Energy Policy

It’s not often that I come across something in Foreign Affairs that I strongly disagree with, but I do have some big problems with elements of Edward Morse’s September/October article “Low and Behold”.

In an attempt to reassure the reader of the coming spare capacity in global oil production, he says:

"Further disproving the peak oil theory, since 2003 Saudi Arabia has also successfully engaged in a massive campaign to increase its production capacity (not just its actual production). This means it has committed to being able to raise its output quickly and massively in the event that supplies from the second- and third- largest producers in OPEC are disrupted."

Well that’s great I suppose, except that I don’t simply trust that Saudi Arabia has done this, or is capable of sustaining those levels of production in the event of a crisis. If western governments or oil industry analysts ask for information to back up these claims, they are told that it is a state secret. I’m sorry, but I don’t want the world’s and specifically the West’s energy policy guided by something that is in fact a state secret.

Why would Saudi Arabia lie to the world? Good question! Fortunately, on the SAME PAGE, Mr. Morse tells the reader why:

"Saudi Arabia wants spare production capacity for multiple reasons, including, importantly, to give it influence in the G-20 and other international forums. Riyadh’s ability to increase production is the key to its being taken seriously.

Saudi Arabia will also likely use its surplus capacity to keep prices moderate in order to spur global economic growth, maintain long term demand for oil, and deter investments in alternative sources of energy. In addition, by increasing Riyadh’s ability to keep prices low, surplus capacity will help it reduce the revenues of oil producers- such as Iran, Russia, and to a lesser extent, Venezuela- that use them in ways that undermine regional stability. And it will help Saudi Arabia ensure discipline within OPEC by enabling it to, at any time, threaten to increase production and thereby lower prices."

So clearly there are many strong reasons for Saudi Arabia to be deceptive about its production capacity as well as its total reserves. It strikes me as profoundly misguided to structure our energy policy around information where the incentive to deceive is high, and the ability to monitor or investigate is non existent.

In fairness to Mr. Morse, he presents some figures on production increases and demand reductions which are somewhat more reassuring, but since Saudi production capacity is key to any assessment of the future of energy markets, the assumptions we make about it matter a great deal more than most, if not all others.