State-Run Companies and Investment

Kevin Drum is concerned that projected drops in Mexican oil production are a leading indicator that the "Peak Oil" theory is coming true.  I would argue that, in fact, it is a trailing indicator of what happens when you let governments run producing assets.  Drum says:

The issue here isn't that Cantarell is declining. That began a couple
of years ago and had been widely anticipated. What's news is that, just
as many peak oil theorists have been warning, when big fields start to
decline they decline faster than anyone expects. So far, Cantarell
appears to be evidence that they're right.

Actually, fields in the US do not tend to decline "all of a sudden" like that.  Why?  Because unlike about any other place in the world, oil fields in the US are owned by private companies with capital to make long-term investments that are not subject to the vagaries of political opportunism and populism.  There are a lot of things you can do to an aging oil field, particularly with $60 prices to justify the effort, to increase or maintain production.  In accordance with the laws of diminishing returns, all of them require increasing amounts of capital and intelligent management.

Unfortunately, state owned oil companies like Pemex (whose assets, by the way, were stolen years ago from US owners) are run terribly, like every other state-owned company in the world.  And, when politicians in Mexico are faced with a choice between making capital available for long-term investment in the fields or dropping it into yet another silly government program or transfer payment scheme, they do the latter.  And when politicians have a choice between running an employment meritocracy or creating a huge bureaucracy of jobs for life for their cronies they choose the latter. 

I am not arguing that US politicians are any different from their Mexican counterparts, because they are not -- they make these same stupid choices in the same stupid ways.  The only difference is that we have been smart enough, Mr. Drum's and Nancy Pelosi's heartfelt wishes notwithstanding, not to put politicians in charge of the oil fields.

By the way, I wrote on Peak Oil here.  A while back I dug into the 1870 archives of our predecesor publication, the Coyote Broadsheet, to find an article on the "Peak Whale" theory:

[April 17, 1870]  As the US Population reaches toward the astronomical
total of 40 million persons, we are reaching the limits of the number
of people this earth can support.    If one were to extrapolate current
population growth rates, this country in a hundred years could have
over 250 million people in it!  Now of course, that figure is
impossible - the farmland of this country couldn't possibly support
even half this number.  But it is interesting to consider the
environmental consequences.

Take the issue of transportation.  Currently there are over 11
million horses in this country, the feeding and care of which
constitute a significant part of our economy.  A population of 250
million would imply the need for nearly 70 million horses in this
country, and this is even before one considers the fact that "horse
intensity", or the average number of horses per family, has been
increasing steadily over the last several decades.  It is not
unreasonable, therefore, to assume that so many people might need 100
million horses to fulfill all their transportation needs.  There is
just no way this admittedly bountiful nation could support 100 million
horses.  The disposal of their manure alone would create an
environmental problem of unprecedented magnitude.

Or, take the case of illuminant.  As the population grows, the
demand for illuminant should grow at least as quickly.  However, whale
catches and therefore whale oil supply has leveled off of late, such
that many are talking about the "peak whale" phenomena, which refers to
the theory that whale oil production may have already passed its peak.
250 million people would use up the entire supply of the world's whales
four or five times over, leaving none for poorer nations of the world.

  • I tend to agree, in general, with your implied conclusions -- that, while the "peak oil" crisis might be real if current trends to not adjust, such trends always adjust in a free market and as such we will likely route around the problem.

    There's just one small issue with that conclusion: the passage of time sees reduced freedom of the market. As a species, we seem to have lucked out in that the growth of free market capitalism in the world roughly coincided with population growth approaching critical numbers for then-current resource demands. This allowed us to route around problems that would otherwise have likely proved somewhat significant. The real danger, then, is not so much a "peak oil crisis", because the ill effects of that would simply be a symptom of a much greater problem: a "peak economic freedom crisis". If we don't manage to turn around trends in market regulation, the innovation enhancing effects of unfettered market forces may well be stifled to the point that bugbears like the "peak oil crisis" become all too real and immediate.

    Maybe that's just me, though.

  • Craig

    Apotheon suggests we "lucked out in that the growth of free market capitalism in the world roughly coincided with population growth approaching critical numbers for then-current resource demands.

    Is this really a coincidence, or did free markets precede and allow population growth? That's what happened here in the US post-WW2. I think the pattern is similar in Europe, too. I believe they had a baby boom too, but as freedom descended into socialism, so did the birthrates also decline.

  • I'm not saying that free markets don't have anything to do with the kind of prosperity that allows population growth -- I'm saying that we lucked into it at a time when we were beginning to approach our first "critical mass" numbers for a worldwide population.

    Taken as a model:

    Assume a population of eighteen people, at a growth rate of one every year. Assume that a population of fifteen people is the maximum sustainable number with current rates of foo consumption, and that civilization cannot withstand a foo shortage -- we have crossed the threshold of peak foo production and just haven't noticed yet. Assume that foo is used at a rate of one unit per year per person, there is a worldwide supply of foo raw materials that would allow production of only eighty more units, and that it takes a year for enough raw materials to produce fifteen units of foo to replenish themselves (thus the sustainability number). Assume as well that the three world powers, individual leaders who each hold sway over five constituents -- one a monarch, one a President For Life, and one a theocrat -- are not particularly freedom-oriented. Assume, finally, that though nobody realizes it yet a replacement for bar could be developed, but it would require leveraging the power provided by mass foo production and consumption at an alarming rate, quickly depleting the world's supply. This means that, at the current rate of population growth and foo consumption per capita, the world is running out of time.

    Now throw a revolution into the mix. Two out of three of the monarch's people rise up against him, throw off the yoke of tyranny, discard the strict controls he imposes on their economy, and start breeding like rabbits. In three years, they've developed free market capitalism, invented bar -- a more efficient, more sustainable way to achieve the effects of foo -- and increased the population of their new nation by five people for a total of seven. One is elected President for four years, and they start exporting bar.

    It's awfully fortuitous that the bar-producing nation's revolutionary birth developed a government founded in principles of freedom, including economic freedom, when it did.

    That's obviously an absurdly contrived example, but I think it might indicate where my previous statement and your understanding of it diverge.

  • Anonymous

    Back to Pemex. Mexico shares the enormous Gulf of Mexico natural gas resource with the U.S. But much of the gas is flared into the atmosphere or injected back into the reservoir. For want of a pipeline, Northern Mexico imports natural gas from the U.S. U.S investors won't invest in the needed storeage reservoirs and pipelines because of concerns about expropriation.

  • Dan

    I think your example fails (though I'm not sure I completely understand it) because of a misconception about what has been driving population growth. Population has not grown because of more births per woman, It has grown because more babies have been growing up to become fertile adults. It is the wealth created by industrialization that led to investments in technogy that raised farm output per farmer, and allowed free resources for the vast improvements in sanitation and medicine that led to the decrease in infant mortality.

    Wealth created population growth, which in turn created more wealth, since there were now more people to convert resources into goods.

  • Apotheon,

    Are you familiar with the theory of Peak Liberty?

  • Dan:
    Actually, that doesn't obviate my core point at all. My comment about "breeding like rabbits" was a bit tongue-in-cheek, not a statement about why an economically successful nation might see a population boom.

    Brad Warbiany:
    I don't think I've heard of that term before this. I should definitely check it out especially since, if it means what it sounds like it means, it may basically be an exact match for conclusions at which I've arrived independently.

  • TCO

    I wonder to what extent the price is indicative of the free competition situation and to what extent it is indicative of a functioning cartel. It's a non-trivial situation and I'm interested in how you would analyze, it Mr. SEM. You have 20 minutes. Then you can ask those trite questions you've prepared to sound smart, like a little running dog, MBA-student.