Thomas P.M. Barnett :: Weblog

POLITICS & ECONOMICS: “Why Oil May Not Stop at $100: As Reservoirs Age and Demand Grows, Prices May Go Even Higher,” by Neil King, Jr., and Guy Chazan, Wall Street Journal, 31 October 2007, p. A4.

THE ECONOMY: “Asia Keeps Pressuring Oil Prices: Economic Growth Offsets Efforts to Curb Demand; Ambivalence on Ethanol,” by Patrick Barta, Wall Street Journal, 23 October 2007, p. A2.

LEADING THE NEWS: “Boom in coal use world-wide is expected: Higher oil prices, aging fields to spur use of dirty fuel,” by Neil King Jr. and Spencer Swartz, the Wall Street Journal--European Edition, 8 November 2007, p. 3.

ARTICLE: “China’s Green Energy Gap: Coal Stays King as Cleaner Fuels Can’t Keep Pace With Demand,” by Keith Bradsher, New York Times, 24 October 2007, p. C1.

ARTICLE: “Relentless advance of oil leads Asia to rethink subsidies,” by Heather Timmons, International Herald Tribune, 2 November 2007, p. 12.

THE INTERNATIONAL INVESTOR: “Oil prices stress China: price controls mean state-owned refineries buy high, sell low,” by Shai Oster, Wall Street Journal--European Edition, 8 November 2007, p. 25.

CORPORATE FOCUS: “Big Oil Has to Share the Wealth: As Crude Prices Rise, Contracts Give Host Nations More of the Output,” by Guy Chazan, Wall Street Journal, 9 November 2007, p. A12.

Asia’s pushing up all commodity prices, but the most important one is naturally energy. The oil industry’s been low-balling investment for so long, thanks in part to the mid- and downstream players not wanting to get stuck with long-term capital investments they’ll never earn out on (think, refineries) while upstream NOCs (national oil companies) persist in wanting to hold off outsiders and their money and technology, preferring smaller reserves they feel more control over than pursuing larger ones they fear will trigger another depression in prices.

So everyone’s waiting on everyone else and here comes Asia’s skyrocketing demand and nobody’s ready--except the speculators who’ve fallen in love with betting on commodity prices. These prices will naturally rise with rising demand, but the history is clear: once they rise high enough, people and firms and economies switch off to alternatives or conserve, which is how the world actually lowered its total use of oil in the early 1980s despite continuing to grow.

Naturally, pulling off that sort of trick this time on oil will be far harder, because of those 3 billion new capitalists wanting more, more, more. We’re up about 1% from last year, using 20mbd (million barrels /day), and Europe’s up about 1.5%. But Asia’s up 2.5% to 25 mbd. In 1992, China accounted for just under 4% of total world oil consumption. Next year? Nine percent.

Meanwhile, the Middle East is ramping up its use of oil, and the IEA is predicting almost 8mbd by 2015--more than India’s projections.

Casually turning to alternative fuels, such as biofuels, is discouraged by the general price rises there too. So naturally, as both India and China dramatically ramp up electricity production, they’re turning to cheap coal (accounting for roughly 80% of coal’s increased usage over the next two decades), meaning China supplants the U.S. this year as biggest CO2 emitter and world’s biggest energy consumer in 2010 (according to the IEA’s “World Energy Outlook”).

On transportation, India and China, with their ambitious populations, are no more eager to increase their heavily subsidized low gasoline prices. People expect a lot more mobility with prosperity, but it’s clear the government can’t afford those prices over the long haul.

So what’s going to give?

NOCs, or national oil companies, directly control less than 40% of global reserves currently, but by 2030, according to the IEA, they’ll directly account for 75% of all production, meaning “big oil” companies are being slowly squeezed out of the picture, with investors increasingly looking at the NOCs and bypassing the remnants of the so-called seven sisters.

Scenarios in which some powers get long-term deals with NOCs on oil access and others are starved just don’t stand up to scrutiny in a globalized world where oil is quite fungible, markets are fluid, and the big consumers are so intimately interlocking in their growth that dreams of energy “independence” are just that--dreams.

So one of two things happen, in my mind: 1) the NOCs are increasingly penetrated by outside investments and thus those nations are increasingly opened up to globalization’s effects (both good and bad), especially when the governments in questions (like Dubai) seek to radically diversify their economies because they correctly view their oil windfall as historically temporary, or 2) NOCs will try to stay the course, holding off outsiders and their technology and money and accompanying change agents, and they won’t keep pace with demand, forcing the big consumers to move their energy profiles elsewhere as rapidly as feasible, based on the monetary trade-offs.

And, as with most either-or’s, both are likely to occur.

If so, I think history will judge China and India’s rise as the bigger influence on globalizing the Middle East than our wars there, meaning everything still traces back to Deng and beyond him to Nixon.