The fate of an oil exporter is to have sold the bulk of one’s inheritance cheaply – only to live out the twilight years cramped for income, and worried sick about reserves. Of course, this would be less the case if one had converted the built-up years of oil revenue to new productive capacity in energy. If we consider both the UK and Indonesia in this regard, two oil-exporters who turned net importers this decade, scant evidence exists that such capital investment took place. Perhaps the more solemn fate of an oil exporter is to author a tale of resource mis-managment.
For 25 years the UK exported oil. Roughly from 1980 to 2005. While the UK did enjoy relatively high global prices when the surge of North Sea Oil came on stream in the early 1980′s, the bulk of the UK’s exported oil was sold into a weak price environment up until 2002. In truth, the tipping of the UK and other countries like Indonesia into net oil importer status formed, in part, the structure of higher global prices post-2002. To export oil is to contribute to the downward pressure on the price oil. And to stop exporting oil generates news headlines, and tighter supply.
What did the UK do with its oil revenues? Well, this post is not just about the UK. But I would point out that the bulk of the UK’s current nuclear power capacity, for example, was built prior to 1980. In addition, as I have written both on this blog and in a previous newsletter, the UK’s reliance on natural gas imports has risen also this decade. This is the nasty delta that has hit the UK energy balance sheet, therefore: falling supply, falling revenue from supply, and rising outlays for imported oil but especially imported natural gas. I will leave readers to ponder that the greatest expansion of (money) credit ever in the UK took place, just as these structural (energy) changes were unfolding.
The intriguing issue that’s raised here is why are oil producers price takers? Matt Simmons has recently given talks and presentations that confront this question. (see slide 12 in the Simmons .pdf presentation to the Houston Energy Institute) In addition, I would suggest readers get either acquainted or reacquainted with Hotelling’s views on resource pricing. The status quo viewpoint will maintain that of course oil producers are fated to be price-takers. I disagree. Instead, I would argue it’s the collective consensus reality still shaped by 20th Century fossil fuel oversupply, combined with the growing cost-disparity between OPEC oil supply and non-OPEC oil supply, that makes this question now more pressing than ever. That oil is priced at the margin of the daily souk is no longer a satisfying answer. Just ask Indonesia. Or soon-to-be Mexico. Or watch how middle east oil producers like Saudi Arabia and the UAE are now building massive solar utility capacity, and using their oil export revenues to do so.
Photo: Old Baku, Azerbaijan early 20th C.