Oil, Oil Everywhere

WSJ reports that despite rising oil prices (57% last year), top oil exporters' shipments dropped by 2.5% last year and are expected to trend similarly this year. This is a major aspect behind the continued high oil prices.

There are several phenomena behind this drop in exports. First, is the declining outputs from aging fields in some countries. As oil fields age, it takes more effort and energy to extract it, slowing exports down. Second, investment in new fields and technology is slowing in some areas due to economic troubles and rising taxation on new developments. Third, increasing internal demand for oil in producing countries is eating into their exports.

In places like Saudi, UAE, and I'd imagine Oman, too, rising development and lower-than-expected natural gas supplies is making states eat into their oil exports in order to fuel their own needs. It probably doesn't help that, in many places, developments are audacious in their energy consumption and that energy subsidies encourage profligacy.

Add to this the commonly discussed rising demand from China and India, and its no wonder that oil prices are so high. While some commentators in other venues are saying that oil can't stay this high over the medium-term, an analyst quoted in the article stated, "The sense in the market is that peak oil is here and that things will only get worse, but the verdict is still out on that."

Peak oil is the not-so-magical point at which oil production begins to decline permanently as we head toward depletion of the resource. When this happens, there will have to be some major adjustments to nearly every aspect of economic and industrial life in the world.

I read Karl Polyani's The Great Transformation a while ago. It is a cheery little book. In it, Polyani argues that nineteenth-century civilization and the Hundred Years' Peace rested on the balance of power system, the international gold standard, the self-regulating market, and the liberal state. When the economic foundations of this system came crashing down, the political system that had been built to perpetuate them was thrown into upheaval in the form of the most destructive war the world had ever seen (World War II).

I haven't thought long and hard enough about this, but it seems to me that a lot of the same conditions are present today. Oil is not equivalent to the gold standard, but going off oil will be somewhat similar economically and will probably throw the global economic system into turmoil. Furthermore, while many of the developed states have created sustainable social protections against the self-regulating market in the wake of WWII, many developing nations face the same struggles as to whether labor is to be treated as a freely-traded commodity or not. Polyani argues that the differing types of social protections created by states in the beginning of the twentieth century was behind the World War. This argument is furthered by a huge book called The Shield of Achilles by Philip Bobbitt. I think that these phenomenon may come to a head as oil starts to run out. Could there be another great transformation ahead?