Steve Waldman raises a point I’ve thought about in the context of peak oil.

Say you know only a few things:  Your king.  You have oil reserves.  The price of oil is rising fast due to peak oil, say 12% a year.    From a financial perspective you have a large asset that is returning 12% a year.  This asset is reasonably liquid, you could pump some and invest in other things.  But your only going to do this if you think you can find better assets to invest in.  These days that seems unlikely.  So you let it sit.

People like point out that as we transition across the top of the peak or peak oil the supply of oil doesn’t suddenly dry up.  It just stops increasing.  I think that misses the message in the above model.  Because what does change is the expected furture value of all oil reserves.  If the supply of oil is growing faster than the demand then prices fall, and the moment that reverse they can be confidently predicted to rise.  And the moment that happens anybody with oil in the ground is better off leaving it there.  That may not be a positive feedback loop, but it certainly a phase change.  To compound the effect; absent macro economic intervention, the phase change triggers a shape rise in prices which triggers a economic downturn which hollows out expected value of alternate investments so that hording is even more attractive.  That last sentence, of course, explains the psychology of recessions – or why all the money hides in a self destructive manner under the mattresses.

Steve at this points out that maybe you know another thing.  Maybe you, the king, know your countrymen hate you.  If you figure there is a 10% chance per year they will throw you out then your best course of action is to convert that oil into something even more liquid.  This is what happen in Russian after privatization, everybody who managed to get their hands of a high value asset thought: “Gosh this situation looks pretty volitile… i think i should try to convert this into something less risky.”  And they stripped the assets to the best of their ability and moved the money out of the country.

Generally political upheaval in oil producing regions drives up oil prices, but in Steve’s model a dose of political unrest creates an incentive for the king to increase supply.