By Published On: May 5, 2006

Bolivia roiled energy markets last Monday by taking control of its oil and gas resources. As Venezuela did last year, Bolivia declared that all major producers in the country would be required to sign new contracts that give the government a majority voice in resource decisions. Not coincidentally, the price of crude oil jumped nearly $2 per barrel. Governments in nearly every major energy-exporting country now directly control their energy resources. As the industrial countries increase dependence on energy imports, exporters understand that controlling depletion of their energy resources is a matter of vital national interest. Industrial countries are rightfully worried about depending on a handful of countries to provide vital energy supplies, even if politicians in Washington have become inured to the dangers. Europeans are grumpy about their growing reliance on Russian natural gas, which is now firmly under the Kremlin’s control. European gas prices spiked last winter when Russia reduced pipeline pressures during a squabble with Ukraine. There is no fear that energy-exporting countries are going to cut off global supplies en masse – they are heavily dependent on energy revenues. But national considerations are playing an increasingly important role. A vigorous debate is going on in Iran, for example, over whether or not to increase domestic use of natural gas in order to free up more oil for export. Indonesia is cutting its natural gas exports in order to have more for internal use. Industrial countries are becoming ever more dependent on imported energy – the U.S. is even poised to become reliant on imported liquefied natural gas. China and India are now major buyers. At the same time, exporting countries are increasingly determined to exert control over energy resources made available to the global markets. The tension between these forces is largely responsible for the steady rise in global energy prices, in my opinion. I expect this trend to continue. How this will evolve in the next decade or so provides plenty of opportunity for speculation. What happens when a single major exporting country realizes that it can make more money by exporting less and causing prices to rise? When a nation can unilaterally limit exports enough to increase global prices and increase revenues despite flat or decreasing amounts of energy sold, the game is over. This could well be called the “global Enron scenario,” because it parallels the situation that led to the demise of the California electricity experiment. What Ken Lay’s company did was allegedly illegal, but no such law prohibits Hugo Chavez from increasing Venezuela’s oil revenues in much the same way Enron did. There would be howls of protest from the U.S. and others, of course, but can we really expect poor countries such as Iran, Nigeria, Venezuela, and Bolivia to keep pumping ever-increasing amounts of energy simply to keep prices in the U.S. from rising too fast – especially if they can provide more revenue for their people by pumping less? I don’t think so. Global energy consumption continues to rise, despite current prices. It’s a classic sellers’ market. I look for global energy prices to continue to rise until they begin to limit consumption. Energy is still cheap, despite the flock of U.S. politicians running for cover from the fallout of $3 gasoline. Politicians prefer more optimistic scenarios, of course. Ethanol from corn could replace gasoline – despite the fact that it takes about the same amount of energy to make ethanol as it provides when burned. Canadian tar sands will replace Saudi Arabian oil – someday, perhaps. The hydrogen highway is paved with good intentions – but where will the energy to generate hydrogen come from? Alas, I see no easy way out. I expect global energy prices to keep rising until they hurt enough to reduce consumption. And I expect that to be very painful indeed.

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