Oil and Overproduction

Charles Jannuzi b_rieux at yahoo.com
Wed Jan 15 03:03:02 MST 2003


Actually Re: Oil and Overproduction plus a
comment on the so-called 'cotton famine'

I believe this will be my LAST word on the
matter, though believe me I'm not trying to pick
or sustain an argument on the topic.

It's pretty obvious to me that we have lived in a
post-war era based on plentiful and cheap fossil
fuels. And that plenitude has up until today been
a source of overproduction--overproduction of
food in places like the US, Canada and Australia,
and overproduction in manufacturing where both
the material used to make things and the energy
used to make things comes from fossil fuels. Even
overproduction in transport in an era of
globalization (I remember hitching a ride with a
trucker taking a trailer 1/3 full of frozen
pretzels hundreds of miles into backwood
Maine--what efficiency!).  I would argue that
fossil fuels have been the commodity of modern
overproduction--though, as Mark points out, that
is going to change.

I don't think it's going to be anywhere near as
soon as Mark thinks. He might be skeptical about
the US government's or western oil companies
estimates of the reserves or their ability to
keep finding new sources or pumping more from
known sources, but it's rather complex actually.
One way to inflate your value as an oil company
is to inflate the extent of your reserves you
have the right to pump from. But another way to
inflate your value is to value your reserves
using a higher price per barrel. Look, oil is $30
per barrel; our reserves are more than twice what
they were when it was $14 per barrel.

So 'artificial' shortages can be used to create
beneficial higher prices. Higher prices also
bring higher profits to the companies. They make
more money on sales, as some inflation up to a
point is always better for profits than
deflation. And the higher price helps you to pump
more from rather expensive domestic sources (I
knew wells in Kentucky, hardly known as an oil
state anymore, where they pumped one day but
didn't the next because the price of oil went
below a certain price). And a higher price helps
you put together financing for more exploration
and especially capital-intensive development,
including extraction, storage and transport.


The question that the next era will pose is: how
will capitalist governments and economies respond
in an era when dwindling reserves are the actual
cause of shortages? That hasn't happened yet,
though US and EU foreign policy is largely driven
by the need to forestall it.

Some of the reasons why an era of tight supplies
of fossil fuels has been avoided include: better
extraction methods, unexpected finds, and even,
up to a point, more efficient and flexible use of
the fuels. For example, new extraction methods
made available much more Canadian oil. And the
opening up of that oil also made available more
sources of natural gas, which the US switched to
in order to extend oil for other purposes.

The original thread also led to one on Malthus
and Marx, and then the Perelman article and the
so-called 'cotton famine'. Actually, I don't
think the so-called cotton famine is that
pertinent because the cotton famine is more an
example of potential supplies being (potentially)
plentiful while actual supplies are tight--a
shortage.

The historic example of the cotton famine

(see these for fascinating background reading:
http://csf.colorado.edu/psn/marx/Other/Riazanov/Archive/1927-Marx/ch07.htm
http://www.marxists.org/archive/marx/works/1867/letters/67_11_30-abs.htm
http://www.geocities.com/Athens/Aegean/7023/Irishnationalism.html)

is more relevant to the way capitalist economies
have dealt with temporary scarcity, not with
resource depletion--though admittedly, there was
depletion of the South's soils that supported
cotton agriculture (but even though Engels being
concerned about the cotton famine for business
reasons as well as distress on the working class
in Lancashire is fascinating, it is an example
less modern than say scarcity and post-war Europe
and Japan and the ways it was dealt with by
capitalist governments--such as commodity and
capital cartels).

One question will be: when nature forces
rationing on us, what forms of government and
political economy will best respond? First, it
will be ways that are able to rationally impose
rationing so as to avoid hording and price
panics. Second, it will be ways that can
spearhead energy conservation and efficiency as
the stop gap solution. Third, it will be ways
that effectively pursue alternative approaches to
energy production and consumption in a manner
that doesn't wipe out the human race or
civilization. Somehow I think Enron wasn't a
solution, though I'm sure free market ideologues
really thought 'energy deregulation' would
produce 'efficiencies' from discoveries right on
up to development and power generation and its
sale.

The resource wars may not yet be upon us--not
quite yet anyway. Note how the first Persian Gulf
War was really about overproduction of oil, not
its short supply. Saudi Arabia and Kuwait were
producing too much, and it was bankrupting Iraq.
That Iraq would assert itself as a 'swing'
producer at a time when the US interests in power
actually wanted higher priced oil itself brought
a paradoxical convergence of interests. This is
arguable but there is quite a bit of information
and analysis supporting it. It might explain why
the US was so tolerant of Hussein up to a point.
He was a good weapons and technology client.

President Bush the Elder went to war with Iraq to
get Kuwait back but, in effect, also brought up
the price of oil artificially (in a way similar
to now when 'markets' say oil should be $30 per
barrel, though OPEC and actual supply estimates
insist it shouldn't be). Then, when Iraqi oil
production itself was to quite an extent
destroyed in the war, the US also helped drive
down production--and the results of the war were
far worse for Iraq than overproduction in OPEC. A
war with Iraq almost seems inevitable because we
went from clear overproduction to tighter and
tighter supplies, which brought Iraqi oil back
into the picture. The US establishment doesn't
want a hostile government supplying it oil, and
most especially if that country is a supplier of
cheap oil (compare the price of Iraqi oil to
Russian). Or to put it better, the US doesn't
want a potentially hostile country determining
the price of oil, since there is so much more to
oil than supplying it.

I'll believe the fossil fuel depletion wars are
upon us when the Japanese yen tanks and stays
down. Afterall, how in an era of 'naturally'
tight oil supplies could Japan and its currency
be an economic refuge for capital? It couldn't.
Japan has to import 100% of its oil, and most of
its coal and natural gas as well. As it is now,
the threat of temporary shortages doesn't even
stem the strong yen. Now, I'm not saying markets
are smart and rational enough to predict this,
but if it were upon us, you'd think it wouldn't
be a matter of prediction. They don't dump yen
because more than the price of oil they read the
US government as (1) wanting a strong yen and (2)
not supporting the dollar vs. the yen or euro.

You know the proverb: money is the root of all
evil. But actually, I believe the biblical
language is 'want of money is the root of all
evil'. I think finite supplies of fossil fuels
could replace money here. It's not oil that
drives what capital does. It's the desire to
control the price of oil that does. So I don't
think capital has really woke up to the looming
era of fossil fuel scarcity, yet. They are just
too busy doing what they always do. Diversifying
their suppliers, looking for ways to maximize
profits. So like Exxon and Ford employees
everywhere, you are all supposed to step on it as
you drive your SUV between your job and your
exurban paradise.

Charles Jannuzi
Fukui, Japan



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