Oil Warning

I found this article on BBC about Total warning of a looming oil shortage very interesting for a few reasons. First, why is Total concerned about a shortage? At first glance it would appear that they would be huge winners from a shortage. Oil prices should rise and because virtually everything else in the oil industry is a fixed cost, their profit would simply increase with no extra effort on their behalf.

This leads to two thoughts. The first is that there must be very little oil left in the world that is not in states which do not have state run oil companies. If there were oil available for private firms to drill for, given this prediction, it would seem that Total should be picking up those rights and keeping its mouth shut. If there is a lack of exploration happening now, it would make even more sense for them to do the work while capital and labour are cheap. Seemingly the only conclusion to draw here is that most of the world’s remaining untapped oil production capacity is in countries with a monopoly on oil production. This doesn’t strike me as a particularly good omen.

The second thought is then why is Total saying anything? Wouldn’t it be better for them to simply sit on their holdings, wait for the supply crunch to hit, and subsequently reap massive profits? Governments did not seem willing in the past to pass laws to claw back windfall profits, does Total now believe that such a trend is shifting? Based on the bonuses that bankers are being paid only a year after a near total collapse of the financial system, that prospect doesn’t appear likely either.

This leads me to one of two conclusions. The first is that private companies, much like oil exporting nations are worried about the price of oil climbing too high. Their concern is that this will motivate the world to migrate to other sources of energy to the detriment of their financial interests. The second potential conclusion is that the fear of a shortage might be used as leverage to open markets currently closed to private investment in oil concerns.

I have no problems believing Total’s message, but I think the goal is far more self interested than they let on. At least it bolsters my claim that when the world economy starts a vigorous recovery we will be seeing oil at $150 a barrel again.