Ever since I discovered the concept of ‘peak oil’, I have been fascinated by it. It was put forward in 1975 by an American scientist called M. King Hubbert and he essentially said that since fossil fuels – crude oil in particular – were nonrenewable sources of energy, there would come a time, 1995 in his estimation, when the maximum rate of crude oil extraction will be reached, after which would come a slow, but inevitable decline. It is important to understand when, and in what context, that prediction was made, in order to understand why it was easy to believe that theory.
Until very recently, say the last 10 years, the number of places on earth where crude oil could be extracted viably were a lot fewer due to low prices, and the rate of production from some of the largest existing wells had begun to decline. In addition, the cost of extracting crude oil had begun to go up, because the crude was harder to reach. To add to this, conflict in the Middle East as a result of the Second Iraq War and increasing demand for energy by a booming global economy, led by China, saw prices take off from about $23 a barrel on April 29, 2003, to an all-time high of $140.73 on July 3, 2008, just before the global economic meltdown.
The story of human civilization over the last 150 years would be utterly impossible to tell without the magic of crude oil discovery, and all the uses it has been put to. Without it, much of what we regard as progress would simply not have happened. To name just one example, our ability to move things and people over great distances at the kind of speeds we take for granted today, would simply not exist. So, the spectre of Hubbert’s peak continued to hover, spawning all kinds of theories about the fate of mankind should we run short, or run out, of crude oil.
All this background up till this point is necessary because by Hubbert’s calculations, we should have reached peak oil by now, which means that the price of a barrel of oil should be high, and not reducing, as is currently the case. Since its high point this year of $110.48, the OPEC basket price of 12 crudes has lost 30% of its value. There are a few reasons for this:
- Slower global growth, especially Chinese growth.
- Libyan oil coming back online after the fall of Gaddafi, as well as Iranian oil (embargo lifted)
- Increased output of oil in the US, led by shale.
- More oil extracted from existing/hard to reach sources, as a result of better technology.
The last two – better technology and just more oil, period – are things Hubbert could not have foreseen, and while economies can always rebound, it is becoming abundantly clear that there is a lot more crude oil than we thought there was, and the means of accessing it is better than ever. So, while Hubbert’s peak MAY still come to pass, it is quite a bit farther away than we thought.
America’s shale revolution is important because a significant number of American politicians, commentators, and business people have endorsed the idea of ‘energy independence’, and turned it into a bit of a crusade. Since 1973 when America could no longer cater for its domestic energy consumption, it has had to kowtow to and tiptoe around the Saudis in exchange for oil, all through gritted teeth. When it was not doing that, military regimes like Nigeria’s that had oil, were treated rather lightly in exchange for keeping the crude flowing. In short, a lot of America’s foreign policy decisions over the last 40 years have been determined by access to energy, and some have dreamed of a time when Uncle Sam will be free of those shackles.
Commentators like Thomas Friedman and other environmentalists have proposed things like a ‘carbon tax’, the proceeds of which would go to research in alternative energy sources, one or some of which would eventually reduce American dependence on foreign crude, as well as energy efficiency proposals across board. These proposals were also put out due to the very real challenges of climate change. With shale coming on strong, however, that conversation has changed slightly.
There is a lot hurrah-ing over America’s strong oil output, and not just because the need to bend low to the Saudis is now much reduced. Low oil prices are seen by the Americans as a way to achieve geopolitical objectives that appear to be beyond military might or diplomacy. It has long been thought, with good reason, that high oil prices – and high commodity prices in general – often insulate governments from reform. Nigeria is a textbook example of this. Each period of high oil prices in the nation’s 54 year history so far, has passed with even more waste and even more corruption. Karl Marx said once that history repeats itself, first as tragedy, then as farce – to say nothing of the fourth or fifth time.
The sure way to connect a people to their government is through taxes, hence the phrase ‘no taxation without representation’. This link can be short-circuited when the government can simply sell natural resources and carry on life as usual. As such, the phrase ‘taxpayer’s money’ does not really apply in Nigeria: The total non-oil revenue of the entire Federal government – N800 billion – is not quite half of the federal wage bill.
So, the hope is that a prolonged period of low oil prices will bring governments like those in Russia, Nigeria, Venezuela and others in the Middle East out of their bubble and make them behave better. For Vladimir Putin, the alarm bells are already ringing as the Russian economy also feels the effects of sanctions.
America would like nothing better than to keep oil prices low, if it hurts Putin. It will also hurt the Saudis as well, but from all accounts they are prepared for an extended period of lower prices, in order to put shale producers under pressure and preserve their market share. Other OPEC nations are unlikely to agree with this position. Rather than keep spending low in time of surplus and save for a rainy day, countries like Nigeria do what they always do: Spend like there is no tomorrow.
The question is what will happen if prices stay low for a prolonged period, as an increasing number of analysts are predicting. Will it inspire a change in the way the Nigerian government spends, or will they be the last to feel the pinch, while everyone else drinks the harsh medicine? It is safe to assume that fuel subsidy will go next year, but since we import petrol for domestic consumption, the price at the pump may not be significantly higher than it is now.
The Medium Term Economic Framework for 2015-2017 should be submitted in the coming weeks, and all eyes will be on the crude oil benchmark on which much of government spending is based. It is certain to be much lower than the current benchmark of $79, and a major tax drive by the Federal Inland Revenue Service (FIRS) is already underway to make up for the big hole in government revenues.
All told, the coming weeks and months will be very interesting locally and globally. It will be interesting to see how governments used to huge oil revenues make do with much less, how long the trend will persist, how low prices will go, and the overall effect of these events.