For decades now, speculators in oil have justified their bidding up oil futures with the concept of peak oil: to wit, we have discovered all the major fields that there are and soon there will be no new oil, and this will lead to wars and exorbitantly high prices, and so although not now, but SOMEDAY oil will be scarce and so we should pay more for it TODAY. (No kidding: this is the rationale.)

What to make of the fact, then, that in this year alone, hundreds of new fields — some sizable — have been discovered?

Oil has been discovered by big companies, little ones, national oil companies. It’s been found in expected places (Brazil, Nigeria, Iraq, the Gulf of Mexico), places thought defunct (Norway), and completely unexpected places (Uganda, Sierra Leone).

How does Economics 101 (supply and demand (greater volume available now and in the future), diminishing demand (the current recession, green energy, staggering quantities of natural gas globally)) account for the fact that oil is hovering at $70 a barrel instead of falling?

“Peak oil” has been around since the 1970s. Last week I heard it promoted again, this time at an event featuring Peter Maass, author of the new book, Crude World: The Violent Twilight of Oil. To the average layman, the idea sort of makes sense — doesn’t everything non-renewable have to have a limit?

But peak oil is a myth for speculators. Why oil companies and others keep pushing it? For the speculators and investment houses, it’s a way to make money —so much so that the Commodity Futures Trading Commission has considered limits on the futures contracts available to them.

For oil companies, who reap the rewards of high prices, it means large profits, but it also means capital.

What is true is that oil is not and cannot be as cheap as it once was, no matter how plentiful. A lot has changed since the first oil well in the 1850s Pennsylvania was found just dozens of feet below the surface. Now oil is tens of thousands of feet down in terrible conditions, like the Arctic Circle or off the Continental Shelf. Governments and landowners now want more money for their treasure. And drilling is not cheap — offshore drilling costs between $500-600 per foot.

So what is the conclusion to draw? The world isn’t running out of oil, but don’t think for a minute it will ever be cheap again. It’s amazing what enough money will find.

Does the US care enough about Pakistan to face the long haul? Does Pakistan?

The New York Times reported Sunday that the Obama administration is trying to decide what economic assistance to offer Pakistan, given the level of corruption and waste.

American officials said the need to assist the Pakistani economy directly became alarmingly clear when recent power shortages across the country contributed to Pakistan’s first year of negative industrial growth. There were widespread complaints here, including by Finance Minister Shaukat Tarin, that the government had solutions to improve the power output but was refusing to implement them in order to benefit a handful of power plant operators…
(Tarin said) the United States should invest in developing vast coal reserves in the province of Sindh, and in hydroelectric, wind and solar power to bolster Pakistan’s energy supply…
The administration’s special envoy for Pakistan and Afghanistan, Richard L. Holbrooke, has appointed Robin L. Raphel, an experienced American diplomat, to oversee the planning of the new aid programs. Mr. Holbrooke has also sent David Lipton, a senior member of the National Economic Council, to Islamabad twice to look at ways to fix the Pakistani economy.
One key factor in trying to find more effective ways to deliver aid to Pakistan is a recognition that big projects are likely to win more Pakistani friends because they are more visible, American and Pakistani officials said.
“It was not only an assistance issue but a public image issue, too,” the senior American official said. “People talk about the Chinese nuclear reactors and the Japanese.” The United States was searching for a “signature contract,” the official said.

There is no doubt that the people of all of Pakistan’s provinces need aid. But they need more than a short-term cash infusion on ad hoc projects.

Here’s a thought: one huge, game-changing thing the US could do is to pressure Pakistan to look past its favorite and most populous province of Punjab, with its comfortable business, educational, and military elite, its cronies and special interests, and deal with the way it treats its angry and marginalized provinces of Sindh, the North West Frontier Province (NWFP), and the restive and resource-rich Baluchistan.

The grievances of Baluchistan, Sindh and the NWFP are longstanding. Both the Baluch people and the Pashtun (of the North West Frontier Province) resisted becoming part of Pakistan from the start. These provinces have a much lower per capita income and literacy rate than Punjab, and unequal distribution of tax revenues leaves them stuck in poverty.

Simply deciding that Sindh’s coal reserves should be developed — with the huge environmental destruction coal brings — will only aggravate the situation. As with many developing countries, Pakistan’s national government acts as if it has a right to all the resources a region has to offer, without addressing the very real resentment of the people who actually live on the land.

Both Baluchistan and Sindh have enormous natural resources, including natural gas, gold, copper, and uranium. The constant exploitation of these resources for the enrichment of a few outsiders has only made relations worse. According to the Carnegie Endowment for International Peace, Baluchistan receives only 12.5% of the gas royalties due to it by the central government. There is anger already in Sindh over water rights to the Indus River.

Both Sindh and Baluchistan have spoken of banding together to create a separate federation. All three provinces are moving towards separatism for the same reasons: the same sort of economic inequity was one of the causes for the 1970-1971 separatist war between West and East Pakistan. Today East Pakistan is Bangladesh.

Thankfully, we’ve also seen a solution to this problem before — in the Indonesian province of Aceh. As with Pakistan, Aceh endured decades of enormous popular anger over federal economic exploitation over its huge natural gas fields and massive political corruption, a long-standing violent separatist movement, thousands dead, and widespread human rights abuses by the military.

After the 2004 tsunami, a peace deal was mediated by Nobel Prize winner Martti Ahtisaari between the Acehnese and the Indonesian government. It guaranteed political autonomy, amnesty, the removal of federal troops, oversight by independent monitors, and that 70% of the revenues from natural resources stay in Aceh. So far the peace is holding.

Pakistan could and should negotiate a similar deal in good faith with its provinces.

Whatever other “aid” the US wants to give, the easiest, cheapest and most enduring help it can provide is to mediate an end to the anger in the provinces by offering fairer royalties for natural resources and a mutually agreeable level of local rights in the NWFP, Baluchistan, and Sindh.

History doesn’t repeat itself. The Acehnese agreement was given a tremendous push by a natural disaster, an impetus that cannot be reproduced. However, it was the constant support by Indonesia’s President Yudhoyono that made it work. Those in Pakistan who are corrupt and profiteering — and they are many and powerful — and those who insist on separatism will work against trying such an approach. Only consistent effort from Islamabad and unending US pressure will make it work.

Giving the people of an area the money from their own natural resources and control over the environmental impact can go a long way in placating a population and encouraging trust and capacity.

On the first anniversary of the financial crash, I have been thinking of the role oil played. Most pundits cite re-setting mortgage rates as the precipitate cause, but I believe the sudden spike in energy prices earlier that summer — and the resulting inflation in food and other prices — acted as the tipping point for many American families already living beyond their means.

Oil played a similar destructive role in the stagflation of the1970s. Then there were price spikes and shortages, lines waiting for gas. But the financial world was different. People were not used to living so far beyond their means — if you didn’t have the cash, you had to cut back. Far fewer women worked so when family finances became strained in the 1970s, women went out and got a job. Stagflation pushed women into the workplace as much as the women’s movement. The two person family economy has been how the American family has coped since then.

Both then and now, Americans predicated their lives on the assumption of permanent cheap energy. In this century, it was the huge house in the exurbs. His and her SUVs.

In the 1970s, food and gas couldn’t be paid for with a credit card. Everyone does now. We were told — why save? Hand your money over to a financial advisor, work that 401(k). Invest in real estate: it’s America — indulge —you’ll earn more in a couple years to afford it. But how could that work out for everyone?

Unlike the 1970s, wages have not kept pace with the real cost of living. Partly because of their confrontational tactics in the 1970s, unions became targets. As quickly as possible, jobs were shipped to cheaper more accommodating foreign shores. A college education is no longer the ticket to a glamorous life, just enough to get you a middle class one. Upward mobility is the American dream, but for two decades it has become increasingly a dream.

So when last year’s oil spike came, we were already too close to the edge in our lives. Except, unlike the 1970s, we had fewer escape hatches. Everyone in the family was already working for less and less. The house in the exurbs couldn’t be sold or moved closer in. We were already near our over-extended credit limit. As speculators, looking for the next big thing, assured us that demand would force oil to $200 a barrel, the tsunami that had been harmlessly rolling on, unseen, in the deep sea finally snagged on the shore.

My recollection is that the average American could sense something very bad coming in June, even though the pundits and financial stars were still telling us Bear Stearns was a fluke. It was the beginning of the crash, where we finally realized our debt had totally swamped our savings and this time, we had no buffer.

In the past couple of weeks, the International Crisis Group, which monitors and comments on conflict situations around the world, has been focusing on the African country of Chad. Chad is neighbor to Sudan and starting point of what had been one of the most anticipated oil pipelines in history. ICG’s recommendations ask Chad’s government to step up to the plate and become more inclusive and honest, and for the US, France and China (China!) to pressure it to do so. This seems unlikely to happen.

Negotiating the Chad oil deal, and its 665-mile long oil pipeline which snakes through Cameroon on its way to the Atlantic Ocean, took a long time and the involvement of an consortium of oil companies. The World Bank acted as midwife. It was a difficult birth, especially since Chad didn’t really have that much oil to begin with – maybe 900 million barrels — and is land–locked. (For example, in 2004, Saudi Arabia has an estimated 260 billion barrels.) This made the project comparatively unprofitable; the Bank had to put up millions to get it off the ground.

The Bank meant well: it wanted to give an economic chance to a country that doesn’t have a whole lot going for it. The Bank, which became involved in 2000, pushed for a new approach involving outreach and payment to the local populations whose land the oil and pipeline would use. The people were told what was about to happen; they were paid a nominal sum for the property they would lose. There were many solemn vows of transparency and good governance by the Chadian government. By the end of 2003, the wells were drilled, the pipeline completed, and the oil flowed to the sea.

Chad did not have a democratic government to begin with. President Deby was in power for a decade by the time the project was started. He is still in power. Shortly after the oil began to flow, he began to backtrack. He bought quantities of weapons, ostensibly to deal with the incursions from the neighboring Darfur region. There were telltale signs of cronyism and corruption; the official oversight committee was crippled.  Child mortality rose. The money never reached the people. The initial cash payments the people received were mostly wasted (hardly surprising in a country where most people are illiterate, there is no functioning economy, and little financial infrastructure to speak of) — so the economy did not grow.

The World Bank pulled back when the abuses became too apparent; in 2006, it suspended loans to Chad. In 2008, Chad repaid the loans, while reneging on its promises, and freed itself from the Bank and its constraints.

Obviously, the resource curse has Chad in its teeth. But why would any one have thought it would be otherwise?

Let me be the one to bell the cat. I’ll say what most international institutions will not say and most developing countries would never ever want said. Although nationalizing the oil and oil industry when Mexican President Cardenas first did it in 1938 — when the foreign oil companies were robbing the country blind, ruining the environment, underpaying their native workers and wreaking political chaos — was the best, the obvious, thing to do then, times have changed. The solution has become the problem.

Turning over control of a (local) natural resource to a national government, which can do with it and the ensuing revenues what it will, looks like a good idea but it simply hasn’t worked. Many countries do it: Nigeria, Saudi Arabia, Iran, Angola, Gabon, Venezuela, Ecuador — so, so many. Where has it worked? Where has it transformed a country into a multi-sector economy, a democratic country?

A few will point to Botswana, which is a success. But Botswana’s situation, with a concentration of diamonds in a corner of the country and a great legacy of good governance cannot be easily duplicated elsewhere. The same with Norway — a Western industrialized, stable, well governed, wealthy and long-peaceful country.

So perhaps not nationalization. And the privatization of such resources, a popular alternative among free-marketers because it allows parties with the capital and expertise to handle the project, also offers little benefit for the people or the country as a whole.

If not nationalization or privatization, what? That’s the real question. Is it local ownership? Private ownership with huge taxes? Sovereign wealth funds? Partial public trading of nationalized oil companies like Norway’s Statoil? International laws?

Until and unless we look for an alternative, neither International Crisis Group nor anyone else should be surprised at outcomes like Chad.

I know China’s economic philosophy is different than America’s but was it ever so glaring as a week ago, when it was reported that China “loaned” China National Petroleum Corp. $30 billion for yet more overseas projects?

Can you imagine Uncle Sam doing this for Exxon? (Okay, maybe GM, but the terms were a lot less sweet.)

But I’m not quite at the Thomas Friedman stage. He recently bemoaned the amount of compromise the US political system requires versus the autocratic Chinese one, which can take the longer view without political resistance. To me, there are still fewer democratic freedoms in China, less political inclusion, minimal public protection, and probably more corruption. And obviously, there are plenty of other autocratic countries that abuse their power far worse than China. And obviously, Exxon really hasn’t done so badly under the US system.

China is also investing heavily in its green energy projects. It has spent this recession moving heaven and earth to insure its commodity security.

Will China’s approach “win” against America’s?

It’s hard to say, its situation is so different. China doesn’t seem as geologically lucky with oil and natural gas deposits as the US. It has modernized at an amazing clip of course, but it has just now started to bump into ideas that must slow it down for the better: consumer safeguards, corruption control, environmental protection, unhappy outer provinces. Industrialized World economies have to deal with Industrialized World standards and norms.

Anyway, as we saw with Japan in the 1980s, sometimes a little competition, a different approach, can push us harder in the right direction than we would otherwise go.

I like it when things line up. Syzygy, they call it.

What do Mongolia, Iraq, and Venezuela have in common? (Hint: it’s not oil.)

It’s that they have all recently bumped into the sharp edge of resource reality.

There is something about the discovery of  valuable resources that make people and countries take leave of their senses and figure that now they are set for life; they just have to squeeze every penny from the energy or mining companies, sit back and let the money roll in. But this is not the economy for that, not with commodities being hammered the way they have been (and it would have been worse without China), and with national treasuries as depleted as they have become. The cash cow has become lean. Compromises are in order.

In late August, the Wall Street Journal reported

“Mongolia’s Parliament agreed to cancel a windfall-profits tax on copper and gold and took other steps aimed at hastening development of its more than US$3 billion Oyu Tolgoi project, one of the world’s largest undeveloped mineral assets.
The mine, which is being developed by Anglo-Australian mining giant Rio Tinto and Canada-based Ivanhoe Mines Ltd., is viewed as a blueprint for billions of dollars of investments in Mongolia. The country has some of the world’s largest untapped reserves of coal, copper and other commodities… Talks on an investment agreement have dragged on since 2003 and hit a serious snag in 2006, when Mongolia introduced its windfall tax in a bid to capture more profits from its resources. The provision imposed a 68% tax on copper sold above US$2,600 a metric ton and gold priced above US$500 a troy ounce on the London Metal Exchange.”

Not coincidentally, at almost the exact same moment, the Journal was also announcing,

“Iraq is seeking lower upfront payments in its second oil bidding round, hoping to recapture the interest of international energy companies that largely shunned the country’s first attempt to open its oil fields to investment in June.
The country is now seeking signing bonuses of $1.2 billion in total for contracts to develop the 15 fields on offer, Iraqi oil officials and executives from companies involved in talks on the deals said. Iraq’s attempt to auction off contracts for eight fields in June got hung up in large part on its demand for $2.6 billion in so-called soft loans that oil companies were supposed to pay when signing deals.

In addition to the lower up-front payments, Iraq this time will allow international oil companies to operate the fields. Terms of the first bidding round had stipulated that Iraqi oil officials would be involved in running the fields.”

It isn’t only greed (considering how rich extraction companies used to get off contracts that disproportionately favored them, countries are right to be suspicious and demanding) that is undermining the incomes of resource countries. It’s policy, and their own investment.

That’s where Venezuela comes in. Investors are hesitating in Venezuela. The Economist recently wrote on the oil sands there.

“It does not help that PDVSA wants a 60% share and operational control in each block while not putting up any money. On top of that the government will take a 33% royalty and a windfall tax.”
Energy specialist Michelle Billig is quoted saying it’s more than the recession that has caused investors to hesitate there; it’s political risk.

Hugo Chavez is famous for using the country’s oil resources not only to fill the coffers but to express his political pleasure or displeasure. This might be more feasible if Venezuela had a history of funneling funds back into maintaining and developing its oil industry itself, but it doesn’t. That expense is left for its investors. And that’s why although Chavez barks and occasionally bites the hands that feed (and try to pet), he has to back-pedal when to lure the money back.

It is  right that countries that have nationalized their natural resources (for better or worse) seek every penny they have coming to them — they owe it to their people. But they also owe them a fully developed economy that provides jobs in multiple sectors. Many developing countries, particularly those ruled by political despots, have a long sad history of taking what is offered them and keeping it for themselves. But it’s a negotiated relationship with the extraction companies. This is not the moment of commodity power. Footdragging is no substitute for  financial sophistication.

What so many countries ignore is the more they rely on these commodities, the more they see them as the solution to their financial problems and a pot of gold, the more the resource curse inevitably claims their economies.  After close to a century and countless promises that the oil would end poverty there, Venezuela’s people are still poor.

While I am not a specialist in green technology, I could not help but be depressed by an article in the New York Times Tuesday about China’s rare earth minerals and metals.  

The Times and many other papers announced Tuesday that China which “currently accounts for 93 percent of production of so-called rare earth elements” plans to cut its exports of these minerals in order to get manufacturers to open plants in China. Today, China did a bit of backpedaling to reassure the rest of the world that rare earth materials would still be available.

While obscure, these elements and metals are used in a number of green technologies, including magnets for wind turbines and batteries in hybrid cars, and in missile systems.

What especially caught my eye was the Times report that

“some of the minerals crucial to green technologies are extracted in China using methods that inflict serious damage on the local environment. China dominates global rare earth production partly because of its willingness until now to tolerate highly polluting, low-cost mining.

To get at the materials, powerful acid is pumped down bore holes. There it dissolves some of the rare earths, and the slurry is then pumped into leaky artificial ponds with earthen dams, according to mining specialists.”

Western green technology at the cost of extreme pollution in another country. China’s environmental problems, not limited to the mining sector, are well-known. How do environmentalists resolve this moral dilemma? They cannot force China to clean up its act; they cannot repudiate hybrid cars and other green technology. Will environmentalists support development of rare earth extraction elsewhere, like in Australia, California, and Canada? Can green technology engineers find alternatives to rare earth? I will be interested in following how they resolve this predicament.

Oil giant Chevron says that it had obtained video recordings — and has posted them on its website —  that appear to show an Ecuadorean political operative seeking $3 million in bribes, in connection with a $27 billion lawsuit the company.

It is the latest wrinkle in the on-going class action lawsuit brought by dozens of Ecuadorean communities against Chevron. The tapes supposedly implicate the judge in the case and President Correa’s sister, but as several newspapaers point out, they do not show if the bribes were paid or even if the judge and the sister even knew of the bribes. Chevron says it did not pay for the recordings. It’s hard to know what to think: political corruption versus oil profits.

The background of the case, Aguinda vs. Texaco Inc., is pretty straightforward and well-known: for more than 20 years — until 1992 —Texaco oversaw the extraction of oil from Ecuador’s virgin rain forest. They made a colossal mess. And they are being sued because of it. Similar awful situations exist in Nigeria, today’s China, — dozens of other places — and of course, the US.

But this particular situation gets murky. There is ample, more than ample, documentation that the Ecuadorean government was aware of these problems and in fact worked very, very hard to facilitate Texaco’s operations in the rain forest. The government often put extreme pressure on the indigenous people and, when they did not acquiesce, it ignored their wishes. According to The Economist, from the mid-1970s, the Ecuadorean state-owned oil company (now Petroecuador) had a nearly 2/3 stake in the field, with Texaco overseeing operations. It’s hard to imagine Ecuador was unaware of the contamination. In 1992, the government did not renew Texaco’s contract and the company left everything for Petroecuador.

In 1993, lawyers representing 30,000 local people filed a suit against Texaco in New York City court, claiming damage to the environment and people’s health. In the face of public outcry, Texaco agreed to clean up the pits. It cost $40 million, was completed, and signed off on by the Ecuadorean government. (The Economist says too, Petroecuador was supposed to clean up the rest of the mess, but apparently has not done so and seems to be still using some of the contaminated dump sites. And there have also been questions raised whether Texaco’s work was done right or even at all.)

In 1999, Ecuador passed environmental regulations, but they were not retroactive. In 2001, Chevron bought Texaco and inherited the problem.

 “The case is historic by several measures. Never before have indigenous peoples brought a multinational oil corporation to trial in their own country. Moreover, a victory would mark a turning point in the relations between native populations around the world and the foreign corporations that do business in their homelands.
Texaco discharged more than 18 billion gallons of waste water into rivers and streams, burned millions of cubic meters of natural gas without proper emissions controls and spilled millions of gallons of crude oil directly into the earth, polluting the water”, according to the LA Times

It sickened residents including 1,400 people in the region who died of cancer possibly caused by toxic chemicals.

The suit seeks $27.3 billion in damages. $9.5 billion will go to compensation for the cancer deaths; $8.4 billion is for “unjust enrichment”; the remainder is for environmental clean-up.

The case was dismissed in the US appeals court, and sent back to Ecuador.  The Ecuadorean judge in the Lago Agrio district, Juan Nunez, seems sympathetic to the local people. “This is a fight between a Goliath and people who cannot even pay their bills,” Mr. Nuñez, 57, said to The New York Times in an interview in his office, where more than 100,000 pages of evidence were stacked to the ceiling. He was also seen on “60 Minutes” expressing similar sentiments.

But the Ecuadorean government has a lot to answer for too. And as The Economist points out,

“Texaco’s total profits from its operations in Ecuador were only $497m, while over the 20 years to 1992 Ecuadorean governments received $25.3 billion in profits, taxes and royalties from the field.”

Increasingly it seems that oil (or other multinational) corporations are sued for very real damages, but ones where the national governments are also partially liable. Perhaps it seems to the plaintiffs that they will get farther if they sue a multinational rather than their own government (if they even legally can); or perhaps they think that since oil companies have a low reputation and deep pockets, it’s easier to go after them alone; or perhaps they have greater hope for a case that gets started in a Western courtroom (as with the Ken Saro-Wiwa case from Nigeria in New York). But the governments of many resource-rich countries seem only too happy to let the multinationals assume full responsibility.

It is not that the multinationals are not responsible for what they did — everyone has always known such dumping was an environmental catastrophe (even before the term was coined), and that the people of the area were angry and exposed to waste that could poison them. But the corporations did not do it alone, and the governments that let them ought to at least recover compensatory money from those nationals who enriched themselves one way or another on the misfortune of their countrymen.

Central Africa is not the first place energy people traditionally think of when it comes to oil. Now it appears Uganda may have up to 2 billion barrels of the stuff, according to their government. The question is what to do about it.

Uganda would like to have a refinery, although some oil companies say this is a mistake. Uganda could use the energy, but not as much as would be produced. They believe the oil should be exported, although it is waxy and difficult to pass through a pipeline. A pipeline to the Indian Ocean would cost $1.5 billion; investors interested in helping Uganda, according to the Economist, include Iran, the US and China.

All this talk of what to do with the oil when it finally comes out of the ground is less important than setting up good government policies before serious drilling begins. Museveni’s government faces a number of hurtles if it is to do things right. But they can get it right.

The first question is income transparency: the two Western companies, Heritage and Tullow, who own the drilling rights have said they are open to disclosure. Now the government must decide whether it can resist the temptation of opacity and probably corruption, and sign on to EITI (Extractive Industries’ Transparency Initiative).

Dow Jones newswire has noted Tullow and Heritage have reached out to local communities, which, having heard about what happened when oil was discovered in Nigeria and Angola, are understandably worried. There are issues of more general public input.

“A dispute is already brewing over who controls rights to minerals in the Lake Albert area and how revenues will be distributed between the government and leaders of the Bunyoro Kingdom - the ethnic grouping that occupies districts on the lake’s eastern shore. Local communities ‘say they have been completely left out of the process and are not satisfied,’” Dickens Kamugisha, chief executive of the African Institute for Energy Governance, a non-governmental organization based in the Ugandan capital, said in the same article.

An especially encouraging note: New Vision (of Uganda, reported by allAfrica.com) says,

   “Under the mining law, the Government takes 80% of the revenues, the local government 17%, while the land owner takes 3%.”

This distribution of income is different than most other countries, where the constitutions cede all mineral rights and income to the national government. Assuming by “landowners” they mean those living on the land (as opposed to a wealthy absentee deed-holder), this, plus environmental controls and transparency, means that people in the area could actually profit from the oil extraction.

Uganda’s government will hopefully realize that they have the chance to effect that rarest of economic phenomena — with public inclusion, their oil bonanza could actually financially help the country and the people.