Monday, December 29, 2008

Two Greatest Mysteries of the Early 21st Century

When I look back at the almost-complete first decade of the 21st Century, I can make sense of most of it. But there are at least two mysteries which continue to vex me. Although I’ve read a lot about each of these issues, I have not read any truly satisfactory explanations.

1. Why did Saddam Hussein act guilty?

There is no way to describe Saddam Hussein’s behavior in the months and years leading up to the second Iraq war except as that of a man who had something to hide. Even though Hans Blix, the U.N.’s designated inspector, increasingly insisted he was making progress, Hussein never provided the transparency required to make the western world believe he had nothing to hide. Even in the winter of 2003, Hussein had declared all of his Presidential Palaces, which covered 32 square kilometers and possessed hundreds of buildings, completely off-limits to UN inspectors. The only explanation that makes sense is that a violation of his Presidential Palaces was somehow a matter of personal honor and, until the very end, he thought George Bush was bluffing. But it’s hard to imagine that Hussein thought Bush was bluffing in the winter of 2003, when Bush practically started using the word “when” rather than “if” as he spoke about an imminent invasion of Iraq. I suppose the western world had been so wimpy for so long in this respect (remember the UN’s 19 sanctions after the first Iraq War?) that Hussein just couldn’t imagine the cowardly infidels following through with their threats. Considering how he was found living alone in a ratty hole one year later, I’m sure that Hussein rued his faulty judgment to the day he died, swinging from a noose (an Iraqi one!). It is a conundrum which bothers me to this day.

2. Why is OPEC so secretive with its oilfield data?

There is perhaps nothing more important to the well-being of the modern world than energy. So when oil prices began an upward climb in 2003, leading to a peak of $147/barrel in the summer of 2008– an order of magnitude higher than it had been for 20 years – the world sat up and took notice (Indeed, I happen to believe that energy prices might have actually caused the beginnings of the financial crisis which began in 2008 – see here).

In order to figure out what is going on with energy prices at any given time, one is tempted to construct a bottoms-up analysis of both energy supply and energy demand. While the demand side of the equation is relatively easy to figure out given masses of available correlated financial data, the supply side of the equation is an informational black hole. We must simply admit that we don’t know. OPEC spokesmen are no help. At the height of the crisis this summer, they were insisting that supply was plentiful and orders were being filled on an orderly basis, all evidence to the contrary. Supply concerns got so dire, and the spot price of oil got so high, that people were looking to Matthew Simmons and his Peak Oil theories for help. Unfortunately, the only data he had was vague or old. OPEC has no interest in letting the world know what is going on within its tight confines, other than to brashly assert that it can cheaply meet projected demand for 50 years. Meanwhile, the self-declared “fair” price of oil had gone from around $20/barrel to $30-40, to $60, and then to $70-80, all within the space of about five years. And yet we are now hearing that various middle eastern governments don’t work (and appropriate investments will not be made) with the price of oil less than something like $80-90.

With the IEA releasing a decidedly glum report at the end of 2008 (for a summary, read this) which essentially confirmed the major tenets, if not necessarily the exact timing, of Peak Oil, the world has begun an ever increasing clamor for data from OPEC producers. But they remain mum. So my question is: if there is truly no practical limit to the amount of oil which OPEC can supply to the rest of the world, why don’t they show us? Why won’t they provide us with as much rig-level specificity as the oil analysts of the world would require? What, exactly, do they have to lose? The absence of such data will, at the very least, result in continued volatility of energy prices.

OPEC's reticence strikes me as very similar to Saddam Hussein’s in early 2003, and I am extremely uncomfortable with it. More than just about anything else, it makes me think that Peak Oil theories are more correct than not. And if so, then we’re all in for trouble, because $147 is going to seem cheap.

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