Regular readers will have noticed the lack of recent posts -- I've been too busy with business lately to blog. I always keep a running list of potential blog topics, but unfortunately many of the short pithy ones are related to some immediate event in the news that makes them relevant, and once the moment has passed without the opportunity to sign on and put a post up, they no longer seem quite so pressing or interesting.
Since I don't have as much time these days to get at it, I thought I might try to tackle instead one of the big ideas I've been noodling about. It's a work in progress and will need to be laid out in several parts, but I wanted to begin to get some of these thoughts out there on one of the huge issues of our day for any comment or further thinking that it may stimulate. I'm afraid at times it may seem more like theoretical economics than international business, but my thinking begins and ends with the topic of this blog -- where and what are the opportunities for businesses in the international marketplace. In this case the specific international market I'm focused on is energy resources, production, and whatever it takes in the way of services and equipment to support those markets.
Oil Cartels and the Impact of Market Inefficiencies
One of the critical inducers of economic turmoil in the world today is the historically high and continually escalating price of oil and the myriad of products and services derived from or dependent upon oil whose own cost structure is adversely impacted. At first blush it is easy to explain much of this by the simple supply and demand dynamics in the international markets for crude oil -- as a finite natural resource, the supply is continually being depleted while the high octane industrial growth of emerging markets such as China and India are simultaneously pumping up demand. Higher prices are the natural and inevitable consequence.
The problem with this simple explanation is that for supply and demand to drive price in such a predictable way, it assumes that the market is free, efficient and competitive. In reality the vast majority of currently producing oil reserves are in countries with relatively autocratic governments which, not surprisingly, view their oil reserves as a key strategic and political asset. The means of production are not under the control of freely operating private enterprises responding rationally to the price mechanism created by supply and demand. Instead, these resources are controlled largely by governments themselves or government controlled corporations whose decision making is directly and usually not so subtly influenced by their domestic political and economic agendas. As such, the international energy markets seem to be anything but bastions of free, open and competitive trade that would allow for the efficient distribution of resources across borders.
Without an openly competitive international market for energy resources, it is at best difficult to determine how much of the high price of oil is due to the predictable market dynamics of supply and demand and how much is due to engineered inefficiencies tied to some country's or cartel's own political agenda.
In a functioning market, of course, the price elasticity of demand would result in the development of alternative energy resources as substitutes for high priced oil. The problem is that, even at currently inflated oil prices, currently feasible alternatives are still not economically viable in a free market governed by rational returns on investment, and even less so if one considers social costs such as the massive despoliation of land and visual pollution associated with large scale solar or wind farm projects or the risk of a nuclear plant malfunction or disposal of radioactive waste. The risk of investment in these alternative resources is further exacerbated by the fact that because the current high prices for oil are not truly the result of competitive market forces, the controllers of the oil reserves potentially could engineer a price decline sufficient to wipe out the value of any investment in alternative energy just when it was looking promising, pulling the rug out from under the entire economic rationale for substitute energy sources. Anyone who saw the boom and subsequent collapse of the shale oil industry here in Colorado in the 1980's knows how this fool's game is played.
Thus, as the international energy markets currently function, those of us in net oil consuming countries are damned if we do and damned if we don't. We can either continue playing the losing game of consuming a finite product subject to inevitable depletion but priced low enough to prevent the rational development of economic substitutes while fluctuating at high enough levels to pose an on-going threat to our economic well-being, or we can make what by any rational economic estimation remains a bad financial investment in alternatives subject to potentially high and insufficiently accounted for social costs and a near certain collapse of the price support creating what financial rationale for the investment does exist in the first place.
We are trapped in a box that makes it nearly impossible to formulate a rational energy policy on which even a majority of intelligent and clear thinking individuals can agree. It seems to me in pondering this dilemma that the only way out of the box is to make a paradigm shift in how we understand and respond to the market for and economics of energy resources and production. And with that steep and craggy climb in sight, I will pause before picking up again in Part II of this post.