William Bliss Baker - Hiding in the Haycocks, 1881
Peak oil has become a popular meme over the past several years, its popularity bolstered by websites like The Oil Drum, Energy Bulletin, Daily Reckoning and others. The mainstream media has also amplified the message of the oil scare, especially during the massive run-up in oil prices that ended with the financial crash last year. I myself believed that peak oil would lead to a collapse in living standards in civilized countries from 2005 until mid-2008, when I began to understand free market economics better.
The vast majority of global oil production is controlled by government-run corporations, like Saudi Aramco and PEMEX from Mexico. These organizations own approximately 80% of the world’s oil reserves, according to Stanford University’s Mark Thurber. Instead of plowing the entirety of their profits into the company, they bloat the government. This is largely why these companies have severe capital equipment maintenance problems. The profits aren’t going back into oil production, but into growing their parent states.
When capital equipment decays and lack of new exploration puts a damper on oil production – as it is currently worldwide, but particularly in Mexico and Russsia – these national companies begin contracting with outside help internationally. The process is already beginning in Mexico, probably because the production declines there have been particularly severe.
This could get screwed up if oil runs up all the way to $100 and beyond again, however, as governments will be able to put off capital improvements and exploration for longer.
These are political problems, not geological ones, as the peak oilers contend. There is so much more of the planet to be explored – and some of it kept restricted – that the geological issues cannot be accurately considered the major cause of declining oil production in certain countries.
This, of course, doesn’t stop the price of oil from trending upwards. The problems that the national oil companies face are likely to only get worse as time goes on, until they are forced to privatize components of their operations. Some countries are simply doomed to have declining production for the forseeable future because of geological conditions in their largest fields, such as Cantarell in Mexico or Ghawar in Saudi Arabia. Outside companies can help, but they can’t un-do depletion.
I don’t know what the hell is going to happen with oil prices. If equities continue their run-up, the money that has been going into commidities as a safe-haven might start flooding out of them. If not, then rising oil prices could squash stocks easily.
