Khamis, 13 November 2014

The Myths of Petrostate: Is cheap petroleum a blessing or curse?

Picture of an oil field in Norway, one of the petro-states in the world today (picture courtesy of Bloomberg)

By Wan Ahmad Fayhsal

It is not an exaggeration to claim that 20th century civilizations are hydrocarbon-based. Maybe many are not aware of this fact of how we as a species, are so dependent, or to be more precise 'addicted' towards this 'Black Gold'. We eat, sleep and live by consuming and using petroleum.

In the age where modern science and technology reign supreme as observed by Lewis Mumford, a renowned historian of technology, mankind now lives in the age of Paleotechnic where every nook and cranny of our lives have been mechanized. Modern food production requires huge machineries in and rampant usage of pesticides in agribusiness. This has made almost 90% of our food to have direct and indirect linkages to petroleum.

This massive usage of petroleum as basic chemical is more prevalent in our daily products. The usage and application of petroleum are almost endless due to the fact of its cost-effectiveness in fulfilling the demand of our consumer culture.

In spite of that fact, we must know that such addiction is relatively new to mankind civilizational existence. The rise of "Petrostate” – nation-state that depends so much on hydrocarbon for its politico-economic growth – begins earnestly in the era of Industrial Revolution that kick-started in Victorian England circa late 18th century.  

Post-colonial countries like Arab Gulf states and even Malaysia, which are blessed with this Black Gold, have been beholden to the same political and economic models of their former colonial masters. The mantra of prosperity and progress preached by these leaders of Petrostates are full of promises and hopes, but they also come with what many economists called "resource curse" and "myths" that are being coupled to it.

Recent unpopular move made by Putrajaya to continue the quest of rationalizing subsidies has really become a storm in a teacup. To understand the dejection and anger felt by citizens of Petrostates the likes of Malaysia on this socio-economic issue, it is very important for us to critically assess such myths to get better views of the misconceptions on the ground.

Myth #1: Petroleum can easily be found as before

One of the main characteristics of Petrostate is that its people will always think that this natural resource called Petroleum is considered to be a source of ‘income’ that will last till end of time. The truth is rather bleak. Petroleum is not and cannot be regarded as a source of income to our nation, rather it is an 'asset' which cannot be replaced once it is used.

Citizens of Petrostates consume things more than their forefathers of pre-Industrial Revolution due to the fact they regard such resources like petroleum to be their inalienable birth-right to be consumed here and now - at the expense of sustainable future for next generations. They are totally oblivious of the fact that the era of cheap petroleum is over, or known as Peak Oil. The theory which was first discussed by M. King Hubbert in 1956 has now becoming a reality.

Hubbert, who was a geologist at the Royal Dutch Shell had crunched huge amount of data, which he analyzed in thorough manner on the petroleum production profiles of oil and gas companies. From the analyzed data, he made a conclusion that all matured petroleum productions will encounter a 'bell curve' production graph in which the production of oil fields will first reach plateau before heading for a rapid decline.

At first Hubbert's theory was not properly accepted by the industry players especially when those oil companies made huge discoveries of new oil fields which were larger than what they had discovered before especially the newly-discovered oil fields of Middle East and Alaska in 1968. Such discoveries have made leaders of Petrostates to be more lackadaisical in preserving those precious natural resources because at the back of their mind oil production will last longer down the road.

Association for Study of Peak Oil and Gas (ASPO) based in Sweeden is one of the leading organizations that continue to support and propagate Hubbert's legacy. All this while their concern was simply dismissed by the oil and gas giants but lately the captain of industries have started to pay serious attention towards Hubbert's theory.

More evidences surfaced recently that lend credibility to the Peak Oil theory. In Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, Matthew R. Simmons, an expert in oil and gas discussed in great detail on the conundrum besetting petroleum production in matured oilfields of Saudi Arabia which is the largest petroleum producer in the world.

The chain reaction to this problem is no other than the increase of production cost that rose sky high even though technology in oil and gas has breaking many new grounds. Former CEO and President of PETRONAS, Tan Sri Hassan Merican had aired the same concern some time ago on this paradox. He lamented that though the revenue stream of oil and gas companies have improved tremendously, exploration cost also went up more than two hundred percent.

Some of these challenges, and concerns raised by the authorities of the oil and gas industry should ring an alarm to governments and the people at large that Petrostates can no longer be basking under the same sun as the good old days of oil barons like Rockerfeller and Andrew Mellon.

Myth #2: Petrostate views history as a linear progression in human development

People of Petrostates perceive the world progress in linearity. They view the present as culmination of linear progressions in all areas of human life: education, economic, even religion. This idea has its genesis in what the historians called Whig historiography: an idea that has its genesis from Anglo-Saxon conception of history that assumes the whole world by far and large will evolve towards the path of European Enlightenment where scientific progress and liberal democracy will take root in all civilizations including the non-European ones.

Consequence of subscribing to this idea or vision of historiography will lead to homogenization and commodification of culture which also begets similar consumer pattern. For example, GDP has become the ultimate standard to measure material 'development' of one's country that many easily equated to be the same as ‘wellbeing’. This parochial view of wellbeing sometimes went at odd against traditional and religious values.

Having rich petroleum resources will not guarantee a genuine independence from Western modernity that underpins the ethos of more advanced Western-Petrostates. This can be seen on how non-European Petrostates behave in managing their development which for them the only way to capitalize and monetize such assets is by adopting the same production of model of Western-Petrostates which means logically is also to follow and adopt their consumer culture or what Thomas Veblen called “conspicuous consumption”.

Myth #3: Government and Petroleum companies are solely responsible for petroleum price hike.

Citizens of Petrostates have been acclimatized with cheap gasoline at the pump. What most of them do not realize is that such cheap price is very much artificial and does not reflect the real value of petroleum. Since gasoline has become artificially cheap due to government subsidies, citizens of Petrostates could not bear the brunt of market force and harsh economic realities of today where blanket subsidies that are normally given to all users of automobiles is no longer sustainable to government's coffer.

Much of the money spent on subsidies is in actual fact more strategic to be channeled to pressing developmental needs of the citizens of Petrostates themselves especially with regard to public amenities. Unbridle usage of petroleum for automobiles have created unfavorable condition in preserving petroleum for future generation. Rampant consumerism and modern lifestyle of today in truth are being fueled (pun intended) by the illusion of cheap petroleum.

A closer examination into the politico-economic fabric of Petrostates is no other than neo-liberalism which was made famous by President Reagan and Prime Minister Thatcher. Spike in petroleum price in our times could not be viewed simply from the elementary supply and demand rule. Commodity future exchanges like the one in New York Mercantile Exchange (NYMEX) have become the playground for unscrupulous traders who profited from people's sufferings.

Greedy traders tend to look at the balance sheet above all else. At NYMEX, regulators found out many cases where traders broke many rules by manipulating transactions of petroleum; case in point JP Morgan’s ‘wash trades’ fiasco in 2013. There was a huge discrepancy between the real quantity of physical production of petroleum and the one being traded at NYMEX.

This malpractice of futures trading in mercantile exchange where petroleum crude is regarded to be one of the lucrative trading commodities have created negative ripple effects where consumers worldwide - including nations who are members of Petrostates. Perhaps due to this same reason most developing countries have to fork out huge subsidies to cushion the impact of that unethical trading although we all know very well such move will not solve the real problem because the root cause is still untreated.

There is no piecemeal solution

People of Petrostates must accept the hidden cost of having its own petroleum industry as a bitter pill to swallow. The earlier we accept it, the easier we will able to address the problem better. The price of crude oil will always be fluctuating erratically especially at the higher level due to direct and indirect influence from contemporary challenges faced by oil producers.

Geopolitical instability the likes of ISIS who able to gain control of strategic oil fields in Middle East, territorial dispute in South China Sea and the ever depleting and hard to recover oil wells should put this whole mess into the real perspective: the Golden Age of Petrostate is approaching its end.

The long-term solution must not be altered solely at the level of production notably the players of oil and gas industry but most importantly it must be equally embraced by those who consume it excessively in the name of freedom, progress and development.

By right the newly member of Petrostates like Malaysia who still holds unto significant religious and Asian traditions should reflect carefully of our modernized lifestyle that hinged on cheap petroleum: Is our lifestyle sustainable? Can we do justice to future generations by having all of them now? Is the current economic and governance model of contemporary Petrostates could really provide us the happiness and prosperity that we are looking for? Can we not learn how non-Petrostates like Japan and Korea or even the more welfare-based Petrostate like Norway in managing their resources prudently without sacrificing the qualities of modern livelihood?

Malaysians should scan the globe and see that there is a strong correlation between failed states and the curse of being too much dependent on having cheap petroleum at hands. The curse must be avoided for us to attain true blessings and build a more sustainable and humane future or in Lewis Mumford’s vision, an ecotechnic civilization that predated Petrostates era.

The author is a fellow at Putra Business School, Malaysia

(this article was published by The Malaysian Reserve in two-parts series on the 15th and 16th of October 2014)

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