The Fate of an Oil Exporter

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.

baku-oil-wells-2

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.

-Gregor

Photo: Old Baku, Azerbaijan early 20th C.

  • Inegoveritas

    Wasn't the US also an oil exporting nation until WW 2? Just wondering if historically, this is the reason the country hasn't developped alternative sources of energy up until now. A sort of original sin.

    IEV

  • Bob Inget

    It's also true, population growth increased, due in part to cheap oil, in both the UK and Indonesia.

    Left unchecked, India's population will outstrip China's in ten years. Their solution?
    A Nano for everyone!
    The UK will have more people then France. Their solution? Improve already great rail transportation.

    The US, after peak oil production year of 1970, found it cheaper to import Saudi oil. The same, it should be said, can be said for most manufactured goods.
    Since 1950, US population has doubled, Expect, by 2050, our population to quadruple that of peak year 1970. The American solution? Up to this year, build better interstate highways.

    Trouble ahead.. In Africa's most populous nation, Nigeria, puts out bids, to foreign oil companies, exporting the last plentiful, liquid, bridge-fuel, natural gas. That's correct, instead of value added jobs creation, a hundred million poor are ignored and short term profits substituted.

    The Saudis decided, last decade, it was better all around, building infrastructure using their gas reserves to keep youth employed.

    bob

  • gregor.us

    No one has got their head around the Nano yet. But I have. And the advent of the Nano feeds directly into one of my favorite sleeper memes: the yawning gap between the two petrol demand structures of the OECD and the ROW. For the ROW, just starting to use 1-2 gallons a week per capita of fuel is revolutionary. While here in the OECD, our lifestyles are uber-leveraged to much higher quantities of fuel use. As for population, I am listening to the Diane Rehm show right now on population: Listen Live (podcast later) Upcoming WAMU/NPR: 10:00am NY Time – World Population trends:

    http://bit.ly/dpi9D

  • Gator8387

    The problem oil producing nations face is their primary or one of their primary assets is a “wasting” asset.

    It's a problem that is studied in law school by the few people who take “fiduciary administration.” If the chief asset of a trust is a wasting asset, you can't simply distribute all the income to the lifetime beneficiaries, because that will leave nothing for the people entitled to the remainder (i.e., Saudi Arabians 50 years from now).

    So the fiduciary has to allocate that stream of income between income/principal, and has to re-invest the principal portion in non-wasting assets. Otherwise the fiduciary gets sued to hell and back by the remainder beneficiaries.

    You can see the oil producing nations doing this through sovereign wealth funds, or by investing in assets located in the far side of the world. Are they doing enough of it? Almost certainly not.

    Seen in this light Iran's desire to develop nuclear energy makes perfect sense .. the oil won't last forever and when it's gone they would like to have something to show for it (not that there aren't ulterior motives).

  • Gator8387

    The problem oil producing nations face is their primary or one of their primary assets is a “wasting” asset.

    It's a problem that is studied in law school by the few people who take “fiduciary administration.” If the chief asset of a trust is a wasting asset, you can't simply distribute all the income to the lifetime beneficiaries, because that will leave nothing for the people entitled to the remainder (i.e., Saudi Arabians 50 years from now).

    So the fiduciary has to allocate that stream of income between income/principal, and has to re-invest the principal portion in non-wasting assets. Otherwise the fiduciary gets sued to hell and back by the remainder beneficiaries.

    You can see the oil producing nations doing this through sovereign wealth funds, or by investing in assets located in the far side of the world. Are they doing enough of it? Almost certainly not.

    Seen in this light Iran's desire to develop nuclear energy makes perfect sense .. the oil won't last forever and when it's gone they would like to have something to show for it (not that there aren't ulterior motives).

  • Gator8387

    The problem oil producing nations face is their primary or one of their primary assets is a “wasting” asset.

    It's a problem that is studied in law school by the few people who take “fiduciary administration.” If the chief asset of a trust is a wasting asset, you can't simply distribute all the income to the lifetime beneficiaries, because that will leave nothing for the people entitled to the remainder (i.e., Saudi Arabians 50 years from now).

    So the fiduciary has to allocate that stream of income between income/principal, and has to re-invest the principal portion in non-wasting assets. Otherwise the fiduciary gets sued to hell and back by the remainder beneficiaries.

    You can see the oil producing nations doing this through sovereign wealth funds, or by investing in assets located in the far side of the world. Are they doing enough of it? Almost certainly not.

    Seen in this light Iran's desire to develop nuclear energy makes perfect sense .. the oil won't last forever and when it's gone they would like to have something to show for it (not that there aren't ulterior motives).