The knock on NOC's

"Paying the Pumper," J. Robinson West, Washington Post, 23 July, p. A29.

"Scrutinizing the Saudi Connection: Questions the 9/11 commission left unanswered," by Gerald Posner, New York Times, 27 July, p. A19.

Lotta people sending me info on the infamous Hubbert curve analysis that "proves" global oil production is irrevocably peaking and thus inevitably heading toward a crash. The analysis is essentially correct but fundamentally myopic, because it largely misses a fundamental fact about global oil markets: they are not run by multinational corporations but far more by national oil companies, or NOCs. NOCs control 60% of production but control close to 90% of reserves, as West points out in his excellent op-ed in the Post:

The capabilities of the national oil companies vary widely. Some are as competent as the international firms. Others are deeply corrupt and lack the capital and skill to meet the sophisticated requirements of portfolio and reservoir management. Furthermore, exploration for new reserves can involve massive risks, which most governments are unwilling to underwrite, whereas the internationals, with huge balance sheets and diversified portfolios, are quite comfortable with these risks.

The thesis of the Hubbert curve is correct, but the conclusion that a fall in global oil production has inevitably begun is not. The Hubbert curve analysis applies where full commercial exploitation has taken place, but in many areas, other factors, including politics and policy, weigh in. It is true that production in most of the United States, Canada and the North Sea is in declineóthere, exploration and production have been exhaustive. But the most oil-rich areas, notably Mexico, Venezuela, Russia and the Middle East, have not been fully explored.

As West so aptly puts it: "National companies are government agencies accountable to their governments first and the international markets second." Why don't NOCs fully exploit their reserves? As West states, "The indigenous oil industries in these countries, usually national companies, resist international foreign investment. They don't want the competition, nor do they wish to share the economic rent from the oil."

If the NOCs were to open up their national industries to competition, there would be a bigger pie for the country as a whole, but less control for the elites who dominate the NOCs andólikewiseóthe governments that own them. This is classic Gap state behavior: preferring a smaller pie that they can control more fully than a larger one that might escape their control. This is the essence of the oil curse: you treat wealth as a zero-sum concept. You act as though there is only so much wealth in the world, so you must hoard what you have. Getting Gap states off the oil curse forces them to treat wealth-generation as non-zero-sum, meaning everyone can get richer with the right investment in things like education, information connectivity, and tax incentives for foreign investment. Countries without such natural resources simply have to develop their people first and foremost if they want to get ahead in the global economy. Theyíve got no choice.

What is wrong with the Middle East can't be solved by stopping the flow of financial support to terrorists groups. Yes, it would be nice if rich Saudis didn't fund al Qaeda, but that is only a symptom of what's really wrong with the Middle East: elites that hoard the natural wealth of the country while keeping the massesóespecially the womenódown and far too ignorant. Whenever publicly-owned companies dominate an economy, broadband economic development will be retardedóplain and simple. That skewed development pattern gives rise to political rigidity on top and suppressed anger below, and that's what defines the latent and real instability of much of the Gap. Deal with that realityóthat fundamental disconnectednessóand you deal with the real roots of terrorism.