There is nothing to fear, but . . .

When President Roosevelt uttered his famous phrase on fear, America was, to be blunt, in a mess. The Great Depression was not a fun time to be around. Yet the important point is not one of comparing circumstances, it is in his message on the debilitating effects of fear itself.

Consider the underlying fear revealed in the article carried today by Rigzone on the latest International Energy Agency comments. Those who have survived in the oil industry have had to learn a lot of harsh lessons as demand for their product has shot up, and then as they invested to take advantage, suddenly dropped. Thus there is an industry-wide fear that as new and very expensive projects are funded based on $50 oil, the price will drop back to $25. I have heard this very recently from those making investment calls and J commented on his experience the other day. Judgements on project viability are still being made based on an assumed price of oil in the $20 - $25 range. Historically this has been prudent management, but is now a position that the IEA boss is challenging.

When you ask why, with oil prices seeming to have reached a new floor at around $50 oil company executives will tell you of how bad it has been trying to survive through those cycles in the past (and it was). And they will also talk of the major projects that have been touted as coming on line over the next few years. All can cite some reason for caution, despite the rational view of the numbers that shows that the oil supply cannot realistically be expected to increase much more in the near term. The major projects, and even the new production promised by the Saudi Crown Prince will come in as too little and too late to help in the immediate future. With supply and demand now so close in volume, and with production falling in an increasing number of countries, the times have changed, and the underlying assumptions are no longer valid.

Some caution is commendable, but unfortunately when carried too far it becomes overly restrictive and limiting. The gap since the last oil boom has been too long. Those who saw the challenge in the past and used it to make fortunes, moved on as the industry fell back, investing in other fields where challenges would be more rewarding. Those who stayed and survived were the ones trained to caution, and a more unemotional view of relative risk.

There are, admittedly other things that must be considered, the sites where major new investment can yield an adequate return are getting much sparser, and spending large sums of money to find small pools of oil is not a long-term productive strategy for any company.

Yet there are steps that can be taken and avenues of investment that do exist that will reward those more willing to accept the much diminished risk of investment. We need company executives to overcome their fear of the past to invest both in technology to help meet our supply needs, and also to make a not insubstantial amount of money. They will make money longer and at higher levels this way. And they will also help those who already may be constrained by prices.

Technorati Tags: ,

This is one of the best arguments for nationalized oil companies I've seen. There is far too much at risk to leave the very important decisions regarding energy policy to a totally private or quasi-private system, the latter of which is the current US model of greatly subsidized energy companies.

An example, a national company will withhold production for domestic use rather than rapidly exporting it for the highest price in order to maximize profits--National Interest vs Corporate Interest. The message sent from the Bushites is--Suck it out and Use it up as Fast as Possible: To hell with the future (a sentiment falling in line with most of their policies).

Much has been written and said recently by the likes of Campbell and Simmons regarding coporate oil's investment behavior, which amounts to a withdrawl from major tax-free investments for new discoveries (such investments are treated as a tax deduction in the US). The same can be said for refinery construction. For the most part, it's the national oil companies that are building the needed heavy oil refineries, sometimes partnered with a major (This is almost always the case now with discovery too).

Setbacks and disappointments present new opportunities for success for those willing to learn the lessons offered by negative experiences. That was a part of FDR's message. Four interconnected challenges confront us: Climate change, Chemical poisoning of the environment, Debt Bubble, and Fossil fuel depletion. These might lead to #5: World War.

Humpty Dumpty is about to hit the ground. It's best that we leave him there and build anew.

If the executives have not changed from $25/bbl it is because they like the answers they get using that number. If a CEO does nothing, he gets rising oil profits and personal bennies. If he authorizes anything, he gets to spend billions during his tenure so that his successor can make out like a bandit.

I see this argument pretty much an analog to the global warming argument. The deniers always have a fallback position. Here we have basically an argument between economists and corporate heads and geologists. The deniers of a geological limit and advocates of such a limit. Now the deniers have retreated to a fall back position of blaming past economic boom bust cycles for an unwillingness to invest. Soon, after the high prices have been sustained long enough to render this excuse inoperable the final excuse will be the state owned resources that put large parts of the world off limits to private exploitation.

Of course that is bogus as well. I'll give an example why. Years ago, before it became fashionable to worry about depletion, one of the higher ups from the Mexican oil company PEMAX came to our organization for a talk about what they were doing to increase production while protecting the environment. When he was done talking I asked him why he was in such a hurry to maximize production. Given the fact that it was a finite resource, that Mexico has a growing population, that oil was at the time cheap, why were they trying so hard to pull that stuff out of the ground so they could sell it to us at fire sale prices when in twenty or thirty years, they would be forced to import oil for their own internal consumption?

He replied that oil exports were the governments primary source of income. Everything that the government did, from programs for the poor to building roads, everything was subsidized by petroleum production. Given the nature of governments it is naive to assume that they would not try everything they could to maximize their income from oil production when that oil production represents their primary source of revenue. And you may be tempted to envision an enlightened government that is interested in the long term maximization of their revenue stream but the reality is that they are usually more concerned about their immediate needs.

So, basically, I think that although there is a kernel of truth to these rationalizations, they are in the end, simply rationalizations. Yes, investment has lagged due to artificially low prices over the last decade, but it amounts to a minor blip in the grand scheme of things. Yes, there is a lot of oil sitting under state owned territory, but those states are just as determined to exploit the resource as the CEOs of EXXon or BP.

The single biggest reason NOT to nationalize is the tremendous drop in efficiency that occurs when government, with all its bureacrats, takes control of anything. Once in place, the first thing that happens is the remaining government body tries to milk the "new guy" for all they can. This forces the NOC (national oil company) to reduce costs, and the way any government agency does this is by bidding, and then taking the low bid.

I have written responses to literally hundreds of tenders from NOC's, and under these conditions there are two ways to get the business: bribery or lowest price. I am sure that others will argue my points, but my experience is such that my position on this will not be swayed.

karlof1 is right on the money - the inability of government to respond to these challenges, IMHO, is directly related to the level of corruption and 'personal pocket lining' within the government. In the US, it is taboo to even speak about this, and those that do are labeled as nutbaskets. The corruption in this country at both the federal and state levels as well as corporate corruption (Enron, AIG, FNMA, etc, etc, etc) is such that they are incapable of changing paths or acknowledging new paradigms. Why? Because acknowledging the need for no growth will have effect on either corporate profit or government power.

Corporations do not want to acknowledge this, because when the analysis is run to final conclusion, you wind up staring at the fact that the "ever expanding economy" is doomed. And that this "ever expanding economy" is what caused the massive consumption and population growth that caused our current dilemma. And the "ever expanding economy" is directly derived from one concept - money.

I have no faith in either corporate or government solutions to these issues, as their record speaks for itself. It will take a crisis, and the result will be blaming and finger-pointing and more power or profit grabbing. I wish I had faith in either, or that they deserved my faith. But we have consumed and profiteered our way forward for so long that this paradigm shift must be by "force majeur". I feel that it will take something severe somewhere on this blue ball of Earth to force the new paradigm. It will not be accepted by those in power, because it requires them to relinquish power or profits.

I wish it could be different, but the signs and trends show that we are doomed to repeat history. We must be forcibly directed into a "new way".

Here's a real example of what one can expect from government as a "solution". NZ is worried about global warming, so the government has decided to simply tax carbon emissions. Of course, they have exempted farmers who are responsible for 50% of the problem.

And this in a country with some of the greatest geothermal potential on the planet....

In this item, , Boon provides some intersting insights regarding oil company investment along with other observations about Peak Oil.

Another reason investment isn't happening is that Wall Street demands a certain level of return on equity, or ROE; and if an investment proposal doesn't meet this benchmark, no money will come from the "traditional" source of equity investment--commercial banks--and the entrepreneur must look to other sources.

I agree with J that it will take a crisis to make change in the USA, and if you look closely, its onset is visible in the rise of stagflation. It's also wise to remember that the way we measure economic performance is poor at best at the macro level. For example, higher energy prices make the GDP grow, as does the latest billions to be spent on Iraq. So, using other measures, like those at Reinventing Progress and the Economic Policy Institute, can provide a more accurate picture and analysis.