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Resource nationalism: The last stand for the oil optimists

With the world in the middle of the worst economic downturn since the Great Depression, oil prices ought to be hugging the ground. Instead, they continue to fly upward. With concerns growing about the geologic limits of oil extraction, the oil optimists are putting forward one of their favorite arguments: resource nationalism.

According to the U. S. Energy Information Administration some 88 percent of the world's remaining oil reserves are under the control of government-owned oil companies. Thus, extraction of the vast majority of the globe's proven reserves is subject to the needs and priorities of the governments that control them. Not all those governments think it is in their interests to extract an appreciating asset from their oil fields as fast as possible. Why not save some for later when prices are likely to be higher? Wouldn't that be the rational thing to do?

The problem with the resource nationalism argument is that it contains an important hidden assumption, to wit, that oil under the territory of, say, Venezuela, doesn't necessarily belong to Venezuela. The same is implicitly being said about oil under the territory of Iran, Saudi Arabia, Libya, Russia, Brazil and many other countries. Would the same analysts complain about resource nationalism in the United States because that country shares almost none of the crude oil and natural gas it produces with the world? And, are these analysts really suggesting that major oil importing nations such as the United States and many countries in Europe simply seize oil fields in oil exporting nations and ramp up production to suit their needs?

The oil optimists love to dwell on so-called "above-ground" issues. But, the world oil delivery system is an integrated above-ground and below-ground system which cannot practically be split into two parts. It is the growing scarcity of oil which makes it possible for oil exporting nations to take advantage of the fact that importers are increasingly at their mercy. If oil, as the optimists insist, were simply available for the taking in such places as the oil shale formations in the United States, then so-called resource nationalism wouldn't even be an issue, at least not for the United States. The country would already be producing gobs of oil from this supposedly gigantic resource.

But as it happens, the human race has extracted the oil that's easy to get first, a very rational thing to do. Now comes the stuff that is hard to get and therefore more costly, both in terms of money and of the energy to get it. That's why the oil shale in the United States sits largely undisturbed except for a few pilot projects. True, technology may improve and make some of this difficult-to-get oil easier to extract in the future. But so far technology has proven no match for geology as the rate of oil discoveries has fallen persistently for the last four decades even as exploration technology has improved. (See the graph entitled, The Growing Gap on this link.)

The energy policy question regarding resource nationalism then is two-fold. First, should oil importers engage in hostile actions to force oil exporters to increase their production? This seems, in part, what happened in Iraq. From a policymaker's point of view there are three considerations in answering this question: 1) Will the violence done to international rules respecting sovereignty be worth what the importers get from such actions? 2) Can such actions actually succeed at increasing world oil supplies? (The results in Iraq suggest the answer is no since world supplies flatlined from 2005 onward despite the presence of a large occupying force drawn primarily from oil-importing nations.) 3) Are there policy alternatives which are better at addressing shrinking oil supplies such as conservation and the development of alternative energy sources and modes of transportation?

A second related question regarding resource nationalism is as follows: Should policymakers base policy on presumed future technological breakthroughs that will supposedly solve the ongoing oil supply crisis? Such breakthroughs could moot the question of taking oil by force from the countries that have it by making much more oil available on the world market. On the other hand, these same breakthroughs could make it even more attractive to seize poorly run oil fields and run them more efficiently using the latest technology.

But let's look at where those supposed breakthroughs will come from. Nearly all of the research and development infrastructure is dependent on cheap, abundant fossil fuels, especially oil. It's not clear that that infrastructure can continue to produce the needed breakthroughs if fuel supplies are dwindling. This could turn out to be one of the most troublesome feedback loops in our society. Dwindling energy supplies mean dwindling energy supplies for the education of technological specialists and for the energy research and development facilities where they work. The result would likely be declining innovation which leads to further reductions in available energy for society which leads to declining innovation and so on. Any strategy to confront resource nationalism directly must assume that there is enough oil left to avoid such a vicious circle. If not, then any hostile action to gain access to oil wouldn't result in increased flows, making such a move a gigantic waste of energy in itself.

The response to the oil scarcity problem should be based neither on wishful thinking exemplified by blind faith in technological progress, nor rigid devotion to so-called free market philosophies, nor military adventures that amount to nothing more than raiding parties. Rather it should be based on practical realities which indicate that a program of rapid energy transition and radical conservation is already long overdue.

What do you think? Leave a comment below.

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