Orinoco Seizure by Hugo Chavez Threatens Global Oil Stability

By seizing control of the Orinoco tar sands, Venezuelan President Hugo Chavez delivered a stunning blow to US oil security. If the world economy worked in the way postulated by the globalizers his action would hardly have mattered, except to the unfortunate shareholders of the affected oil companies. However, the world economy doesn’t work that way, and Chavez’s seizure is thus of major long-term importance.

Orinoco is important, not because of current production from the region, a modest 600,000 barrels per day at a cost of $20 per barrel, economic but well in excess of the cost of Saudi or even Mexican offshore oil, but because of the size of the tar sands deposit. This has been variously estimated at between 1.2 trillion and 1.8 trillion barrels of oil, with higher estimates more recently. At the latter figure Orinoco represents 34% of all known world oil reserves, and 58 years of world oil consumption at current levels.
Since Orinoco’s oil comes in the form of tar sands, extracting petroleum is expensive, and not all the theoretically available petroleum can be extracted. However, current estimates that only around one fifth of these sands can be economically used are probably over-pessimistic; we have only been extracting oil commercially from the Orinoco tar sands and the similar Athabasca tar sands in Canada for less than a decade, so extraction technology can be expected to improve. Over the next couple of decades, production from Orinoco could be ramped up and extraction technology improved, so that the sands could take their rightful place among the world’s truly important sources of energy supply.

Thus if Orinoco and Athabasca were freely available to the world market the extreme “peak oil” theorizers would be wrong; there is enough oil supply for the world’s needs for at least 100 years at current prices. Only a sharp ramp-up in world oil usage or a disruption in the free trade patterns of world oil could prevent the United States and other major world oil users from having enough supply well past 2100. Whether burning all that oil would disrupt the world’s climate is another question (my estimate is: only modestly, provided appropriate precautions were taken) but oil supply as such should not be a problem.

Before Chavez’s action, a free world oil market seemed a reasonable assumption. There were certain rigidities, such as the US refusal to deal with Iran, but Iran is a second tier supplier and there are plenty of other countries willing to deal with it (as there were with Iraq in the days of the infamous “oil for food” program.) The main problem has been the extraordinarily rapid surge in Chinese and to a lesser extent Indian oil demand, which disrupted established market relationships and was bound to strain the system as well as raising oil prices.

Daily Reckoning