Managed Oil Markets  

Heading Out at The Oil Drum has been musing about reality, in particular on how open oil markets will remain as competition for energy intensifies. He speculates that China's bid for Unocal is about controlling access to Unocal's energy reserves (in Asia) rather than a purely financial investment.

Strangely enough I had a bet with a friend at the end of last year that this was exactly what would happen - trade in oil would become completely "managed" and supplies would eventually be directed based on politics (or the use of brute force) rather than to the highest bidder in the relatively open market (which isn't really a "free" market) that we have today.

I'm pretty confident I'm going to win my bet (although this probably isn't a good outcome for anyone), given that Venezuela is already showing signs of doing exactly this and Russia has made noises about limiting exports in future.

there is one statement that I suspect is widely accepted, which while presently true may yet, in the near future, radically change. This is the idea that oil is fungible.

In other words it is a commodity where the resource goes into one global market and individual volumes are sold to the highest bidder. It is an assumption that appears in a number of discussions, and is currently relevant since it addresses some of the issues that are tied up in the bid of the Chinese National Offshore Oil Corp’s (CNOOC) bid for Unocal. In today’s Boston Globe, for example, William Overholt of the Rand Corporation says:

“Buying oil wells does nothing to enhance China’s energy security. Oil is an internationally traded commodity and in a time of squeeze, whoever has enough money will get the oil.”

We have seen in the past where countries in the Middle East have cut off oil to specific countries. What we may see in the future is that the production from certain countries or regions may be either politically or economically directed toward selected countries. There is a move afoot to do this in South America at present, with Venezuela promising to make supplies available at a lower cost to its neighbors.