Oil Odyssey

Oil on the Brain, Lisa Margonelli, 2007
Margonelli takes a three year journey to try to understand the complex and critical resource oil. Her ventures take her places few journalist have been, probably as much due to her lack of obvious agenda as much as her persistence and persuasiveness. She did not set out to establish that oil reserves are vastly exaggerated, that exploration technologies are unlikely to uncover vast new reserves, that oil companies are in a vast conspiracy to drive up prices and realize record products. She honestly set out to learn as much about the oil industry as she could learn, wherever that might take her.

The result is a slow start at her local independent gas station on Twin Peaks San Francisco which stays in business largely due to impulse purchases from its mini mart. She rides a fuel delivery truck working out of an independent distribution point in San Jose which buys its product from different sources delivered to it via pipeline. She learns that gas is a uniform product that is differentiated with branded additives put in as the last moment. Even color is added to identify non taxed fuel to be used off road such as by farmers.

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She visits BP’s refinery in Carson, near Long Beach, now surrounded by suburbia. She tries to understand why no new refineries have been built for 50 years despite existing refineries continuous full capacity operation. She gets a glimpse of the enormous scale and complexity and continuous evolution of the refinery process as ever more product is squeezed out of crude oil, and of the great variety of crude oil from sweet light to almost tar that must be reduced to a common set of products. She also experiences, first hand, the dangers of the refinery when a partial power failure occurs (an accident at a BP plant in Texas killed a number of workers). She discovers that any interruption of operation has an instant impact on prices, the most notable example being the shutdown in production caused by hurricane Katrina in the gulf states.

She meets one of the last Texas wildcatters who dies while the book is in process and discovers that the new natural gas explorers are accountants, extremely averse to risk and who use MBAs to squeeze productivity by reduced job security, minimum benefits, and reduced wages and salaries just like all other modern American corporate enterprises.

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She talks her way into the Strategic Petroleum Reserve (SPR) that she likens to Fort Knox in the days of America’s gold standard, an object of endless fascination, imagination, and speculation. She idly wonders why a movie like Goldfinger doesn’t exist for the SPR. The reality is that any Presidential move to add or take away oil from the SPR has an immediate and exaggerated impact on the NYMEX spot market price. But the SPR actually represents a very small cushion of a few months supply at most and if called on in a real emergency cannot deliver oil to the markets very fast due to the limits of its pipelines. In reality, the refineries use the SPR as a hedge so they can limit their crude oil inventories. They regularly “borrow” oil from the SPR if their own inventory is exhausted and “pay back” oil when they can afford to out of inventories. In other words, the SPR is a publically funded store to be used by the refineries as they see fit.

She visits NYMEX and talks to industry experts about pricing. OPEC began in the 1970s as a cartel of oil producing nations who would set quotas of production in an attempt to control supply and hence keep oil prices high. It never worked very well and individual members would cheat whenever it suited their own short term needs The main impact of OPEC seems to have been to greatly exaggerate oil reserves so the member states would have a high basis for their quota. These non existent reserves are the subject of Oil Twilight which doubts the middle east has the vast reserves most analysts assume. Now, with non OPEC states such as Russia becoming an increasing portion of world supply and with the emergence of NYMEX as a worldwide price setter, OPEC no longer has much control over prices, if they ever did. Instead, today, the worldwide increases in demand for oil, led by China and India, combined with the inability of oil producing states to dramatically increase production, has led to a permanently tight market for oil and ever increasing prices. NYMEX is a very sensitive gauge of world oil affairs, overreacting to every little outbreak of violence or instability in an oil producing state whether in Africa (Nigeria), Venezuela, or the middle east. The New York analysts she interviewed believe this is a permanent state and that prices will no longer fall like they once did. Only a dramatic lowering of demand could ever cause prices to fall such as the increased mileage of American cars for a few years after Carter’s oil crisis in 1979. As to the record oil company profits, she points out that Congress investigates the industry for collusion and gouging every time prices go up but never find evidence of wrong doing. Making a profit, after all, is capitalisms highest goal and achievement. She doesn’t take this discussion very far and never really gets into the subject of record profits.

As an aside, I have never understood why a resource so critical to the economy as a whole is not treated in this country as a regulated utility that provides total transparency and requires regulatory approval in order to raise prices. Whatever happens behind the closed doors, the record profits are there for all to see and the main benefactors seem to be the oil executives. There is virtually no evidence beyond superficial (and cheap) PR exercises that the oil companies are putting these record profits to a use that might actually benefit the world as a whole. They certainly have a negative impact on every other aspect of the economy. Both Nixon and Carter attempted price controls of gas at the pump but each time, the oil companies retaliated by limiting supply, creating long lines and furious public backlash against the Presidents, not against the oil companies. There is some evidence that huge pension-funds backed speculators are currently manipulating the oil futures market to drive the price of crude oil ever higher. Some predict that a bubble is forming that when it bursts could devastate several pension funds. If true, these oil gamblers are devastating economies around the world in search of selfish short term profits, and recklessly risking the critical retirement funds of its members. Are we looking at Enron redo?

She then travels to oil producing regions of the world starting with Venezuela which is an old timer, having started production in the 1920s. She notes that the Dutch disease, coined by the Dutch in the 1960s to describe the loss of manufacturing and exports to any nation with major natural resource exports has been known to Venezuela for a long time. This is also known as oil’s curse. She highlights another critical factor in all oil producing states, the changing relationship between the government and its citizens as oil revenue replaces taxes as the major source of government funding. Whether the government is “democratic”, a monarchy, or a military dictatorship, the presence of oil comes to dominate the relationship between the rulers and the ruled. This dominance is obvious and central to both. The state is relieved on needing to set and collect taxes from the public as the public is freed from paying those taxes. The public comes to expect some benefit from the oil revenues and the government usually complies by supplying very cheap gas for cars (19 cents a gallon in Venezuela). Beyond cheap gas, services for the public seems to break down, probably because the human infrastructure needed to effectively deliver such services never develops. Oil producing state governments are all corrupt. The only competent sector of the economy is the oil producing sector with its trained engineers, managers, and accountants. Chavez is testing the bounds of this competency by firing 25,000 oil personnel following the failed coup attempt in 2002. Can Venezuela sustain its productivity without the services of its trained oil oligarchy?

She next travels to Chad, a military dictatorship thinly disguised as a democratically elected government. Chad was very poor and very backward before Exxon and the World Bank invested $3.7 billion to develop an oil field and pipeline to the coast across Cameroon. The president/dictator claims to have signed the oil contract without reading it. While in Nigeria the state realizes 80% of oil revenues, Chad receives 28%. Knowing that the government was corrupt, Exxon and the World bank tried to create a third player, a “college” of educated citizens who would receive half the government oil revenue and could decide to spend it on schools, roads, hospitals, or any other public works. Once in place, the “college” was simply undermined by the president, who replaced the original members of the college with his cronies. Chad is now rated the most corrupt regime in the world. Chad’s citizens have gotten nothing from oil.

She visits Iran with rare to permission to visit some Persian Gulf oil platforms damaged or destroyed by the U.S. Navy during the Iraq-Iran war where the U.S. supplied arms to Iraq. She enumerates the long list of grievances Iran holds and remembers against the U.S. starting with the imposition of the “Shah”. This is a good reminder why Iranians don’t much like or trust the U.S. and why they are so intent on acquiring a nuclear weapon, after witnessing the invasion on non-nuclear Iraq while nuclear North Korea went untouched. She was struck by the geography of the Gulf and the number of disputes between the states over the British drawn borders (sound familiar? The British were still committing the same mistakes in the Partition of India). She was particularly struck by the narrow Strait of Hormuz through with 40% of the worlds oil passes. She points out that Iran can easily control this narrow strait military if they so desired. The U.S. navy’s constant presence in the gulf is probably an attempt to prevent such an occurrence.

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She next and finally travels to oil producing Nigeria, where the delta has been the site of much pollution, violence, and suffering. The corrupt government of Nigeria is located elsewhere and normally buys off the rebel leaders when they cause too much havoc. Then things quiet down until a new charismatic rebel leader arises. She is struck by the education and articulateness of the unemployed Nigerians she meets, but for all their articulateness, they don’t make much sense and nothing ever seems to change. For their part, the oil companies wish the world would look to the Nigerian government rather than blame the oil companies for all the problems in the country. Regardless of who is to blame, Nigeria remains the source of much volatility in the price of oil.

Almost buried in the account of these travels, but confirmed, is the terrible role played by the IMF and World Bank explicated in some detail in The Shock Doctrine. The IMF particularly, insisted that governments cut back or eliminate social programs as a condition of their loans. Klein explains the Chicago School neocon rational for these requirements that would exacerbate the crisis and lead to privatization of state resources, hopefully into the hands of foreign owners. What we are seeing is a new form of capitalist imperialism, but the perpetrators have virtually no understanding of the enormous costs and consequences of their greedy and selfish actions.

Finally, Margonelli travels to China, the fastest growing new market for oil. She is astounded by the 100 year long term visions of Beijing’s leaders who continually talk of leapfrogging changes. They have enacted one of the strictest mileage requirements in the world and appear to be serious about alternate energy sources such as hydrogen fuel cells, hybrids, and all electrical vehicles. Unlike the west, China has very different requirements for performance of cars (acceleration, top speed, and driving range) so that golf cart like vehicles or even electric bicycles are very acceptable options. Unfortunately, an increasingly autonomous regional focus may undermine the advantages of long range central planning for pollution and greenhouse gas emissions and adaptation of alternate energy. For instance, gas guzzling large cars are banned in the big cities but Guangdong chooses to ignore the rule feeling that a successful entrepreneur should be free to show off his success however he wishes (sound familiar?).