Keep an Eye on Khuzestan
And a graphic of the oil resources and ethnic makeup of the region worth a thousand words:
![](http://web.archive.org./web/20161119014701im_/http://www.bartcopnation.com/dc/user_files/12241.gif)
In the world of technology and sustainability, there is a certain “buzz” surrounding the topics of personal manufacturing and platform design. Can we get away from the hierarchal model of centralized manufacture and distribution, and replace it with a world where design emerges from open-source collaboration and is manufactured at the point of use by 3-D printers and community manufacturing centers? Can a focus on meeting community needs, rather than selling communities products that create dependence, allow for improved localized self-sufficiency by way of platform design and localized manufacture? Maybe. There are many projects and theorists already working on these notions—the intent of this article is to suggest that these efforts operate within the framework of rhizome theory, and more importantly, that these efforts recognize their inherent weaknesses that rhizome theory was developed to overcome.
LifeTrac embodies the problems inherent in the promise of 3-D printers, extreme-personalization, and other examples of technology-first platform design. But these problems are not inherent in the notion of platform design itself. It is possible to properly yoke the technology of platform design to the needs and objectives of creating a resilient, minimally self-sufficient community. As an example of such a rhizome approach to platform design, let’s consider mud bricks…
How far can this go? Many people immediately point to modern medicine (e.g. an MRI machine) or to the internet (microprocessors) as examples of things that simply can’t be solved I this manner. They may be right. If your goal is to produce an MRI machine using only locally sourced raw materials and local manufacture, I’m pretty sure you’ll fail. However, if the goal is to produce a system of medicine that effectively serves a local community, I think there is a great deal of potential to address the problem in a truly local fashion if we can just get our goals in the right order. MRI machines are developed to make money, and they do that to the extent that they can improve health within a for-profit system. That works decently well for most people in an environment of surplus energy and amidst a solid political and economic foundation like currently exists in
Shell’s $3.6 billion “Bonga” Floating Production, Storage, and Offloading vessel (FPSO), 120km from shore in 1000m deep water, was recently attacked by MEND militants.
Overnight on June 19th, militants from the Movement for the Emancipation of the Niger Delta (MEND) struck Shell’s offshore Bonga facility, resulting in Shell declaring force majeure for deliveries of 225,000 barrels per day in June and July. Bonga, the first and largest Nigerian offshore facility, is 120km offshore. Then, on June 20th, militants destroyed a key Chevron pipeline near Escravos, Nigeria, forcing Chevron to shut-in and declare force majeure on 120,000 barrels per day. This article will analyze the significance of the Bonga attack in light of Nigeria's efforts to grow its offshore oil production.
What is at Stake?
This recent attack is particularly troubling in Nigeria, where a February, 2006 Citigroup report noted that "clearly most of the (oil production) growth near-term looks to be in the Nigerian deepwater and as such should be less subject to current disruptions." While offshore production currently only accounts for 16% of Nigeria’s oil production, it is expected to account for 90% of future growth. MEND has already demonstrated its capability to shut in significant portions of Nigeria’s onshore oil production, and now it is threatening to re-attack offshore facilities, urging expatriate workers to abandon them immediately. Significantly, Nigeria’s onshore production is already mature, and government hopes of raising total production to 4 million barrels per day are entirely dependent on the success of the offshore sector. If MEND can continue to interrupt offshore production, the prospects for any increase in production from Nigeria look dim. The situation in Nigeria is particularly important as Nigeria is one of the few states with the potential to significantly increase both production and exports. The megaproject list on WikiPedia shows 345,000 bpd of offshore production set to come online in 2008 (Agbami field, Oso field); 220,000 bpd of offshore production in 2009 (Akpo field, Oyo field); 220,000 bpd of offshore production in 2010 (Bonga North, Bonga Ullage fields); 285,000 bpd of offshore production in 2011 (Bosi, Ukot, Usan fields); 250,000 pbd of offshore production in 2012 (Bonga SW, Nsiko fields); and 150,000 bpd of offshore production in 2013 (Egina field).
That’s 1.25 million barrels per day of new offshore production planned in the next 6 years. None of it was previously considered vulnerable to attack. Now it all appears to be within the demonstrated reach of MEND.
MEND: Potential for Innovation & Improved Capabilities
This most recent offshore attack also highlights significant development in MEND’s capabilities. Comments as early as 2006 noted that MEND’s offshore capabilities are continuously improving, and that facilities as far as 50-60 km offshore may be at risk. Bonga is twice that far offshore, at 120km.
I predicted a year ago that MEND would increasingly focus on Nigeria’s offshore facilities for two reasons: to differentiate their ideologically-grounded struggle from the privateers and criminal bunkering that is also interrupting Nigerian production; and as a result of the innovation that naturally results from their decentralized structure. While this most recent attack demonstrates MEND’s ability to operate in the deepwater environment, it also shows significant room for improvement. MEND’s press release stated that their goal was to gain access to and destroy the facility's main control room, but that they were unable to do so. Their failure, however, most likely provided MEND with the specifics of what capabilities, training, and equipment they will need to succeed in the future, suggesting that the improvements in capability demonstrated in this attack are part of a larger cycle of capability improvements (an OODA Loop).
The recent attack demonstrates three significant and separate advances by MEND: targeting, naval equipment, and training. By targeting far-offshore infrastructure that was previously considered to be beyond their reach, and by targeting projects that are key to the Nigerian government’s revenue plans, MEND has accurately identified a very high return on investment target. This demonstrates an advancement in their ability to pursue “effects-based targeting”—that is, the ability to carefully select targets for their ability to produce the desired effect. For MEND, the desired effect is to force the Nigerian government to better meet the needs of the Delta peoples. Previous tactics of kidnapping and attacking pipelines were poor choices for several reasons: they spawned criminal activity within the Delta, they increased pollution in the already polluted Delta region, and they did not effectively compel the desired action on the part of the Nigerian government. While it is yet to be seen if the current targeting choices will be more successful, in my opinion they are an advancement in targeting skill on the part of MEND.
The Bonga attack also demonstrates a significant advance in MEND’s ability to operate far offshore. While MEND has always been noted for their riverine naval capability, their demonstration of offshore capability suggests an improvement in naval equipment. No information is available on what types of watercraft were used by MEND in the recent Bonga attack, but at a minimum they have demonstrated that their boats have 120km range.
Additionally, MEND demonstrated a fairly advanced set of navigation skills. Standing in a rigid inflatable boat, at 1.7 meters above the water, the visible horizon is only 5km away. Even if Shell’s Bonga facility flares at 100m above the surface, the flare is still below the horizon at 40km. Reports that the attack commenced at 1 a.m. suggest that MEND has developed fairly advanced offshore and nighttime navigation skills, that Nigeria’s naval presence in the region is not currently capable of protecting offshore facilities, and that all major Nigerian offshore facilities are within MEND’s reach.
Conclusion: Geopolitical Feedback Loops in Action
The recent attacks in Nigeria should be viewed as a product of geopolitical feedback loops. I’ve written previously about these feedback loops in operation in Nigeria, and will begin to reassess and update them in upcoming posts. These geopolitical feedback loops are significantly undermining Nigeria’s ability to deliver on their potential to increase oil production and exports. While it may be tempting to view these geopolitical feedback loops as separate from the geological phenomenon of Peak Oil, it is more accurate to view the geopolitical factors as a direct result of geological peaking—-but for geological factors, disruptions in Nigeria would simply cause oil exploration and production to move to other, equally fertile grounds. Instead, the geological reality that there are very few “geologically fertile grounds for increasing oil supply” forces companies to accept the high costs of doing business in Nigeria.
A Hummer dealership in Caracas, Venezuela, where consumers pay only pennies for a gallon of gasoline as reported by the New York Times
Fuel subsidies are currently in place for nearly half the world’s population. Fuel subsidies around the world have previously been covered at The Oil Drum in Fun With Subsidies and Taxes, as well as numerous articles in the media on the topic in the past few weeks (links above). Additionally, most OECD states indirectly subsidize fuel consumption in a variety of ways. I won’t rehash this existing coverage, though I do need to point out that every article* I’ve been able to locate has argued that cutting subsidies will have a significant effect on demand, and will help to lower oil prices (*only one analyst, Benoit de Vitry of Barclay Capital, seem to agree with me). To me, this wave of media coverage of subsidies is just like the waves of media coverage past on speculators, big oil conspiracies, and the promise of oil shale: a source of false hope that a magical solution exists to our energy problems. For that reason, my intent here is to argue that the long-term effect of cutting fuel subsidies is, contrary to the reports in the media, not of much significance.
Demand Elasticity is a Marginal Matter
The first reason that cutting subsidies won't have a dramatic impact on demand is that the fuel demand elasticity of a country is the aggregate of the marginal demand elasticity of each of its consumers. For that reason, the elimination of a 30% subsidy for fuel will not result in a proportional drop in demand of 30%. For some users, price increase will completely price them out of the market, and their marginal demand will be completely eliminated. For others, either because of wealth or the value of liquid fuels to their economic activity, the elimination of the subsidy will result in no decline in consumption. The vast majority of consumers will lie somewhere in between. Therefore, right at the outset, we can say that the elimination of a 30% subsidy will not result in a 30% drop in demand. I’d love to be more precise on this point, but neither the data nor methodology currently exists to project with any confidence exactly how much demand reduction would result from the elimination of subsidies—all we can say with any certainty is that it will be smaller than the size of the subsidy eliminated.
Evaluating the Energy Intensity of the Opportunity Cost to Subsidy Expenditures
The next question—and perhaps the most important—is to evaluate the opportunity cost of a government’s expenditures on fuel subsidies. If a government does’t spend $X billion on fuel subsidies, what will it spend the money on? What is the energy intensity of that expenditure compared to the amount of demand reduced through cutting the subsidy?
Take India, for example. In India, the total cost of fuel subsidies could be as high as 2-3% of GDP. What happens to that spending if it doesn’t subsidize fuel use? There are two theories here, both of which create at least some fuel consumption that didn’t exist before. One theory is that it will be spent in a way that results in lower fuel consumption—but almost certainly not in a way that results in NO fuel consumption. The argument in favor of this position is that, because fuel subsidies distort economic calculations in favor of consuming fuel, a neutral use of the same amount of funds should result in less fuel consumption. However, there is an opposing position: because subsidies are, according to market theory, a sub-optimal allocation of resources when compared to free-market allocation, the elimination of subsidies will result in stronger economic growth (or less economic decline) than with the subsidies. This is especially true if the money saved from subsidies isn’t spent at all, but rather reduces the tax burden or lowers the rate of inflation. It remains potentially true to a lesser degree even if the money is merely spent elsewhere, since neutral spending is likely to have a less distorting effect on economic activity. Therefore, according to this theory, elimination of a fuel subsidy may actually result in greater fuel demand over the long term—and that demand may be even more inelastic because it stems from a more efficient allocation of resources. This is the argument of Benoit de Vitry of Barclay’s Capital. In the end, it may come down to this question: What’s worse (from the admittedly very skewed perspective of demand management): 100 million Indian middle class paying 40% under market for diesel with a GDP growth rate of 5%, or 200 million Indian middle class paying market for diesel with a GDP growth rate of 7%?
Cutting Subsidies Won’t Slow the “Export-Land” Effect
Finally, cutting fuel subsidies in exporting nations won’t significantly slow the grinding effect of the Export Land Model, whereby rising revenues of fuel exporting countries lead to increasing domestic consumption and declining net exports. What happens if subsidies are suddenly cut, and citizens of Venezuela or Saudi Arabia have to pay the market rate for oil? The extra money they spend on oil goes to their own government, rather than to some other nation. And that money can then be spent on other projects or programs—the opportunity cost issue noted above. However, to make the cuts in subsidies viable, they are likely to be offset by progressive spending plans that disproportionately benefit the poor. This is exactly what is currently happening in Malaysia. The result may actually increase demand: the rich, who are not the beneficiaries of these offsetting handouts, are also the least likely to reduce their demand due to price rises. The poor, who may otherwise reduce their demand, are the most directly benefited by the handouts. And, because it may be possible to prevent any demand destruction by simply handing out 1/2 or 2/3 of the money previously spent on subsidies to the poorest consumers, there is likely to be money left over to be spent elsewhere (or not taxed in the first place), which brings us right back to the previous discussion on the energy intensity of that alternative spending.
To conclude, I’m certainly not advocating the maintenance or increase of existing fuel subsidies. They are an inefficient allocation of resources, resulting in less economic activity for every barrel of oil consumed. Rather, my intent here is only to dispel the notion—increasingly popular of late—that eliminating fuel subsidies is some kind of magic bullet to derail the demand train. At best, I think the elimination of fuel subsidies will result in a minor and short-term decrease in the rate of demand growth in developing nations. It will not significantly alter the energy crisis facing humanity. Either way, the elimination of subsidies may not be politically practicable—where they have been cut there have been riots (1 2), and there are numerous movements attempting to actually increase fuel subsidies (1 2 3 4 5).