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The Potential Upside of Captivity
David Sirota, Creators Syndicate
With states looking to raise taxes on oil and gas production and better regulate the most controversial drilling practices, we can expect industry to soon trot out its tried and true argument against such moves. As they did here in Colorado a few years back when our governor proposed a hike in severance levies, oil and gas companies will promise to leave any place where taxes or regulation increase.
Such blackmail deftly plays to our reflexive fears of job outsourcing — and those fears are understandable. Indeed, in a “free-trade” era that has seen corporate decision-makers dream of putting “every plant you own on a barge” and shifting production to the lowest-wage nations on earth (a direct quote from GE’s then-CEO Jack Welch), offshoring is very real in too many industries.
But, as a new study highlights, when it comes to natural resource extraction, there’s a little secret the oil and gas industry doesn’t want voters to know: namely, that the “we will leave if you tax or regulate us!” threats are hollow when it comes to fossil fuels thanks to their captive status.
Before we get to the study, remember how energy economics fundamentally differ from those of other industries. Specifically, remember that unlike textile or electronics firms, whose raw material inputs are common and that can therefore move production all over the world, fossil fuel companies are extracting a resource that is relatively rare, altogether finite and — most important — tied to specific geographies. Additionally, because of both scarcity and consumers’ insatiable demand, these resources retain their long-term value like few other commodities, meaning if one company leaves a fossil-fuel-rich area, another will surely move in to exploit the vacuum.
The Death of Petro-State Risk
Matthew Hulbert, Forbes
… In what was deemed a tightening market and dwindling supplies, producer states all thought they were onto a good thing. That applied as much to worn out North Sea fields as it did to new offshore finds in East Africa. It didn’t matter where the resources were located; energy companies all expected a heavy diet of tax increases, fiscal fiddles, contract renegotiation, local content, enhanced royalties, state control, and even expropriation and nationalisation of assets when things went really wrong.
That dynamic has seen drastic revision. Risk, if not ‘officially’ dead, is at least in abeyance. Global energy companies are enjoying a new lease of ‘operational life’, and doing so for two key reasons. The first, (simple) reason is that global demand for oil and gas is down.
… The upshot is that energy companies can slow down, delay, reschedule or cancel projects wherever they see fit – playing different jurisdictions off against each other for better terms on projects earmarked to go ahead
(24 June 2012)
Is Peak Oil Dead?
Tim Stevenson, Brattleboro Reformer
… With this increased production, a growing number of people (especially from the oil industry, Wall Street, and the Republican Party) have loudly proclaimed the end of peak oil, dismissing it as a myth that has now been dispelled. We’re not running out of oil, they insist.
But peak oil is not about the end of oil. Geologically speaking, that will never happen. Rather, peak oil is about the end of the cheap, abundant, easy to extract oil, the “sweet” crude that has been the bedrock of our industrial civilization, and the basis of the economic growth we’ve come to take for granted. This older oil still accounts for 75 percent of our daily consumption, but has been disappearing at the rate of 3-4 mb/d each year, and will be largely gone in 20 years. As older fields dry up, newer ones are not being discovered. In 20 years, cheap oil will be largely gone.
… energy companies have increasingly turned to unconventional sources, those previously identified reservoirs that were long considered inaccessible and prohibitively expensive, such as deep offshore and Arctic oil, shale oil, and tar sands.
Despite their apparent promise of a bright future, however, this shift to unconventional fossil fuels has a very dark side. For one thing, their extraction and processing is extremely expensive.
… Rather than devoting resources, and the time we have left, to creating a sane transition to a post petroleum world, this oil rush to unconventional sources only exacerbates our addiction to oil, and compounds our delusion that technology can somehow trump nature, as well as the challenges that are essentially political, social, economic, and (especially!) spiritual, blindly hurtling us yet closer and faster to the edge of the cliff.
Should we Still be Concerned with Peak Oil?
Dave Cohen, OilPrice
• Cornucopians do not know how to subtract.
• Doomers do not know how to add.
Of course when I say these people don’t know how to add or subtract, I am describing the psychological requirements of these groups. Cornucopians cannot acknowledge that oil fields peak and decline, and that global oil production might do the same. Doomers cannot acknowledge that technology, exploration and wars in Iraq bring new resources on-stream. By and large, members of both groups know bugger all about the global oil industry.
… How long might this plateau in oil production be maintained? For Cornucopians, the answer is not as long as you think. For Doomers, the answer is longer than you think. At least 5 years, perhaps 10, or even 15 (a very outside chance).
Of course this is merely a supply graph. Who knows what global demand will look like. Right now, it doesn’t look like demand will be robust, and that could remain true for many years to come. If we’re falling into a prolonged global recession, OPEC will cut their production.
… Without getting into the details, what can we conclude about peak oil going forward? You don’t have to be a rocket scientist to understand that—
1. Oil will never be cheap again. Even if demand falls off a cliff, producers require high prices to get new oil on stream to replace production declines. If demand is robust because the world economy is booming, as unlikely as that sounds right now, oil will get very expensive again in a hurry.
2. Industrial civilizations are not going to go out of business because oil is very expensive during the boom times and pricey (but not exorbitantly expensive) during the lulls. Peak oil acts more like a brake (one of many) on global economic growth when times are good. As usual, we’ll know more in 10 years than we know right now.
(26 June 2012)
Dave Cohen has been a contributor to Energy Bulletin.