January 22, 2007

IF NOT FOR US, FOR THEM:


Blood Oil
: Could a bunch of Nigerian militants in speedboats bring about a U.S. recession? Blowing up facilities and taking hostages, they are wreaking havoc on the oil production of America's fifth-largest supplier. Deep in the Niger-delta swamps, the author meets the nightmarish result of four decades of corruption. (Sebastian Junger, February 2007, Vanity Fair)

This is why oil is so valuable: one tank of gas from a typical S.U.V. has the energy equivalent of more than 60,000 man-hours of work--roughly 100 men working around the clock for nearly a month. That is the power that the American consumer can access for about $60 at the gasoline pump. If gasoline were a person, we would be paying 10 cents an hour for his labor. Easily accessible reserves are running dry, though, which means that the industry must develop increasingly ingenious--and costly--techniques for getting at the oil. Deepwater drilling, for example, now happens so far offshore that rigs can no longer be anchored to the seabed; they must be held in place by an array of propellers, each the size of a two-car garage. The cost of deepwater drilling is close to twice that in shallow water.

As a result, oil is one of the few commodities with virtually no surplus production; just about every drop of oil that gets pumped gets used. The world currently goes through 84 million barrels a day, a figure that is expected to rise to almost 120 million barrels in the next 25 years. As that happens, oil will become more and more expensive to extract. When oil was first exploited, in 1859, the energy equivalent of one barrel of oil was required to pump 50 barrels of oil out of the ground. Now that ratio is one-to-five. Thus far, nearly half of the proven, exploitable oil reserves in the world have been used up. Barring the discovery of new reserves or new drilling technology, some experts predict the world will run out of oil by 2040.

Added to these technological problems is the fact that--as if by some divine prank--most of the world's oil reserves happen to be in politically unstable parts of the world. (The alternative theory is that oil exploitation tends to de-stabilize underdeveloped countries.) Because of the financial risks involved, oil reserves in politically stable countries have more value, per barrel, than oil in politically unstable countries. As we speak, the value of Nigerian oil--as a function of the capital investment that must be risked to produce it--is in steady decline.

That is MEND's trump card. It has several times threatened to shut down all Nigerian oil production, but it's possible MEND doesn't quite dare, because of the chance it will provoke a military retaliation it wouldn't survive. By the same token, the Nigerian military has threatened to sweep the delta with overwhelming force, but it doesn't know whether that might force MEND to carry out one devastating counterstrike--taking out the Bonny Island Liquefied Natural Gas facility with a shoulder-fired rocket, for example. An act of sabotage on this scale could drive Shell and the other oil companies from Nigeria for good, completely wiping out the national economy. One major company, Willbros, has already discontinued operations in Nigeria because of the security threat.

On the world stage, as well, MEND's political power depends on its ability to cause economic pain in other countries. Some industry experts contend that new market mechanisms and the availability of U.S. petroleum reserves would mitigate the effects of even a complete shut-in of Nigerian oil. "Look at Katrina," one oil analyst at the Department of Energy told me. "There was a spike in oil prices for a couple of weeks, but then demand shifts and there is a little bit of conservation. Two years ago we were at $28 a barrel and now we are in the mid-50s. Short-term market predictions are a fool's game."

The Oil ShockWave panel wasn't so sure. It found that a complete shut-in that coincided with another event--a terrorist attack in the Persian Gulf or even an exceptionally harsh winter, for example--could trigger a major recession. Furthermore, there seemed to be no good options for dealing with it. Opening up the U.S. Strategic Petroleum Reserve--some 700 million barrels of oil in underground salt caverns along the Gulf Coast--would lower oil prices for the whole world without providing a long-term solution. Begging Saudi Arabia for more oil could compromise the United States politically and damage our long-term interests in the region. And sending the U.S. military into the Niger delta would be politically risky and possibly unfeasible, given American commitments in Afghanistan and Iraq.

That did not stop the U.S. government from authorizing a joint training exercise with the Nigerian military in 2004. It was reported to have been focused on "water combat."

Two weeks after our first trip to the creeks, Jomo told me by e-mail that he would arrange for MEND to take us into its camp. It was deep in the mangrove swamps, and he said that no journalist had ever been there. Allegedly, the only foreigners who have ever seen the MEND camps were hostages.


The best thing we could do for several of the worst places in the world is drain their oil of value so that their governments become reliant on their people instead.

Posted by Orrin Judd at January 22, 2007 7:03 PM
Comments

Barring the discovery of new reserves or new drilling technology, some experts predict the world will run out of oil by 2040.

Are these the same experts who in the early 1970s gave a date in the 1990s? At least they've made their prediction horizon twice as long this time.

Posted by: Raoul Ortega at January 23, 2007 11:23 AM
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