Guest essay by Roger E. Sowell, Esq.5
Recently on WUWT, a post1 by Willis Eschenbach was made advocating the almost doubling of energy consumption worldwide, by increasing energy use per capita in the poorest countries. This post addresses the issue of increased energy consumption and poses a few questions. I say at the outset that I agree that improving the quality of life is an important goal, and energy consumption per capita is probably a good indicator of quality of life.
First, what do the following countries all have in common? Nigeria, Indonesia, Algeria, Libya, Iran, Iraq, Venezuela, Mexico, Russia, Canada, and United Kingdom?
Each country is a major oil producer and exporter, but with Indonesia and UK experiencing decreased exports recently. The first seven countries all are, or were, a member of OPEC, the Organization of Petroleum Exporting Countries.2 Yet, all but the last two, Canada and United Kingdom, have below-average GDP per capita, gross domestic product, according to the World Bank statistics.3
Second, while it is true that a correlation can be made between energy consumption per capita and quality of life, there must be something else at work that prevents the oil-rich countries Nigeria, Indonesia, Iran, Iraq, and the others from enjoying that high quality of life. There are fundamental issues that prevent energy-poor countries from copying the success of another energy-poor country, Japan. Japan has essentially no natural energy resources, but found the means to import energy as oil, coal, and liquefied natural gas, LNG, to power its industry, commerce, and residences.4
Until some fundamental issues are resolved, simply increasing energy consumption in the poorer parts of the world will not improve the quality of life.
Among these fundamental issues are, in no particular order, economic system, a fair justice system, and the political or governing system. I don’t imply that I am an expert on any of these countries, or their economic systems, justice systems, or political systems. I have done a fair amount of study, and also have traveled to and worked extensively in five of the countries mentioned above: Indonesia, Mexico, Canada, Japan, and UK.
Perhaps the most important issue is the political system, for the justice system and economic system may depend on who is in power and the type of power exerted. It may be that a representative constitutional democracy is a favored political system. It may be that the degree of official corruption is a major factor. It may also be that civil discord is a major factor. Having a modest degree of government regulation to ensure fair treatment, but not an onerous burden, is surely important.
A fair justice system ensures that those with a legal grievance will be heard, and treated fairly according to laws that do not change on someone’s whim. Having a contract honored, or being allowed to bring a lawsuit for breach of a contract, are important issues. Having a means to collect on a judgment is also important, as it does little good to win a lawsuit, be awarded money as damages, and be unable to collect the money.
A brief anecdote to illustrate the importance of a justice system: during my time in law school, US Supreme Court Justice Anthony Kennedy spoke to an assembly of professors, staff, students, and guests. Justice Kennedy spoke on many things that night, but what I most remember is him telling us that he had met recently with members of Iraq’s judiciary. It was soon after the war to remove Hussein ended and Iraq was building up its new government and judicial system. According to Justice Kennedy, the Iraq delegation thanked him tearfully for bringing to the world the US Constitution and its many provisions for legal rights, especially the first ten Amendments known as the Bill of Rights. They intended to copy as much of those rights as they could into their new governing documents.
The economic system may be important, perhaps not as important as other issues. Economic systems in the oil exporting countries range from absolute monarchies to dictators to elected representative.
It is interesting to note that OPEC has existed for more than 50 years, having been founded in 1960, so ample time has passed to allow oil-rich countries to improve their standard of living. A few have, such as Saudi Arabia, but most have not. Clearly, other factors must be addressed besides access to basic energy, if the goal is to improve quality of life.
It is further interesting to note that even within a country with high energy consumption per capita, such as the United States, enormous differences exist between citizens and their energy consumption. It may be that energy per capita in the US is distributed according to a bell curve, with a few percent of the population consuming vast amounts of energy in their mansions, jet airplanes, and fast motorcars. Likewise, a few percent of the population are poor and have very low energy consumption. The majority of the population likely fall in the middle, with about average energy consumption. Clearly, again, other factors must be at work that prevent the poorest from achieving a better quality of life along with higher energy consumption even in an energy-rich nation like the US.
Citations
1 WUWT, article of August 21, 2013 “Double The Burn Rate, Scotty”
2 OPEC membership at www.OPEC.org
3 World Bank GDP per capita, 2012 data.worldbank.org/indicator/NY.GDP.PCAP.CD
4 EIA data for Japan www.eia.gov
5 The author is an attorney in California, practicing in engineering, science and technology law. He is a frequent speaker on climate change, energy, and engineering issues. He worked worldwide as a chemical engineer in the energy industry with oil refining, petrochemicals, basic chemicals, and power plants. He blogs at http://sowellslawblog.blogspot.com
“They rely on oil revenue to keep their country functioning. Thus there is the incentive to produce as much as possible, not as little as possible.”
That’s the theory that has led to so much tragic mismanagement around the world. It sounds good, but it’s wrong. (not faulting you; many, if not most, people believe this)
Mexico relies on oil revenue to keep their country functioning – BUT oil production has been collapsing over the last 10 years, because Mexico has stripped out almost all of the money needed for new exploration and instead used it for everyday government spending! And PEMEX doesn’t mind, because PEMEX doesn’t have any incentive to grow, no one in it makes any profit from that. PEMEX’ only incentive is to make sure that no competitors ever enter Mexican territory, because it might demonstrate how BAD a job they are doing, and lead to a loss of power. And now Mexico is in a real bind – their government revenues are collapsing due to the loss of oil income, and yet in order to create more wealth, and more production, they have to TAKE money away from social programs and the military in order to spend it. And they are having a devil of a time convincing anyone of the need for that, because PEMEX has been a source of incredible corruption for 50 years and counting.
And that’s far from the worst problem with PEMEX.
Let me put it simply – PEMEX is much better off if Mexico only produces 2.5 million BOPD, and they control ALL of it. than if Mexico produces 10 million BOPD but PEMEX only controls a fraction of that. 2.5 is about what they are producing; if Mexico had US style laws and competition, many geologists believe they could hit 10 million in 10 years easily. You see, the Eagle Ford geology which is exploding in Texas runs on into northern Mexico – and yet Mexico has no plans to even explore that, much less develop any of that. Why? Pemex isn’t interested, because they have no expertise in that kind of operation and they would have to bring in outsiders, and that would threaten their control. So they’re going to make sure it doesn’t happen there. (and don’t even get me started on the offshore plays they’re ignoring, which are bigger than Canterell)
Mexico has a President who is valiantly trying to break the stranglehold PEMEX has over that country’s economy, but it remains to be seen whether he can actually succeed or not. Until he r someone like him does succeed, Mexico is going to remain a tragic land of vast, untapped, wealth and vast suffering.
I remember an article I was a long time ago where it was pointed out that countries that are dependent upon the export of natural resources tend to have lower standards of living. Being rich in natural resources doesn’t equate to the creation of robust economies. Outliers like the Gulf States I think are more do to their relatively small populations.
From the article:
“It may be that energy per capita in the US is distributed according to a bell curve, with a few percent of the population consuming vast amounts of energy in their mansions, jet airplanes, and fast motorcars.”
Speculation like this is driven by envy. I am middle class and I do not envy what the rich have nor do I despise the poor because I have been there. What I dislike is class baiting. A fine article, well thought out, but failed at the end due to envy.
Life, Liberty and the Pursuit of Happiness (the pursuit of property). How far countries could go by reading those words of wisdom, considering why the men who wrote them thought that these are the foundation of a just and moral society and then applying those ideas to their own situation.
And if they want a to understand why those are the important ideas, one explains the moral foundation of Capitalism better than Ayn Rand.
@JRwakefield
You need only look at the map of offshore oil fields in the Gulf on the U.S. territorial side vs. Mexico to know there is more involved here than Cantarell. In fact, it is the silo dependence on Cantarell production that reinforces the need for a new policy path with new investment and more players. Then look onshore at the map of Eagle Ford shale on the Mexican side of the border where new tech expertise will be needed.
“And now Mexico is in a real bind – their government revenues are collapsing due to the loss of oil income, and yet in order to create more wealth, and more production, they have to TAKE money away from social programs and the military in order to spend it.”
Such is the nature of the Monetary Trap. Like the Energy Trap, the Monetary Trap is when governments no longer have the funds because of interest payments on debt, and loss of revenue from resources.
Mexico is there, but the US has yet to hit that wall. The bigger they are the harder they fall.
Roger highlights “fundamental issues are . . .economic system, a fair justice system, and the political or governing system” and “corruption is a destruction of the Rule Of Law”.
Vishal Mangalwadi further explores these issues, showing how the Biblical command “Do not steal” is in turn the foundational to trust and in turn to the Rule of Law, economics and justice. See The Book that Made Your World. ISBN 978-1595555458
Resourceguy, how much is there, and what will the flow rate be? Shale deposits are low flow rates, wont compensate for the declines elsewhere.
@jrwakefield
That’s hard to say. It’s like looking at a night time satellite photo of North Korea compared to South Korea and asking what the change in economic output is going to be from a major policy shift in the north.
Resourceguy, Eagle Ford is a minor play:
http://en.wikipedia.org/wiki/Eagle_Ford_Formation
6.3bb in Mexico side is puny, especially since the flow rate is very small, in the US 52,000b/day. Such is the nature of shale deposits.
@jrwakefield
Your comment about low flow rates for shale deposits suggests you have not adjusted your thinking to the multimodal distribution of oil play types. The oil shale plays are drilling-intensive investment models with lower cost per well onshore than offshore complexes and with good productivity curves for cost reduction and yield enhancement over time. The off shore model favored by oil majors up until recently is hugely expensive projects with much longer construction and pay back periods. Both models are valid in their own way.
The value of Willis’ post is not that he was advocating the increased use of energy (he was) but that he was attacking the “straw man” that there’s not enough energy to do it.
Education, you have missed that pivotal point. Both literacy and education index are low in most countries on your list, Canada and the UK undoubtedly comes out on top.
Russia is an enigma though. Energy consumption per capita is high (about the same as in Germany), education is excellent, still, GDP per capita is half of that in countries in the same league. In this case only deficiencies in the political system, poor quality of the ruling elite and subservience of the general populace may explain the lag.
Nigeria, Indonesia, Algeria, Libya, Iran, Iraq, Venezuela and Mexico all have, or until recently had, corrupt governments where a large percentage of revenues from oil go into the Swiss, or any of the other off-shore, bank accounts of the rulers and/or government officials. Until that problem is corrected, nothing can be done to better the general populations of those countries.
If I understand your points correctly, they are:
1) Energy access doesn’t correlate directly to GDP
2) Not having intrinsic oil resources doesn’t mean your nation is doomed to be poor
3) Having intrinsic oil resources doesn’t mean your nation is able to achieve Spain/Italy GDP level
1) is obviously nonsensical. There is this issue called time. If some nation discovers huge oil resources last year but is desperately poor then, they’re not going to have a higher GDP. Higher GDP via energy access requires the building of infrastructure like electricity transmission systems, electricity generation systems, roads, bridges, etc. Need I point out that all of this requires years if not decades of investment?
2) is equally picayune. Yes, Japan doesn’t have intrinsic energy resources – but Willis never said this was necessary. Japan has achieved the ability to access a large amount of energy via other economic means – principally leveraging its labor then successfully transitioning to a higher technology/value add economy. This isn’t necessarily achievable by any other nation to the same degree, but equally it is achievable via other means.
The last area covered by 3) is equally picayune. Yes, not all oil exporters are Spain/Italy. Nigeria was/is a very backward nation with poor literacy rates and low infrastructure investment; the relatively recent oil discovery has changed this but progress doesn’t happen overnight – and absolutely the levels of corruption are a factor. So are the levels of tribal warfare. Libya – was one of the best off North African nations, at least until it was ‘liberated’. Its upward trajectory has now been put off for the foreseeable future.
All in all – a poor rebuttal. A more effective rebuttal would have shown that energy access is simply not feasible, but this is in fact untrue. If a nation as fractious and corrupt as India and Pakistan can achieve a national electricity grid, there is no reason why any other nation cannot achieve the same. Yes, the grid there isn’t great, but is a tremendous amount better than what you see in true 3rd world nations.
It is obviously true that energy is necessary but not sufficient for economic development.
It is also true that all energy is not created equal. Coal is useful for large scale electricity and steel. The first requires much additional infrastructure. The latter can be imported rather than made, and does not limit economic development in a broad sense. Liquid transportation fuels (petroleum) are absolutely necessary energy. They enable local electricity gensets without large scale infrastructure. They enable productive agriculture, forestry, and mining. They enable transportation of people and goods, without which no scaled manufacture can develop.
Now look at future oil production critically, and in detail region by region, without committing errors such as Maugeri did (applying Canterell type decline curves to tight oil like Bakken, which is orders of magnitude worse) and you can only see major problems ahead. Cheap energy hopes for development are not in the cards. 2012 IMF working papers project $200/bbl oil and emerging absolute scarcity by 2020, which other IMF papers point out will cause grave disruptions globally.
Roger,
You nailed this one. I would add “culture” as an issue as well for those countries in question, but it’s too catch-all and not specific. The rule of law, individual rights, property rights, a robust and reasonably fair legal system, etc., are all more specific factors. Economic rights is another catch-all phrase that also comes to mind.
JR Wakefield—-Indonesia imports oil but exports vast quantities of LNG. Half the electricity in Japan comes from Indonesian LNG.
The oil production has not “peaked” it has declined. They offer a Production Sharing split of 85% government 15% company. If they ever go to a reasonable rate, foreign investment and technology will produce a lot more oil.
There is more to the oil business than just spouting Hubbert’s discredited curve.
Resourceguy, that may be, but 53k is awfully small. I understand that the Bakken is making improvements in output, but it too is still small in output. It just means, as long as oil stays high, the deposit will be flowing for decades, albeit at low rates.
The problem the Western World faces isnt just the lack of revenue from oil, but the continued increasing interest payments on the debt squeezing out everything else.
“There is more to the oil business than just spouting Hubbert’s discredited curve.”
Maybe in your mind, but Hubbert’s curve is a physical fact, seen in every field that has peaked.
Some other requirements:
1) Access to trade. Land-locked countries and interiors of large countries without good river systems (middle of Russia for example) are cut off from trade which is a huge economic stimulus. Coal is useless unless you can ship it. Afganistan is land-locked and mountainous, which makes each little area isolated.
2) Ability to get clear title to land. Many countries have most of the land owned by the government or a small elite. In Greece (and probably many old countries) it is almost impossible to figure out the title to land because of lost records, unclear boundaries, and conflicting claims. If you don’t know for sure your title to land is secure, it is risky to build anything.
3) An affinity for hands-on work. If all the educated people don’t want to get their hands dirty and only want to work in government or as professionals, (eg., Nigeria) then building up industry, agriculture, and mining won’t happen.
But to defend Willis: preventing power plants from being built will for sure stop progress. Industry and small business can’t get started without electricity. In some oil rich countries, the oil is sold for cash more than being used to develop the infrastructure of the country.
“Until that problem is corrected, nothing can be done to better the general populations of those countries.”
The big question is now does that problem get corrected? Civil war?
Roger E. Sowell, this was a good essay. Many things are necessary but not sufficient for the development of material wealth.
Kurt Granat: Economic historians, like Douglas North and J.R.T. Hughes, have pointed to property rights and the rule of law.
In the previous thread, several people commented on the necessity to protect the installations. Whether large or small, with or without a complex grid, no matter what the actual cost, if the people and their government can not protect the electricity generating installations, there will be no increase in material wealth. To select one criminally run country, Haiti, I doubt that it matters that much what is built — the thieves will extort more than the market can bear or steal the resources outright. In the US, by contrast, the federal government first subsidized and then protected the transcontinental railroad, the Panama Canal, the TVA and the extension of the grid to rural areas (REA) — as well as protecting property rights (with the occasional “taking”.)
Isn’t higher energy consumption per capita correlated with rather than a cause of higher quality of life? You may equally say that eating a McDonald’s is correlated with nations with a higher standard of living so everyone should eat McDonald’s. (please don;t do this though!).
As nations get wealthier they do tend to desire those things that consume more energy, whether it’s air conditioning or gas guzzling cars.
Isn’t higher energy consumption per capita correlated with rather than a cause of higher quality of life? You may equally say that eating a McDonald’s is correlated with nations with a higher standard of living so everyone should eat McDonald’s. (please don;t do this though!).
As nations get wealthier they do tend to desire those things that consume more energy, whether it’s air conditioning or gas guzzling cars.