Oil's not well...

The seemingly inexorable rise of oil toward $100 is (choose one)

1. Caused by the weak dollar
2. A spike soon to be followed by a nosedive
3. About to strangle our economy
4. Caused by soulless multi-national corporations
5. Nothing to worry about

Jeez - don't ask me.

What I suspect is this. It is not comforting to realize this crucial commodity is largely in the hands of governments rather than profit-seeking businesses. Unfortunately, it's the case. In a brilliant article by Tina Rosenberg, the example of Venezuela can serve as a proxy for estimating the outcomes for the remaining world reserves.

So perhaps the best strategy for resource-rich countries is to keep the oil private, watch it carefully and tax the hell out of it. Better yet, raise royalties, which are more straightforward and easier to collect. “If your objective is to maximize rent, then the best way is to have companies compete with one another in open bidding for access,” Tissot says. “Angola and Libya have done this very successfully. Libya invited private companies to come back and is squeezing 90 percent of the profits out of them.”

As a slogan, “Negotiate a Better Royalty Rate!” doesn’t have the ring of “The Oil Is Ours!”; nationalization of natural resources can bolster a country’s psyche even if the management of those resources is a failure. The urge to nationalize is, at its core, a political one. Chávez seized Pdvsa not so it would produce more but so he could directly control the money. When governments give into this urge, they tend to be susceptible to the temptations of using oil for short-term gain. But not always. Nationalized oil production doesn’t necessarily lead to political corruption or shortsightedness. If the old Pdvsa were operating in today’s booming oil market, there might be plenty of money for investment in oil and social programs. But it would be the government’s job to watch the company closely to make sure the state got its fair share — in other words, to ensure oil does what it should do: produce maximum sustainable money for the state.

It’s also the government’s job to use the money wisely. That is a more important and difficult problem than the dilemma of whether to nationalize, and the solution does not depend on whether production is nationalized or privatized. It is not even an oil problem at all. All oil production ends up at some point in the realm of politics — whose interests will the bounty serve? The only way to mitigate the political influence is transparency for state-owned and private companies alike. “There should be a law that a national oil company has to publish its corporate figures, matching an S.E.C. filing,” says Jaffe, the Baker Institute fellow. “We recommend that there be a regulator in Parliament that requires full reporting. And it should be open to the public. It’s easy to say and hard to do.” [More of highly recommended reading]

With Mexican oil output faltering, and domestic production limited by our inherent inventory, the future of energy becomes more questionable with each passing day. While the biofuels effort offers us a (let's be generous) gain of say 40%, we still must invest a BTU to get 1.4 BTUs back. Bluntly put, we're not making much ethanol (or biodiesel, oddly enough) without petroleum.

Still, high oil prices appear to be berra-berra good for commodities - especially soybeans, which drags corn along, which lifts wheat who ate the mouse that scared the wife...

Where was I?

While we are all titillated by skyrocketing grain prices, the energy situation stikes me as more serious than just a few months ago. With new belligerence from energy-rich countries like Russia, and an uncertain future in the Mideast, we could see astonishingly high fuel prices very soon. In fact, I'm counting on it.

My answer to this threat is two-fold. First, lower consumption. Many of you have tired of my repeated admonitions for farmers to acquire by any means necessary high-speed Internet (broadband). But given the level of commerce I now do without leaving home and thinking what a tank of $5 gas would cost, spending $80/month for video speed broadband is the best money I spend. We gotta stop driving around for no good reason.

I'm going to let specialists manage transportation costs. In other words, we're going to build bins and haul as little as possible. Dedicated truckers can take it from there. I'm also going to shrink my selling radius to promote expansion in local facilities.

We're continuing our strategy of farming close, as well. Bidding like an idiot on ground you can see from your window isn't quite as silly as it used to be. The economies of scale for far-flung operations just added a drag factor. Perversely, extremely high oil prices could be helpful for local competitors versus multi-county operators.

Second, I'm trying to offset energy costs with proxies that follow fuel prices. I'm raising more beans - like many of you. And I'm selling them early, even though I have lost tens of thousands of dollars with early sales this year. Trying to just wait and see may seem like a safe bet, but it is hard to get beat up locking in a historic profit.

Above all, I'm trying to stay flexible - no easy task at my age. These are historic times in my opinion. We shall run out of analogs and conventional wisdom to rely upon often. With that challenge comes historic opportunities.

The future of oil will reshape our lives. But I think we have choices early on as to how.

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