Thursday, October 20, 2005

The New Energy Mercantilism

In the past century of growing energy supplies, the non-zero-sum economics of globalization and free trade has spread to the farthest reaches of the earth. But the next century will be defined by finite and decreasing supplies of oil and gas--a reality that will transform our non-zero-sum world into a zero-sum game: The New Mercantilism.

Mercantilism is the economic strategy of zero-sum environments: in a zero-sum world, if you have something then I don't have it, so I need to try to take and wall off as large a share of the pie as possible. This strategy dominated European trade from the solidification of the territorial state after the Treaty of Utrecht, and was a motivating factor to the inward-focus of many historical East Asian powers. It reached its pinnacle during the European grab for African colonies between 1850 and 1939, and the vagaries of geography, timing and leadership that resulted in Germany and Italy being late to joining the race led to a century of conflict between those who have and those who want.

After a brief interlude of non-zero-sum potential, driven by seemingly endless energy reserves and the ideology of global free trade, we are quickly returning to a mercantilist world where finite energy supplies are fueling a new resource grab. All complex societies require energy surpluses to meet their structural need for growth; in the past this surplus was met with colonies, with their surplus of land and people, but today's economies depend on the high energy surplus of petroleum products to maintain growth. As a result of the slowdown and reversal of growing petroleum supplies, there is no longer plenty for everyone...the uneven geography of petroleum distribution will be the defining factor in the new century's "Race for Africa."

Some will say that a free, exchange-traded commodity like oil and gas is fundamentally incompatible with mercantilism. States can't control the supply of oil because it will always flow to the highest bidder. Well, that's a great theory as long as state's don't WANT to control the supply of oil and gas. But power--"laws" and the military force to back it up--rests with states, not exchanges. At the point in the Peak Oil supply decline where there is no longer enough oil for all states to maintain their current standards of economic wealth, let alone to keep growing that standard, then states will be forced to take a mercantilist approach to oil in order to remain viable institutions. The very legitimacy of a Nation-State rests with its ability to provide economic welfare and security to its citizens--welfare and security that are acutely dependent on oil.

But we don't have to wait to watch states implement a mercantilist oil strategy:

- BP, with US/EU aid has developed the Baku-Tbilisi-Ceyhan pipeline to direct Central Asian Oil flows to the West, while China has simultaneously formed the Shanghai Cooperation Council to makes sure that that very same oil flows East. The US forces currently present in Georgia (the Tbilisi link in the pipeline) aren't there on accident. They're "training" the Georgian military to fight terrorists, but are also serving the much more important factor of preventing Russia from leveraging its ties with North & South Ossettia to control Georgia.

- The EU has implicitly and explicitly stated that the value of Turkey in the EU is that it provides geographic access to the oil-rich 'Stans. Turkey is to the oil grab what Egypt and the Suez were to the British empire in India.

- China has unveiled its strategy of growing influence in countries where oil can be exported to them via dry-ground pipelines, in an unspoken recognition of the fact that US blue-water naval superiority will prevent them from effectively contesting ocean-transported oil supplies. Specifically, their interest in purchasing UNOCAL was for its significant reserves in SE Asia--with potential land-pipeline connectivity to China.

- Canada and Denmark recently got in a minor military scuffle over some frozen rocks in the newly-ice-free arctic as a result of their potential oil reserves.

- The US wars in Kuwait and Iraq--Res Ipsa Loquitur.

- China's increasing involvement in the affairs of select oil-rich countries: Venezuela/Panama (working to build heavy-crude refineries and coordinate for their shipment to China via the canal). Also in Sudan, Kenya, etc.

- Recent escalation of Japanese/Chinese conflict over economic exclusion zones around some remote, contested islands...yes, with offshore oil reserves.

The list goes on. My analysis says that by far the most likely explanation for these actions--taken as a whole--is initial jockeying for position in a future oil mercantilism. In my mind the most interesting question is not "are they planning for an oil mercantilism," but "how will countries begin to exert exclusionary claims to oil supplies?" What will be the first steps to exclude oil from an exchange traded system to a mercantilist system? What are the indicators to watch for? Perhaps the forerunner in this is Venezuela's Hugo Chavez, who is using his control over oil reserves to provide them at cut rates to choice nations in order to cultivate influence. State-owned oil, especially state-owned companies that are exploring internationally, will certainly play an important role--and China is THE leader in that regard, with South Korea just behind. I am watching for the following:

- Increases in state ownership or influence in international oil companies.
- Exclusionary oil transport projects--like the BTC pipeline
- Efforts to divide into regional blocs--such as the Shanghai Cooperation Council--and especially if these blocs apparently go out of their way to include oil-regions.
- Legislation that facilitates circumventing free-markets and exchange-trading of commodities, especially for "emergency response" or "economic recovery."
- Intervention (covert or overt, armed or otherwise) in states (like Iran and Venezuela) where the current regime is seen as a threat to oil supplies--or even to create a regime that will provide preferential status in oil supply.
- Changes in tariffs or import/export regulations of energy commodities, or citizenship ("licensure") requirements to purchase commodities contracts, not just to trade them on an exchange floor.

This is your indications & warnings matrix for the New Mercantilism. When this boulder finally hits the water, the ripples will cause heavy erosion on all shores...

Side notes: What country, like Italy and Germany in the "Race for Africa" are notably behind in positioning themselves for the "grab for oil?" India stands out in my mind...


Disillusioned kid said...

India may not be so far behind in the global oil grab. They've shown an interest in Central Asia and elsewhere. This doesn't seem to have translated into action though. Yet.

See e.g. here.

Jeff Vail said...

Very interesting article... India may be a lot of things, but stupid isn't one of them. While I'm sure that they have the intention to grab in Central Asia, I'm not convinced that they have the power projection capability to do so over the long term.

Maybe they'll look to the ocean? The eastern shore of Africa, from Madigascar to Somalia is becoming an increasingly active exploration zone, and India has recently stepped up efforts in the Andaman and Nicobar islands. This trend, if it takes off, could bring India and Australia into conflict over the potentially oil rich Eastern Indian Ocean...there's already a nice conspiracy theory that the Acheh Tsunami was caused by Australian explosives in oil exploration in the area...

tstreet said...

Playing this game seems like a recipe for disaster, including a possible world war. Mercantilism seems inevitable, but it seems we should finesse the issue rather than play the game. It would be less destructive and maybe even cheaper to proceed full force ahead on a path that leads us away from oil. Since this will have to happen eventually anyway, it makes sense to do it now to minimize conflict.

luckent47 said...

having heard the words of exxons president on charlie rose nad his explanantion of the actual size of the oil industry world wide i can see that you have a very valid point with regards to nations' getting set for oil grabs etc..

but don't forget one very important thing. its still a 19th century technology. where are all the engineers that invent new technologies that cut into oils supremacy? they are from those outlying countries. Gemany invented food fertilizers and synthetic oils. Crackers have created oil from shales and tars that will start to look more interesting ifthe opposite is dependence and war.

India is sun drenched and solar tech is still looked atthrought the eyes of 70's opinion. You tlak about BP without mentioning the factthat they are buying up US gas stations left and right positioning themselves for hydrogen.

it happening right in front of us that alternatives are being developed, don't just poo poo to try and bolster your point. Oil was discovered just like very other technology and avoiding death and war is a pretty big necessity.

The question is "how expensive must oil become before its profitable to sell something else?"

I'm not just talking about prices in dollars.

In that light, India isnt so bad off. Its population hasnt been inculcated intocar culture so changing to someting elsewon't be such a shock. The US,Europe and Japan on the other hand are stuck on the gas car. We'll see how that effects things too.

Getting away from gas is looking more andmore profitable every day.
for a while there will be both but the oil paradigm is about to crumble, its too big, too wobbly and its becoming too profitable to change from it.

Jeff Vail said...

tstreet: I couldn't agree with you more, but I'm not very optimistic about that happening...

luckent47: I disagree that the key question here is "how expensive must oil become before it is profitable to sell something else." The key value of oil is its Energy Return On Investment (EROI). Oil is by far the highest EROI energy source that is widely available, and none of the "alternatives" waiting in the wings are even close, especially if implemented on a large enough scale to replace a significant portion of our oil use. It's not just a question of maintaining our car-culture, but a question of maintaining the fundamental energy surplesses required to grow out society and stave off collapse due to diminishing marginal returns. Take a look at this article:

Logic of Collapse

The only true "alternative" to oil use by our society is something that will provide an even higher energy surplus via a higher EROI. That or collapse. Is it possible that we develop something that meets the bill? Sure...I just think that it's unlikely. So, in the absence of a quickly implementable fusion generator or something, Nation-States will be faced with the choice between collapse and oil mercantilism. Given that choice, they will choose the latter.

ThoughtCriminalUK said...

People are inherently resistant to change, especially if it impacts their bottom line. As such, when the people who benefit most from the status quo are the same people who are "in charge", change will not be made until it is forced or absolutely necessary for THEIR survival.

The wellbeing of the population and/or the planet has no impact on leadership in countries like the US, so unless corporations and their interests are excluded from governmental decision making, every drop of oil and every cent possible will be squeezed out of the earth and its inhabitants.

As far as the possibility of world war for oil goes, it seems pretty clear that we're well on our way. Of course, it will probably be called some variation of the "Global Struggle Against Extremists [whose purpose doesn't serve ours this week or whose stuff we want]" or the "Global Effort to Free the [insert country/state/tribe here]s From Resource Exploitation [not currently controlled by us]."

It's not that I don't have faith in people to pull their heads out of the sand and make some far-sighted decisions. Rather, the people capable of envisioning and implementing change are far outnumbered by those whose motivations are deeply rooted in their own self interest...and the majority of the populous (at least in America) is too busy being brainwashed by Fox News and waiting for someone to hand them the "American Dream" to realize that the dependence on the SUV, not the $3+ per gallon to fill up their SUV is the problem.

Jacques van Ginneken said...

My self-interest is to get my family (the node I belong to) out of this oil dependance as soon as possible...

I wish many will do the same. Like that self interest may become a positive force. I do think nevertheless that it's an utopia because I think like thoughcriminaluk...

Jacques van Ginneken said...

Basically I agree with the future you're envisioning. I am preparing for this kind of stuff.
What I disagree is with your image of the past. OK, a non-zero economics environnement was the origin of 2 world wars. OK, we (developped nations) have lived in a non-zero economics world from 1950, basically from the green revolution AND from the apparition of AIR TRAVEL.
I think that it's only the developped nations, that is ex-colonising powers and their emulation (USA), that have lived this paradigm change and not the ex-colonized cultures.
I do think that in the last 60 years after the last big independance struggles, the relationship between colonizers and colonised didn't change actually. Thank to fast travels brought by more rapid vessels and jets, we have been able to manage a remote colonization of the poor countries ("poor" means here "globalization economically poor"). That was actually the progress made in transport technologies that made the colonzers accept to "lose" the direct control of the colonies.

Ok, I get to the point. I think that in the last 60 years our eductaion system managed to make us think that colonization actually ended in the first half of the 20th century and that as a matter of fact we lived in a non-zero economics world but if we consider that our continuing economic success was still based on remote colonization then that is not true.

Nothing changed from the begining, oil or not and some day the chance with the technologic breakthroughs will turn and environment limits will be overwhelming.

Excuse my poor english (I'm French) and confusion, clear writting has never been my good point.

M. Simon said...

Wind power gives a return on energy input of about 10 to 15 to 1. About in the same range as oil.

America is the Saudi Arabia of wind.

This year one nuke equivalent of wind will get installed in America.

Right now wind is cheap enough to offset natural gas electricity. Texas is using them that way. So they can sell more gas to the rest of us.

As turbines get bigger wind will be cheaper than any other form of electricity.

So yeah. We are at the start of the transitiion.

In 20 years or so solar cells will be cheap - electrical costs similar to wind.

The #1 problem is liquid fuel.

Methanol or ethanol is probably the answer. Used in some kind of direct conversion fuel cell. We are probably 20 years away from a commercial product.

M. Simon said...


America is not the problem. We can do more modeming to work. It is places like India and China which are not as efficient as America.

Another option: we can replace our housing stock faster.

Lots of things to be done to increase our energy efficiency.

Lots of ways to gather more energy. Lots of ways to reduce energy consumption.

M. Simon said...


America is a different kind of colonizer.

Our model has been since WW2 to make our clients self governing and rich. Not steal from them and oppress them.

See the Peter Sellers movie "The Mouse That Roared". America prefers rich friends to poor clients. It pays better.

You Euro guys need to get out more and stop believing in your own propaganda. You will in time find yourselfs in a world you do not understand if you don't get a better grasp.

M. Simon said...

Countries that go the mercatilist route are screwing themselves in the long run.

By not pricing oil to market or running excessive revenues through government they slow the increase in energy efficiency. Thus making themselves more dependent as supplies tighten.

Jeff Vail said...

What percentage of the cost of wind generation is derived from oil? Answer: 100%. OK, so at this point you're questioning my numbers...fair enough. Price of a product is an accurate reflection of the total amount of energy that goes into its creation. If a single 1MW wind turbine setup costs $1million (just making up that figure), then that figure is an accurate aggregation of the cost of all that went in to it, right? Right. And each of those components is made of energy: either directly (in the form of the cost of the gasoline to transport the parts to site), or indirectly:

- Energy input required to extract the various metallic ores from the earth
- Energy input required to transport those metallic ores to processing
- Energy input required to refine and process those metalic ores
- Energy input in the manufacturing process
- Energy input (in the form of housing, food, transport, etc.) of the constitutent human labor required at every step along the way (to include all related "service" economy functions)

Point is, if you regress far enough, the entire cost of that wind turbine is made up of energy. Energy, the vast majority of which is petroleum-based. What happens when the price of that energy doubles? Suddenly the EROI of your turbine drops to 5:1, or less.

Not to mention the significantly less useable form of energy produced by a wind turbine than by an oil well: there are great losses of efficiency in transporting and converting that wind energy to a place and form where it is needed for use.

Even IF wind energy does represent a viable alternative to the petro-economy, it doesn't represent an INCREASING energy surplus needed to stave off diminishing marginal returns (see Logic of Collapse, linked above). That's the bottom line problem, and the problem that at present we have no solutions to.

M. Simon said...


We do live in non-zero sum economics.

The reason: invention.

Big Gav said...

Jeff - I'm quibbling here, but the EROEI of wind power should be independent of the price of oil - so it doesn't change as the cost of oil goes up. The cost of the windpower does increase as that of oil does of course, but thats not the same thing.

If this isn't true it means the EROEI has been incorrectly calculated in the first place (there is a whole poorly understood field called emergy which looks at how to do this).

Moving on (as I can't resist a good conspiracy theory), where did you see the conspiracy theory about Australian drilling being behind the tsunami ?

My understanding is that most Australian exploration is in the Timor sea (and we've already had events occur in that part of the archipelago, though I've no idea if they were oil driven or not) but Aceh (and the rest of Indonesia) is not on the radar of any Australian oil company that I know of.

You might find a certain large non-Australian oil company has a lot of interests in Aceh already though.

I've certainly seen a conspiracy theory or two about the US Navy kicking the earthquake off - but like the conspiracy theories about hurricanes being manipulated by HAARP and the like, I find it hard to take them at all seriously.

I suspect sometimes these events are serendipitous rather than planned.

And finally, re: your mercantilism matrix, I think Russia is a good example of the first (increasing state ownership - the oligarchs getting squeezed back out of the industry as Putin takes control) and last (increasing regulations and tariffs on energy exports). It will be interesting to see what fault lines appear between the blocs.

Is BRIC (+ Iran) going to materialise as a coherent bloc ? Or will India decide to stay loosely within Oceania ? Will Russia decide to become rich by being the supplier of energy to the EU or instead side with China ?

Its like watching the European maneouvring a century ago on a global scale.

Jeff Vail said...


The only way that I can claim to include the rising cost of crude into the EROI (or EROEI?) of wind is to depreciate the start-up project cost over time--and from that perspective, to me, it makes sense.

That said, I couldn't agree more that EROI seems like the foggiest, fuzziest, least understood--and perhaps most important--factor of the energy world.

I made an argument in an EROI discussion on a long time ago that the only real figure we can get is whether EROI is less than or grater than 1, based on a "bubble-world" thought experiment: If a world powered ENTIRELY by X type of energy could sustain itself and even grow, then the EROI of energy X is greater than 1, otherwise it is less than 1. Ultimately there are just too many interdependencies and non-linearities when you use crude inputs to build wind capacity, but the validity of wind capacity may affect the price of the crude inputs, etc., etc. It gets crazy. Talk about a topic in need of a serious, qualified advocate. Any PhD candidates out there that want to take this one on???

Anonymous said...

Hey --

Regarding wind energy in the US -- this site shows the wind resources available in different parts of the country. Like so many alternative energy sources, the primary difference with oil (discounting the obvious) is that it is not equally effective everywhere. Any future energy economy will need to be firmly rooted in the local ecology.

Regarding the EROEI of wind... Gav is right, you cannot talk about the economic cost of the technology, when the ratio itself compares Energy in and out. Its two separate units of measure, right? So cash dollars increase as oil prices go up -- unless and until other alternative enery source start to be used in the fabrication process itself. (We could endlessly regress those costs back to oil if we choose, but at some point it would get silly.)

Now, whether any of this is viable, within out current paradigm depends almost entirely on how close the Peak really is. If it is here, then the only viable application of alternatives will be small scale and local. BIG things (like governments) simply move too slowly to accomplish what will need to be done.


Jacques van Ginneken said...

M. Simon,

I quote myself to answer some of your remarks:
"some day the chance with the technologic breakthroughs will turn and environment limits will be overwhelming".
By "chance", I meant "luck".

Then about colonization: I didn't mean that only the USA were neo-colonizers, I mean all the countries that are on the good side of the globalization. That is, countries that are able to get what they need to develop themselves in a balanced way without being disturbed by the price of those goods (though this kind of goal looks increasingly difficult to acheive...).
Those countries are a few only, all others are obliged to produce quantity of stuff (generally production from their own natural ressources) that are not at all diversified and that allow a tiny portion of their population (the politicians and military generally put in place by big powers) to live gorgeously while their fellow nationals live in shit.

Thanks to comment my comments.

I am sorry to have revealed that I am French because now it seems that you have a bias about me. De toute façon je devrais écrire en français, cela montrerais mieux que je ne "sors pas de chez moi".

Jeff Vail said...


Je pense que ton abilite a ecriver en anglais monstre un element particular de superiorite de la system education francais...

OK, enough of that--I think that I've made my point that I can't communicate effectively in french despite studying it for 3 years. But on to business: I think that you make an important point about colonialism: it certainly exists today just as much as in the past (or more), we've just discovered that it's silly to facilitate a bunch of self-important rich kids' fantasies when it's soooooo much more efficient to use economic colonialism. I'm sure The Raj was fun--from a British artistocrat's perspective--but with our modern communications technologies it makes much more sense to just use "business process outsourcing" to Bangalore...

Big Gav said...

Jeff - The only way that I can claim to include the rising cost of crude into the EROI (or EROEI?) of wind is to depreciate the start-up project cost over time--and from that perspective, to me, it makes sense.

That said, I couldn't agree more that EROI seems like the foggiest, fuzziest, least understood--and perhaps most important--factor of the energy world.

I think we've got our wires crossed. EROI (Energy Returned On Investment) is tricky to calculate because the ground keeps shifting under you as energy prices change - especially when you have ongoing costs that have an energy related component. I'm not sure anyone ever tries to calculate this explicitly.

I was talking about EROEI (Energy Returned On Energy Invested), which seeks to quantify the amount of usable energy returned per unit of energy input. For example, if it takes the energy equivalent of 3 barrels of regular oil to produce 6 barrels of oil from tar sands, you have an EROEI of 2. Anything less than 1 means you are simply throwing energy away.

50 years ago crude oil extraction had an EROEI of over 50 - now the figure is often under 10 (obviously it varies a lot depending where you find the stuff - offshore arctic would tend to be far more difficult to extract than a new onshore field somewhere like Libya or Yemen for example).

ThoughtCriminalUK said...

"Like so many alternative energy sources, the primary difference with oil (discounting the obvious) is that it is not equally effective everywhere. Any future energy economy will need to be firmly rooted in the local ecology."

I agree with Janene. The concept of local ecology driving economy is brilliant. Unfortunately, the ability of governments and colonizers to exercise control over that type of economy would be limited and would create an even more hostile environment toward non-conformers. It will take some exceptionally progressive/non-profit driven leaders to “allow” a rhizome economy to develop.

If the US is as benevolent as you make it sound when you say
"Our model has been since WW2 to make our clients self governing and rich. Not steal from them and oppress them,"
why has its leaders created an economy in which it steals from and oppresses its own citizens with dependence on a finite resource? How can any country be "self governing" if it is dependent on the wars and exploitations of other nations to become "rich"?

Jacques van Ginneken said...


I'd rather say that my ability to write in english is the result of the very thing we are talking about... cultural and economic colonialism by the USA upon the rest of the world (well, and my strong taste for foreign cultures as well).

Who knows? This ability may not be required in a few years...

Anyway, I am delighted to see that you study french. I hope that some day you come to France to talk about your book on french TV, that would be an interesting program for once. I am working on a translation of it to french so that my friends and family can benefit from it.

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