There's a presumption out there that things look tough in the Middle East, but that soon enough -- maybe by summer -- they will sort themselves out, and becalm the volatile prices of oil and gasoline. Not so, says veteran oil analyst Edward Morse, a student of history who correctly called the 2008 oil bubble while everyone else was still throwing money into the pot. "This is not a one-off disruption," Morse says. Instead, we're in a new age of geopolitical risk that threatens to disrupt the region for a decade or even longer.
As if to reinforce his point, 6,400 miles away in Libya, Col. Moammar Qaddafi has again triggered the all-important Flaming Oil Port Index by having his air force bomb the country's main oil terminal at Es Sider, turning it into a ball of fire. Oil prices shot up.
Given the Libyan uprising, not to mention the trouble in Bahrain, Egypt, Oman, Tunisia and Yemen, even the region's rich petro-states understand the basic math, says Morse -- their demographics (60 percent of the region's population under 25 years old, high unemployment rates, and lopsided income distribution), awakened by the kindling of revolutionary fever, have put all of them in potential jeopardy. "A rapid contagion is spreading," he said. "Even if you think you are relatively safe, this is a new, permanent risk. It will be with us for the next decade," or even two.
Therefore, all the petro-states are going to mimic the recent largesse of Saudi King Abdullah, who distributed $36 billion to his people in the form of higher wages and forgiven loans, and do so on a regular basis. They will also try to figure out how to put all those discontented and often well-educated youth to work.
That's great, but what does that mean for the rest of us? That the break-even point for annual government expenditures in all the states -- meaning the price of oil required to cover regular state obligations like salaries, road repair and defense, plus these new expenses in order to satisfy the restive youth -- has just gone up, says Morse. If they needed $60-a-barrel oil multiplied by the number of barrels they are producing and selling each day to fund the state budget, now they will need much higher prices. Saudi Arabia, Kuwait and other petro-statesmen that previously attempted to keep oil price stamped down to some degree can no longer be counted on to do so. Instead, they will be interested in the kind of price increases we are seeing today. For more Ed Morse, including a video, read on to the jump.
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We need some balance in the Libyan oil story. Is this north African nation an unmitigated disaster for those elsewhere in the world running an economy or driving a gas-guzzling vehicle? Notwithstanding the turmoil, the answer so far is no.
For good reason, much attention is focused on Libya's oilfields, since they are the whole reason why the United States, Great Britain and a host of oil companies have been courting Col. Moammar Qaddafi since he reopened the country to the outside eight years ago. An as-yet unknown volume of Libya's 1.6 million barrels a day has been shut down. Traders have bid up oil prices above $100 a barrel for the first time since 2008, though that's not very surprising -- what are traders supposed to do with such uncertainty (read: opportunity) staring them in the face? In addition, there's valid concern about the stability of the Middle East's big oil monarchies -- Kuwait, Qatar and Saudi Arabia. As Cameron Hanover, the energy analytical firm, wrote clients in an overnight note: "With unrest all around them, is there any really strong reason to believe that the [United Arab Emirates] or Kuwait or even [Saudi Arabia] itself can remain oases in this swirling, engulfing sandstorm?"
Still, when it comes to oil, things are going surprisingly well in Libya considering the turbulence.
Oil and gasoline prices -- currently continuing their rise through the roof -- are doing so in their role as a mirror on history. We will never look at the Middle East the same way again -- contrary to what we generally thought, the region's monarchs and dictators are all susceptible to the popular will. What one might call the Susceptibility Index is a relative one -- the globally crucial petrostates of Saudi Arabia, Qatar, and Kuwait seem comparatively secure. Yet, since so many articles of faith have already been punctured -- Mubarak is gone; Qaddafi looks like he will be behind him; the 230-year reign of the al-Khalafis of Bahrain is threatened -- we cannot rely on assurances that these geopolitical big wheels are absolutely secure either. And so oil prices are surging for a second day.
Here's how Helima Croft and Amrita Sen at Barclays Capital sum it up in a note to clients today:
The foundation that has held the region together for the past 30 years has been shaken and the first cracks that appeared in the tectonic plates with the uprising in Tunisia and Egypt is now causing widespread ruptures in the region.
Therefore, the economic models on which the big industrial nations, Wall Street, and the banks are operating will have to be reconfigured to take account of this new risk premium to the global economy. But Croft and Sen go on to say that oil history also shows that one should not fret too much -- markets correct themselves, and the flow of energy that feeds the global economy will probably not be damaged. Read on for their thoughts.
Update: I discuss the big oil picture out of Libya and the Middle East this evening on Marketplace.
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Hundreds of thousands of Egyptians are in the streets, Bedouins are threatening the Suez Canal, and one of the West's most reliable Arab allies is on his way out. As a result, oil prices soared last week by ... 23 cents a barrel.
That's right, folks. Oil traders turned Friday into a manic scene of futures buying -- trading on the U.S. side of the Atlantic was at an all-time high, according to Bloomberg -- yet did not push the oil price through $90 a barrel. In the United Kingdom, Brent crude butted up against $100 a barrel, but again did not penetrate the psychological barrier. As of this morning, oil prices are down.
The takeaway: We are again seeing the intersection of so-called "spare capacity" -- how much surplus oil can be produced above and beyond current demand -- and the base desire of oil traders to earn really big money really fast.
A lot of traders did do well on Friday by pushing up the price by 4 percent (which compensated for losses earlier in the week), though they did so by hammering hedge funds that had earlier bet the other direction, Bloomberg reports.
Officially, the world's oil producers have about 6 million barrels a day of spare capacity -- their daily productive ability above and beyond what the market needs. But a lot of observers think the official number is exaggerated - they think spare capacity is more like 4.5 million barrels a day. The belief in the lower number is what is allowing traders sometimes to push up prices in a crisis such as Egypt.
Over at OPEC, there is consternation over prices. In a speech in the United Kingdom, OPEC secretary general Abdalla el-Badri noted that oil inventories are above their five-year average, and repeated a complaint of other OPEC officials in recent years -- in effect, oil traders drive up the price, and OPEC gets the blame. Bloomberg quotes him:
OPEC has consistently said in recent times that prices are disconnected from the physical oil market and are increasingly subject to the paper market. Consequently the market is dominated by financial players, which is misleading when it comes to understanding the behavior of the oil market.
Few oil traders are actually worried about the Suez Canal, through which about 1.8 million barrels a day of oil and oil products flow. Here is a snippet from a note to clients sent by Helima Croft and Amrita Sen of Barclays Capital:
We believe the Canal does not appear to be under immediate threat from the current political crisis in Egypt. Although the industrial city of Suez has witnessed some of the worst violence during the past week, there have been no reported attempts to target ships. Even if Western companies become a major target for the protestors, we believe that shipping traffic through the Canal is unlikely to be seriously imperiled, though some individual ships docked in port might be at risk of attack if the situation deteriorates further. Even in the unlikely event that the there is an attempt by some groups to disrupt shipping traffic, it would not necessarily be easy to accomplish. There are no indications that the protesters in Egypt have yet developed the intent or capabilities to carry out organized attacks on tankers like that seen in the case of the USS Cole.
That final sentence of course refers to the 2000 al-Qaeda attack on a U.S. naval vessel in Yemen.
Instead, we are seeing classic casino behavior. Here is Frank Verrastro, director of the energy at the Center for Security and International Studies in Washington, in an email conversation over the weekend: "Even if no barrels were impacted, the bullish run on oil will use this or any other supply threat to push prices up. "
Exxon Mobil has considerably raised its forecast for the global switch to natural gas from far-dirtier coal. Exxon -- whose energy models have much influence because of the intellectual firepower the company's forecasters brings to bear -- says that not only will natural gas surpass coal use in the next two decades, but it will also start to come close to oil consumption, as Angel Gonzales reports at the Wall Street Journal. The big takeaway from Exxon's 20-year forecast, released today: China's natural gas demand will rise six-fold.
These are enormously consequential forecasts. We've been discussing what we think is coal's dim future for some months. Energy forecasts going forward are almost entirely founded in China's voracious appetite; it's been presumed that China will account for some 90 percent of the increase in global coal use over the coming two or three decades. But that's never made sense, unless you presume that China's Communist Party has a death wish. Unrest has already broken out in China over pollution, and it is simply absurd to conclude that the population will tolerate an order of magnitude greater coal smoke, or even more.
As we've discussed, the direction of the global energy supply will relatively soon trigger a sectoral shift in how China produces electricity. We will have supply-push demand: So much natural gas is sloshing around the world -- from Qatar, Australia, Yemen, and now possibly liquefied natural gas from the United States -- that China will shift massively to gas-fired electricity plants. This has enormous implications in terms of climate-change forecasts. In a nutshell, global warming may be less of a problem than a lot of people currently think because natural gas emits one-third of the CO2 as coal.
One of our most prevalent current canards is the mantra that we must "get off foreign oil," by which we invariably mean Saudi Arabian crude -- and that we must generally distance ourselves from the kingdom and its leaders. Here is a rare issue that finds bipartisan traction. Last summer, for example, the comedian Jon Stewart looked and found that eight consecutive U.S. presidents starting with Richard Nixon, rolling through Ronald Reagan, both George Bushes, and finally Barack Obama have used the phrase in more or less the same formulation. Usually, the mantra is stated in the context of either the environment -- promotion of green industries -- or national security, meaning a way to confound terrorists who, it is said, are largely financed by Saudi and other Middle Eastern oil receipts. But ultimately they mean the same thing -- Saudi Arabia is bad, bad, bad.
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I become suspicious of phrases that roll off the tongue and get me riled up, because often they are intended to accomplish just that outcome. Such is the case with the get-off-foreign-oil sloganeering, as I write in the latest issue of Foreign Policy. News from the Middle East and elsewhere exhorts the United States not to distance itself from Saudi Arabia, but in fact to more fully embrace this definitively central relationship. The reasons include top-tier U.S. strategic priorities regarding Iran, terrorism, Afghanistan, and of course oil.
WikiLeaks showed that the Saudis, unsurprisingly, have been in lock step with Western policy on containing Iran's nuclear program. The most dramatic recent example of the Saudi alliance paying off came in October, in the form of abortive terrorist attacks that were halted in Europe before they could reach the United States. Last summer and fall, U.S. intelligence agencies received three progressively more unnerving warnings from Saudi Arabia, all suggesting that al Qaeda was preparing to set off bombs in either Europe or the United States. The final alert, sent Oct. 28, was the most explicit, providing tracking numbers for two suspected explosives-laden packages on their way to Chicago from Yemen. A day later, police intercepted the packages at FedEx and UPS facilities in Dubai and Britain and defused bombs containing enough of the explosive PETN to take down the cargo planes on which they were to be shipped. Al Qaeda's Yemen affiliate claimed responsibility and warned of more such attempts. The take-away: Short of Saudi Arabia's insistent calls to the Central Intelligence Agency, there is almost certainly no chance that the bombs would have been detected.
What about the other main theater of current U.S. strategic interest, Afghanistan and Pakistan? With its long close ties to all parties in the region -- Pakistan, including the Army's jihadi-linked Inter-Services Intelligence directorate; Afghanistan; and the Taliban -- Saudi Arabia was asked early last year by Afghan President Hamid Karzai to help mediate a political settlement with the Taliban. In February, the Saudi foreign minister, Prince Saud al-Faisal, agreed to receive a delegation of former Taliban, but in November he froze contacts after the Taliban refused to repudiate Osama bin Laden and al Qaeda. Riyadh's position is not new: The Saudis adopted a similar posture position prior to 9/11, when they severed ties with the Taliban after its leader, Mullah Omar, refused to force bin Laden out of Afghanistan. Yet it is yet another example of crucial alignment in U.S.-Saudi policy.
All the while there is oil, although many people seem to suggest that as a source of strategic importance it is a temporary artifice. What are the facts? Not only will Saudi Arabia's predominant oil market position not shrink over the coming decades -- it will grow. Consider the current activities of Chevron, the original developer of Saudi oil, in the partition zone that the kingdom shares with Kuwait. Vice Chairman George Kirkland told me about Chevron's findings in the Wafra field, a reservoir of highly viscous, heavy oil in which the company is using a method of steam-injection drilling to recover an expected 10 billion to 15 billion barrels of petroleum. (For perspective, the industry regards a 1 billion-barrel field as a supergiant.) Saudi Arabia, Kirkland says correctly, is "at the top of the mountain as it is. [Wafra] reinforces a longer future delivering liquid hydrocarbons to the world economy." Meaning probably far into the second half of this century, adding up to another pinion of U.S. strategic interest. Here, Bloomberg's Wael Mahdi reports on Chevron's current progress at Wafra.
Those who suggest getting off Saudi oil are violating the basics of economics. As the pithy Anthony Cordesman of the Center for Strategic and International Studies expressed it to me: "What is the benefit for the U.S. of 'deplete America first'?"
A nod to $100 oil, and another sign of OPEC's wane. The Organization of Petroleum Exporting Countries (OPEC) is still closely watched for the minutest shift that could shake up oil prices, but yet again it's clear that the group is trying simply to stay ahead of more powerful market forces. The latest evidence came this week when OPEC members -- who control 40 percent of the world's oil supply -- gave their nod to $99.99-a-barrel oil prices. (This comes a month after the group expressed contentment with $90-a-barrel oil.) OPEC Secretary-General Abdalla El-Badri said that $100-a-barrel oil would be a sign that prices have gone out of whack with fundamentals, and that OPEC should act, presumably by loosening up its quota and adding supply to the market, report Bloomberg's Juan Pablo Spinetto and Nathan Gill. This week, oil momentarily crossed over the $90-a-barrel line before falling back. As for O&G, we are betting on the contrarians who believe that the giddiness is premature, and that prices will remain at current (historically high) prices in the coming year.
The big spend. Oil junkies have fretted that petroleum companies have so curtailed their exploration spending in recent years that we are headed for a huge jump in prices starting in 2012 and stretching through the decade. Not so fast: Yesterday we learned that Chevron, for one, is seriously stepping up its investment next year. The company says it will spend a full 20 percent more than planned, or $26 billion, to drill a lot more in Australia (gas) and the Gulf of Mexico (oil), among a few other places, Sheila McNulty reports in the Financial Times. This puts Chevron in the same league as top-rank spender ExxonMobil, which already said it planned to lay out between $25 billion and $30 billion a year for the next five years on exploration and other capital expenditures.
A newly cautious BP? The first possible signs of a new, far more careful BP showed up this week in the company's decision to forgo drilling in deep water off the coast of Libya until it can switch out the rig planned for the project. Eight months after the disastrous explosion of its Macondo well in the Gulf of Mexico, BP says it will not use Homer Ferrington, a rig owned by Noble Corp. that's already on site in the Gulf of Sidra, but Deep Ocean Ascension, a rig belonging to Pride International. The Pride rig is currently being outfitted, the FT's Sylvia Pfeifer reports, and drilling is now supposed to begin next year. No one is saying why Ferrington is more suitable than Ascension.
Argentina's big sale to China. Chinese oil companies continue their Latin American buying binge. In Argentina, a Sinopec subsidiary agreed to pay Occidental Petroleum $2.45 billion for oil and natural gas fields, report Jim Bai and Farah Master of Reuters. The deal includes 393 million barrels of oil equivalent (oil and gas) in what's known in industry argot as proven and probable reserves. The fields produced some 51,000 barrels of oil equivalent last year - a respectable though not eye-popping volume. But the big news is that this is just China's most recent deal in the region. In all, Chinese companies have spent $13.3 billion in Latin America on oil and gas deals this year; that is compared with no deals the previous year.
Is Tehran convinced the United States is out to steal its oil? Here's Kazakh President Nursultan Nazarbayev, in a cable describing a Jan. 14, 2009, meeting in the capital city of Astana between Nazarbayev and U.S. Gen. David Petraeus, in which the Kazakh leader recounts his recent conversations with Iran's leaders:
[Nazarbayev] said Supreme Leader Ayatollah Khameni told him that even if Iran compromises on the nuclear issue, the United States would always find another reason to criticize "because they hate us -- all the United States wants is to conquer the entire region and steal the oil." General Petraeus interjected, "We could have bought all the oil in the region for 100 years for what we've spent in Iraq!" Nazarbayev, looking a bit amused, said, "I know. I'm just telling you what he said."
The cable, signed by Richard Hoagland, the U.S. ambassador to Kazakhstan, is also interesting for Nazarbayev's pretty shrewd insights into Afghan politics. Nazarbayev is worried about publicized efforts to bring the Taliban into the Kabul government. Petraeus, then the head of U.S. Central Command, replies that this is just an attempt to break up the movement, while roping certain elements into the power circle. That's all well and good, Nazarbayev replies, but suggests that the Taliban is all about control, and not sharing power: "The Taliban leadership will never change its position," Nazarbayev says.
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Peak coal in China. First it was rare earths, now it's coal: Ravenous China is using so much coal that it's considering a cap on production of the fuel, writes David Winning in the Wall Street Journal. China accounts for some 47 percent of the world's coal consumption at the moment, and its 2010 imports of the fuel are already higher than all of last year. In fact, here is an area of unaccustomed Chinese global weakness: Wholly fixated on energy security to the extent that it's willing to burn domestic coal with abandon, China is facing a coal deficit -- it will run out of the fuel sometime in the next two to three decades at current rates of consumption, according to Winning's sources. The United States, meanwhile, has some 240 years of reserves, and India has about a century's worth. As a result, China may turn more fully to imports, while capping production at current levels.
The oil boom town of Havana? Moscow was Cuba's closest ally for decades until the Soviet collapse, when Russia simply didn't have the money any longer to support its foreign friends. Now, Gazprom is moving in to fill the gap. The Russian gas giant is joining a half-dozen other companies in a rush to explore for oil in Cuba's waters, writes the New York Times' Andrew Kramer. Since Gazprom has no actual experience drilling offshore, its oil arm, Gazprom Neft, has bought a 30 percent share of acreage controlled by Malaysia's Petronas, which will handle the actual work. Other companies drilling include Spain's Repsol, India's ONGC, Norway's Statoil, Venezuela's PdVSA, and Vietnam's Petrovietnam. China's Sinopec is working onshore in the country. No U.S. companies are present because of a 48-year-old trade embargo. President Barack Obama has been allowing a thaw in relations, but that is likely to slow given the composition of the new Congress, in which more members are opposed to closer contact with Havana.
Peak confusion. The Saudi kingdom is reacting to a fresh spate of reports predicting a waning of global oil supplies and a corresponding spike in prices. In a talk at Rice University, Prince Turki Faisal said that, regardless of China's and India's growing demand, Saudi Arabia will use its massive resources to keep global oil prices stable, according to Business Insider. "As the demand for oil continues to rise, especially in China and India, the kingdom has every intention of meeting that demand," Turki said. His remarks came the same week as an International Energy Agency report that conventional oil production has peaked, and higher prices are on the way.
Tony Hayward's next chapter. Run out of BP after mangling the company's public message during the Macondo oil spill in the Gulf of Mexico, former CEO Tony Hayward is setting up a private oil consulting firm, called 3E Capital, writes James Quinn of London's Daily Telegraph. Hayward is also serving on the board of TNK-BP, BP's Russian joint venture.
Tariff-supported ethanol industry boosts exports. The U.S. agricultural lobby and its congressional supporters have long argued that American corn ethanol producers cannot stand on their own feet -- they need a government subsidy, which currently stands at 45 cents a gallon. Yet it turns out that U.S. producers have been churning out so much of the fuel additive that there is a surplus, and they have been exporting this bounty at record volumes, writes Gregory Meyer of the Financial Times. Nearly four in 10 bushels of this year's corn crop will become ethanol fuel, according to the U.S. Department of Agriculture. Of that, government mandates add up to 12 billion gallons of the fuel, but the industry is on track to produce some 13.6 billion gallons this year, while Americans are driving less. So it is that, according to government data, the industry had exported some 250 million gallons of ethanol as of Sept. 30, more than double the entire figure for 2009. Rob Vierhout of ePure, a European ethanol trade association, said the subsidized exports are not fair, and that the group may seek to stop the United States from allowing them.
The battle over oil demand. Over at the Financial Times' Energy Source, Kiran Stacey explores the varying oil demand projections of OPEC and the International Energy Agency. The IEA projects oil demand of 99 million barrels a day by 2035. OPEC thinks it's going to be more like 116-121 million barrels a day. While it is impossible to reliably predict oil prices, supply, or demand, it is not an inconsequential exercise to try, since so much is at stake. Currently, the world uses about 85 million barrels a day. The prevailing wisdom falls into the OPEC camp; these thinkers look at China especially and see a huge uptick in demand going forward. A compelling minority of thinkers says the majority fails to consider underlying political trends in China; they say that China's oil demand curve will not be anywhere as steep as the majority believes.
For Japan, the rare earths embargo goes on. China continues to block Japan's rare earths. Beijing had signaled that the cutoff of the strategic elements was over, but Keith Bradsher at the New York Times quotes metals traders who say that while exports have been restored to the United States, not so for Japan. The unofficial export ban to Japan began Sept. 21 with a fishing dispute in the East China Sea and spiraled into an international incident.
Beets, anyone? Energy guru Charlie Maxwell forecasts $300 oil by the end of the decade, and a higher diet of root plants. Speaking with Olivier Ludwig of IndexUniverse, Maxwell points to depletion as the key factor -- the natural pressure in old oil fields is dropping, and by 2015 or so the energy world will begin to be out of balance. Demand will begin to exceed supply, and a price spiral will begin. When that happens, our current lifestyles will start to be too expensive. Maxwell says that the only way out is more energy efficiency.
Costly but with a high envy quotient. With the gift-giving holidays upon us, the world's luxury carmakers respond with sleek, fast and comfy wheels for the green-minded, Vanessa Furmans reports at the Wall Street Journal. Hybrid entries are here or about to be from Bentley, BMW, Ferrari, Mercedes, and Porsche. They carry steep price tags -- Porsche may charge north of $600,000 for the model it expects to market in 2013.
The latest oil boomtown. The oil flow is picking up out of long-declining producer Iraq, reports Chip Cummins of the Wall Street Journal. Cummins profiles the world's newest oil boomtown, Basra. The activity is the object of much attention because, to the degree that Iraq can boost production toward its target of 12 million barrels a day from the current 2.5 million barrels a day, the country will reduce concerns of a price spike in the latter part of the current decade. The consensus among analysts is that the production aim is quite high, but that Iraq may be able to reach about 6 million barrels a day.
Autumn of the son-in-law. Finally, we turn to the travails of Rakhat Aliyev, the estranged former son-in-law of petro-state leader Nursultan Nazarbayev, the president of Kazakhstan. For the last three years -- ever since Nazarbayev ran Aliyev out of the country under still unclear circumstances -- Aliyev, on a blog at LiveJournal, has been providing a gusher of entertaining taped conversations, articles, and even a book that he says expose the corruption and general perfidy of his former father-in-law. On Tuesday that came to an end with the unexplained suspension of the blog, reports Lenta.ru. LiveJournal is owned by SUP, a Russian media company.
The International Energy Agency -- the autonomous Paris-based research group funded by an array of mostly European and Asian governments -- has released its annual energy outlook (English language executive summary here), one of the most eagerly awaited big-picture prognostications in the business. The takeaway from this year's report, which was leaked to the Financial Times last week, is that governments matter: What they do, or don't do, about climate and energy policy in the next decade will determine what we pay for oil, and how much of it we have.
In the IEA authors' words, "the age of cheap oil is over." The question is how expensive it gets. Consider this chart:
We're looking at several energy scenarios for the next quarter-century: a business-as-usual scenario (the red line above), a scenario in which industrialized countries pursue the relatively modest policy goals they agreed to at the last year's botched Copenhagen summit (the blue line), and a scenario in which those countries pursue the sort of ambitious overhaul of their energy use that would be required to hold the atmospheric concentration of carbon dioxide to the level that climate scientists believe is necessary to avert the worst of climate change, or a 2-degrees Celsius rise in global temperatures (the green line).
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The world versus China on rare earths. An unusually broad and multinational coalition of business associations wants the G-20 nations to help persuade China to reopen its exports of rare-earth elements. Some three dozen associations from the United States, Germany, Japan, South Korea, and elsewhere asked all G-20 members in a letter to "renounce interference with commercial sale of rare earth elements, domestically or internationally, to advance industrial policy or political objectives." The appeal follows a Chinese shipping embargo on rare-earth exports to Europe, Japan and the United States that began with a dispute over a fishing trawler in the East China Sea. The G-20 will start meeting next week in Seoul.
A Georgian vote for electric fleets. Shai Agassi got Israel to agree to be a guinea pig for his company Better Place, which aims to provide a network of battery-charging stations for electric cars. But now former Soviet Georgia wants to do him one better: It says it will replace its entire government vehicle fleet with electric and hybrid cars over the next four years. The New York Times' Andrew Kramer figures the plan will cost Georgia between $88 million and $166 million, depending on which commercial brands it buys. Georgia largely subsists on foreign aid, but the United States and Japan may welcome such ambition given current pessimism about electric-car sales.
It's official: Higher oil prices are coming. Over the last two years, petroleum behemoth Saudi Arabia has endorsed oil prices in the $70-per-barrel range, and that is largely where they have stayed. Now the influential kingdom is backing a price boost to $90 a barrel, and prices have recently moved in that direction, closing over $86 a barrel. Saudi oil minister Ali Naimi signaled the shift in a statement in Singapore. Meanwhile JPMorgan Chase and Bank of America Merrill Lynch are both forecasting a jump to over $100 a barrel next year, and the International Energy Agency says prices will be tempered in the coming decades only if governments enact climate-change rules that cause oil demand to drop.
The coming Caspian oil boom. The International Energy Agency is projecting that the Caspian states -- Azerbaijan, Kazakhstan, and Turkmenistan -- will produce 5.4 million barrels a day by 2025, double today's volume, and enough to satisfy 9 percent of total global demand at that time. The IEA also notes, however, that Russia continues to choke off the Caspian natural gas exports.
Shell in trouble for palm-greasing. Royal Dutch/Shell, Switzerland's Panalpina World Transport and five oil service companies are paying $236 million in penalties to settle a bribery case with the U.S. government. The companies admit that they paid millions of dollars in bribes to officials in seven countries -- Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan -- in order to facilitate customs shipments and to circumvent other rules.
Elon Musk's new friends. Panasonic is investing $30 million for a 2 percent share of Tesla Motors, the Silicon Valley electric-car startup run by Elon Musk. The Japanese electronics-maker joins Daimler and Toyota as big-ticket investors in Musk's company. Tesla already produces a $109,000 high-end car called the Roadster, and wants to build a mid-range vehicle called the Model S.
In the weeks before President Barack Obama took his oath of office, Exxon Mobil CEO Rex Tillerson determined to get a march on the new, less greenhouse-gas-emitter-friendly world that he and almost everyone else believed was coming, in the form of some sort of carbon-trading system. Tillerson was so certain of facing this new set of circumstances that he went to Washington to push publicly for something that Exxon opposed constitutionally: A straightforward tax on carbon.
As we all know now, the political sausage machine on Capitol Hill chewed up cap and trade, and the conventional wisdom now is that if such a system ever does materialize, it may be decade or more down the road. So it's surprising to find that Tillerson's lobbying wasn't just a matter of short term political triage -- he actually believes this stuff.
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Worries about geopolitical bogeymen can overwhelm good sense. Case in point: today's melee over the discovery that Iran has been regularly handing Afghan President Hamid Karzai fistfuls of cash. Just who is Tehran endangering by keeping Karzai lubricated with pocket change? For one, the fellows U.S. troops are fighting: the Taliban. Karzai calls the payments "normal," and he is right. In the case of Afghanistan, Iran is in effect a U.S. ally.
It's useful to keep in mind that Iranian influence in Afghanistan is traditional. The two countries share a language, after all -- making it easy for the Iranians, for instance, to be particularly close to the leaders of the populous Herat and Balkh provinces, in the west and north of the country. Since the mid-1990s, the Iranians have served a useful balancing purpose to the Pashtun Taliban.
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Chevron is drilling again in the Gulf of Mexico, and the rest of Big Oil won't be far behind now that the Obama administration has cleared the way, the Financial Times' Lex columnists report. As for the South China Sea and the Gulf of Guinea, they are under siege by upstarts like PetroVietnam and Ghana National Petroleum Co.
It's not news that the age of Big Oil is waning, as national oil companies like Petrobras and the Chinese National Petroleum Co. drill their own reserves, and venture abroad as well. But PTT Exploration and Production? As Tim Johnston writes in the FT, Thailand's state-owned oil group is hunting oil, gas and coal assets in Brunei, Indonesia and Madagascar with a $1.9 billion war chest. It may not seem like much considering the sums that Big Oil throws around, but Thai companies in general have been successful acquirers in recent months.
The rare earths imbroglio continues. The New York Times' Keith Bradsher has another report on the slowdown of rare-earth exports from China: This time, he wrote, the flow of the strategic elements has slowed to not just the United States but also Europe. The Obama Administration ordered an investigation into the report. Two weeks before the U.S. mid-term elections -- in which the dastardly Chinese are already emerging as a popular bogeyman -- the elements are likely to come up as a political issue.
Sanctions tighten on Iran. The United States succeeded in further tightening oil sanctions on Iran this week, when Japan's Inpex said it would join European companies and halt its relationship with Tehran, which Washington is attempting to push to the negotiating table over its nuclear development program. (The Iranian government, meanwhile, played down Inpex's announced withdrawal from development of the Azadegan natural gas field.) That now leaves China as the last major country with significant energy investments in Iran, John Pomfret reported in The Washington Post.
Did Britain just institute a carbon tax? Earlier this year, Britain's Department of Energy and Climate Change launched a carbon emissions reduction policy that would have levied a pollution charge -- about $22 per ton of carbon -- on Britain's 4,000 biggest energy users, then paid the money back to the same companies in the form of energy efficiency incentives. It was a revenue-neutral approach -- until Wednesday, when the government quietly decided to keep the money, on the order of $1.58 billion a year. David Roberts at Grist explains.
China braces for a flood of LNG. If you want to gauge how much liquefied natural gas a country plans on using in the coming years, look to the shipyards. Case in point: The Chinese shipbuilding company that has built all of China's LNG tankers to date is ramping up its tanker construction efforts in preparation for what it anticipates will be a quadrupling of LNG imports between now and 2015, one of the company's top executives told Bloomberg News on Thursday. China's LNG consumption, if it lives up to the current projections, will have ramifications far beyond the country's shores -- just ask the companies building pipelines in Alaska.
Another $1.5 billion for biofuels in the United States. After the collapse of efforts to pass cap-and-trade legislation and hopes fading for even more modest renewable energy legislation, these are not the best of times for the clean energy industry in Washington -- unless, of course, you're in the biofuels business. Reuters reports that the U.S. Department of Agriculture is throwing another $1.5 billion at the industry in an effort to meet congressionally mandated targets for the production of still-commercially-unproven advanced biofuels by 2022. As for the 54-cents-a-gallon tariff on imported ethanol -- a reliable source of teeth-grinding for Brazil's government and sugar cane industry -- Agriculture Secretary Tom Vilsack says it's probably sticking around, though it's likely to be phased out in the future. File that in the "I'll believe it when I see it" folder.
Chevron drills deeper. Well, that didn't take long -- barely a week after the Obama administration lifted its moratorium on deepwater drilling in the Gulf of Mexico, Chevron announced Thursday that it would develop two fields in the Gulf estimated to contain some 500 million barrels of oil. The project is pegged at $7.5 billion, and would involve drilling wells deeper than BP's ill-fated Macondo operation. "In the end, the United States needs the oil and gas and other countries need the oil and gas, and some of the best places to explore are deepwater environments," Bobby Ryan, Chevron's vice president for global operations, told the New York Times' Clifford Krauss.
CNOOC, Statoil Invest $1 billion in south Texas' Eagle Ford oil shale. Guess who will be scrutinized and who won't? The betting is that the Chinese National Offshore Oil Corp. will not suffer another fiasco like in 2005, when it lost in its attempt to land Unocal. This time it will manage to hold on to its investment, in this case a $1.1 billion buy-in into the scorching hot shale bonanza. Yet some analysts say that election-year jingoism in the United States could again leave China out in the cold. Ditching the deal will be difficult, however, since it was announced on the same day -- Oct. 10 - that Norway's Statoil unveiled its own, $1.3 billion deal with Talisman involving another section of the Eagle Ford field. Given the continued interest of U.S. energy companies in China, the Administration and Congress may have to tough out any instinct to scuttle the CNOOC project.
IEA Bumps Up Oil Demand Forecast for 2010, 2011. The Paris-based International Energy Agency lent credence to those who believe that the global economy is slowly recovering with its much-watched oil report. The agency said increased demand in both developing and industrialized countries means the world will use 86.9 million barrels a day this year, 300,000 barrels a day higher than previously forecast, and a full 1.5 million barrels a day more than last year's recessionary pullback. Next year, the IEA predicts, demand will rise another 1.3 million barrels a day. What does this mean? Not lower gasoline prices at the pump, that's for sure. Possibly, however, that the record inventories of oil around the world will start falling, and put a floor under what this year has been a volatile market. Reports by Deutsche Bank, France's Total and a couple of think tanks have foreseen comparatively high oil prices headed into the middle of the decade, before falling again, and this could be the start of that climb.
Oil: another target in the Afghan war. Militants linked to the Taliban have spent much of the last 10 days or so blowing up NATO oil and fuel tankers plying routes from Pakistan into Afghanistan. Today there was another attack in the Khyber Pass leading from the Pakistani city of Peshawar into eastern Afghanistan near Jalalabad, where two died in an attack on a NATO fuel truck. It is a time-tested strategy -- war combatants have been targeting each other's fuel supplies ever since Winston Churchill triggered the age of strategic oil just before the outbreak of World War I. Over at Wired's Danger Room blog, Katie Drummond writes of a three-mile-long jam of NATO fuel trucks on the very same route (the piece includes must-see satellite images of the bottleneck by DigitalGlobe).
Moratorium lifted in the Gulf of Mexico. Taking no chances with control of Congress on the line in Washington, President Barack Obama lifted a moratorium on drilling in the Gulf of Mexico more than a month before scheduled. Six months after five million barrels began spilling into the Gulf from BP's Macondo well, the administration said that oil companies again can drill in both shallow and deep water, though under a tighter regulation regime, and with more surprise inspections. At Investing Daily, Jim Fink calls it Obama's "October Surprise." But Obama was wrong if he thought the move would silence the hecklers. Over at the State Column, a still-dissatisfied Louisiana Gov. Bobby Jindal took a swipe at Obama and his "harsh," "job-killing," "arbitrary," and "capricious" decisions regarding the Gulf.
The geopolitics of energy has rarely seen such a crowding of potentially disruptive events at the same time -- the Texas shale-gas breakthrough; the Qatari liquefied natural gas behemoth; the global push for electric cars; and Iraq's ambitions to multiply its oil production. What separates these from research into renewable fuels such as algae is that they are not notional -- they are really happening. Should they reach their potential and converge, they will shake up the geopolitical order as we know it.
But will they do so? As regular readers of this blog know, I think that these shifts are changing geopolitics as we speak, the most visible evidence being Russia's much-reduced fear factor in Europe. But it's useful to heed cautionary voices -- though even there, dispassionate doesn't always mean unemotional.
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As the saying goes, people gravitate to public service to do good, and stay on to do well. In any case, that apparently is Peter Galbraith's motto. In the 1980s, this foreign policy maven (and son of economist John Kenneth Galbraith) became known for his part in exposing Saddam Hussain's gassing of the Kurds, and for being one of Benazir Bhutto's best allies in America; in the 1990s, he was a key diplomat in the Balkans; and most recently, he was fired as deputy United Nations envoy in Afghanistan, then accused the Kabul government of massive fraud in the 2009 presidential election.
Late last year, we learned from the work of journalists at the Norwegian newspaper Dagens Naeringsliv (Galbraith's wife is from Norway) and the New York Times that Galbraith also has cashed in on his long work in Kurdistan. After the 2003 U.S. invasion of Iraq, Galbraith was instrumental in Kurdistan gaining as much independence from the central government in Baghdad as it did. Now we know fairly well how much Galbraith's work was worth -- between $55 million and $75 million, as established yesterday by a British court presiding over a commercial lawsuit.
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Today, the Taliban set 22 NATO fuel tankers ablaze in the southern Pakistani border city of Quetta. That's a day after a fuel tanker was blown up at Torkham, the border post leading into Afghanistan. On Monday, the Taliban set 20 NATO oil tankers afire in Rawalpindi, outside the Pakistani capital of Islamabad.
In all, the Taliban's oil war has gone on for a week straight. This is a page straight out of the histories of the two world wars, in which access to -- and the absence of -- oil was the deciding factor in both making and breaking enemies.
Until now, the attacks have been explained as the Taliban capitalizing on a standoff between the United States and Pakistan over Pakistani casualties in drone attacks, to which Pakistan has responded by closing the border at Torkham, and leaving the fuel trucks exposed. But that doesn't explain today's attack in Quetta.
In fact, as the U.S. military has clearly documented, long fuel convoys have been among the main sources of American casualties in both Iraq and Afghanistan. The Taliban are Exhibit No. 1 as to why the military is working to untether itself from fossil fuels.
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In the world of oil reserve forecasting, Iraq is hunky, handsome, and -- to its dissatisfaction -- often overlooked. Today, it sought to rectify this negligence with the announcement of a whopping 24 percent increase in its estimated reserves. With a poke in the eye to a traditional rival, Iraq's oil minister said the country had overtaken Iran as the world's fourth-largest petrostate, with 143 billion barrels of oil, or more than half of Saudi Arabia's mother lode.
Hussain al Shahristani appears to be targeting two audiences with his announcement, write Bloomberg's Kadhim Ajrash and Nayla Razzouk: cash-rich foreign oil companies and, more importantly, the Organization of Petroleum Exporting Countries (OPEC), which at some point will reassign Iraq a production quota.
Bluntly speaking, Shahristani was giving the following notice to OPEC: We are big, really big, and can shake up global oil prices if left to our own devices. Meaning that the house of petulance and jealousy that is OPEC is going to have to move back and create a significant space for Iraq, which has ambitions of producing 12 million barrels of oil a day, and might get halfway there. (Currently, Iraq produces about 2.4 million barrels of oil a day.)
Not everyone is impressed. Reuters, for example, queried a number of nonplussed industry analysts. Bassan Fattouh, at the Oxford Institute for Energy Studies, noted that OPEC determines quotas based on actual production, not reserves. "So I'm a bit surprised by the statement," Fattouh told Reuters. "I expect OPEC to continue having a wait-and-see approach and deal with this when Iraqi output and exports actually start increasing." Andy Sommer, of the Swiss trading firm EGL, agreed. "I do not see Iraq getting any OPEC quota for the time being until production reaches something like 4 million barrels per day, which is similar to Iran's production. … Everyone knows Iraq needs every penny it earns from oil to rebuild the country."
Phil Flynn, an analyst with PFG Best, is impressed, but for different reasons, he wrote in his daily column today. "Oh well," he said, "another setback for peak oil theorists."
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Petrobras generates $70 billion in share issue. Petrobras finally made its long-anticipated share offering yesterday, announcing the sale of $70 billion of stock in the largest share issue in world corporate history. Despite earlier concerns over mounting debt, investors were attracted to the Brazilian energy company due to its enormous offshore oil fields, which at 50 billion barrels are the largest discovered in the western hemisphere since the 1970s; assuming oil prices stay above $45 a barrel, Petrobras could join the ranks of Saudi Aramco as one of the world's leading oil producers, according to the Financial Times Lex Column. The biggest winner in the deal is the Brazilian government, which will increase its stake in Petrobras from 40 to 45 percent in exchange for the exclusive rights to 5 billion barrels of oil. All eyes are now focused on how Brazil will manage to balance its rapid economic growth with the potentially harmful economic effects that come with being a major oil exporter, though the country's finance minister confidently pronounced that Brazil will avoid the "oil curse" that has plagued other exporters.
Moscow hosts dialogue on Arctic oil and gas. Three years after a Russian submarine planted a Russian flag on the seabed beneath the North Pole, an international conference met this week in Moscow to discuss rival claims to the Arctic Ocean's potentially lucrative oil and gas resources. The stakes from the dialogue are high, as the U.S. Geological Survey has estimated that 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas could lie under the Arctic's surface, about a quarter of the world's reserves of both resources. As Arctic sea ice continues to shrink, these resources will become more accessible, and the countries bordering the region have begun to assert sovereignty over areas with no discernible geographic boundaries. Russia has been at the forefront of the push to carve up the region, first through the flag-planting episode and now by spending $64 million to prove that the disputed Lomonosov Ridge, an undersea mountain range near the North Pole, is Russian territory. The area lies outside the 200-mile range established by a U.N. convention, but Moscow is intent on its claim. Yesterday, Russian Prime Minister Vladimir Putin urged delegates from Canada, the United States, Norway, and Denmark to come to a deal on dividing Arctic energy resources. Whatever the outcome of the talks, the Arctic looks likely to remain at a focal point of geopolitical jockeying for years to come.
World's largest offshore wind farm opens. On Wednesday, Swedish utility giant Vattenfall officially inaugurated its Thanet wind farm, consisting of 100 wind turbines off the coast of Kent in southeast England. The turbines, which generate enough electricity to power 200,000 homes, are located seven miles offshore and spread out over a 35 square mile area. The completion of this project brings the United Kingdom's power generated from wind power to 5 gigawatts, enough energy to power all the homes in Scotland, while moving Britain further towards the European Union target of generating 15 percent of its energy needs from renewables by 2020.
Ghana and China ink oil and gas deal. The government of Ghana this week signed a series of deals accepting a total of $15 billion in loans from Chinese state banks, with $3 billion of the funding earmarked for infrastructure improvements in Ghana's burgeoning oil and gas sector. Ghana is set to export its first oil later this year, and speculation arose of a Chinese loan offer following a dispute between Ghana and Texas exploration firm Kosmos Energy over the sale of lucrative Ghanaian oil leases. The loans will be repaid to Beijing through commodity exports, following a similar loans-for-resources model that China has deployed throughout Africa.
Save the incandescent! House Republicans Joe Barton, Michael Burgess, and Marsha Blackburn introduced a bill this week that would roll back impending regulations designed to replace the venerable incandescent light bulb with more energy-efficient compact fluorescent light bulbs, or CFLs. Under regulations adopted by the 2007 Energy Independence and Security Act, beginning in 2012 all light bulbs sold in the United States must meet minimum efficiency standards, which are likely to push retailers to gradually stop selling incandescents in favor of CFLs. Congressman Barton and others supporting the bill have raised concerns of job losses, citing the closure this month of the last General Electric incandescent light bulb production facility in the U.S. the shuttering. Most CFL production, by contrast, takes place in China.
Oil rebounds amid new economic optimism. A rally in stock prices this week sent crude oil prices back up above the $75 mark this week, closing at $76.50 a barrel in New York on Friday. Favorable reports of business capital spending from the Commerce Department, combined with a falling dollar -- it's at a six-month low -- contributed to the gains, the highest in two weeks. But high American inventories seem set to put a cap on the price rise, with most analysts this week agreeing that oil will hover around the $75 marker. "King Abdullah said he wanted $75 oil," Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, told Bloomberg. "It's good to be king. When you're Saudi Arabia and have the ability to put oil on the market and take it off in the quantities you want, you can pretty much have what you want." OPEC, not surprisingly, announced that it would increase crude shipments later this year.
The shrimpers of Louisiana will be some time recovering from the Gulf of Mexico oil spill, even though BP has finally declared the Macondo well dead. But, contrary to expectations, the spill has turned out to be a catastrophe neither for the company, nor the industry as a whole. As the Financial Times' Ed Crooks reports, the 152-day-long crisis is but "a bump in the road" for the industry. So my question is, why is Exxon Mobil in trouble?
Consider Exxon CEO Rex Tillerson, who, like his predecessors going back to John D. Rockefeller 150 years ago, has inspired fear among rivals and those merely observing the company; most industry analysts and journalists routinely offer Exxon kid glove treatment in order to avoid its wrath should they diss it. Yet people who wouldn't ordinarily do so are starting to diss the company.
Just last week, Paul Sankey, a Deutsche Bank oil analyst who for some 18 months has been probably Wall Street's loudest cheerleader for a company he calls The Big Unit, downgraded Exxon shares from "buy" to "hold." Sankey is one of the best analysts on the Street, and Steve Gelsi of Marketwatch has blamed his assessment for a new slide in Exxon's share price. Sankey was followed the next day by a similar call by Jacques Rousseau at RBC Capital.
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Macondo well to be "declared dead" this Sunday. Five months after a blow-out caused 4.9 million barrels of oil to spill into the Gulf of Mexico, the Macondo well is on track to be permanently sealed off by Sunday, according to National Incident Commander Thad Allen. On Thursday the relief well, which BP has been drilling since May 2, finally intersected with the blown-out well where it meets the oil reservoir some 2.5 miles below the Gulf's surface. Cement and heavy drilling mud are now being pumped down the relief well to kill the Macondo well once and for all. As the well is sealed, BP expects to scale back its spill response, a sign that cheered investors and ratings agencies on Thursday. Meanwhile, embattled BP CEO Tony Hayward, who will be stepping down from the post on October 1, made his first public appearance in weeks on Wednesday when he testified before a U.K. parliamentary committee. One week after BP published a report on the causes of the Gulf oil spill, Hayward told the committee that the company had exhibited "a lack of rigor and a lack of oversight of contractors," admitting that there had been a level of industry "complacency" towards offshore drilling risks prior to the accident.
China's coal and carbon conundrum. As Europe takes steps to scale back its coal usage, China remains as dependent as ever on black diamonds to fuel its rapid economic growth: The International Energy Agency has predicted that Chinese coal usage will more than double by 2050. After IEA executive director Nobuo Tanaka outlined this week that China's adoption of carbon capture and sequestration technology would be crucial to combating climate change, Elisabeth Rosenthal at the New York Times Green blog describes the challenge of making this adoption happen. Carbon sequestration is still an expensive technology, and it's not likely that China will be willing to embrace it on the massive scale needed to reduce its carbon emissions, unless it has outside investment. Beijing is already facing huge problems of meeting growth and energy efficiency goals at the same time, but given that it has poured $1.5 billion into green technologies, including $300 million for electric cars, attempts to mitigate the effects of its primary energy source may not be too far off.
A new use for those old oil wells. While the Interior Department on Wednesday ordered all non-producing oil wells in the Gulf to be permanently plugged, these wells might prove to be a new business opportunity for carbon capturing technology. BP and Shell may begin storing carbon dioxide by pumping the greenhouse gas into old oil wells in the North Sea, which could net them a sizeable profit as they work to extract the remaining oil in these wells. Though the costs of capturing, transporting, and pumping carbon dioxide into the wells remain high, turning older oilfields into CO2 storage sites could be a viable means of reducing carbon emissions.
As if the oil wasn't enough... Khalid al-Falih, the head of Saudi Aramco, revealed this week that Saudi Arabia could hold massive reserves of unconventional gas, totaling in the trillions of cubic feet. This is good news for the kingdom, which has lately been pouring more money into gas development than into oil, in a bid to satisfy its rapidly growing domestic energy demand. Burning oil for power generation is expensive and polluting, and a shift to natural gas-fired power plants would free up more oil for export, where profit margins are higher. However, developing the unconventional gas reserves poses new challenges; "fracking," the procedure used to access shale gas in the United States, requires large amounts of water -- clearly a problem for a country where water may be more valuable than oil. Aramco says it is working with the major oil companies to look at alternative extracting solutions.
The West's geothermal boom. Clean, renewable, and reliable, geothermal energy seems to be the perfect green energy source, but it has usually been difficult to develop due to the costs of locating geothermal resources on a commercially viable scale. However, technological advancements and government funding are giving geothermal energy a boost in the American West. Geothermal producers have been using such methods as aerial mapping and reflection seismology -- which uses man-made vibrations to map out geothermal resources underground -- to reduce exploration and development costs. At the same time, millions of dollars in federal grants towards renewable energy development, as well as state renewable portfolio standards, are suddenly making geothermal energy an attractive alternative in the West, where the U.S. Geological Survey estimates that there could be 30,000 megawatts of untapped geothermal power. Having proved itself in Iceland, geothermal energy could soon become a major electricity source for Nevada, Utah, and California.
Oil slips on lagging economic indicators. After topping $77 earlier this week, oil prices began a long slide, closing the week at $73.66 on Friday in New York. Crude saw a 3.7 percent loss for the week, the biggest weekly decline since mid-August and reaching its lowest price so far this month. Earlier in the week, pipeline operator Enbridge Energy reopened a major pipeline from Canada to the U.S., releasing tension in the markets that had helped push prices up last week after a leak near Chicago forced the pipeline's shutdown. Rising U.S. stocks and a falling dollar kept crude above $75 until Thursday, but continued high U.S. oil inventories and reports showing a drop in consumer confidence (indicating a negative economic outlook) contributed to a fall in prices towards the end of the week. Analysts continue to forecast oil in the $70 to $80 range, with Credit Suisse revising its estimates for 2011 prices down from $80 a barrel to $72.50.
We know Iran as a nuclear story -- Israel, the United States, and much of the rest of the West are convinced that Tehran is uncomfortably close to deploying a workable atomic weapon, while President Mahmoud Ahmadinejad delights in tweaking his detractors with, at turns, vows to continue the country's nuclear activities, and to attack Israel. The latest installment is a dust-up over access rights for international inspectors.
But Iran is also an energy story. The United States spent much time trying to prevent Iran from activating its long-in-the-works Bushehr nuclear power station, which, with Russian expertise, will begin to produce electricity in the next month or so.
Having lost that game, the Obama administration is working to shut down Iran's life-blood oil and gasoline complex, testing whether the Iranian government is prepared to sustain an economic body blow -- and thus risk local public support -- in order to preserve its presumed nuclear program. The Financial Times' Roula Khalaf reports that the U.S.-advanced sanctions are biting: Iran is being forced to stop making potentially crucial chemicals, and instead convert those plants to gasoline production. Likewise, Javier Blas reports in the FT that banking and shipping restrictions are making it harder for Tehran to sell its oil abroad.
But let's face facts: Around the world, nuclear weapon capabilities play well to domestic audiences -- in India, Israel, Pakistan, and in Iran. So does confounding the desires of great powers. Karim Sadjadpour, of the Carnegie Endowment for International Peace, told Khalaf that a plummet in oil prices under $50 a barrel might turn Iran's head, since it wouldn't be able to pay its bills. There is something to that -- Vladimir Putin and Hugo Chavez have become more agreeable negotiating partners when oil prices have dipped. But given Ahmadinejad's record, and his apparent support within the senior clergy, it's hard to see these measures resulting in a nuclear stand down.
Finally getting Russia to turn on Bushehr has been a key public relations development for Iran's leadership. I talked to Dan Byman, an Iran expert and my colleague at Georgetown University. "It showed [Iranians] that they are escaping from isolation," Byman told me. "It's something that you play up domestically."
So we have the continuing game of chicken. Iran says its nuclear efforts are peaceful; the Obama administration says "prove it," and meanwhile threatens to make the country go dark.
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Happy birthday, OPEC! The Organization of Petroleum Exporting Countries celebrates its fiftieth anniversary this coming Monday. Responding to a unilateral cut in the price of oil by the major Western oil companies, oil ministers from Saudi Arabia, Kuwait, Iraq, Iran, and Venezuela met in Baghdad for four days beginning on September 10, 1960. The result was OPEC, which was to forever change the oil industry by redefining the relationship between the oil companies and the exporting countries. Previously, oil-producing countries had granted concessions to the major oil companies, sharing in revenues but allowing the companies to determine the rate of production. The founding of OPEC marked the beginning of a shift in power towards the countries themselves, which reached its apogee in the 1970s with the 1973 oil embargo. OPEC has expanded its membership to twelve countries since its founding, and with the decline of oil supplies outside its member countries, it remains arguably as important and influential as ever. That importance also ensures that it will continue to be a lightning rod for criticism.
U.S. steelworkers cry foul over Chinese clean energy subsidies. The United Steelworkers union is filing a trade suit against China, accusing Beijing of maintaining illegal subsidies on its clean energy industries. The union alleges that the subsidies are giving Chinese exporters of solar panels and wind turbines an unfair advantage, violating World Trade Organization regulations. The trade dispute comes as China has rapidly become a hotspot for green energy investment and production, and follows Beijing's announcement earlier today of a $20 billion trade surplus for August 2010. As the White House decides whether or not to press forward with the case, the debate over China's trade policies once again returns to center stage, with Keith Bradsher of the New York Times examining in depth the country's "aggressive government policies" in the clean energy sector. Dissenting from the accusations towards Beijing is UCLA environmental economist Matthew Kahn, who points out in a blog post that Chinese prowess and innovation in clean energy will ultimately benefit both U.S. consumers and producers.
Kuwait's nuclear energy push. Kuwait unveiled plans on Thursday to construct four nuclear reactors for power generation by 2022. The decision to move into nuclear energy stems from burgeoning electricity demand -- expected to grow by 7 percent per year up to 2030 -- as well as expectations of oil prices above $50, which makes Kuwait's oil more valuable as an export than as an energy source. Kuwait's nuclear energy committee is expected to issue a "roadmap" for its nuclear development by January, and it has just signed a cooperative agreement with Japan to help it gain expertise in nuclear energy. The Gulf state joins a broader push into civilian nuclear energy in the Middle East, as Saudi Arabia, Jordan, and the United Arab Emirates begin to develop their first nuclear power plants.
The dive into deepwater continues. Chevron and BP have been approved by the Chinese government to take operating stakes in new deepwater drilling projects in the South China Sea. The two majors will operate alongside China National Offshore Oil Corporation to develop any oil found in the deep-sea blocks, which range from depths of 980 to 6500 feet. BP's damaged reputation after the Gulf of Mexico oil spill has evidently remained intact in China, and CNOOC executives have welcomed the addition of the Chevron and BP teams to the South China Sea projects.
Rewarding, rather than picking, winners. Ugo Bardi, a chemistry professor at the University of Florence and peak oil theorist, argued on the Oil Drum this week that it might make more sense for governments to award prizes, rather than research grants, to spark innovation in renewable energy. In the case of research grants, the government decides the themes on which the research should focus before any funds have been allocated, and this narrowing of the parameters may do little to actually achieve a marketable result from the research. But if prizes are awarded for innovations in green energy and energy efficiency research, the funds go to the accomplishment itself, and not the promise that it may or may not happen. Using the example of Europe's feed-in tariff system, Bardi claims that prizes are more effective in stimulating developments in green energy because they reward success and not failures.
Oil rallies to its highest levels in a month. Oil prices climbed above the $75 mark for the first time since August 11 this week, ending the week at $76.49 a barrel in New York. A variety of factors contributed to the rally. Chinese imports of crude climbed 10 percent in August from July levels, while the International Energy Agency revised its 2010 oil demand forecast upward by 50,000 barrels per day. Reports from the American Petroleum Institute revealed a decline in U.S. oil stockpiles, sparking expectations of increased future demand. And the dollar weakened slightly, driving traders back into oil. A final contributor to the 3 percent price surge today was the shutdown of a major pipeline from Canada, which sprung a leak near Chicago. Still there remains a generally unchanging view among analysts that the economic fundamentals of oil demand are weak, and some models show oil hitting $50 a barrel this winter.
Would you like a wind turbine with that inexpensive and fashionably Scandinavian-looking bookshelf? Furniture giant Ikea announced on Wednesday that it will acquire six German wind farms in order to keep up its company goals of generating its complete electricity needs from renewable energy sources. It's unlikely that this move towards electricity self-sufficiency will make the jump to other retailers, but the image-conscious Swedish company is hoping to be a trend-setter.
Greenland or bust! On Tuesday the U.K. exploration firm Cairn Energy revealed that it has discovered natural gas in Baffin Bay, just off the west coast of Greenland. It's too early to tell whether the area contains commercial quantities of oil and natural gas, but the find is encouraging. The U.S. Geological Survey has estimated that the waters off the island could contain as much as 50 billion barrels of oil and gas, while melting ice has suddenly made a once-inhospitable area more viable for offshore drilling. Edinburgh-based Cairn is optimistic that the basin could be a major find, and other energy companies have hurried north to apply for exploration licenses. One company that won't be joining them is BP, whose less-than-stellar recent reputation with offshore drilling has forced it to back off. But despite mounting environmental groups' opposition to the drilling and the presence of a renegade ice island floating south, energy companies are likely to continue to flock to what could be the next frontier in oil and gas.
Nigeria's electricity privatization gamble. Nigerian president Goodluck Jonathan announced yesterday that the country plans to privatize the state-owned power monopoly and attract foreign investment in the electricity sector. Electricity demand in Nigeria, the most populous country in Africa, has always strained the country's inadequate national grid thanks to heavily-subsidized prices, and power outages are common. Abuja hopes to drum up some $10 billion in foreign investment to make the necessary upgrades, and already investors from Canada, Turkey, Saudi Arabia, India, and China have expressed interest. In keeping with his other energy reform efforts, President Jonathan is trying to boost his reform credentials as his party heads into national elections in January 2011. Overcoming Nigeria's chronic power crisis would be a critical step forward in the government's pursuit of growth and development.
An unlikely partner in drilling safety. Lee Hunt, president of the International Association of Drilling Contractors, said on Wednesday that he would welcome Cuban state oil company Cubapetroleo (Cupet) to join the organization as "a member of the international drilling community." Hunt and other association officials were visiting Havana this week as Cuba prepares to drill a series of test wells in its section of the Gulf of Mexico over the next two years. Cupet's drilling partners in the project are all members of the industry group, which wants to bring in the Cuban company to ensure that drilling safety and technical standards are met. But the Houston-based organization will have to secure approval from the Obama administration first. While there are no signs that the 50-year old U.S. trade embargo will be lifted any time soon, informal industry cooperation over drilling safety standards could be a modest first step towards some normalization of commercial relations with Cuba.
Drilling ban's diminished impact. Concerns about the Obama administration's extended moratorium on offshore drilling may have been premature, according to John Broder and Clifford Krauss at The New York Times. After much protest from drillers and supply firms, who argued that the ban would endanger thousands of industry jobs and drive drilling from U.S. waters, the impact of the moratorium has been milder than expected. This is because oil companies have used the drilling freeze to perform needed maintenance and upgrades to their rigs, while concentrating more on onshore drilling. Job losses have been far below what the industry claimed they would be. Administration officials have also repeatedly hinted that the ban might be lifted before its November 30 expiration date. Meanwhile, the BP spill seems to have had little to no effect on the progress of other global offshore drilling projects, although other governments have announced new regulations and safety reviews.
China and South Africa ink nuclear energy deal. China and South Africa announced a series of high-profile business deals on Tuesday, one of which could see China National Nuclear Corp. construct a nuclear-power plant in South Africa. Talks are under way with the Chinese state-owned nuclear company to import nuclear technology to South Africa, while a banking partnership between the two countries would finance any joint nuclear efforts. The deals come as South African president Jacob Zuma visited Beijing this week to promote commercial relations with Beijing, South Africa's top trading partner. China has been trying to position itself as a leading exporter of nuclear technology, while continuing its broader strategy of strengthening its presence in Africa.
Could China push the world into alternative fuels? The Council on Foreign Relations' Geo-Graphics blog has an illuminating post this week depicting the potentially sobering effect of China's insatiable demand for oil. According to the chart, once a country's per capita income hits $15,000, oil consumption growth tends to increase exponentially. So far Chinese oil consumption has shown no signs of slowing down, but its per capita oil consumption remains less than 0.1 barrel per person per day, compared to the nearly 0.7 barrels per person per day by the United States. But as China approaches the $15,000 GDP per capita mark, world oil supplies could be in for a shock, as the projected increase in demand would necessitate unrealistic increases in global oil output. If China follows this consumption pattern, alternative energy sources may be looking like less of an alternative and more of a necessity.
Oil prices rebound, gas moves to new low. Crude oil prices were staring at a third straight week of declines before rebounding towards the end of the week, closing at $75.17 Friday in New York. Plummeting U.S. housing purchases and continued high U.S. stockpiles pushed oil prices to an 11-week low of $70.76 on Wednesday, before a reduction in jobless claims, a weaker dollar, and Friday's speech by Fed chair Ben Bernanke renewed confidence in crude. But a weak U.S. economy remains the primary concern for oil analysts, and reports of cooling Chinese oil demand are also likely to encourage bearish sentiments. Accordingly, OPEC has already announced a 0.3 percent cut in crude shipments. High stockpiles of natural gas also caused that commodity to take a beating this week, as prices fell to their lowest levels in nearly a year. And gasoline prices are also in a downward spiral, which should provide some added relief for drivers getting away this Labor Day weekend.
When the United Nations Security Council voted to impose its fourth round of sanctions on Iran in June, Iranian president Mahmoud Ahmadinejad -- always a guy with a way with words -- likened the resolution to a "used handkerchief," incapable of having any real effect on the country. Two months later, and after the opening of Iran's first nuclear power plant, Ahmadinejad's vice president is maintaining that Iran "won't bow to pressure" from the sanctions, thanks to the "self-determination of the Iranian nation."
Public defiance notwithstanding, Tehran's leaders have reason to be genuinely worried -- the sanctions are serious trouble for Iranian energy interests. With vast oil and gas reserves and ready buyers in the emerging world, energy was supposed to be the get-out-of-jail-free card for Iran, but it hasn't exactly worked out that way. Earlier this month, the National Iranian Oil Company announced that it was suspending development on two major liquefied natural gas (LNG) projects. Officials from the company have cited costs and complexity, but the announcement should come as an implicit recognition that the sanctions have started to bite. It also makes Iranian officials' onetime claims that the country would soon rival Qatar's in LNG exports seem less plausible than ever.
BEHROUZ MEHRI/AFP/Getty Images
The countries of the Middle East might seem like the last places that would embrace non-hydrocarbon energy sources. With a total of 55 percent of the world's crude oil reserves and 41 percent of its natural gas, why should they? But the past year has seen a major push towards nuclear and renewable sources of energy in the Middle East, as the region's states work to solve the problems of burgeoning domestic growth through energy diversification.
In last week's Bloomberg Businessweek, Stanley Reed described the rise of the "nuclear option" in the United Arab Emirates, Saudi Arabia, and Jordan. At the forefront is the U.A.E., which placed a $20 billion order for four nuclear reactors from Seoul-based Korean Electric Power Corp. last December. The Saudis have followed with a plan to construct an entire city focused around nuclear energy, while Jordan's extensive nuclear ambitions, fueled by the discovery of large uranium reserves, see the country satisfying a third of its electricity demands with atomic power by 2030.
Remember the natural gas dispute between Israel and Lebanon? Back in June, Israel announced its second large offshore natural gas find in 18 months, to which Lebanon immediately responded with a stern warning not to develop any gas in Lebanese waters. Then Israeli Infrastructure Minister Uzi Landau escalated the tension further by threatening force against Lebanon to protect the fields. Now Beirut is raising the stakes again by moving forward with plans to authorize exploration of natural gas fields within its maritime boundaries, boundaries which happen -- would you expect any less in the Middle East? -- to be disputed.
Israel's movement to develop the huge Tamar and Leviathan gas fields -- which could hold as much as 23 trillion cubic feet of natural gas -- has spurred Lebanon's parliament to move forward on a law enabling offshore exploration, which it passed today. It is part of long-delayed oil legislation that has been debated for over a decade, but went nowhere due to Lebanon's notoriously fractious politics, government instability, and myriad external distractions. But the gas discovery has galvanized Hezbollah and its allies in the parliament's opposition, including the Amal Party, who pushed the government to pass the laws necessary to prevent Israel from "stealing" Lebanese resources.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.