullion did. In my opinion, the volatile price of gold shown here is directly tied to the recent dramatic increases in oil prices. I think this chart is the best available picture of gold prices over the last quarter century. It's a point-and-figure chart, consisting of columns of Xs (upticks) and Os (downticks) to represent price movements over time. As Stockcharts.com explains, there are several advantages to using P&F charts instead of the more traditional bar or candlestick charts. Briefly, point-and-figure charts automatically eliminate the insignificant price movements that often make bar charts appear ‘noisy;’ remove the often misleading effects of time from the analysis process; make recognizing support/resistance levels much easier; make trend line recognition a no-brainer; and help you stay focused on long-term price developments. In that context, you will notice that there has been more price volatility in the last six years (when the present uptrend began) than in the previous 20 combined. Within that context, please note that The Privateer's technical analyst recently identified an extremely bullish on this chart – the dashed green line on the far right. If this trend stays intact, we won’t see $900 gold again for a long, long while. Point-and-figure charts can’t tell you when gold will run through $1000 per ounce, but this one gives a very strong opinion that it will. Perhaps you should buy some gold producers - or, if you can handle even greater volatility, a leveraged bull fund like HGU. Why? In my opinion the price we are paying for gold is directly related to the price we are paying for oil. And gold's fast-moving price reflects a rapidly deteriorating situation in the petroleum industry. A few weeks ago I answered the big question of the day – will oil prices climb or collapse? – with arguments that prices are still on an upward trajectory. I recently had a discussion with an oilman - he has created a $5 billion enterprise in Canada, and is still in the saddle - who tended to agree. He was just back from the Cambridge Energy Research Associates conference in Houston, where one participant was Matt Simmons. Author of Twilight in the Desert, Simmons is a fierce sceptic of Saudi Arabia’s ability to increase or even maintain oil production capacity beyond the next few years. In a recent pronouncement, he proposed that the world reached maximum production two years ago. The apparent increase in supply since that time has been essentially a drawdown in global inventory. Gold prices reflect political instability. And if Simmons is correct, the near-term geopolitical outlook is quite dangerous. Imagine battles for supply, complicated by Jihadism, disrupting the world order. Imagine regional conflict between large landmasses, as in the US vs. the Middle East and Islamic terrorism (already reality); Putin keeping his hand on the valve to dictate terms to parts of Europe (already reality); regional struggles between India and China for Southeast Asian resources, especially petroleum; America using the terms of the US/Canada free trade agreement to demand ever more of Canada’s oil and gas production. Peak Oil: And that, of course, takes us to the topic of peak oil - the notion that the world has produced about half its producible reserves, and that implied demand will soon outpace available supply. You usually see a peak in oil prices in the spring, and the low point for oil demand is usually in December, but that is not what peak oil is about. What it is about can be seen more clearly in this simple fact: we have $90 oil, and most companies are still missing their production targets. Maybe the oil just isn’t there. Let's look at that in a broader context. It took about 250 million years to create all this oil, and we have used about half of it in the last three generations. That’s amazing. Worse, western oil companies are now decapitalizing – buying back stock and otherwise returning cash to shareholders, rather than exploring for large new fields which aren't there. Decapitalization is one way to acknowledge the problem of peak oil. Whether you do or don’t believe in peak oil, there hasn’t been sufficient reinvestment in the business. There’s been a classic cycle of underinvestment. What are the major companies doing with their cash flow? Spending some on new development and buying back stock to increase shareholder value. Some major companies (e.g., ConocoPhillips) are replacing as little as 15% of their reserves. This underinvestment has several causes. For one, 80% of the world’s reserves are national oil – owned by countries where aliens can’t invest directly. These countries are mostly not known for their efficient use of capital: Venezuela, Sudan, Saudi Arabia. Other known reserves and resources are located in places that are difficult and undesirable to explore, like the Arctic. The problem has been articulated for a full century. The oilman I was talking to put it in these no-nonsense terms: “Petroleum is a capital-intensive business. You’ve got to keep offsetting depletion and there’s a massive amount of capital required just to maintain production. And suppose there’s not enough investment to both offset the decline and grow production in the near term. What’s going to happen if India and China continue to boom and expand their requirements for energy?” That is a good question. After listing a number of large producing basins and giant fields in decline, he pointed out that “the only country that has the potential to grow production over the next 5-10 years is Canada, because of the oil sands.” He returned to his central theme: “Whether you believe in peak oil or not, there is not enough money going back into the oil industry to offset production. It’s a huge issue.” There are a couple of ironies in this. For one, a logical conclusion from peak oil theory is that, by accelerating production to meet demand, you are accelerating oil depletion. We consumed the first half of the planet’s oil reserves in three generations. How long will it take to consume the rest? Using a geologist’s understanding of the underworld, peak oil prophet M. King Hubbert suggested that the world’s crude oil production will take as long to decline as it took to peak – roughly speaking, three generations. But isn’t it possible that, because of improved production technologies and much greater markets in the post-peak world, it will actually take much less time? The question matters. The other irony is that oil companies, whether they understand the peak oil issue or not, are responding to developments through a program of decapitalization – as I have already suggested, returning cash flow to investors, with an eye to eventually leaving the oil part of the business. Giant and other large fields not being available through exploration, much of the private sector is now involved in the orderly and efficient liquidation of existing assets through mergers and acquisitions. This matter also matters.

The Ultimate Dilemma for Oil-Dominated Economies

By Peter McKenzie-Brown

Energy security, always a critical mission for any nation, will steadily acquire greater urgency and priority. As it does, international tensions and the risk of conflict will rise, and these growing threats will make it increasingly difficult for governments to focus on longer-term challenges, such as climate or alternative fuels – challenges that are in themselves critical to energy security yet which, paradoxically, will be seen as distractions from the campaign to keep the energy flowing. This is the ultimate dilemma of energy security in the modern energy system. The more obvious it becomes that an oil dominated energy economy is inherently insecure, the harder it becomes to move on to something else.

I am a big fan of Paul Roberts, whose book The End of Oil: On the Edge of a Perilous New World (from which I copied this passage) is one of the best tomes available about the current energy situation. The book was published in 2004, though. Although Roberts accurately spotted the major trends and concisely explained the issues, the period in which he did his research and writing was one of high optimism compared to the situation today. Sometimes he seems almost naïve. The big word today is recession, with fears around the world that the US may already be there, and that Europe and Japan will soon follow. Perhaps the ballyhooed “disconnect” between growth in the developing world and that in the west is nonsense, goes the thinking: growth in China, India and other rapidly developing countries actually will respond to a slowdown in the West. Those fears have raised concerns in the oil markets: Will demand for the commodity decline so much during the recession that surpluses will wash around the world, driving prices down? Fearing a crash in demand, the price of West Texas Intermediate briefly dropped to its lowest level in three months at the end of January. Then, as I suggested elsewhere, reality began to intrude: OPEC doesn’t have a lot more oil (in the sense of productive capacity) they can produce. Geopolitics, rising demand and historically tight supply still govern the price of oil. Traders aren't likely to let oil prices decline from their current lofty levels. (Natural gas prices, by contrast, are likely to rise rather quickly.) Won’t a slowing of oil demand give the world a respite – buy a bit more time during which we can “do something” about the energy mess? Not if the decline in demand is caused by recession. The world’s energy problems need money to be solved. In an era of job loss, declining consumer spending, huge government and trade deficits (in the United States and other western countries), rising inflation, tightening credit and seemingly interminable religious and energy wars around the world, money for energy solutions is increasingly unavailable. Add to these problems the uninspired leadership in the US, Canada and much of the rest of the world (especially in respect to the intimately related issue of carbon emissions) and the outlook seems particularly bleak. How bad can things get? I’ll give the last word to Paul Roberts, who describes a grim worst case in which crude oil production has peaked, followed by “global recession, worldwide unemployment, economic chaos, and, perhaps, a dangerous and escalating competition among the big oil-importing nations over the remaining reserves in the Middle East.” In an afterword to the reissue of his book, Roberts describes an important change in people’s awareness – by which he mostly means that of the American people. He writes,

More people and policymakers now seem to understand that the energy system is in serious and growing trouble and that without a fundamentally new approach we are almost assured of a catastrophic failure. What our new awareness actually means is hard to say. It may be the first tentative step toward building a more sustainable energy economy. Or it may simply mean that when our energy system does begin to fail, and begin to lose everything that energy once supplied, we won’t be so surprised.

Efficient Markets? How Noise Drives Prices

By Peter McKenzie-Brown This week was remarkable. It began with the Americans twisting Saudi arms so they would increase oil production. Nervous that there might be spigots that could actually be opened, oil prices dropped off their lofty levels. Then a decline on global stock markets was greatly exacerbated by the squeeze forced on France’s Société Générale by a rogue trader.

The Martin Luther King holiday market closures compromised an orderly unwinding of those futures contracts, and the decline in the markets turned into a meltdown. Not knowing that the actions of a 31-year-old rogue had precipitated the collapse, the Fed’s Ben Bernanke flooded the world with cash by precipitously slashing key US interest rates. The markets were also flooded with rumours of a severe US recession impending – one that would take the world with it. Fearing a crash in demand, the price of West Texas Intermediate briefly dropped to its lowest level in three months. Then reality began to intrude: the Saudis don’t have a lot more oil they can produce, and geopolitics, rising demand and historically tight supply still govern the price of oil.

The chart illustrates two things. First, it shows the trading range of oil (the space between the red and green lines) during the last six years. Second, it shows an extended breach in that trading range – essentially, three months of trades above the red line. What used to be resistance has now become support. I consider it highly significant that oil prices popped up after touching their three-month low.

In the future, oil is likely to trade above the red line. One of the great things about technical analysis of this kind is that it is a way of imposing order (straight lines) on a market riven by noise (jagged lines.) However, technical analysis is not an excuse for not understanding what decisions help form the jagged lines of day-to-day trading. Oil prices are governed by a highly sophisticated market – one that can quickly balance innumerable pricing factors to establish appropriate prices for oil, but so doing creates endless charts of jagged lines. Herein I present my perception of how that market developed and of the major factors influencing it. As a Canuck, I will deal with the matter from a Canadian perspective.

The Background: As oil became a vital factor in western life during the twentieth century, exploration for the stuff – a new industry – found more than the world could consume. In response, big companies set prices for the oil they controlled overseas, while governments and regulators in the US helped create a parallel environment in which America’s huge domestic oil industry could prosper from higher prices. By 1970, these different policies had created a global pricing environment in which oil produced in the United States cost $3.18 (U.S.), while oil produced overseas only fetched $1.30 (U.S.)

This situation received a severe blow in 1973 when OPEC began to act as a cartel – an organization committed to keeping prices higher than the market would ordinarily allow. They were so successful that OPEC’s member states made price control the organization’s primary purpose, and for more than a decade a statement from OPEC was enough to give world energy markets the jitters. The energy crises of the period were possible because the world was no longer awash with oil. In particular, production in the United States (then the world’s largest producer) had begun to decline.

The Western world needed new supplies, and the volumes required were only available from OPEC members. This period culminated with the Iranian Revolution of 1979-80, which brought panic to oil markets. Dubai oil prices rose from about $2.00 (U.S.) per barrel in 1972 to $36 (U.S.) in 1980. All this was far more traumatic a generation ago than the rapid oil price increases of the last ten years. The reason is that – at least, in relative terms – oil then played a much larger role in the world economy.

Spot and Futures Prices: The market responded dramatically, and predictably, to these painful price increases. Consumers used less oil while producers pumped more. OPEC soon lost the ability to keep prices high. Then, in 1986, Saudi Arabia, an OPEC leader, flooded the market with oil in an effort to re-establish market share. As a result, prices plunged. Dubai oil dropped to $13, and fluctuated around that level for more than a decade. It did not move decisively upward again until 2000, when tight oil supplies began to squeeze prices higher. Aided by the convergence of computer and telecommunication technology and by increasing competition among global oil producers, the world’s response to these three “price shocks” – the price spikes of 1973 and 1980-1981 and the price collapse of 1986 – was to create a sophisticated global energy market.

After much turmoil, this market, which now accommodates innumerable buyers and sellers, imposed a laissez-faire discipline on the matter of global oil pricing. In this market, petroleum prices take the forms of “spot” and “futures” prices. Spot prices represent what traders charge for oil for immediate settlement – usually, delivery within two days. Futures prices are prices for delivery of oil at a certain date in the future – as soon as one month, as far into the future as nine years – at specified prices. Driven by a global network of traders working around the clock (except weekends and holidays), spot trades take into account the needs of refineries and a constant stream of geopolitical and economic data.

The markets are more strongly influenced by information about how much crude oil inventory is in America’s stockpiles than by OPEC statements about how much oil they are going to produce. News about hurricanes and other extreme weather events also figure into price calculations. So do rumours and worries about conditions in the world’s large economies. 

The world’s energy traders bring uncountable resources, facts, needs, expectations and beliefs about the future into their collective trading decisions. This interplay of intelligence and knowledge creates a group mind capable of processing extraordinary amounts of information as it establishes global prices. Charts of spot prices changing minute by minute can be found on numerous web sites.

Benchmark Pricing: Spot prices represent the business end of crude oil pricing, but futures contracts are the ones that truly set prices. As their name implies, futures contracts anticipate what prices will be in the future. Investors and speculators buy these contracts on major commodity exchanges, and spot traders use them as their main references as they negotiate prices.

Traders have developed many strategies using futures contracts. They are commonly used for financial speculation, but they also have practical business uses. Refiners can use them to secure the price they will pay for oil at certain points in the future, for example. To create futures markets, exchanges had to settle on particular kinds of oil to serve as benchmarks. The price of a barrel is highly dependent on both its grade (which is determined by factors such as its specific gravity and its sulfur content) and its point of delivery. In North America, the benchmark price on the New York Mercantile Exchange (NYMEX) is West Texas intermediate oil (WTI), delivered at Cushing, Oklahoma.

There are other benchmark crude oil contracts. Of these, the most important is Brent light, delivered at a port in the north of Scotland. Traded on the International Commodity Exchange in London, this oil contract essentially determines the price of oil in Europe and Africa. Oman oil, which is traded in Dubai, helps determine the cost of oil in the Middle East. The US government’s Energy Information Administration uses an entirely different approach to oil price calculations. It calculates the weighted average cost of oil imports (including oil from its biggest supplier, Canada) to determine the world oil price for the United States. Known as the Imported Refiner Acquisition Cost index, this is a lagging indicator. Instead of giving information about what prices are or will be, it describes what they have been.

Edmonton Par: Although Canada is a large and growing oil producer, we are a price taker rather than a price maker. Canadian prices are established by reference to the benchmarks of New York, especially, and of London. Those benchmarks are the price makers. The “real” price of oil is its spot price – the amount a buyer will pay for oil for real, immediate delivery. One important Canadian pricing standard is Edmonton light oil. How prices for that oil are established illustrates spot pricing in action. Initially, the price for Edmonton light is set by the companies – Imperial Oil, Petro-Canada, Shell and Suncor – with facilities at Refinery Row, near Alberta’s capital city.

Each morning they post the price they will pay for Edmonton light. Those prices closely track the most recent closing price for NYMEX futures contracts. The daily average of the prices offered by those four refiners is known as Edmonton Par, and it is the standard used for calculating oil prices in Western Canada. Foreign buyers (mostly located in Chicago) negotiate deals that take into account Edmonton Par, the futures price in New York, the spot price in Edmonton, the date the oil will be delivered, the difference in quality between Canadian light and WTI, the cost of transportation and the availability of competing supplies. As with other efficient markets, the price of Canadian oil reflects a balance of the needs and intelligence of many buyers and sellers.

Canada’s Split Personality: Global markets have had quite a big impact on the distribution of oil within Canada and across North America. In particular, they have helped determine which parts of North America use Canadian oil, and which use oil from the US and overseas. Refiners avoid the high transportation charges required to pipeline oil from Alberta to Toronto and points east. Instead, they buy oil from offshore Newfoundland or from international markets. That oil is delivered to ports in eastern Canada or to a pipeline terminal at the ice-free harbour in Portland, Maine. From those delivery points the oil is piped to major refining centres in Come-by-Chance, Nfld.; Saint John, NB; Montréal and St. Romauld, PQ; and Nanticoke, Ont.; and to smaller eastern refineries.

Oil from western Canada is another story. It is highly competitive from Vancouver to Sarnia, and in parts of the US West and Midwest. Many refiners in those areas have developed equipment designed to refine specific kinds of oil from Canadian producers. That specialized equipment is one part of the industrial infrastructure that has created secure markets for Canadian oil. Another is North America’s complex network of interconnected pipelines, which make delivery relatively easy.

In practice, Canada has a split personality in the matter of oil imports and exports, and this is mostly a function of our planet’s market pricing for oil. We are the seventh largest exporter of oil in the world, but also the seventh largest importer. In 2006, each day Canada exported 1,784,000 barrels of crude oil, mostly from the west. At the same time, however, we imported 849,000 per day into the east. Canada was thus a net exporter of 935,000 barrels of oil per day.

Because a great deal of our oil production is lower-quality heavy oil, in 2006 Canadian production on the whole sold for less than the $66 per barrel fetched by West Texas Intermediate. However, those net exports added more than $55 million per day to our trade balance with the world. The creation of a sophisticated global marketplace for crude oil coincided closely with the years in which Canada joined the big leagues of global oil producers and exporters. As we have seen, market pricing now suffuses the sector, and it has helped put the industry into its present form. An example is Canada’s decision to import oil for its eastern refineries while exporting oil from the west. In this instance and many others, efficient markets have helped create a cost-efficient industry.

Pricing the Marginal Barrel of Oil

The large-scale exporting nations and regions that are increasing government take from oil – or have already nationalized their oil resources – include Russia, much of the Middle East, Venezuela and other countries. The five countries whose production is charted here are not particularly friendly to the West.

By Peter McKenzie-Brown Five of the world’s large oil exporters have two things besides big oil reserves in common. First, their economies are largely dependent on revenues from energy production – they don’t produce much else. Second, their people or their governments (or both) are hostile to the West.

The chart shows the relative positions of five of the world’s large producers – Venezuela, Russia, Iran, Nigeria and Saudi Arabia. Consider the context: the planet consumes about 85 million barrels a day. Together, these five countries produce more than one third of world supply. Except for post-Soviet Russia, which is new to the game, each of these countries long ago found ways to maximize government revenue from petroleum. Perversely, in the long run this will serve them well by making less production available. As prices rise, their economies will boom long after their production has gone into decline. As the world nears its petroleum peak, the economic reality of a seller’s market will have strange, unintended consequences.

Economic Dependency: Consider the first of the two points I raised. The countries named in the chart have little to keep their economies going except revenue from oil and gas. Here are the numbers. The info comes from many sources, but I’ve done my best to keep it consistent.
• Nigeria: Oil exports provide 20 per cent of GDP, 95 per cent of foreign exchange earnings, and about 65 per cent of budgetary revenues. No reliable export numbers available; Nigeria’s OPEC quota is 2.3 million barrels per day.
• Saudi Arabia: the petroleum sector accounts for roughly 75 per cent of budget revenues, 45 per cent of GDP, and 90 per cent of export earnings. Oil exports are 8.5 million barrels. Saudi’s official OPEC quota is 10.1 million barrels per day.
• Iran: Petroleum exports of 2.8 million barrels per day represent 80 per cent of exports. Exports: 2.8 million barrels per day; the country’s OPEC quota is 4.1 million barrels per day.
• Venezuela: Oil revenues account for roughly 90 per cent of export earnings, more than 50 per cent of federal revenue, and around 30 per cent of GDP. Oil exports are about 2.3 million barrels per day – well short of Venezuela’s OPEC quota of 3.2 million barrels per day.
• Russia: Oil, natural gas, metals, and timber account for more than 80 per cent of exports and 32 per cent of government revenues. Each day, Russia exports some 7 million barrels of oil. It is not a member of OPEC.

No matter how much they protest the importance of oil at “reasonable” levels, these countries are delighted when the price of the marginal barrel of oil – that is, the price of the last barrel sold – goes up. Higher marginal prices enable them to charge more for the barrels they load onto tankers. Nothing new here. However, at a recent energy conference in London, Sadad Al-Husseini – an oil consultant and former executive at Saudi Arabia’s national oil company - made an observation that puts the reality of this economic dependency in an interesting light. In effect, he quantified the price of the marginal barrel when he suggested that supply shortages will add $12 to the price for every million barrels a day of additional global demand.

As this chart of eight major oil-consuming nations illustrates, it isn’t hard to see where increases in world oil consumption will come from. Just watch China and India grow.

Of course, supply and demand are parts of the same equation. Let’s assume that $12 is the cost of adding another million barrels of demand. It would also be the price of subtracting a million barrels of supply. Cutting supply by one million barrels a day would jack prices up by $12 per barrel as effectively as would increasing demand by that amount. While the marginal price is increasing from a growing Asia, it could also increase because of reductions in supply.

If the five producing countries I have been discussing were to cut supply by a million barrels per day, we would likely see yet a price increase of the same magnitude. Consider the math: Today’s marginal barrel is worth about $90. If our five countries collectively reduced production by 5 per cent, their revenue per barrel would increase by 15 per cent, as oil rose to $102 per barrel. Their collective revenues would benefit quite nicely, thank you very much. How could such a reduction occur? These countries wouldn’t need an OPEC agreement to reduce production – you may have noticed that none of the OPEC members are producing their full quotas anyhow. They could effectively reduce production through failure to explore for and develop reserves, by shoddy production practices, by simple government fiat, or as a result of the natural depletion of their reservoirs. Supply could also drop as a consequence of war, insurgency or terrorism. Whatever the cause, the result would be that countries with little else to offer could increase government coffers and national wealth.


Hostility to the West: At the beginning of this post, I noted that each of these countries has a certain amount of hostility to the west, and each in its special way.
 • In the case of Nigeria, part of the issue is an insurgency in which local entrepreneurs have found that taking westerners hostage can be a good source of income. A major oil exporter, the country is also hobbled by political instability, corruption, lousy infrastructure and worse management. Oil is frequently stolen from production facilities, and whole fields shut down after rebel attacks.
 • Saudi Arabia? Officially, the princelings love the West and will do everything they can to maintain supply. Their subjects have other ideas, though. You may remember that fifteen of the September 11 hijackers were Saudi nationals. The land of the fanatical Wahhabist sect of Islam has some real issues with the decadence of the West.
 • Iran’s mullahs can’t understand why anyone would be concerned about their peaceful nuclear program, and would just love to nuke anyone who questions their nuclear rights. George Bush recently announced that if they get nuclear weapons, it will lead to World War Three.
 • Hugo Chavez is selling gasoline in Caracas for 3 cents a litre (part of his socialist reform), while running a country fuelled by crude oil exports. And he’s confiscating the assets of well-managed western oil companies in the interest of owning and operating those assets locally.
 • Then there is newly-belligerent Russia. Incredibly popular and riding the wave of high oil prices, Vladimir Putin wants Russia to become a superpower again. And his control of energy can help him achieve that goal. His country is already an energy superpower. Putin has briefly cut off the taps to both Ukraine and Georgia in recent years, using the energy weapon to settle political scores. He does much more than talk.


Greedy Government Redux: In a recent post, I discussed last week’s changes to Alberta’s royalty regime. As I pointed out, during periods of high oil prices, governments get greedy. In Canada we experienced the disastrous National Energy Program due to the greed of our federal government in the early 1980s. Now, the provincial government of Alberta is at the trough. My basic assumption is that the spectre of peak oil is imminent. As a result, and because of high prices, governments around the world are increasing their take from oil and gas. Alberta is by no means alone in this. Increased government take does not increase oil production – in practice, it decreases the incentive and ability for oil companies to bring more oil on stream. Less production, higher prices: it's a simple matter of supply and demand. In a response to my article, a correspondent told me that “The sooner we get away from the dirty polluting tar sands, the better it will be for the environment and the people of this planet.”

I think that if the 1,250,000 daily barrels of oil that now come from Canada's oil sands suddenly evaporated, you and I would both be dealing with oil well beyond $100 per barrel, right now. Most consumers in the West can pay the extra money for gasoline that such an increase in oil prices would generate, although most of us have had to tighten our belts to do so. However, rising prices are already causing a great deal of suffering around the world – especially in the poorer countries. The world is hooked on oil, which is not good. However, as long as we are hooked, we must find ways to keep those supplies of oil coming while we look for solutions. Increased government take makes it more difficult to develop supply. Increased take by countries whose governments or people are openly hostile to the West is a danger we cannot resolve, but it is also a danger we must not ignore.

Language Triumphant, Language in Decline

By Peter McKenzie-Brown

For two centuries – since the defeat of Napoleon – the globe has been dominated by English-speaking nations.

The first of these great powers was Britain, which used sea-power and the economic muscle of its Industrial Revolution to create an empire that planted English in all the populated continents. America rose as Britain’s rival, and decisively replaced her as the world’s global power after the Second World War – especially after the collapse of the Soviet Union.

In both instances, these countries held diplomatic sway over most nations, and economic dominance over large percentages of the global economy. Both countries were leaders in science, technology and medicine, and they were great trading nations.

The result? Although it is the native language of perhaps half a billion people – a large number, but still only eight percent of the world’s population – English dominates the planet.

It is the primary language of world trade, business and management. It is the language of global travel, tourism and hospitality. It is the international language of science and medicine. It is the language of diplomacy and international cooperation. It is the language of global banking and Third World development. It is the dominant language in all forms of international media and publishing. Although many languages can now reach around the world cheaply over the Internet and satellite broadcasting, it is English that consistently reaches the biggest global audiences. English is the language of sports and glamour: both the Olympics and the Miss Universe pageant use English as the official language. It is the ecumenical language of the World Council of Churches.

And it is the language of academia. According to The Economist,

The top universities are citizens of an international academic marketplace with one global academic currency, one global labour force and, increasingly, one global language, English. They are also increasingly citizens of a global economy, sending their best graduates to work for multinational companies. The creation of global universities was spearheaded by the Americans; now everybody else is trying to get in on the act.

Not since the Tower of Babel has a single language had so powerful a presence. According to some forecasts, within just a few decades more Chinese will be able to speak English than in the rest of the world combined. Already, more people speak English as a second language in India than in all of Britain, where the language began. Indeed, in countries like India and Singapore, English is the language used for administration, broadcasting and education.

In the European Union, English is spoken by more people as a foreign language than by the combined populations of many of the region's smaller countries. The young in particular use this foreign language with unnerving fluency.

Alone among the world’s major languages, English is spoken by more people as a second or foreign language than by people who learned the language as their native tongue. According to one outstanding account of the growth of English from local dialect to global behemoth, we are now living in an English-speaking world. English is the first truly global language.

As an international language, English has a few regional rivals. These include Arabic in the House of Islam; Spanish and Portuguese in Latin America; Russian in much of Eurasia; and Chinese dialects in overseas Chinese communities. Except in Canada and a few former colonies, French long ago lost its claim to be the lingua franca. English has no equals.

The language has become the basis of a teaching and learning phenomenon that prospers in almost every country. Within English-speaking countries like Britain, Canada, Australia and the United States, huge numbers of new migrants must be taught English as a second language. Among prospering countries in the developing world, English is generally part of the public school curriculum, and language schools flourish.

As an international learning phenomenon, nothing comes close to the study of English. At any given moment, untold millions are studying the language. Some do so to integrate into British, Canadian, American, Australian or New Zealand life. Others hope to get a higher-paying job in a tourist resort in Phuket, say. And still others want only to benefit from the increasing mobility this language offers to travellers bound for Southeast Asia or virtually any other international destination.

Languages at Risk: At the other end of the spectrum from English are the world’s tribal languages. Most of these tongues - more than six thousand in number - are in steep decline. The process has been well documented. First, decreasing numbers of children learn the language. It becomes endangered when the youngest speakers are young adults. A language is seriously endangered when the youngest speakers have reached or passed middle age. And it is moribund when only a few moribund speakers are left. Then comes extinction.

Using Thailand as an example, one language, Phalok, is already moribund. Four other obscure languages – Bisu, Mlabri, Myu and Lavua – are in earlier stages of decline.

Every year the deaths of old people reduce the already small numbers of speakers of many marginal languages. Meanwhile, these tongues carry on in the fringes of most societies, with few advocates for their preservation. Obscure texts by linguists may preserve their grammar and vocabulary, but there is no likelihood that these languages will repeat Hebrew’s achievement, and rise alive from the tombs of dead languages.

Is this important? The followers of Chomsky would say "no", since the underlying idea behind universal grammar is that everybody speaks the same language. Most field linguists, however, believe that linguistic diversity represents a common good for mankind. According to the 2001 edition,

every language reflects a unique world-view and culture complex mirroring the manner in which a speech community has resolved its problems in dealing with the world, and has formulated its thinking, philosophy and understanding of the world around it.

The Status of Thai: Between these two extremes is the Thai language, which epitomises the development of national languages during the years since English began to take over the world. Thailand’s present dynasty was founded in the years after 1767, when Burma destroyed and looted the kingdom of Ayuthaya and its vassals.

As a resurgent Siam conquered Burmese armies and extended its domain, the new Chakri dynasty of kings found themselves heir to a much larger land, but one comprised of many peoples speaking many tongues. In Thailand’s far south, the people were Muslim, and the dominant language Malay. And in the mountains that dominate the landscape of northern Thailand, the rich fabric of hill tribes was woven with languages spoken in few other places in the world.

For most people living in valleys and on the plains the root language was Thai. However, there were so many variants that linguists have identified Thai dialects with six and even seven tones. Besides these tonal differences, dialects varied dramatically from region to region – and still do.

Speakers in Thailand’s northeast (Isaan) speak a language more like Lao (a Tai language spoken in Laos) than to central Thai. Along the Thai/Cambodian border, large numbers speak Khmer – another language still. In the new kingdom, even the scripts were different – the country’s north, for example, had a script that was widely used until the second half of the twentieth century.

From this Babel of tongues, Thailand has progressively developed the Thai language into an important national language: perhaps among the 20 most widely spoken languages on the planet. Through the tools of education, mass media and government influence and suasion, central Thai has developed into the national language.

At some level, it is spoken by most of the kingdom’s 63 million inhabitants, and only one script is now in common use. Thai is not much spoken outside the country, except to a small extent in adjacent countries – most of them (Myanmar, Laos, Cambodia) failed states.

Book Review: The Color of Oil

by Peter McKenzie-Brown

Note: I wrote this in 2001, and just found it on the Internet.

Oil Shows Its Colours

Possibly the best book about the oil business since Daniel Yergin's Pulitzer Prizewinning volume "The Prize", a masterful narrative published in 1991, The Color of Oil offers a thorough and authoritative analysis of the global industry.

The book uses as its central theme the colours of the petroleum industry. For example, the industry's financial impact on the global economy is based on the idea that the colour of oil is green (the colour of money). A technical chapter on exploration and production is based on the idea that the colour of oil is black. A chapter on the U.S. impact on the oil industry begins with the idea that the colour of oil is red, white and blue.

You get the idea.

The authors are both US academics, and they are both engineers by training. However, they both have direct experience with the petroleum industry - Economides as a technical advisor to a number of U.S. corporations; Oligney as a corporate honcho who, according to his bio, "negotiated one of the first joint ventures in the former Soviet Republic of Kazakhstan."

The authors bring a strongly business-oriented focus to their book, and offer refreshing insights into much of its well-traveled history.

To give some idea of the perceptivity of this book, consider that it was published at the beginning of 2000 when the T.S.E. Oil and Gas Index languished around 6000. There was widespread gloom about the future of oil and gas investment.

Wrote the authors, "Now is the time to buy energy stocks. They will escalate in value substantially in the early 2000s. The wise investor buys for the long-term because energy is the world's biggest business, and it continues to move unstoppably forward."

The index is now one third higher. Market psychology seems to be changing, with more investors wanting to hold oil and gas stocks in their portfolios. If another period of energy crisis looms, as many pundits claim, this book will be a good primer to help understand what is happening.

The Color of Oil: The History, the Money and the Politics of the World's Biggest Business by Michael Economides and Ronald Oligney; copyright 2000. Published by Round Oak Publishing Company, 200 pages; $37.95. Available at DeMille Books.