19 thoughts on “Why Foreign Hydrocarbon Prices Matter”

  1. Dan, I’ve gone looking for your arguments on this, and I simply cannot agree. Historically the price of oil has been exceedingly low, and for much of the age of oil the amount of money paid to producer nations has been a meager fraction of that exceedingly low price.

    So they’re mad. What else could they be?

  2. I don’t think the future bumbled into based upon oil money is any different than the future bumbled into as the result of manufacturing Model Ts or Rubik’s Cubes.

    Everybody in the equation is best off if the price of oil reflects its true cost. That has almost never been the case, and both sides have bumbled into bad situations as the result.

  3. sonofsamphm1c ,

    I don’t think the future bumbled into based upon oil money is any different than the future bumbled into as the result of manufacturing Model Ts or Rubik’s Cubes.

    There’s numerous examples — and causes — of the harm that befalls countries that get rich from natural resource extraction. The Dutch Disease is a macroeconomic model [1], but perhaps a better reason is that oil allows governments to buy off most opposition, allowing a system to rot and hollow out while the money keeps flowing in [2].

    If large transfers of money were the answer, the foreign aid sent to Africa over the decades, and the oil wealth going to the Middle East for generations, should have made those the most future-friendly areas of the globe.

    Growing through the creation of wealth forces a country to build up the legal, social, political, and (least important of all) physical infrastructures needed for interaction with the global economy.

    Natural resource exploitation gets you the physical structure lickety-split, and allows you to buy off the other problems… for a time.

    [1] http://en.wikipedia.org/wiki/Dutch_Disease
    [2] http://www.tdaxp.com/archive/2004/12/09/removing-the-iv-from-tyrants.html

  4. The Japanese bubble of teh 1980s — and their handling of that situation — certainly have depressed growth rates.

    However, more to the point, they suffer none of the problems that the Venezuelas, Irans, and Russias of the world suffer. Like South Korea, Singapore, etc., they have very few natural resources to export, so they have to get rich by creating wealth.

    Thus, Japan is comfortable within the core of the global economy, is well developed, and is capable sustaining a complex multiparty democracy, individual liberty, and economic growth all at the same time.

  5. But they have shipped off a very large number of manufacturing jobs to low-wage countries. Their stock market has been in the doldrums for a long time.

    Dutch disease sounds like a fancy name for what happens.

    Venezuela is a perfect example of a country that got very close to nothing for its oil for a significant majority of the age of oil. I’ll never forget reading a Wall Street Journal editorial that ripped Chavez for building baseball fields for kids, and for actually having the gall to stock them with baseball equipment – sort of like the American Legion.

  6. Naturally, when labor prices increase, the labor pool will be priced out of more and more activities.

    When we see this in East Asia, it is a product of increased human capital, better social infrastructure, etc (Japan offshores to South Korea offshores to China offshores to Vietnam)

    When we see thin in hydrocarbon states, it is a product of an expensive but worthless labor pool (hence, the generations of ideless of Saudi youth, for example).

    Not sure what your point is wrt Venezuela.

  7. It remains lost industrialization and economic upheaval. It always has a reason.

    Saudi Arabia has what it has because of religion and culture. Texas, once the Saudi Arabia of the world, never had the problems Saudi Arabia has.

    The United States can only propagandize Venezuela. Look at the astonishing number of articles that misstate Venezuelan oil production – usually sourced to a former employee of the PDVSA. It’s usually presented as proof state ownership does not work. This approach is actually damaging American oil companies. State-owned oil companies around the world are purposefully contracting with other state-run oil companies for technological expertise. They are freezing the snarling and meddlesome Americans out. Russia just froze ExxonMobil out of the new Sakhalin project. I will not be surprised at all if Statoil ends up a partner there. The Russians won’t have to worry that some of their employees are CIA agents.

  8. sonofsamphm1c,

    Thank you for your comment.

    Saudi Arabia has what it has because of religion and culture.

    Cultural determinism may play a role, but certainly not an insurmountable one. Through most of the twentieth century, China’s “confucian values” were seen as condemening it to poverty. Now, the same values as seen as a source of the wealth!

    What changed was the establishment economic infrastructure centered on the creation of wealth.

    Texas, once the Saudi Arabia of the world, never had the problems Saudi Arabia has.

    First, yes the southern states did. Their history of cotton-dependency tacks the modern history of oil-dependency. Predictably this led them to attempt to trade natural resources – for cash – for an army – for political power. Russia’s attempting to make the same trade now. Iraq was trying it not so long ago.

    Like modern Venezuela, the Confederacy experimented with nationalizing state industries. This makes sense, as the existence of a business class naturally threatened Gap regimes such as Chavez’s Venezuela or Davis’s Confederacy.

    Alaska and Texas have been lucky to avoid a repeat of this trap because of the ruleset imposed by the United States’s economic, political, monetary, legal union. (The same holds true for Norway in Europe.)

    The United States can only propagandize Venezuela. Look at the astonishing number of articles that misstate Venezuelan oil production – usually sourced to a former employee of the PDVSA.

    No, imprisoning his own defense minister is better propaganda than anything the State Department could ever come up with. [1]

    The creation of a national oil company is largely besides the point. The unpredictable nationalization of land and industries belonging to political opponents — as well as the military build-up that only makes sense for intimidating neighbors, the harassment of opposition figures, and the general destruction of Venezuela’s legal, political, and logistical infrastructure — are perhaps graver issues.

    hey are freezing the snarling and meddlesome Americans out. Russia just froze ExxonMobil out of the new Sakhalin project. I will not be surprised at all if Statoil ends up a partner there. The Russians won’t have to worry that some of their employees are CIA agents.

    I’m glad we agree that Russia and Venezuela are engaging in similar problems.

    By segregating themselves from the global economy, both Russia and Venezuela achieve greater political freedom in exchange for greater isolation. This systematically destroys the “Western lobby” in those countries, and the Russian and Venezuelan lobbies in the economic core of the global economy. [2,3]

    [1] http://en.wikipedia.org/wiki/Ra%C3%BAl_Baduel
    [2] http://duckofminerva.blogspot.com/2008/08/maybe-weve-got-it-all-wrong.html
    [3] http://www.tdaxp.com/archive/2008/08/31/russia-spurned-by-china-lashes-out-at-europe.html

  9. Venezuela is not segregated from the global economy. They buy goods from everywhere, and they sell goods everywhere. They still do a substantial business with ExxonMobil.

    Chavez hates George Bush with an extreme passion. In the core, that is not the rare. That is going to last about 74 more days.

  10. sonofsamphm1c,

    Venezuela is not segregated from the global economy. They buy goods from everywhere, and they sell goods everywhere. They still do a substantial business with ExxonMobil.

    Certainly Venezuela has very shallow links with the global economy. Russia does as well. They sell a natural resource and turn that into cash. They then spend the cash on things they cannot make themselves.

    (For that matter, Saddam Hussein’s Iraq and the Soviet Union behaved in just the same way for decades.)

    However, as Russia and Venezuela have no capacity for generating wealth, and little interest in doing so, they have no deep connections to the global economy. The complex trade/financial/political links that tie the global system together barely exist for Russia and Venezuela.

    Indeed, as we’ve mentioned, Chavez and Putin have taken pains to weaken what durable ties there were.

    Chavez hates George Bush with an extreme passion. In the core, that is not the rare. That is going to last about 74 more days.

    Irrelevant.

    Saying ‘Chavez hates Bush’ may get you rhetorical points at Kos or DU or some other hack blog, but it’s pointless for understanding the situation.

  11. I rarely ever read KOS, but I do know what it is. if I have ever posted there at all, it’s not more than once or twice. I have no specific memory of posting at KOS. I have absolutely no idea what DU is.

    It is not irrelevant. Just watch what happens.

    Venezuela’s non-petroleum exports have been rising. They make a lot of products. Because of their love of sport, we’ve considered moving a factory down there.

    Do they buy Asian electronics? Like most Americans, yes they do.

  12. Do they buy Asian electronics? Like most Americans, yes they do.

    Why in the world would this be relevent?

    And you’ve not defended why your Bush comment was relevent, other than to reassert that it is.

    How are these comments useful to me?

  13. A lot of American businesses have operations in Venezuela.

    I used to talk weekly the the Network/System Engineer for the Venezuela campus of my former employer. In 1995, we got them up on internet email and web. They were fully connected in. My contact (a young geek) was playing around with Linux, watching America movies and was more up on Pop Culture then I was. Venezuela wasn’t some backwards place from the 1800’s.

    The only guys more geeky where the pre-takeover Hong Kong guys.

  14. Soob has an excellent post on the benefits and drawbacks of $60/gallon oil [1], drawing on Wiggins @ OSD [2] as well as Forbes [3].

    RE: Venezuela (and for that matter Russia), consumption of western goods by Gap countries is not qualitatively different from Soviet policy during the 1970s. Trading hydrocarbon wealth for nonproductive economic assets is attempting to buy prosperity without building an infrastructure for it, whether you’re wasting money on industrial tools that will rust or DVD movies that will fade from memory.

    The sooner Chavez is out, the sooner what remains of Venezuela’s economy can be reconnected with the Core.

    [1] http://soobdujour.blogspot.com/2008/11/ultimate-5gw-holding-foreign-economy.html
    [2] http://opposedsystemsdesign.blogsome.com/2008/11/07/iran-needs-oil-at-60barrel/
    [3] http://www.forbes.com/afxnewslimited/feeds/afx/2008/11/03/afx5637506.html

  15. Venezuela is rapidly increasing its reserves. Chevron is building facilities there. The Chinese oil company is building facilities there. The Brazilian oil company is building facilities there. BP is building facilities there. The Russian oil company is building facilities there. Total is building facilities there.

    About the only oil companies not currently building in Venezuela are ExxonMobil and ConocoPhillips.

    They are not disconnected. There is tremendous ongoing international investment in Venezuela.

    Chavez was elected by the people of Venezuela in fair and free elections. Contrary to all hyperbolic reports to the contrary, he honors their expressed wishes at the ballot box. Would he honor their expressed wish that he go? I’m guessing that he would. It’s highly unlikely that Venezuelans will ever elect a candidate who states he will undo Chavez’s 60-40 ownership ratio. International investment appears robust. On hydrocarbons, most producer nations are at 100-0. He’s offering one of the better deals on the earth.

Leave a Reply

Your email address will not be published. Required fields are marked *