I was just thinking that with the recent jump in crude oil prices, Iraq probably got richer as a nation because recent events led to reduced oil production. Thus, there is more oil still in their land, which is worth more now.
Will future Iraqis see this as a blessing because they can sell their oil at higher prices?
Or is it more financially advantageous to sell the oil as quickly as possible and invest the profits?
One of the problems with this is that if you leave it there too long something else may (and probably will) come along and superseed oil…and then you will be left with a pile of the stuff that is worth a hell of a lot less than it was just a few years ago (I doubt oil will ever be completely worthless). Its the way of comodities after all. How much is whale oil worth today for instance? And look at the diamond market since gem quality artificial diamonds were producable (and cheaply). It hasn’t started to decline (yet) but companies like Debeers are getting a bit worried I’ll bet.
I’d say its a balance between getting it all out of the ground as quickly as possible and sitting on it in the hopes that the prices will just keep going up. I think the smart play is to take it out in a measured way and re-invest the profits into alternative technologies…so that once the price of oil goes crashing down you still have a steady stream of money coming in. Instead of a few really nice palaces and a lot of burned out and rusting armored vehicles out there in the desert…
-XT
It would be fun for the left to say “OK you wanted us to open up more of the US for oil exploration, but we were better off importing ‘cheap’ oil from abroad and letting our domestic supply increase in value” just to piss off the right.
Well, this is an interesting question. I assume you are talking about the party that owns the oil (the state or private company, whatever the case may be) as opposed to society as a whole. I will answer from the point of view of the resource owner, please correct me if you meant society.
For a private company, most models show the optimal time to extract as yesterday, meaning that you are worse off each successive day you leave a resource in ground. It comes down to this: Will the oil in the ground appreciate in value at a rate greater than my discount rate? If the answer is no, you want to extract now. For a private company, the answer will probably indeed be no. Why? You have investors who demand a return, and often you have debt or other competing projects to employ valuable capital. You must also consider that the constant appreciation of natural resources is not a forgone conclusion. In fact, many resource economists would argue that the opposite is often true. We have seen this in lots of agriculture markets, timber markets, metals, you name it. In real money terms, crude oil trended downward from 1865 to 1970, and again from 1980 to 2000. I would argue that recent price run-ups are a largely due to politics, not crustal scarcity just as run-ups in the 80s were, but that’s another debate. Another practical reason why oil companies can’t wait to extract is because their contract to explore and produce will stipulate that they get their asses in gear soon, or loose the lease. The owner of the minerals probably wants his royalty check ASAP.
A state resource holder is a whole different animal. Why? A state will often have a much lower discount rate than a firm. This is because states are more patient than individuals (who own private firms) To put it starkly, a person dies while a government theoretically doesn’t. There can be some other reasons to hold back on extraction for a state. Absorption rate is one, especially in a developing country. The marginal utility of money falls quickly in a given period. There are only so many roads, hospitals, schools, etc. we can build this year, no matter how much cash we have, so there isn’t really any reason to sell more than X barrels of crude. Another theory that gets kicked around is that a resource state may actually be working with a downward sloping supply curve. Conventional wisdom tells us when prices are high, a supplier will sell more. However, if a state has a set budget they may produce less when prices are higher to make the same revenue target. (Imagine a youngster just working until he has enough money for a video game he’s had his eye on, and then quitting, no matter what his hourly wage is)
In a “perfect” world, it still doesn’t make a lot of sense for a state to hold off, because they could invest their revenue in a fund for future generations and probably be better off than keeping oil in the reservoir for future generations. Norway and others have a program like this. The world isn’t perfect, however, and such a fund may be hard for the government (or future governments) to keep their hands off of. So, oil in the ground may be safer than cash in the bank.
Hope this helps, let me know if you need some clarification of any points.
There may be good strategic reasons as well. A military machine runs on oil. The U.S. has a strategic petroleum reserve for this reason. ANWR could be considered a secondary strategic reserve.
It really depends on what happens to the rest of the world’s oil supplies and on what time course and what Iaq would do with the revenues.
The big issue is when does oil “peak”? At what point does demand continue to increase while supply starts to go down for other producers? If, at that point, Iraq is able to bring more production online, and at that point alternative energy sources have not superceded oil (and it is very very unlikely that there will be significant alternatives by any reasonable prediction of peak oil timing), then the appreciation in oil’s value will have very likely outpaced the value of investing the revenue elsewhere … unless it was invested wisely, say like in educating their populus, women as well as men, to the level that they can compete in science and technology and the information driven cognitive economy of the world. But no one knows when peak will be, or how much oil Iraq has in the ground. We can bet that the money wouldn’t be invested like that though.
So who knows? Most people would choose taking the cash now thank you.
I don’t wan to hijack, but I think you are falling for the “peak oil” meme and also over simplifying supply/demand. Demand is not a single figure, it is a curve. For all intents and purposes it could be said that demand for oil is infinite. If oil were free then people would not worry about insulation, they’d air condition and heat every space, cars would be even less fuel efficient than now, desalination would be economical because energy was “free”, etc.
In an idealized model the supply increases with cost of production and the demand decreases with price. The market reaches equilibrium where these two curves intersect.
As China and India become richer they will be able to pay more for oil and the demand curve will shift upward, both raising prices and increasing supply. Supply will increase because some sources of oil that are not currently profitable (tar sands for example) will become viable.
Of course petroleum is not infinite, so at some point as the demand curve shifts upward and the supply curve moves down, alternative energy sources will be cheaper than oil. These will include ethanol, solar, wind, etc. Conservation will also make more and more sense and people will better insulate their houses, use public transportation, buy more fuel effcient cars, etc.
With all due respect, no, I do not believe that I am falling for any “meme.”
As you note supply/demand curves are never simple linear beasts. Of course increased demand outstripping current supply results in efforts to increase supply and makes previously unaffordable technologies more attractive given drastically higher prices. And decreased supply with higher prices somewhat reduces demand. But neither is entirely elastic; there is some rigidity and a time delay for significant changes in either to occur. And there is a maximum rate that oil can be gotten out of the ground without threatening the longterm viability of the field (even if it was quick and easy to bring more wells and refineries online) and only so much that even more expensive extraction technologies can produce so fast. Demand increasing faster than supply can keep up with spells rapidly and dramatically increasing prices. Without adequate groundwork there is only so much that could be expected from conservation and alternative energy technologies to reduce demand in that context. I am not an oil expert but have read the opinions of many different experts. There is no question between them that a “peak oil” will occur. The debate is only when. Those who believe that it is far far away believe that we have plenty of time to develop alternative energy technologies and conservation strategies; those who don’t, don’t. Me, I bet with my stock picks: PlugPower, Ballard, but also KinderMorgan (pipelines through Canada).
Again, the timing of those events is critical for making predictions about the value of the resource underexploited for x number of years.
I thought that was already refined?
Does the US Navy still have a strategic petroleum reserve in the ground (Teapot Dome?). This was a scandal in the 1920’s-when Interior Secretary Albert Fall allowed private oil firms to (illegally) drill into the reserve. Just wondering if we in the USA still have such reserves.
Yes, the U.S still has a strategic petroleum reserve. In fact, Bush just announced that the givernment was temporarily halting its refilling to ease oil supply problems.
And yes, the strategic petroleum reserve is refined petroleum. But oil in the ground is just another type of strategic reserve.
I apologize.
No need to, but thanks just the same.
Just curious. If the oil is not needed right away, and not for the immediate future, wouldn’t it make more sense to leave it in the ground until the right time? That way wouldn’t you save a lot of money? It’s just there until you come and get it. You don’t have to store it in tanks or keep it as inventory, or track it in the books, etc. Storage costs money and space.
Leaving oil in the ground might seem like an easy way of storing it, but educating all the people needed to drill it once more in the future is far more expensive than drilling it now and storing it refined. Or, so they say. We’ve just had that debate here in Norway. I didn’t care much for it, though, and important points might have passed me.
It doesn’t matter for this debate, but the US stategic petroleum reserverve is pure crude oil, Sam, not refined goods. The IEA (headquartered in Paris) maintains a refined reserve.