Look for President Barack Obama to order a significant release of oil from the Strategic Petroleum Reserve, the emergency stockpile held by the federal government. At most, it may trigger a short-lived drop in today's high gasoline prices. But Obama is battling history: Since Richard Nixon, gas prices have snuck up and startled otherwise occupied presidents, and led them into a flurry of actions that, while usually ineffective, have the virtue of making them look like they are doing something. Now is Obama's turn at the rite.
In a news conference yesterday, Interior Secretary Ken Salazar reached further into the past, noting that "all the way back to 1857, but bring it into the post-World War II era, you see the price shocks for both oil and gas that have occurred in this country and the different responses that are made." Salazar might have added that this vexing malady has afflicted not just U.S. leaders, but presidents and prime ministers around the world, most recently Nigerian President Goodluck Jonathan (and, pictured above, British Prime Minister David Cameron).
But the pursuit of sanctuary in history will do little good at the ballot box: Fresh polls in the New York Times and the Washington Post suggest that gas prices might be contributing to a drop in Obama's approval numbers. Though Obama spokesman Jay Carney yesterday assured reporters that "the Administration is not focused on polling data," that is belied by an outbreak of news conferences by members of Obama's team. The White House also yesterday released an update on its energy policy.
Obama's opponents have the knives out. One accusation is that Obama has manufactured high prices to encourage motorists to buy electric cars, to which Carney told reporters:
That is categorically false. This President is absolutely committed to reducing -- to doing everything we can to mitigate the effect of higher gas prices on American families and to lower gas prices. What he is not willing to do is to look the American people in the eye and claim that there is a strategy by which he can guarantee the price of gas will be $2.50 at the pump. Any politician who does that is lying, because it just -- that strategy does not exist. It is a simple fact that there is no such plan that can guarantee the price of oil or the price at the pump.
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As O&G readers know, I've been in Houston at CERA Week -- the Davos of the energy industry, hosted by oil historian Daniel Yergin -- for the past five days. So in today's wrap, the highlights of the conference:
Emergencies drive the market: The news over the last 24 hours punctuated the general message of CERA Week: Bad economic news sent oil prices down, unrest in Saudi Arabia's oil-rich Eastern Province pushed them back up, then the 8.9 magnitude earthquake off Japan's coastline pushed them back below $100 a barrel. Finally, the oil price settled just a bit down, just over $100. The message: the market is incredibly jittery, and is holding pretty close to $100 a barrel regardless of the news.
As oil analyst Ed Morse told me, oil was probably overvalued prior to the Middle East unrest. But the turmoil there has fundamentally changed the political calculus, and with it the oil market for around the next decade and perhaps longer. A risk premium is going to remain in the price, especially since real trouble struck Saudi Arabia yesterday, as I wrote. So gasoline prices, too, are going to stay relatively high (that's a Paris gas station pictured above). All in all, as Christophe de Margerie, the CEO of France's Total, said, the oil industry is in a serious fix.
But what's notable is how muted the response has been in the market. Step back and look at the absolute price movements so far since the turmoil in the Arab world began. If we had just one of these events back in the spare-capacity-short year of 2008,we would have seen huge price movements -- $10 and $20 a barrel. Instead, we are getting shifts of two or three dollars one way or the other. One reason is that there is global surplus production capacity of 3 or 4 million barrels a day that can be brought to bear; another is that, in the short term, the United States and Japan can swamp any sudden oil shortage by releasing millions of barrels of oil from their strategic reserves. These petroleum reserves -- totaling 1.6 billion barrels around the world -- cannot create long-term price stability, because traders will always bet on spare capacity in an emergency. But they can smooth out the bumps.
The next emergencies? Where are the predictable next bumps? Today's planned Day of Rage in Saudi Arabia became, as the Washington Post called it, a day of rest, and we cannot foresee natural disasters. Yet, some are attempting to quantify what is possible. Among those is Bloomberg, which has ranked 20 possibly troubled countries in a Combustibility Index. Of those, 18 are in the Middle East, but interestingly none of the big oil producers top the list.
The five most combustible countries, in descending order, are Libya, Sudan, Yemen, Syria, and Egypt. The bottom five among these combustible states, again in descending order, are Saudi Arabia, Morocco, United Arab Emirates, Kuwait and Qatar.
For the quants among you, the biggest component in the Bloomberg equation is repression, which accounts for 50 percent of the weight of the variables. (To calculate that, among the factors are the size of a country's military per capita, how a ruler came to power -- whether by vote, coup or assassination -- plus how long the ruler has been in power, and whether the ruler came from the military.) The other 50 percent includes GDP adjusted for purchasing power parity, unemployment, median age, income inequality and access to information.
Electric car realities: Another takeaway from the conference is how technological advances are shifting the energy equation, and geopolitics along with them. Among the technological changes are in transportation. I spoke with two big players in the electric-car space: Britta Gross, director of global energy systems for General Motors, and Steven Koonin, the U.S. undersecretary of energy for science. Both of them described the multi-year realities of creating a plug-in hybrid and electric-car industry. Gross said that one reason the GM Volt is currently so expensive is the carmaker's strategy of creating a "wow" factor for buyers -- carving out a market by loading up the Volt with exciting gizmos. When the next generation of the Volt comes out -- perhaps in five years or so -- it may have a lot fewer such electronics, Gross said, which will much-reduce the sticker price. In addition, the cost of parts will probably be less because there may be more competition among suppliers. Here are Gross' remarks:
Koonin, looking at the market from the perspective of a government goal of reducing oil consumption, said that much will be gained by simple efficiencies: 25 percent less gasoline will be used when cars are lighter and engines more efficient. He said that years from now, plug-in hybrids will penetrate a much larger segment of the market and cut more oil consumption. No one is certain that advanced batteries will ever be good enough to make a purely electric car commercially competitive, he said, but the performance of hybrids may mean that they won't be necessary. Here are Koonin's remarks:
Possible Putin shift in pipeline politics: For much of the last decade, Russia and the West have fought a pipeline war in Europe. Russia has sought to tighten its natural gas supply grip on Europe -- Russia's Gazprom supplies about 30 percent of Europe's gas -- by building yet another big pipeline into the continent, called South Stream. The West, led by the United States, has offered up a rival pipeline, called Nabucco, that would carry gas from the Caspian Sea states of Azerbaijan and Turkmenistan into Europe, and hence reduce the continent's dependence on Russian gas. This may sound mighty arcane, but the combatants of pipeline politics treat the game quite seriously.
In any case, Russian Prime Minister Vladimir Putin yesterday added new confusion to the state of play. He suggested that Russia may not build the pipeline after all, but instead a liquefied natural gas terminal that would ship Russia's gas to Europe by tanker. In an interview today, South Stream pipeline director Marcel Kramer told me that he has received no new instructions, and that he is proceeding with his existing orders to make the $21 billion pipeline work. He is attempting to get a final investment decision on the pipeline by the middle of next year so that it can be built by the end of 2015. Here is a clip from our conversation:
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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.
Drilling anywhere, any time: When in a negotiation, ask for the sky; perhaps you'll get half of it. So it is with the U.S. oil industry's chief lobbyist, Jack Gerard of the American Petroleum Institute. Interviewed by the Financial Times, Gerard says that the entire United States should be open for oil drilling, without exception. Just months after the unprecedented spill in the Gulf of Mexico, some might regard the position as a bit nervy. Not Gerard. "It is difficult to quantify how much increased production would affect imports," he told the FT, "but if companies had access to all U.S. areas now off limits, a substantial increase in domestic production would be possible." President Barack Obama has revived restrictions on offshore drilling on the U.S. East Coast, and new drilling in the Gulf of Mexico has been effectively frozen awaiting a decision on regulation of the area.
Another step toward speculation regulation: Three years ago, investor speculation rapidly drove global oil prices up to $147 a barrel, before it created a plunge to $32 a barrel. Amid another speculation-driven commodities price run-up, U.S. regulators have voted to impose caps on how much speculation a single investor can carry out. The vote in the Commodity Futures Trading Commission is not final -- that has to come later. But it would place position limits on bets on 28 commodities including oil, gas, gold, and certain foods. Such limits are required by financial-industry regulation approved by Congress last year.
Rare earths workaround: Toyota is trying to bypass a Chinese stranglehold on rare-earth elements by making cars that don't require them. Last year, China imposed a blockade on shipments of the elements to Japan, which uses them for high-tech products including missiles, windmills, advanced batteries, and hybrid vehicles. But blockades, sanctions, and shortages tend mostly to trigger inventiveness, and Toyota now says that it's close to a breakthrough in hybrid-electric motors that won't require rare-earth magnets, reports the Wall Street Journal. Rather than so-called permanent magnets, the motors would rely on electromagnets.
A new sultanate: Elections in the former Soviet Union are almost always scripted affairs -- in most cases, everyone knows who is going to win by a landslide before it happens. Such has been the case for the last two decades in oil-rich Kazakhstan, whose winner has always been President Nursultan Nazarbayev. But Nazarbayev appears to be dissatisfied with this state of affairs, and so a move is afoot to allow him to rule for another decade without the formality of the intervening two elections that are on the official calendar. The Parliament has voted to change the constitution to allow a public referendum on the question. If the referendum passes, Nazarbayev would be the first former Soviet leader to wholly dispense with the election charade.
Duke Energy's proposed $13.7 billion purchase of Progress Energy announced this morning could be a blow to Big Coal, which has ambitions to remain the planet's preeminent fuel for electric power. Both Duke and Progress have big ambitions for nuclear-fueled power plants, and Duke CEO Jim Rogers is among corporate America's loudest advocates for sharply slashed CO2 emissions.
Here is Rogers getting grilled by comedian Stephen Colbert:
|The Colbert Report||Mon - Thurs 11:30pm / 10:30c|
Much in the climate change arena has gone topsy-turvy in the last two years. Back in 2009, China and India seemed to be among the main roadblocks to a global accord on reducing the emission of heat-trapping gases; now, China is aggressively lowering its growth of CO2 emissions absent corresponding cuts in the United States. Back then, it was an article of faith that the U.S. -- the world's second-largest CO2 emitter -- was going to put a price on carbon, and lead a global campaign against Arctic melting; among the leading such voices were corporate giants including ExxonMobil. Now, climate skepticism is ascendant, Republican leaders vow to halt Obama Administration policy to begin regulation of CO2 emissions, and corporate green-speak is heard much less in the halls of power, as Anne Mulkern reported at Greenwire.
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Whoops -- Alaska is pouring more cold water on oil-futures traders with its latest pipeline mishap. Over the weekend, a leak shut off virtually all oil coming to the United States through the Alaska pipeline, which amounts to 3 percent to 5 percent of the total U.S. oil supply.
In 2008, such events were responsible for oil soaring to $147 a barrel and a huge increase in gasoline prices. Today -- the first day the market could provide its own response -- all we heard was a big yawn. Traders so far today have not even managed to push prices to $90 a barrel from their close at $88.03 last Friday.
As we have discussed, almost all the smart money is on oil prices going beyond $100 a barrel this year, with all the corresponding impact on the power and attitude of petrostates like Russia, Iran, Venezuela, and so on, not to mention the burden on already-weak economic growth and our own wallets. But price moves in that direction have been timid despite restrictions on Gulf of Mexico drilling and now this almost complete cutoff of Alaskan supplies. We are not quite back to 2008.
For the last year, Deutsche Bank's Paul Sankey, one of the best long-range energy minds on Wall Street, has been distributing a series of provocative, deeply researched, and forward-looking notes to clients under titles like "The Peak Oil Market" and "The End of the Oil Age." Last week, Sankey produced a sixth note called "2011 and Beyond -- A Reality Check." Among the takeaways: As of 2010, the new electric car age is coming upon us faster than expected -- far beyond this year's conspicuous arrival of the General Motors Volt and Nissan Leaf, and the race among the world's industrial nations to dominate this technology. Converging even more rapidly, says Sankey, are far higher oil and gasoline prices, starting in 2012. Such shifts could have enormous geopolitical ramifications -- as a consequence, some countries will become poorer, and some richer, with corresponding impacts on their global influence.
Starting with the second forecast from this 59-page report, 2010 has seen a comparatively gentle respite in an otherwise unprecedented, decade-long period of turbulence in oil markets. According to Sankey, this calm is about to break. Sankey's forecast is based on the salient factor of "spare capacity." (If you are already familiar with the term, skip to the next paragraph. If you aren't, read on.) This refers to how much oil the world's petrostates can produce above and beyond current demand. So for instance, Saudi Arabia pumps about 8 million barrels of oil a day, but has dug enough wells in enough new fields to produce 50 percent more than that -- or 12 million barrels a day -- if it needs to. That excess Saudi productive capacity of 4 million barrels a day, plus about 1 million barrels a day of extra productive capability elsewhere, adds up to a global surplus of about 5 million barrels a day of spare oil production capacity -- the available volume above and beyond the 87 million barrels of oil a day consumed around the world.
Price-setters -- meaning oil traders -- see a lot of spare capacity as a cause for calm. They remain serene in the face of bad weather, pirate attacks, or pipeline explosions -- the sort of events that, in the 2006-2008 period (when there was much smaller spare capacity) sent them into paroxysms of panic, and accordingly sent oil and gasoline prices through the ceiling. This was because no one could say whence oil would come to fulfill demand. Since the world now has a cushion, we have the relative tranquility of 2010.
But Sankey effectively says that it's been a false calm. Reality is about to strike, he says, based on the following math: Global spare capacity is actually not 5 million barrels a day, but 4 million barrels a day when one takes into account what countries really produce, versus what they report. From there, Sankey projects that global demand will rise by 2.5 million barrels a day next year, and an equal volume in 2012. Looking at the future through this lens, you can see how we will rapidly work through our spare capacity buffer, and arrive right back on the knife's edge.
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It seems much longer than eight months since the worst oil accident in history struck the Gulf of Mexico. Certainly BP wishes it was a lot further behind it, given that it is still working to raise $30 billion that it owes the U.S. government for a victims compensation fund and additional expected bills, with the potential for tens of billions more in penalties for the worst self-inflicted corporate disaster in recent memory (we can debate comparisons in the comments section below). The spill made a fall guy of Tony Hayward, ending his short career as CEO at the age of 53 and making him the second-straight BP chief executive after John Browne to collapse in a scandal (Beware, current BP CEO Bob Dudley: disasters can come in threes).
Yet eight months later, there has been almost no major fallout from the disaster for the oil industry, apart from a tighter production regime in the Gulf of Mexico: BP and everyone else continue to do business around the world, including in offshore zones. Which signals either a perception that BP handled the spill much better than the conventional wisdom suggests, or that Americans and the rest of the world are more inured to environmental disruption than they used to be. Most probably, it's the latter. But should that be the case? We discuss that question below.
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Five countries, oil entrepreneurs big and small, and activists of various types have all weighed in on the biggest remaining motherlode of energy on the planet: the Arctic. Climate change is opening up this region, which holds an estimated 25 percent of the world's remaining oil and gas, according to the U.S. Geological Survey. One principal question mark in this ballyhooed rush north has been the doubts of environmentalists, who note that in the case of a spill, the Gulf of Mexico would be child's play compared with the Arctic, where spills dissipate far less easily and cleanup efforts are far more difficult than they are on the Louisiana coast.
But this is just one of the challenges facing Arctic development. As the biggest oil companies in the world are finding, energy trends themselves are at least for now working against the Arctic. Specifically, billions and billions of cubic feet of natural gas could end up stranded in Alaska, Canada, and Russia because there is so much competing supply around the world.
In the Wall Street Journal, Phred Dvorak and Edward Welsch report on Canada's backing of a 740-mile natural gas pipeline from its Northwest Territories -- which border the Arctic -- to southern markets, including the United States. Called the MacKenzie Gas Project, this $16 billion pipeline has partners including ExxonMobil, Shell, and ConocoPhillips. The three major fields there hold the gas equivalent of 1 billion barrels of oil. Now, with the Canadian government's green light, the companies themselves must decide whether to proceed -- a matter the government says it will take up in about three years, once it figures out the precise costs and engineering requirements.
BP via Getty Images
BP owes a lot, but how much exactly? Everyone knew this was coming: the U.S. Justice Department announced that it is suing BP for this year's enormous oil spill in the Gulf of Mexico. BP has been selling off assets to pay off the $20 billion in liability it has already acknowledged to the U.S. government. Depending on the outcome of deliberations in the United States, that sum could double. But, as the Financial Times notes, that calculus excludes the possibility that a U.S. court could issue a finding of gross negligence -- that BP simply wasn't on top of the work it was doing in the depths of the environmentally sensitive gulf. In such a case, BP's bill could double yet again, to around $80 billion. If that happens, look for the vultures to begin circling the company and its management -- BP may have a large liability, but it also has extremely valuable assets in Russia, Azerbaijan, and elsewhere.
Welcome to Africa's newest petrostate! The world has a new oil exporter: Ghana, whose Jubilee offshore oilfield began pumping petroleum this week. Analysts currently think the west African country has about 3 billion barrels of oil -- Jubilee alone is a supergiant with about 1.5 billion barrels. The reserves are particularly attractive given their location on the accessible Atlantic, and Ghana's relative stability in a turbulent continent. Jubilee could produce 120,000 barrels a day, according to field operator Tullow Oil.
Pipeline hopes die last. For all of its obvious hazards, the challenges of Afghanistan seem fated to attract the bold and ultra-adventurous --including oilmen and those in the pipeline game. This week, the leaders of Afghanistan, India, Pakistan, and Turkmenistan got together in Ashkabad to sign yet another agreement vowing to push ahead with a 1,000-mile-long natural gas pipeline stretching from Turkmenistan and on into the Indian subcontinent, reports Andrew Kramer of the New York Times. There's probably no point in noting that this is not the greatest of ideas -- as we learned in the last such attempt, Unocal's ill-fated effort in the 1990s to build a similar energy transportation network, pipeline folks heed their own inner voice.
Which way oil prices? At O&G, we have run out recent posts suggesting that oil prices are not necessarily headed into the stratosphere in the coming decade. But we also recognize that such exercises are in the end foolish -- if anyone truly knew where oil prices were going, the whole wealthy phalanx of oil traders would be out of business. So we will simply note that, at the Wall Street Journal, Jerry Dicolo makes the bullish case for oil. Dicolo cites dropping global stockpiles, rising demand, and recovering economies in his prediction that oil is heading into the triple digits, and "might stay awhile" there.
Gas, gas everywhere. The U.S. Energy Department adds another data point to the now-familiar narrative that we are awash in natural gas, reports Matthew Wald at the New York Times. The department's Energy Information Administration has doubled its estimate of the volume of shale gas in the United States to a 36-year supply, given U.S. demand. The sudden appearance of shale gas has shaken up global energy and geopolitics -- in Europe alone, it has made former Soviet satellite states less worried about their winter supplies, and weakened the hold of Russia's Gazprom on the continent. The EIA report is interesting in other respects as well: It forecasts that oil prices will not explode over the coming quarter-century, and neither will heat-trapping gases.
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.
Tell me what's wrong with this picture: China burns half the six billion tons of coal consumed globally each year, a vast hunger that's ignited a free-for-all among coal suppliers and dealmakers for a piece of the action, and pushed coal prices to a two-year high. In just one week this month, U.S. and European companies signed $15 billion in deals for coal properties, Javier Blas writes in the Financial Times. Going forward, the United States appears likely to be a special focus of such mergers-and-acquisitions attention, report the FT's Ed Crooks and Helen Thomas. Yet China is barely in the dealmaking -- none of this new action involves Chinese companies. Blas quotes Melinda Moore of Credit Suisse on the topic: "I'm surprised that China has not had a greater presence in the latest round of M&A in coal, or at least not been financing more of the expansions."
That is quite an understatement. How is one to interpret why the most aggressive resource-buying force on the planet -- a country that derives most of its electricity from coal, and has a fixation on energy security verging on the paranoid -- is lying low in a buying frenzy?
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In the coming weeks, we will see the rollout of the two most-watched entries in the global electric-car race, the Nissan Leaf and the Chevrolet Volt. Both are in the headlines today, and here is the detail that caught my attention: The Leaf, writes Nick Bunkley in the New York Times, will get the equivalent of 99 miles per gallon.
For months, a drumbeat of pessimism has threatened to drown out earlier optimism about the possibility of an electric-car juggernaut over the coming decades. Electric cars and hybrids will overwhelm power grids, we are told. Governments, specifically President Barack Obama and the leaders of most of Europe, Japan, and China, are too far ahead of consumers, warns the Economist. Few will buy a car that could stall on the way home from work, U.S. News predicts. At 24/7 Wall Street, Douglas McIntyre writes, "The dream of a highway populated by electric and other low emissions cars may be no more than hope. If wishes were horses, all the beggars would ride."
And yet, that figure -- 99 miles per gallon, calculated using an Environmental Protection Agency formula in which 33.7 kilowatt hours equals a gallon of gasoline -- tips the scales a bit in my eyes. We've all been on the showroom floor, and after admiring the design lines of this or that model, we take a sharp look at the sticker, and the prominent display of the premier maintenance cost we will face, which is fuel. Consumer psychology is a tricky thing, but suffice it to say that the number 99 is a lot different from 28 or 36. The EPA hasn't certified what the Volt will get on the road, but it's going to be in the same ballpark, and I think that is going to turn a lot of heads.
In the Financial Times, Ed Crooks writes that Nissan CEO Carlos Ghosn is already doing a victory lap, arguing that his $5 billion bet on electric cars has been vindicated. That's a bit premature. But pay attention to the number 99. It's important.
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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.
James Giffen, the oil dealmaker at the center of what was once the largest foreign bribery case in U.S. history, is officially a free man.
The 69-year-old former oil adviser to Kazakhstan's president, accused of diverting $78 million from oil companies to the Kazakh government, waited out more than a dozen federal prosecutors and sat through some two dozen court appearances and five trial dates over the course of seven years. Today, the effort paid off. Three months after prosecutors announced a stunning capitulation, dropping all foreign bribery, money laundering, and fraud charges against Giffen in exchange for a guilty plea on a misdemeanor tax charge, U.S. District Judge William Pauley ordered no prison time and no fines in sentencing proceedings at a Manhattan courthouse.
In handing down the non-sentence, Pauley seemingly validated the argument to which Giffen's lawyers had clung since 2003: that whatever crimes Giffen had allegedly committed occurred while he was a highly valued foreign asset of the American intelligence. "Suffice it to say, Mr. Giffen was a significant source of information to the U.S. government and a conduit of secret information from the Soviet Union during the Cold War," Pauley said today.
Giffen may have been lesser-known than the other businessmen-cum-criminal-defendants of recent decades, but he was equally colorful, a swaggering, coarse-talking, heavy-drinking womanizer and a charismatic fixture on the Caspian Sea. He arrived in Kazakhstan in 1992, but the trajectory that ultimately landed him there began in 1969, when he started traveling to Moscow as an aide to a Connecticut metals trader. Giffen worked his way up to become a major player in a U.S-Soviet business association with top-level political ties in both Washington and Moscow. When the Soviet Union collapsed in 1991, business in Russia dried up, and Giffen moved on to Kazakhstan, which was quickly becoming one of the hottest oil plays on the planet.
Giffen managed to ingratiate himself with a man he called The Boss: Kazakh President Nursultan Nazarbayev. He became Nazarbayev's chief oil negotiator and, prosecutors alleged, his personal banker. While honchoing some of the era's biggest oil deals, he also diverted some $78 million in payments made to Kazakhstan by now-dead companies like Mobil, Amoco, and Texaco into Swiss and other bank accounts that he set up in the name of Nazarbayev, other senior Kazakh officials, and their relatives, prosecutors alleged. (U.S. diplomats said that Nazarbayev, an unindicted co-conspirator in the case, so dreaded being tarnished by a Giffen conviction that both he and his envoys pleaded repeatedly for the George W. Bush Administration to order the case dropped.)
The case seemed open and shut, since the prosecutors presented a detailed paper trail -- provided by a Swiss magistrate -- of Giffen slicing payments into tiny discrete pieces for transfer into secret Swiss bank accounts, rather than shifting them as a whole, a classic method of money laundering. Even at their most voluble and expansive in court, Giffen's lawyers made no attempt openly to dispute the prosecution's facts. They simply kept repeating that, whatever Giffen may have done, he was taking orders from the Kazakh government -- a sovereign state entitled to its own ideas of legality -- and otherwise serving the patriotic interests of the Central Intelligence Agency.
It was an audacious defense that many thought verged on the preposterous. For one thing, CIA officers of the era deny that Giffen was anything of the sort -- he walked into CIA headquarters on his own volition and talked to agency officers about Kazakhstan, they said, but that was very different from being a trusted asset on an informal assignment. In short, they asserted, Giffen was simply another dude talking.
The CIA, however, appears to have refused to hand over many -- if any -- documents sought by the defense. Judge Pauley had ruled that such documents were obligatory if Giffen were to have access to his rights to adequately defend himself. So the prosecution was left with having to drop the charges.
In his sentencing remarks, Pauley said that he had had access to classified documents that no one else in the courtroom had seen, and that they largely validated Giffen's claims. "He was one of the only Americans with sustained access to" high levels of government in the region, Pauley said. "These relationships, built up over a lifetime, were lost the day of his arrest. This ordeal must end. How does Mr. Giffen reclaim his reputation? This court begins by acknowledging his service."
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.
Big Oil was born in Pennsylvania, and a growing number of the industry's major players seem convinced that its future is there, too -- specifically, in the natural gas deposits of the Marcellus Shale formation. The latest evidence? Chevron just dropped $4.3 billion on it. The company is acquiring Atlas Energy, a Pittsburgh-based independent producer that has an estimated 9 trillion cubic feet of gas to its name in the region, which geologists think may contain at least 262 trillion cubic feet of recoverable gas.
Today's deal makes Chevron the third member of the Big Oil elite to seek refuge from an increasingly stormy oil business in the United States' burgeoning shale gas industry. In December Exxon Mobil bought the shale gas company XTO for $41 billion. In May, Royal Dutch Shell picked up East Resources, another company active in the Marcellus Shale, for $4.7 billion. On news of the Chevron acquisition, shale gas stocks are up 3 percent today. The Center for Strategic and International Studies' energy policy expert Frank Verrastro is also bullish on the deal. He emails:
It reinforces Chevron's move into unconventional gas (like Exxon, BP, Total, Shell and Statoil) and positions them well as gas is looked to play a significant role in a cleaner fuels economy. In Atlas's people, Chevron also acquires the expertise in operating in the Marcellus (and elsewhere). Nice package.
A few things are worth noting about the deal. One is how differently it's being received than Exxon's XTO acquisition, for which the company had to endure some grumbling. Critics said the oil giant paid too much and offered too few opportunities for the efficiency gains for which Exxon's acquisitions are known; Exxon's CEO, Rex Tillerson, countered that it was a long-term move, not a short-term one.
The second is what an international enterprise the shale gas business has become. Chevron's deal makes it a partner with an Indian company, Reliance Industries, which was working with Atlas in Pennsylvania. As Verrastro notes, Norwegian giant Statoil is investing in U.S. shale drilling, as is the Chinese National Offshore Oil Company (CNOOC).
The third is that Chevron must not be overly concerned about the risk to their long-term business posed by environmental concerns over shale drilling. The process of hydraulic fracturing, or "fracking," in which chemical-laced water is used to loose the gas from the shale, is controversial enough to have spawned its own documentary; when Exxon signed its XTO acquisition, it included a clause by which the oil company could walk away from the deal if the technology proved problematic. "Chevron and Exxon, they may know how to manage these risks, bring the best practices to bear," Lucian Pugliaresi, the president of the Energy Policy Research Foundation, says. "They may be the right companies for these projects."
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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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Over at the New York Times, I'm part of a panel discussing whether the United States needs to re-create a homegrown rare-earths industry even though such mining can be highly polluting. One point I make is that so many companies are responding to China's actions that we are actually in danger of a rare-earths bubble in a few years. The trick will be bridging the gap between the current shortage - in which China enjoys a near monopoly -- and a future period of abundance. Reuters raises the same point in an interview with a clutch of experts. One answer seems likely to be found in countries like South Korea, which says it has found a new rare earths deposit.
There has been talk that China is going to further tighten rare earth exports next year. On Friday, Trade Minister Chen Deming sought to tamp down the alarm by saying that exports will remain the same in 2011 as this year. But that served to confuse the situation as just three days earlier a ministry spokesman said the exports will be cut slightly in 2011. China meanwhile is also mulling tighter environmental rules governing rare earth mining.
The reclusive Douglas Edelman lives in London's posh district of Kensington, but according to those who know him, he cultivates the image of an easy-going, hippieish Californian, complete with a laid-back demeanor, plaid cotton shirts, and jeans. Edelman's business card identifies him as the representative of a company called Aspen Wind, and he is known for helping finance and produce a film about the evangelist Billy Graham. But we of course are best acquainted with him as the proprietor of a greasy spoon in Bishkek, Kyrgyzstan who has been attracting much attention for the $3 billion in single-source contracts he has obtained over the last seven years to deliver jet fuel for the war in Afghanistan.
At the end of last week, the Pentagon apparently finally got around to asking the contract-holder -- a Gibraltar-registered company called Mina Corp. -- who its owners are, writes the Washington Post's Andy Higgins. Lo and behold, Mina did not list Edelman as its owner, but instead his previously unknown French wife, Delphine Le Dain, along with a 35-year-old Kyrgyz named Erkin Bekbolotov.
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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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Six months after a U.S. fuel contract contributed to the ouster of Kyrgyz President Kurmanbek Bakiyev, we appear no closer to knowing whether his opponents are correct in assuming corruption and other criminality in the deal. At issue is a $3 billion U.S. military contract with two companies registered at mail drops and in offshore tax havens, and run by a cloak-and-dagger California native who makes Julian Assange look as open as Oprah, the Washington Post's Andy Higgins suggests in a weekend piece. The current Kyrgyz government says the contract enriched the Bakiyev family, and that the U.S. tolerated the situation to guarantee the longevity of Manas Air Base, which services the war in Afghanistan. Incidentally, Bakiyev alleged the same thing when he helped overthrow the Askar Akayev regime in 2005.
By approving such contracts, does the U.S. in effect cultivate the very corruption that it aggressively abhors in governments around the world? Scott Horton, a New York lawyer who sits on the board of American University in Bishkek, is among those who think so. At the Harriman Institute last Friday, Horton said:
The latest Transparency International corruption index is out, and it shows that countries occupied by the United States, in which U.S. contract awards have decisive importance to the economy, are two of the five most corrupt on earth. These nations have, moreover, become dramatically more corrupt since the U.S. took over. What is the relationship between having a large U.S. military installation and military contracting on your territory and corruption? The TI index points to a direct relationship. The U.S. talks a good tune about democracy, transparency and the rule of law. What it delivers is just the opposite.
(Full speech transcript here.)
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Rare earth watch. The escalating, month-long log jam in the Chinese export of rare earth elements may have come to a close. Keith Bradsher of the New York Times reports that Chinese customs officials this week began allowing shipment of the 17 minerals and metals -- essential in the manufacture of hybrid cars and wind turbines, in addition to a range of other high-volume consumer products. The cutoff coincided with a confrontation between China and Japan last month over a group of islands. This does not bring an end to the global trouble -- India, Kazakhstan, Mongolia, the United States, and elsewhere plan to start providing alternative sources of the elements, but it will take years to scale up such operations. Meanwhile, the price of the metals has soared.
BP's Dudley on the attack. BP's new CEO, Bob Dudley, expressed his unhappiness with rival companies and the media, which he said rushed to judgment while stirring up unnecessary fears after the April explosion at the company's Gulf of Mexico Macondo drilling operation. (A PDF of the speech is here.) But while Dudley is not thrilled with the company's rough treatment, more problems arose as a U.S. presidential investigative commission issued a report saying that both BP and Halliburton knew weeks before the accident that cement used to seal the well wasn't stable. Halliburton issued a statement raising questions about the report.
Build it and they will come? J.D. Power doesn't think so, at least as regards hybrid and electric cars that are about to flood the market. The market research company says that such vehicles will account for 7.3 percent of global sales by 2020. J.D. Power says that cost will be a major factor in holding down the sales -- regardless of government subsidies, the cars still cost more than gasoline-driven models. That's cold water on the plans of GM and Nissan, who are releasing the Volt and the Leaf, respectively, next month in the U.S.
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.
The supply of so-called strategic rare earth metals -- needed for wind turbines, advanced batteries, disc drives, flat-screen TVs, and smart bombs, among other things -- has definitely either slowed or stopped from China. The question is why: Has China cut off Japan in a pique of ill-will triggered by festering resentment over World War II or over the maltreatment of a fisherman? Is the U.S. now suffering because it has dared to challenge China's clean-energy industry subsidies? Or are there more benign reasons, such as the possibility that widely announced quotas for the minerals have run out in the late part of the year?
Chinese Premier Wen Jinbao says that China isn't using its near rare-earths monopoly as a "bargaining chip," China Daily reports. Beijing also says it is not violating its pledges under the World Trade Organization, as the Financial Times' Leslie Hook and Mure Dickie write.
The rare-earth hullabaloo is reminiscent of the alarm bells raised over Middle East control of oil -- it is inherently concerning, after all, when one country or a set of countries wield leverage over a desperately and widely needed product. The more so when those holding that near-monopoly shrink the product's availability, as China has done. China retorts that it's a bunch of Sturm und Drang: It is not embargoing anyone, and if shipments are down, it is because China must husband a limited resource, protect its environment, and supply its own industries.
A few days ago, the United States responded to a United Steelworkers suit by announcing an investigation of China's alleged gargantuan subsidizing of its clean-energy industries -- something regarded by many countries, including China, as a strategic priority. Today we get China's apparent reply: Beijing is cutting off its exports of rare-earth minerals to the United States, according to the New York Times' Keith Bradsher.
The 17 rare-earth minerals are crucial to the manufacture of high-tech products such as advanced batteries and flat-screen televisions, and in military equipment such as missiles and jets. China mines about 95 percent of the world's rare earths.
The news comes the same day that China announced that it is further reducing the export of the minerals to all countries next year. In July, Beijing said it would reduce its rare earth exports by about 40 percent. Next year, it's set to reduce that volume by another 30 percent, according to another report by Bradsher.
The issue of rare earth availability has alarmed numerous companies and countries. Japan got cut off Sept. 21 after one of its naval cutters arrested a Chinese fisherman for ramming Japanese patrol boats. Since then, several companies have announced plans to accelerate the re-opening of rare earth mines in Australia, the United States, Mongolia, and Kazakhstan, but bringing such projects to fruition can take years.
This latest move significantly escalates a steady increase in economic and trade moves by both countries. If confirmed, the Obama administration might have no choice but to reply with some similar action, particularly given the poisonous mid-term election atmosphere in the United States.
Luck has not been BP's dominant experience this year. But the company is trying to align the stars as it can by shoring up relations where it needs to, while scaling back where it has to. Case in point: The company has sold oilfields in Venezuela and Vietnam to its volatile Russian joint venture, TNK-BP. That raises $1.8 billion for BP, and throws wood on the fire of its newly warm relations with its sometimes-restive Russian associates.
The four oligarchs who are BP's partners in TNK-BP have had two main complaints over the years. One is BP's reluctance to broaden TNK-BP's reach outside of Russia; the purchases in Venezuela and Vietnam, plus plans to try to buy BP gas assets in Algeria, address that. The other gripe has been cold cash: The Russians want more dividends for their 50 percent stake in the company. BP has addressed that one too, last week announcing a record $4 billion cash dividend to shareholders.
New CEO Bob Dudley is on a similar charm offensive with BP shareholders. A couple of weeks ago, he announced that he will try to restore BP's usual Big Oil-leading dividend next year. The dividend payment, which had been 9 percent, was frozen in June amid the Gulf of Mexico oil spill crisis.
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Last week, two senior Uzbekistan officials were in Washington in an attempt to broaden relations currently focused on a single matter -- the Afghan war. As of now, Uzbekistan is seen as a friendly voice for U.S. officials fixated only on getting supplies to U.S. troops in Afghanistan over what they call the Northern Distribution Network. Not so much for those thinking about ordinary Uzbeks, whose living standards have steadily deteriorated under the tight economic and political grip of President Islam Karimov. Abdulaziz Kamilov and Sadiq Safayev, both of them senior Foreign Ministry officials, talked a lot about the always-fashionable notion of building a "Silk Road."
But one issue that dogged Kamilov and Safayev at the National Security Council and the State Department was the threatened imprisonment of Abdumalik Boboyev, a Voice of America correspondent, as Josh Kucera reports at Eurasianet. This blog wrote about Boboyev last week -- he was up against a possible eight years in prison for his allegedly slanderous VOA dispatches from Tashkent.
On Friday, Boboyev's verdict came down: an $11,000 fine, but no jail time. That's a gargantuan sum in a country in which the average salary is $291 a month (that's at the official exchange rate. It's $216 on the black market). His lawyers are considering whether to appeal.
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.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.