Revisiting Profits of Instability

By Fester:

I have long argued that a moderate degree of instability in Iraq and other oil producing regions is quite advantageous for numerous actors as oil is the chokepoint supply of economic growth and therefore an opportunity to extract massive economic rents.  From my old blog in 2004:

This presents an interesting dilmena for all of the major oil exporters which are not part of NATO or NAFTA; stability in Iraq and in the Middle East in general is a contiunuum of choices, and the extremes on both ends have extremely expensive payoffs. Extreme levels of stability in Iraq will cost the Russians between fifteen and thirty billion dollars a year, and the Saudis even more money ($17-$35 billion is my best guess). Complete instability such as an Al-Queda led or inspired series of coups starting with the Saudi Royal family and moving down the line of Emirate will cost the current stakeholders their lives and fortunes. Somewhere in between are less dire consequences and therefore more desired states of being. This continuum of instability and its resultant payoff matrix leads to some very mixed incentives that we see acted upon every day....

Some level of instability is extremely profitable to them, especially an instability that so far has not resulted in the destruction of any actual production or export ability....

George Soros is arguing that oil is in a price bubble right now but the counter-argument to the bubble theory is the inventory of oil products is in the normal range. The counter-counter argument is that the inventory data is normal because building new storage capacity is expensive so 'inventory' is being stored in the ground by not pumping it out despite having economically and technically feasible means of doing so.  This theory requires significant spare capacity lying around and OPEC to be a functioning strong cartel.

Let's run with it for the sake of argument and see where the geo-political spin-out could be.  Holding back spare capacity to effectively build silent daily inventory would be a profit maximizing choice and a forms of savings.  Under this scenario, the holders of the spare capacity would have no problems pumping more oil IF there is an equivilant amount of oil being held off the market by other actors.  This would lead to a dollar for dollar shift of income from Nigeria or Mexico or Iraq or Angola to Saudi Arabia or Russia.  In this simplified scenario, we are playing a zero-sum game when available supply is fixed in the short term.

If that is the case, then things can get real interesting as the same dynamic for Iraq's oil exporting neighbors to not be significantly invested in a fully stable Iraq applies on a global scale.  If key bottleneck commodity producers are unstable, other producers of the same commodity have an interest in promoting further instability as this would restrict supplies and lead to higher prices.  The strongest constraints on this type of action is the fear of tit for tat retialiation in the short run and over a longer run the classical OPEC fear that too high of a price for crude oil will lead to a systemic shift to other energy sources and lifestyle modes that require far less crude to run.