There are two articles that have been printed recently that I feel everyone should read. The first was in Business Week last week (5/15/2006) “Why You Should Worry About Big Oil,” by Stanley Reed; and “The First Law in Petropolitics,” by Thomas Friedman in Foreign Policy May/June 2006 issue. Both of these articles are important because they outline the problems with the entire oil industry; the politics, the companies, and the consumers. Like spice in Frank Herbert’s Dune: Oil is life and oil is what makes things possible. This is important and the problem is not with any one aspect but instead in each and every one of us.
Yes, the oil companies have been making record profits, and they are usually the boogyman that people can point their fingers at when things go wrong. We need to understand a few things. First; we need oil and low oil prices (prices in Europe and Japan are much higher than those of the United States) have fueled irresponsibility in how we use oil. America then developed an obsession of inefficient cars, and energy. In addition from a realist political standpoint; how stupid are we to have our most important resource in the hands of others? It is pretty stupid if we think about it. In addition technology the absolve this, like solar energy and nuclear energy was put aside because of a misplaced belief that the oil would always flow. Yes there were greens out there that were seen as “crazy” and “extremist” and they still are by some groups. As oil consumers we are pretty stupid.
Reed’s article highlights several certain facts, only 16% of the oil in the world can be accessed by the oil companies. This means that only 16% of the problem is the oil companies, 65% are the fault of nationalized oil companies (explained later), and 19% are limited (meaning limited access by the government who runs nationalized oil companies). 84% of our oil problems are the fault of countries like Saudi Arabia, Iran, Russia, and other oil producing countries. A result of this is that oil companies are being forced to spend more money to expand into more inaccessible areas to get oil, places like Sakhalin Island in the Russian Far East. Deeper drilling is needed as well. All of this costs more money. Bottom line, our oil is running out not only because there is less oil in the world but because the governments in many countries realized that they limiting access to oil can only be in their benefit.
Oil companies are a cash heavy business, this means that they have a lot of cash laying around. Typically oil companies spend this on finding new oil and investing in oil production. In many of the extreme environments like Sakhalin Island the oil companies are building small cities with infrastructure like roads, communication, and airports. This is very costly. Instead the oil companies know better than us that the oil is running out, they should be investing in alternate energy. From a business sense it is a lot of money to invest in developing a new product, but it will be another product that the world will depend on. The return on the investment will be astronomical if an alternative to oil was made that could be made on a mass scale. Bottom line, oil companies are being short sighted and now they are paying the price, if they looked long term they would have been investing heavily into alternate fuel sources.
Thomas Friedman (I’m a fan) states in his article that there is a strong inverse relationship between the price of oil and political freedom. Friedman calls this the first law of Petropolitics. This is a correct assumption, states that rely on the oil as an export are more totalitarian. In general there are several economic disadvantages to states that rely on a single export, but oil is “spice” and everyone needs it. Most of these states have nationalized the oil industry, and therefore the governments get a lot of money. The totalitarian nature of these states means they spend more on military, police, stability, etc than on infrastructure, services, and education. They become more totalitarian, and the scarcity of oil makes these states more powerful. Friedman states that also an oil rich state do not rely on the people from tax income, and are less inclined to care about what the people think. If one believes this, and there is a lot of evidence to support this, then as oil prices rise then there will be more totalitarian states in the world. Think about it this way, if oil is the link that keeps us industrialized then people will need to place more power within their governments to keep prices affordable.
What is the conclusion? First, it is imperative that we find an alternate energy source. Oil is running out and as oil runs out oil will allow totalitarian states to have more power. A universally available energy source that is renewable is preferable because the energy is cheap. Cheap energy with high costs is not the exact goal of the energy companies because they need to make a profit, but an energy source that has low costs is desirable because there could be profits. Second, as consumers we need to realize that oil prices are only going to go up. Asking for the government to help keep prices down only places more power within our government, and is unsustainable. No government can maintain low oil prices for an extended period of time, and when they no longer can the prices will shoot up. A rapid increase in prices means that the government becomes unstable, crime rates rise, high inflation, etc. Finally this leads to the consumers doing something about this, conserving oil by ourselves sends a message to everyone including governments and corporations. Overnight change isn’t possible, but a change keeping in mind that we have limited time is in the interest of us all.