Newly Found Oil Reserves may break the Cycle of Oppression due to Poverty and Corruption in East Africa

Posted by PITHOCRATES - April 15th, 2012

Week in Review

East Africa is plagued by poverty, political corruption, lack of infrastructure, poor health conditions, AIDS epidemics, high infant mortality rates and everything else that goes with impoverished, corrupt countries.  Somalia is home to pirates that are the scourge of the high seas.  Ethiopia’s recurring famines are well known.  Uganda had Idi Amin.  Who terrorized his people with murder, rape and torture.  South Sudan came into being after a bloody civil war.  Where tribal civil wars continue within the new South Sudan.  As they do throughout much east Africa.  Because there are no advanced economies to support a prosperous middle class.  Just a ruling elite terrorizing the impoverished masses who survive on subsistence farming.  But that may all be changing (see Eastern El Dorado? posted 4/7/2012 on The Economist).

IN ENERGY terms, east Africa has long been the continent’s poor cousin. Until last year it was thought to have no more than 6 billion barrels of proven oil reserves, compared with 60 billion in west Africa and even more in the north. Since a third of the region’s imports are oil-related, it has been especially vulnerable to oil shocks. The World Bank says that, after poor governance, high energy costs are the biggest drag on east Africa’s economy.

All that may be about to change. Kenya, the region’s biggest economy, was sent into delirium on March 26th by the announcement of a big oil strike in its wild north. A British oil firm, Tullow, now compares prospects in the Turkana region and across the border in Ethiopia to Britain’s bonanza from the North Sea. More wells will now be drilled across Kenya, which also holds out hopes for offshore exploration blocs.

President Obama continually tries to tell the American people that we have the smallest oil reserves in the world yet we consume the lion’s share of the world’s oil production.  But that’s not true.  There’s a lot of oil out there.  But you have to drill first to find it.  And until you do you can’t prove these reserves.  So no one counts them.  Including our president.  But it doesn’t stop anyone from looking for oil and natural gas.  If they are not forbidden to do so.  Like they are in America wherever the government has a say in the matter.  People once thought east Africa had no energy.  But it didn’t stop them.  Who believe in the policy of ‘drill baby drill’.  And in ‘drill and ye shall find’.  Which they did.  And they found.  Oil and gas all over that once thought barren land.  Because they just kept drilling, baby.

Kenya’s find raised less joy in Uganda, where oil was first struck in 2006…

South Sudan, for years the largest oil producer in the region and locked in an oil dispute with Sudan, now wants to send crude out through Kenya on a pipeline to a proposed new port in Lamu (see map). Such a channel could also serve Ethiopia, which shares Kenya’s joy about their joint oil prospects. But their winnings pale next to those farther south. Tanzania has done well out of gold, earning record receipts of $2.1 billion last year, a 33% increase on 2010. It will do even better from gas. The past month has seen the discovery of enormous gasfields in Tanzanian offshore waters. That of Britain’s BG Group is big, Another, by Norway’s Statoil, is bigger. Statoil’s recent gas find alone is estimated to hold almost a billion barrels of oil equivalent (boe).

Happily, Tanzania’s gasfield extends south to Mozambique, where Italy’s Eni last month unveiled a find of 1.3 billion boe, matching similar finds by an American firm, Andarko. With plans to build a liquefied natural gas (LNG) terminal, Mozambique could be a big exporter within a decade. At least the vast and impoverished south of Tanzania and north of Mozambique will be opened up to much-needed investment.

Oil and natural gas everywhere.  Finally a chance for these impoverished lands to develop a middle class.  Who can develop a rule of law.  And government of the people by the people for the people.  Like in all Western countries.  Where the quality of life and life expectancy is higher than in these impoverished east African countries.  Which they can have, too.  If they harness their energy resources.  Create jobs.  And provide the energy a modern economy requires.

Yet the region is not just excited about fossil fuels; a parallel push towards alternative energy is under way. Several east African countries are keen to realise the Rift Valley’s geothermal prospects. One of the world’s largest wind farms is being built in Kenya not far from the new-found oil in Turkana. Its backers say it will produce 300MW, three times the total output of Rwanda.

That is a drop in the bucket for Ethiopia. Its rivers, plunging from well-watered highlands into deep canyons, have hydropower potential. Meles Zenawi, the prime minister, has ordered the construction of a series of dams at a total cost of over $8 billion. The jewel is the $4.7 billion Grand Ethiopian Renaissance Dam on the Blue Nile. This should generate 5,250MW when finished, increasing electricity production in the country fivefold, providing a surplus for export and allowing Ethiopia to open up as a manufacturer.

Wind farms.  Well, when you have no energy that 300 mega watts will be a lot.  But when they build that dam which will produce 5,250 mega watts they can shut down those novelty wind mills.  And put that land to better use.  Perhaps building better homes for that budding middle class.  Businesses.  And schools.  For that dam will be able to modernize their infrastructure.  And bring electricity, and the modern conveniences we all take for granted, into their homes.  Including cable TV.  The Internet.  And smart phones.  Things few subsistence farmers enjoy.

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FT110: “You can’t blame our dependence on foreign oil for high gas prices AND say that producing more domestic oil won’t lower gas prices.” -Old Pithy

Posted by PITHOCRATES - March 23rd, 2012

Fundamental Truth

The Combination of Low Demand and High Supply caused Oil Prices to Fall over 70% by 1986

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel.  Made up currently of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.  Their purpose is to set oil quotas for their oil-producing members.  To limit the amount of oil they bring to market.  To reduce supply.  And increase oil prices.  At least that’s the idea.  It’s been hard to keep the individual OPEC members from cheating, though.  And a lot do.  Often selling more than their quota.  Because when oil prices are high selling a few percentages above their quota can be very profitable.  Unless everyone else does so as well.  Which they usually do.  For their choice is either not to cheat and not share in any of those ‘excess’ profits (beyond their agreed to quota).  Or cheat, too.  Thereby increasing supply.  And lowering oil prices.  Not something any oil producer wants to do.  But it’s the only way to share in any of those ‘excess’ profits.

But that’s not the only problem OPEC has.  There are a lot of oil producers who aren’t members of OPEC.  Who can bring oil to market in any quantity they choose.  Especially when they see the high price OPEC is charging.  OPEC’s high price allows non-OPEC suppliers to sell a lot of oil at a slightly lower price and reap huge profits.  Which puts pressure on the OPEC target price.  Forcing them to lower their target price.  For if they don’t lower their price they will lose oil sales to those non-OPEC producers.  Which is exactly what happened in the late Seventies.  While OPEC was cutting back on production (to raise prices) the non-OPEC nations were increasing production.  And taking over market share with their lower prices.  Causing OPEC to reverse policy and increase production during the mid-Eighties.  Giving us the 1980s oil glut.

Of course, this rise in non-OPEC production was a direct result of the 1973 Oil Crisis.  Many of the OPEC members are Muslim nations.  Who don’t like the state of Israel.  In response to the West’s support of Israel in the Yom Kippur War (1973) OPEC announced an oil embargo on those nations who helped Israel.  Giving us the 1973 oil crisis.  Where this sudden reduction in supply caused the price of oil to soar.  Making the oil business a very profitable business.  Causing those non-OPEC producers to enter the market.  Then the Iranian Revolution (1979) disrupted Iranian crude production.  Keeping Iranian oil off the market.  This reduction in demand caused oil prices to rise.  Then Jimmy Carter broke off diplomatic relations with the Iranian state.  And boycotted their oil when it returned to the market.  Further encouraging the non-OPEC producers to bring more oil to market.  Meanwhile U.S. demand fell because of those high prices.  And our switch to smaller, 4-cyclinder, front wheel drive cars.  Saying goodbye to our beloved muscle cars of the Sixties and Seventies.  And the V-8 engine.  The combination of low demand and high supply caused oil prices to fall over 70% by 1986.  Giving us the oil glut of the 1980s.  When gasoline was cheap.  Enticing the V-8 engine back into the market.

Improved Fuel Economy AND Increased Oil Supplies can Reduce the Price at the Pump

So, yes, Virginia.  The amount of oil entering the market matters.  The more of it there is the cheaper it will be.  As history has shown.  When less oil entered the market prices rose.  When more oil entered the market prices fell.  And anything that can affect the supply of oil making it to market will affect the price of oil.  (And everything downstream of oil.  Jet fuel.  Diesel.  And gasoline.)  Wars.  Regional instability.  And governmental regulation. 

So what are things that will bring more oil to market?  Well there’s the obvious.  You drill for more oil.  This is so obvious but a lot of people refuse to accept this economic principle.  As supply increases prices fall.  The 1980s oil glut proved this.  Even John Maynard Keynes has graphs showing this in his Keynesian economics.  The economics of choice for governments everywhere.   Yet there are Keynesian politicians who avert their eyes to this economic principle.  So there’s that.  More drilling.  You can also make the permitting process easier to drill for oil.  You can open up federal lands currently closed to drilling.  And once you find oil you bring it to market.  As quickly as you can.  And few things are quicker than pipelines.  From the oil fields.  To the oil refineries.  (And then jet fuel, diesel and gasoline pipelines from the refineries to dispensing centers).  So before oil fields are ready to produce you start building pipelines from those fields to the refineries.  Or you build new refineries.

Improving fuel economy did help reduce our demand for imported oil in the Eighties.  As well as lowered the price for that imported oil.  But it wasn’t fuel economy alone.  The non-OPEC nations were increasing production from the mid-Seventies through the mid-Eighties.  Without that oil flooding the market oil prices wouldn’t have fallen 70%.  And they won’t fall again if we ONLY try to reduce our demand for foreign oil.  For reducing demand is marginal at best in reducing oil prices. 

Only if we Drill and Build Pipelines can we Reduce the Price at the Pump

For there are no electric airplanes.  The cost to electrify all railroad tracks is too prohibitive to consider.  The capital costs to build that electrical infrastructure.  The maintenance costs to maintain it.  And the electricity costs from the increased demand for electrical power while supply remains the same.  Or falls.  Because excessive regulation inhibits the building of new power plants.  And speeds up the shutdown of older plants.  Especially coal-fired because they pollute too much.  And hydro power.  Because of the environmental impact of dams.  Severely straining our electric grids.  And moving into electric cars will stress our electric grids even further.  Leading to brown outs.  And rolling blackouts.   Or worse.  Causing wires to overheat and sag, coming into contact with trees.  Shorting out.  Causing cascading blackouts as power plants disconnect from the grid to prevent damage from the resulting current surges.  Like they did in the Northeast Blackout of 2003.

You can’t replace oil with electricity.  In some cases there is just no electric equivalent.  Such as the airplane.  Or the cost of moving from oil to electricity is just prohibitive.  Such as updating the nation’s electrical infrastructure to meet an exploding demand.  Which leaves oil.  We need it.  And will keep using it.  Because there is no better alternative.  Yet.  So we need to produce it.  And do everything we can to help bring that oil to market.  Not fight against it.  And it all starts with drilling. 

We must drill.  Bring that oil up from under the ground.  Put it into a pipeline.  And pump it to a refinery.  If we do this enough we will be less dependent on foreign oil.  And have more control over the price at the pump.

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