Learning from Lagos

The September issue of Gregor.us Monthly, Learning from Lagos, addresses key events earlier this decade that helped to reveal the structural changes in the global oil system. From Moscow’s Spring 2004 attack on Khodorkovsky and Yukos, to the late 2005 campaign initiated by MEND in the Niger Delta, these actions at the margins of world oil supply signaled to other global oil producers that the era of spare capacity had come to an end.

It is often too difficult to comprehend the totality of very large systems. This is why, unintentionally, many of these–I call them Oil Actors–performed a series of useful stress tests on world oil supply coming out of the 2002-2003 period. Once the feedback mechanism of these events filtered through the price of oil, that sent a new message and a new revelation to producers such as Venezuela, Brazil, and also to Russia and Nigeria–all producers that never before had been able to impact the price of oil.

But of course no part of this phenomenon would have been sustainable had not something else started to show through, in the geology of global oil supply. And that was the stagnation of growth in Non-OPEC oil. From my newsletter:

We can think of the world of global oil supply in essentially four distinct parts. There is OPEC, with its largest producer Saudi Arabia. And then there is Non-OPEC, with its largest producer, Russia. You can think of these four suppliers of oil as units, or perhaps mega-regions, of oil supply. As four distinct categories, they allow us to better see the totality of global oil. Saudi Arabia is of course the anchor to OPEC supply. Russia is the anchor to Non-OPEC supply. That leaves us with OPEC ex-Saudi Arabia. And, Non-OPEC ex-Russia. It’s this latter category, Non-OPEC ex-Russia, which currently provides a non-trivial 44.00% of global oil supply. Of the four units, it is the largest single contributor to global oil supply. And, as a category, it is also quite useful thematically as this is essentially all the free market oil.

The data now clearly shows that starting in late 2003, just 6 months before the Moscow-Yukos affair launched oil over the 40.00 dollar level, that Non-OPEC supply ex-Russia peaked. And while international managers of both western oil companies and national oil companies would not necessarily have seen the totality of this inflection point, it’s reasonable to conclude that in each oil producer’s corner of the world they were seeing the following: that Non-OPEC oil was getting harder to produce, more expensive to produce, and most important, Non-OPEC oil supply was not responding to price.

In the recent examples of junk journalism from both the New York Times and Scientific American on the subject of peak oil, it should be pointed out that the missing man in these pieces on recent oil discoveries was how these new resources will actually translate into flow rates. Not only are we finding less oil each year now compared to previous decades, but, the geological constraints on this “new” oil is onerous, to say the least. Kashagan, Chicontepec, Ultra-Deepwater/Pre-Salt and even Albertan oil are all evidence of deposits that take years to develop, and even when production does finally start the daily flows are relatively small. It is incorrect and therefore misleading to fail to note these realities to the reader of these publications. Both the New York Times and Scientific American should have instead restricted their articles to the nature of these new oil discoveries, and not erroneously claimed that they will translate into net, aggregate increases in global oil supply.

A new era of resource nationalism is underway for varying reasons, but not the least of which is the stall-speed of global oil production. In other words, the best reason now to hoard your oil is as follows: because you can. No one is going to outproduce you. Wise producers of oil, like Brazil, now understand this. And wise consumers of oil, like China, have also acted accordingly by putting together a global portfolio of oil by peaceful means (using dollars), and one which is widely dispersed geographically (not tightly coupled). Perhaps like journalists, some countries get it, and some countries don’t.

-Gregor