Guyana fact of the day

Exxon Mobil, under contract from the Guyanese government, announced the discovery of vast amounts of oil in the disputed Essequibo region. The finding could be worth more than 10 times Guyana’s current economic output.

The story is here.

Comments

Venezuela begins its invasion tomorrow.
Maduro would actually do this to distract from his current economic problems.
Sadly, the vast majority of Venezuelans believe that this land/ocean belongs to them and would support Maduro's action.

Something similar happened before, when the collapsing military dictatorship in Argentina decided in 1982 as a last measure to remain in power to invade the Falklands

http://www.shanty.org.uk/archive_songs/essequibo-river.html

Not far off topic: do Tyler and/or Alex have opinions on "Confessions of an Economic Hit Man"?

Wagers the opinion would be the John Le Carre was a better spinner of tales.

No one gets stocks and flows mixed up like Bloomberg News.

The economic profession is guilty of making this harder by being sloppy with units. GDP is has units of dollars per annum, but I always see it quoted in dollars. Similarly, the GDP growth has units of inverse time, but these "little details" are always left implicit.

Good news or bad news for the people living in Guyana?

Depends on their governance. If they're more like Norway, good news. If they're more like Libya, not so good. I venture to say they veer more towards the Libya corner.

50 years from now Top Minds will be wondering why Guyana is still poor. You have a bitter racial divide between Afro- and Indo-Caribbean people that dominates political life. The Indo-Caribbean party has been committed to Stalinism although it now pinky-swears it isn't. The Afro-Caribbean party went to some strange places under Forbes Burnham. What could go wrong?

Still, at least it will allow future Guyanese governments to choose their own form of economic insanity. Personally I have always had a soft spot for Burnham. One of the more interesting politicians thrown up by the post-colonial political scene. What better use for the UN General Assembly than lectures on UFOs?

You've confounded Burnham with Eric Gairy.

Burnham's successor Desmond Hoyte began to abandon features of the 'co-operative republic' a generation ago. Cheddi Jagan was never a Stalinist and his confederates have run the government for 23 years, not terribly eventfully.

Can't be. Eric Gairy was even more interesting than Burnham. You don't get Leftist Third World politicians rigging the Miss World competition these days.

Obviously Burnham's swing to the Soviets could not last.

And yes, Jagan was a Stalinist. He didn't hide it. It is true that he eventually came back to power once the West stopped looking the other way while Burnham rigged the elections. By that time the Soviet Union had collapsed and Jagan decided that he had been a Social Democrat all along. But that doesn't change what his politics had been.

When your political life is this dysfunctional, adding billions in oil revenue cannot help.

No global corporation that has a payroll that's a hundred times the entire nation's payroll can't help the people of Guyana because the global corporations will add as little as possible to the payroll of Guyana.

As opposed to what? Small oil companies that are run as charitable institutions? I don't work for free. I don't expect anyone else to either. Do you?

You are nearly on the right point though. The question is what is "as little as possible"? The problem is that the people of Guyana think they own those assets. They do not. The politicians do. They are the ones who buy and sell them. So what is good for the people of Guyana is not the same as what is good for those politicians.

So what is likely to happen is that those politicians will work to maximize their benefit. By transferring as much money as possible from Exxon to their Swiss bank accounts. So the people of Guyana will not get job creation schemes or hospitals or whatever. They will be like the people of Angola - Angola exports more oil to the US than Kuwait does. Not that you would notice by looking at Angola.

So naturally the correct solution is to increase the power of those politicians to control the oil and all other resources, right?

'I don’t work for free.'

You don't have children, do you?

Or believe in the impractically radical teachings of some rabbi either, apparently.

The name of that rabbi? Bryan Caplan, GMU. True story.

"The problem is that the people of Guyana think they own those assets. They do not. The politicians do. They are the ones who buy and sell them. So what is good for the people of Guyana is not the same as what is good for those politicians."

You are describing Saudi Arabia. Whose dictator has crafted a bargain that directs the energy of the people toward first destroying the USSR and now the West for those people who can't be bought off by a welfare state where no Saudi is required to work productively. 80% of the labor force was non-Saudi nationals (to call them citizens would imply a republic).

Now that the price of oil has cratered and the budget deficit is the size of the added welfare state benefits to prevent an Arab Spring, the dictators are forced to force sacrifice on its subjects, increasing gasoline prices 60% in one day, today, without notice.

Contrast your statement with those of candidate for governor, governor, and candidate for VP, Sarah Palin. She successfully argued for huge tax hikes on extracted oil because even the oil on Federal land (much in trust for indigenous peoples) belongs to all the people of Alaska. And she then allocated a big share of that tax to paying welfare to everyone who met the criterion for Alaska citizen.

It is interesting that Congress has granted Alaska this broad power; other States have limited privilege to a share of taxes set by Congress, but most don't, when it comes to Federal mining grants. Texas gets a huge share of government funding taxing all oil and gas, and most is on private land, basically based on oil and gas belonging to all Texans.

And I mention Sarah Palin because her election to government certainly had to do with her taking a position contrary to the one you stated on who owns the oil and gas.

Jagan was President of Guyana for five years, quite uneventfully.

I do wonder how such contracts are structured. Does anyone here have any insights?

Opaquely.

Nigeria's oil contracts are state secrets. And the daughter of the President of Angola is the richest person in Africa. Chazev's daughters ain't short a billion or so either. And his Finance Minister is supposed to have $11 billion in Swiss bank accounts but that might just be a vicious rumor.

Something must show up on the state budgets of these countries, right?

It looks likeme Guyana has some level of transparency: http://www.finance.gov.gy/publications/budget-estimates

It isn't a shock that Venezuela is massively corrupt, nor is it a shock that Nigeria is a complete kleptocracy.

But maybe when it comes to countries like this the only way to structure the agreement is to pay off the current ruler. However, I do wonder what kind of leverage exxon would have, once exxon has put serious capital into the ground it seems like the local strongmen, I mean the local government, would try to extra more and more of the profit. Clearly there are limits, ex: Venezuela, but I don't see how exxon protects itself here.

In case anyone here hadn't noticed oil prices are in a vicious bear market due to massive oversupply. This new oil can't be cheap to get out. This is a long way off from anything actually happening.

Great point. However, that makes me wonder how exxon guarantees its investment. If there will be 10+ years between exxon investing in exploration and the oil coming out of the ground, how do they protect themselves from a changing political environment and nullification of their contracts?

I don't get it.

Alain - They get political consultants to estimate the probability of such an event, then the accountants use this to determine to maximum bid for the project to be worth it. So expected returns on capital must be, say, 20%, not 5%, at the rates they are willing to bid.

I just don't see how the numbers could work out.

I wish we could see the terms to such a deal. I'm sure it would be quite illuminating.

Let's see, Guyana's annual gdp is less than $3 billion, while EXXON's recent rent seeking was generating almost as much cash every five weeks, on revenue every three days equal to about Guyana's total economic revenue.

In those terms, Guyana is a bug for EXXON to step on to increase its monopoly on pillage and plunder of natural capital. EXXON is not going to pay many Guyanese workers a wage typical of EXXON labor force, justifying this on the lack oil industry skills of Guyanese, and unlike American or Western workers EXXON will not provide them the job training.

Thus, the only possible "benefit" to the people of Guyana is increased welfare payments in exchange for the pillage and plunder of Guyana's natural capital.

For EXXON, the primary benefit will be increased monopoly control over the natural capital being plundered so it can limit the rate of plunder to cut supply and drive up prices well above labor costs. The people responsible for increasing the rate of plunder are hundreds of "small people" who can negotiate with a community of farmers to get rights, but would never be able to do the same in a deal with even a very small nation. Some of those "small" players were able to get in a decade to paying $3 billion in total labor costs per year drilling on hundreds of farms and ranches. Eg, people like the George Mitchell who built Mitchell Energy which was bought by Devon for its fracking business.

Ideally, Guyana would have been blessed with a Guyanese citizen who did what Mitchell did using Guyanese workers.

mulp December 28, 2015 at 6:10 pm

Ideally, Guyana would have been blessed with a Guyanese citizen who did what Mitchell did using Guyanese workers.

Guyana probably was. But he was likely beaten up by Burnham's thugs, or intimidated by Jagan's Marxist-Leninism and either way probably had both of them nationalize his company, loot it of any assets of value and then sell it to a Chinese state oil company.

People are not poor by accident. They are poor because they share your politics.

My politics are of capitalism, paying workers to build productive capital assets, so many productive capital assets that the return on capital is no higher than the interest rate paid savers, leaving zero opportunity for rents or profits.

Few such capitalists remain in the US after conservatives extolled monopoly profits and excessive rents to create wealth by inflating asset prices by restricting the quantity of assets to produce scarcity, thus driving up prices. A critical companion to this creating massive labor surpluses to enable paying wages way below the costs incurred by most workers. To keep that system from collapsing, the economists seek debt funded subsidies of labor to prevent death, riot, civil war, etc, eliminating the labor shortage resulting the price of labor increasing faster than worker costs. Like in the 40s, 50s, 60s....

The 50s and 60s were tough for the rent seekers. They just could not create wealth from nothing but churning assets or controlling the movement of goods. Creating wealth required the sacrifice of working, or paying workers, to build productive assets.

I want a return to the economics of the 50s and 60s when the middle class was created.

So you are advocating for 1924-style immigration restrictions?

1924-style immigration restrictions, held in place for 30 years, plus destruction by warfare of all our major competitors, and restoration of the assembly line by eliminating automation. That would do the trick. [sarc]

It is indicative of the current political environment in the USA that you had to be explicit that you're being sarcastic.

I bet half of Trump fans would jump on board the plan, even if drawn out in gruesome detail.

Nathan, the bombing of major competitors is usually mentioned for the historically ignorant progressives, who think 90% tax rates post WWII brought about prosperity. Not much to do with Trump supporters (though he gets support from the liberal side than the other republican candidates).

Given the industrial policy of the Federal government post 1940 was directed at automation and major process improvements, I find your understanding of the 50s and 60s to be quite lacking. What automation in that period did was increase productivity AND WAGES and it takes higher wages to increase gdp.

The stagnant growth in gdp is due to lack of demand due to lack of labor income due to increasing productivity to cut labor costs, forcing the growing labor force to work more for less at increasing manual labor.

The argument that I've heard to justify this is that higher profits create wealth and the wealth effect causes those with stagnant incomes to borrow and spend more. Of course, these workers will never be able to repay the debt, so the Reaganomics model depends on government redistribution of wealth to be sustained, either bankruptcy redistribution, or Social Security plus SSI welfare.

So people are now calling a 700 million barrel oil discovery vast these days with a straight face? That's about what a small first world nation like Australia consumes in two years. But at least they haven't given the amount in liters to make it seem larger, so that's something. And it's not 700 million barrels of oil, it's the equivalent. And that might be the energy equivalent rather than the cash equivalent and if so it is not likely to be worth 12 times the Guyanese economy, even if it could be brought to the market at zero cost. Just what it is worth will depend on the oil/natural gas mix.

And then there is the question of why they didn't know the oil was there until now. It suggests that the oil isn't in a convenient spot and so was overlooked until they started drilling deep, seeking out stuff they'd missed before. This means it could be expensive to extract and not the windfall it may seem. Oil prices are due to rise at some point as not enough new wells are being drilled to make up for depletion in old ones, but reduced supply may take some time to bite, and substitutes for oil use are steadily coming down in price and could be quite capable of preventing oil prices getting high for extended periods of time in the future.

Keep flogging that peak oil horse.

I write that oil prices may not be high in the future and I am told I am flogging a peak oil horse. I can only imagine that if I had written I expected future oil prices to go over $200 a barrel I'd be accused of flogging a peak oil mastodon.

Hey now, the world's largest oil importing nation is about to become, any day now apparently, the world's largest oil exporter, if media reports from that nation are to be taken at face value.

Why, the government of that same nation just repealed a law that prevented the world's largest oil importer from exporting domestically produced crude.

In all fairness, the military of the oil importing nation is fully aware of the actual situation (and has been since less than five years after the end of WWII, when that nation became, and has remained since, a net oil importer), and thus is positioned to ensure that those vital oil imports continue to flow, without for a second being distracted by the idea that the U.S. is somehow not utterly reliant on imported oil.

But the Australian is right about one thing - when the Prudhoe Bay discoveries were publicized during the 70s oil embargo crisis ( back when the U.S. was importing a 1/7 of the oil it imports today - https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRIMUS2&f=A ), the numbers being bandied around so freely of the vast bounty of that discovery involved billions of barrels of oil. https://en.wikipedia.org/wiki/Prudhoe_Bay_Oil_Field#History

Back in that era, a few hundred million barrels of oil was not actually considered a big deal. This field was the sort that got noticed, again note that billions of barrels of oil is how that discovery was measured - https://en.wikipedia.org/wiki/Cantarell_Field

Prior, the world's largest oil importing nation is the United States at around 9 million barrels a day. The largest exporter is Saudi Arabia at about 8 million barrels a day. The United States is not suddenly about to increase its production by 17 or so million barrels a day to become the world's largest exporter. Especially not with with oil at about $38 a barrel as the marginal cost of US oil being quite high compared to the world average. As a result of the fall in oil prices employment in the US oil industry has dropped by about 70,000 this year and is now down to around 455,000. So media reports from that nation certainly cannot be taken at face value. Clearly they do not pass the laugh test.

"It suggests that the oil isn’t in a convenient spot and so was overlooked until they started drilling deep, seeking out stuff they’d missed before" [snip]

a la Tupi, discovered in 2005:

https://en.wikipedia.org/wiki/Lula_oil_field#Reservoir

Punch line: 'The drilling of the first 15 wells has cost $1 billion. It is estimated that the total field cost will come to $50–$100 billion owing to the complexity of the geological formation'

There may be other reasons why Petrobas spends so much money "drilling".

So the Lula oil field is looking at maybe $10 in infrastructure costs for each barrel of oil produced plus whatever their marginal cost of extraction is on top of that. With the current oil price of around $38 that's got to be taking a big bite out of every barrel.

Time to start planning how to avoid Dutch Disease and/or having crooked folks run off with all the money.

Yes. I am sure the crooked folks who run Guyana will be only too pleased to think up ways of preventing themselves from running off with all the money.

No doubt the best solution is socialism - give all the money to the crooked folks who run Guyana. What could go wrong?

For all that one might complain about American-led global institutions, I imagine the World Bank folks in Guyana will be quite active in trying to promote mechanisms to minimize this sort of problem. How effective they will be is another question entirely.

The value of the oil consists in payments from developed countries to forgo its development, per Paris. Thus it is the political perception of the presence and value of the oil that matters, rather than the reality.

According to Census Bureau data, real oil exports are already equal to almost 50% of US oil imports now, even before any of the new crude exports materialize.

Because WTI was selling at a discount to Brent US refiners have been able to export refined petroleum products at a very profitable rate.

If the Brent premium disappears -- it already has in recent days -- US refined products exports are likely to suffer sharp declines.

So be very careful about projecting massive increases in US oil exports.

Oil isn't a perfectly substitutable commodity.

Certain refineries are designed to handle high or low sulphur crude. Others require very light or very heavy crude.

It costs a fortune to build a new refinery or retool an existing one so we should actively ship crude oil around the world to get the right oil to the right refinery. Restrictions on shipping crude oil cost the global economy billions of dollars in lost efficiency every year.

Absolutely. Practically all refinery are built to treat a given source of crude and that is unlikely to change.

So for all practical purposes for US crude exports to increase they will have to displace the crude that the foreign refineries are already set up to use.

I suspect that the claim that laws severely limiting US crude exports will turn out to be one of those magical solutions that we hear so much about. I'm thinking especially about the claim that allowing insurance companies to sell policies in other states would massively increase competition and drive prices down. So five states changed their laws to allow insurance firms from other states to sell in their market. What happened? Not a single insurance company entered those markets. It turned out that there were large of up front expenses to entering a new insurance market that the think tanks and politicians did not take into account.

This discovery makes the oil region a tempting target for Venezuela's collapsing chavista regime (remember how Argentina's unpopular military dictatorship decided to invade the Falklands in 1982)

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