What resemblance does fine wine bear with crude oil? Too much, at least if you wish a diversified investment portfolio, say two shock-jock analysts from the International Monetary Fund. Serhan Cevik and Tahsin Saadi Sedik have attracted much attention by putting seeming opposites into the same economic model, and analyzing what comes out the other end. Their aim was to break new ground in the study of commodity prices, and in doing so found that, even when controlling for differences in their basics, fine wine and crude oil prices have moved in virtual lockstep for the last 12 years. Their takeaway? Demand is the salient factor in the price of any commodity, and not whether its supply is high, low or disrupted.
Fair enough. But it's the way that Cevik and Sedik get there that's generated more buzz than is usually accorded IMF working papers. Marketwatch did a nice chart of the correlation:
At the Financial Times, Javier Blas notes that the 20-page paper directly contradicts the judgment of loads of ostensibly sophisticated portfolio managers. "Investment in fine wines has boomed in recent years, partly in the belief that they diversify the risk of holding just equities, bonds and traditional commodities such as crude oil or copper," Blas writes. At the Wall Street Journal, Benoit Faucon calls it another stake in the heart of OPEC's reputation as a price-setter. The FT's David Pilling says the report explains the current explosion of food prices. "What is true for wine will hold for rice, wheat, potatoes and onions," Pilling says. "If the growth of India and China is destined permanently to inflate the cost of energy, it's a pretty safe bet it will have the same effect on the cost of food." A musician colleague of mine helpfully suggests that if diversification is the aim, maybe try rare violins.
Not surprisingly, the Cevik-Sedik notion sits well with oil traders. I talked to Phil Flynn at PFGBest, for instance, who sees many reasons why oil and fine wine prices ought to correlate -- and also why someone ought to start a wine ETF, meaning a tracking fund. "I would welcome wine futures. It might keep prices lower," Flynn told me.
Among wine experts, the enthusiasm is considerably less. That would include Vic Motto, who runs St. Helena, Ca.-based Global Wine Partners, a wine investment bank. Motto told me that these IMF fellows have simply unearthed a curiosity, not a fact. (To be precise, he said "I think it's baloney."). "They are mathematically correct, but that's all," he said. "There is no valid correlation."
According to Motto, the problems start with the data and the definitions. For wine, Cevik and Sedik rely on the Live-ex Fine Wine 100 Index, which tracks monthly price movements in 100 of the world's most sought-after rare and collectible wines. For oil, they used an average of Brent and WTI crudes. But if you look up the word "commodity," you get this: "A good for which there is demand, but which is supplied without qualitative differentiation across a market." And therein lies the fatal flaw, Motto says.
"Rare wine is not a commodity," he said. "It is rare. It is sold to the elite at auction. You can buy wine for $2 a bottle, for $20 a bottle, for $20,000 a bottle, and $200,000 a bottle. It has little to do with agricultural commodities."
The very best wines, Motto says, are French Bordeaux and burgundies, which are affected year by year by weather and other factors. Vintages go up and down in quality, and there isn't always rhyme or reason to how they are priced. The 2000 and 2005 Bordeaux vintages were fantastic, he said, but the former was initially underpriced in France, and the 2005 overpriced, and hence had to adjust according to very different consumer reactions. "I can't imagine how that might relate to crude oil prices," he said.
That of course is true. Crude oil prices do swing wildly at the whim of traders, but not as wildly as fine wine does when, say, a newly minted Russian oligarch is seeking to impress his friends.
But while they may offend the sensibilities of wine experts, Cevik and Sedik say none of this appeared to matter, at least over the last 12 years. Violins anyone?
Up or down? Oil spent much of last year climbing, climbing until the irrationally exuberant among us began to rub their hands together with glee (that would be the traders). This week, the market placed a speed bump in the road to $100-a-barrel and beyond. Today, oil closed with its biggest one-week fall in five months, plunging to $88.03, Bloomberg reports. As we discussed earlier this week, prudence is called for in the oil markets. Traders might want to look at some arbitrage between crude varieties, however -- that $88.03 price refers to West Texas Intermediate. Brent crude is selling at a $5 premium, closing at $93.44 a barrel, notes Gregory Meyer at the Financial Times.
The trouble with subsidies: In response to a demand from the International Monetary Fund, Pakistan raised the price of gasoline by about 9 percent on New Year's Day. Eight days later, the government reversed the increase. In between those two moves, Punjabi Gov. Salman Taseer was assassinated, a key government ally pulled out of the government, and there was general mayhem in the street. I discuss this in an interview at CNN. A lot of the turmoil stemmed from a poisonous debate over the country's so-called blasphemy law, which prohibits insults against the Prophet Mohammed. But the gasoline subsidy was also a primary player in the turbulence, which may yet return. The IMF wants the subsidy lifted as a condition of providing $11 billion to Pakistan. But a subsidy, once given, is hard to take away.
Price of the spill: President Obama's Gulf oil spill commission returned an early verdict on last year's massive blowout in the Gulf of Mexico, with a stinging rebuke of BP and its partners in the Macondo well. As is usually the case with such reports, one could read into it almost whatever one wished to. That might explain how Wall Street treated the report. The shares of both BP and Transocean ended the week just about where they were before the report was issued, as though investors in the aggregate couldn't decide whether the results were good or bad for the companies.
Electric spying: The world's electric-car combatants take their war seriously, the French no less than the Chinese, the Americans, and the Japanese. So it is that Renault suspended three senior managers for allegedly passing on secrets about the company's electric car plans to China. Renault is partners with Nissan, whose Leaf was launched last month. The probe has been ordered all the way up the chain of command, by President Nicolas Sarkozy himself, the Guardian's Kim Willsher reports.
Fatih Birol, chief economist for the International Energy Agency, is among the most respected voices in energy. When he speaks, he can even get the OPEC folks to listen. So it is notable that Birol has hit the panic button on oil prices, not-so-subtly suggesting that OPEC increase production -- and that oil-consuming nations moderate their appetites. "Oil prices are entering a dangerous zone for the global economy," Birol's told Sylvia Pfeifer in today's Financial Times.
Translation: Oil prices approaching $100 a barrel could take the wheels off the just-recovering global economic cart. Oil traders are driving such talk by upping the number of bets on higher prices that they're making in the futures market, reports Bloomberg's Asjylyn Loder. At one point on Monday, Brent crude -- the variety benchmarked in Britain -- soared to $96.07 a barrel on such bets, its highest price since October 2008.
Phil Flynn at PFGBest, for example, thinks that government stimulus spending over the last couple of years has pumped up oil prices by $15 to $20 a barrel. So while speculators are driving up prices in a frenzy to cash in, politics are working against them -- there isn't political support for sustained stimulus spending any longer, so Flynn expects that air to go out of the price this year. Another moderating factor, according to Flynn, is that a lot of investors piled onto oil as a shelter from tanking stocks and bonds; now they will go the other way. "Even with all the bullish mania that has gripped the [oil] complex in recent weeks, the 2011 outlook, while still bullish, is obviously not as wildly bullish as recent market action might have you believe," Flynn told clients today.
Then there is Barclays Capital. The FT reported yesterday that Barclays is forecasting oil hitting $100 a barrel this year. But the Dec. 30 Barclays report that the newspaper quotes goes on to suggest that its analysts don't expect oil to average $100, but only to touch that price -- namely because OPEC will step in with higher production:
In our view, while it is probably already too late to prevent the market from hitting $100 per barrel at points in 2011, OPEC is likely to have to play a far more proactive role to dampen any potential explosive upside that may arise and ensure that quarterly and annual averages do not reach $100 per barrel. Indeed, we do expect OPEC to exercise control of that upside earlier in the cycle compared with 2008.
Then there are the outright bears. Petromatrix, a Swiss-based firm, looks at the fall in oil prices yesterday and so far today, and sees timidity. Petromatrix Managing Director Olivier Jakob told Bloomberg that prices could plunge to $80 to $82 a barrel if speculators flee the market in droves. "If there is some genuine profit-taking from large speculators, then we need to consider the risk for further downside," Jakob said.
I said the price of oil could hit $200 in 2012, not 2011, and $300 in 2013. It's a normal mistake, nothing earth-shattering. I agree that prices currently are too high and the hedgers are getting carried away. But if the US and European economies start picking up by 2012, and assuming all things stay equal in the big emerging markets, then I think at one point we see at least a doubling of oil prices from current levels, driven by both fundamentals and by super-bullish fund managers. For the average American consumer, let's hope speculative oil prices are just a blip.
We regret the error, and side with Meyer on consumers.
Texas Energy Museum/Newsmakers
FP's editors are rounding up predictions for 2011 from their bloggers, so here are a couple thoughts from me on my beat:
First, with Russia's petro-driven geopolitical power shaken underfoot by uncertainty in its key European natural gas market, Vladimir Putin will step up his two-year-long public relations campaign and announce that he will seek to return to the Russian presidency in elections scheduled in 2012. In a swap of the so-called "tandem" of Russian power, current President Dmitry Medvedev will declare that he will be honored to serve as prime minister.
Meanwhile, oil prices will flirt with $100 a barrel, but stay generally in the $80 to $95 range because global crude oil stockpiles will remain at historic highs. This will temper the price of gasoline at the pump, and help the global economic recovery advance. But another global speculative bubble will form, this time in metals, driven by these same expectations of economic growth. What these traders always seem to forget is that all bubbles eventually burst -- but no one knows precisely when.
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.
Oil prices are up today, another apparent notch in the belt of conventional wisdom, which is that we are on the way to another historic price spike -- $200 to $300 a barrel and $5 a gallon at the U.S. pump. The way this narrative goes is that these sky-high prices finally so aggravate U.S. consumers that they act on them: switching for good to hybrids and other high-mileage cars, weather-protecting their homes and buildings, and generally using much, much less oil. On the other side of all this, a decade or a bit more from now, we get a long, slow decline in global oil demand, paradise, and other fine things.
But is this valid? Not necessarily, if one considers a pair of reports out today from Barclays Capital, the research arm of the investment bank. Start with what leads people to such conclusions. First is the theory of peak oil: the evidence that we've just about reached the apex of our capacity to produce oil, and will be on a supply plateau of around 90 million barrels of oil a day for some time before the supply begins declining (global oil demand is about 85 million barrels a day). The other factor is that oil companies have in recent years curtailed their spending to find new oilfields. Together, these trends suggest that supply will stop keeping up with demand about mid-decade.
Where Barclays takes the punch away from this pessimists' party is a semi-annual survey of 402 oil and gas companies of all sizes around the world. Barclays finds that these drillers are back in the spending game. In what Barclays calls "The Original E&P Spending Survey" (sounds like a cheeseburger ad, right?), it finds that exploration and production spending is going to rise next year to almost half a trillion dollars. In precise numbers, that means $490 billion in spending, 11 percent higher than the measly $442 billion that will have been spent by the end of 2010.
ALFREDO ESTRELLA/AFP/Getty Images
Italy's oil company Eni has long enjoyed a privileged position in oil and gas deals in both Russia and Kazakhstan. The company enabled Russia's dismantlement of Yukos, and has been Gazprom's top-tier partner in tightening its grip on gas supplies to Turkey and Europe. Allegations in one WikiLeaked cable that Italian Prime Minister Silvio Berlusconi and some pals have profited personally from this intimate relationship are not entirely surprising -- nor is it particularly shocking to read allegations of similar Eni activity in Uganda.
The details come in an unusually descriptive new cable released by WikiLeaks. The cable describes a Dec. 14, 2009 meeting between U.S. Ambassador Jerry Lanier and Tim O'Hanlon, vice president for Africa for Britain's Tullow Oil. We have written previously about scrappy Tullow, a serious player around Africa's Lake Albert region, which is believed to potentially contain more than 1 billion barrels of oil.
Here is the backdrop: Tullow was wishing to exercise a right of first refusal to buy the second half of two Ugandan oilfields in which it already held a 50 percent interest. But Eni somehow stepped in and, right around the time of the Lanier-O'Hanlon meeting, announced that it, and not Tullow, would secure the $1.35 billion purchase. O'Hanlon asserted that he knew just how Eni had managed it -- the Italians had created a London shell company through which they were funneling money to Uganda's security minister, Amama Mbabazi.
This bit of news really irritated Lanier, who suggested that he was sick and tired of hearing of "corruption scandals" involving Mbabazi. From the cable:
Depending on the outcome of this major deal, we believe it could be time to consider tougher action - to include visa revocation - for senior officials like Mbabazi who are consistently linked to corruption scandals impacting the international activity of U.S. businesses, U.S. foreign assistance goals, and the stability of democratic institutions.
Lanier said in the cable that he planned to confer with the local British High Commission, plus the Irish ambassador, and talk about writing a joint letter to President Yoweri Museveni expressing their dismay "about these very troubling signs of high-level corruption in Uganda's oil sector, and advocating for the open and transparent sale of oil assets and management of future oil revenues."
We do not know if those meetings took place or if the letter was written. However, the deal was overturned just seven weeks later and given to Tullow under the same terms as Eni.
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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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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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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.
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.
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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Is China still sore over the humiliation of tuna fisherman Zhang Qixiong? Is it China's 32 rare-earth metals exporters -- are they, as Chinese Commerce Minister Chen Deming suggests, so wound up over Japan in general that they have decided collectively to strangle Japan's electronics and hybrid-car industries, as Keith Bradsher and Edward Wong report at the New York Times?
China's ban on the export of the 17 so-called rare-earth metals -- indispensable as of now in the manufacture of high-tech products like wind turbines, advanced batteries and flat-screen TVs -- has now passed three weeks in length. Chinese Prime Minister Wen Jiabao says this isn't political: Beijing, he says, isn't attempting to demonstrate its dominance over Japan. That sounds right. Instead, this looks like standard economics.
What hasn't received much attention is that, while no rare-earth metals have gone -- at least legally -- to Japan since Sept. 21, China has continued to freely export finished products such as advanced magnets in which rare-earths are embedded.
Beijing Review has an interesting interview with Lin Donglu, of the Chinese Society of Rare Earths, and Wang Hongqian, of China's Foreign Engineering and Construction Co. In it, the two men discuss China's efforts to develop advanced rare-earth industries, and not be simply a raw-materials supplier to the world. They also cite western complaints about China's hardball incentives for western companies to relocate in China -- these companies are facing restrictions on rare earths that they can import, but are offered all the metals they wish, at lower prices, if they move their factories to China.
This may explain the China-Japan rare-earths standoff: Beijing is signaling more forcefully now that, if Japanese companies want broad access to rare earths, they should move to China, or buy their rare-earth components from Chinese companies.
Beijing is telling companies in the rest of the world the same thing: You could be next.
Herry Lawford via Flickr
The crazes come upon us with such increasing frequency that it's easy to become jaded. There are the "i's" for instance -- the iPod, iPhone, iPad. Before we know it, many of them become bubbles -- solar panels, mortgage-backed securities, ocean-front Florida real estate. So is President Barack Obama feeding another of these manias with his push for advanced batteries and electric cars? He is getting push back, to be sure. At Slate, for example, Charles Lane says basically that Obama has gone in for rich, snobbish sissies. The Economist says electric cars are "neither as useful nor as green as their proponents claim."
But, in a piece in the new issue of Foreign Policy (just out today), I argue that, notwithstanding whether the surge of electric cars upon us actually gains traction, the race to create and dominate this new industry is very real. And the contestants - every major economy on the planet, and more - think the prize to the winner will be geopolitical power. In a nutshell, China, Japan, South Korea, a bunch of European nations, the U.S. and others think the winner will dominate the last half of this century. All could be wrong, but they would feel worse if they weren't in the race at all. Here is a slide show of some of the cars we are talking about.
Moscow and Beijing have spent two decades trying to patch up relations that went bitter long ago in a battle over Communist purity. In the latest installment in the rapprochement, they are using their most hallowed mutual interest -- oil and gas -- to signal that this time bygones really are bygones. In Beijing today, Russia's Dmitry Medvedev agreed to supply a huge volume of oil and gas to China, not to mention coal and two 1,000 megawatt nuclear power reactors. Then came the pipelines. In a ceremony, Medvedev and China's Hu Jintao marked the completion of the first oil pipeline connecting the countries, a 624-mile project. Not to be outdone, another Chinese neighbor, Turkmenistan President Gurbanguly Berdymukhamedov, debuted new equipment that allows the former Soviet republic to almost double its natural gas supplies to China through a 4,300-mile long pipeline.
This is a multi-dimensional charm offensive. Beijing wants to show that, just because it's quarreling with Japan and the United States, it also can be quite a friendly chap. As for Russia, it wishes to issue a warning to Europe, which has spent much of the last four years loudly proclaiming an intention to wean itself off of reliance on Russian gas. The message: There are other fish in the sea.
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Energy alarmism is on the rise again in the United States. This time, the looming phantom is not peak oil, but the danger of the United States falling behind in alternative energy development. Reprising a role it has played well in trade circles for years, China is a primary culprit. Beijing is accused of illegally subsidizing its clean-energy industry, most recently by the United Steelworkers in a suit filed with the U.S. Trade Representative a few weeks ago. Businesses, clean energy advocates and the U.S. government have make China a focus of attack.
Last Thursday, General Electric CEO Jeff Immelt sounded off on what he calls Washington's "stupid" energy policy, warning that, absent more support for nuclear power, wind, and smart grid technology, the country will risk surrendering its lead in energy innovation to the Chinese. On Capitol Hill, Democratic congressman Ed Markey of Massachusetts has tirelessly urged the country to catch up in the "Global Clean Energy Race."
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China, fresh off of building an international fracas out of a fishing captain with an errant wheel, has found a new arena for conflict with its closest trading partners: chicken feet. The New York Times' Keith Bradsher reports that Beijing yesterday levied a 105 percent tariff on U.S.-produced chicken feet -- sold almost solely to the Chinese -- while retaining its ban on the export of rare earth metals to Japan. But such brinksmanship rarely bodes entirely well in the end for the party unwilling to made amends once the hand of friendship is extended. China may yet become the world's biggest economy, but it may lose its highly strategic near-monopoly on rare-earths.
As of today, Beijing remains unbowed. Last week, Japanese Prime Minister Naoto Kan sustained a considerable political humiliation by flinching in his game of chicken with Beijing, and releasing Zhan Qixiong, the bad-driving Chinese trawler captain who was arrested after veering into two Japanese patrol boats on Sept. 7. Beijing continues to demand that Japan "apologize" and pay yet-to-be-determined "compensation." Now an emboldened Beijing is moving on to chicken feet, a tit-for-tat tariff in reaction to U.S. tariffs on Chinese tires: The United States said Beijing is dumping tires, now Beijing says the United States is dumping feet. But Beijing's dim sum tariff could backfire given the shortage of domestic supply of the delicacy.
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Call it the Georgia lesson. In 2008, Russia informed the United States and the rest of the West that the former Soviet Caucasus and Central Asia were no longer their playland, but rather Moscow's sovereign sphere of influence. How did it do so? By going to war with Georgia.
Now we have China informing Japan -- and the rest of Asia -- that the Diaoyu Islands in the East China Sea are its territory in which to fish and whatever else it wishes. Like Russia, Beijing did so by demonstrating that it was prepared to go to almost any extreme -- in this case short of war, but including the crippling of several Japanese industries -- to press its territorial claim. This includes rights over the big oil and gas reserves in the islands. Today Japan blinked. After this, will Japan continue the presumption that it is in charge of what it calls the Senkaku islands? Not if it wishes to continue to manufacture the Prius, as Andrew Leonard notes at Salon.
The difference of course is that, with all due respect to Russia and Georgia, this case concerns truly serious players. The breathtaking part is China's readiness to dismissively take on Japan, the world's third-largest economy.
Today, President Barack Obama is to meet with the 10 worried member states of the Association of Southeast Asian Nations. In a joint statement and with Obama behind them, they will suggest that China is bad, bad, bad to have forced its way with Japan, and wrong, wrong, wrong if it thinks it will get away with it again. But, as with the Georgian incident, is the U.S. prepared to go to war to press its case? Are any of the ASEAN nations? That was Russia's bluff in 2008; it is China's now.
A smart oilman told me yesterday over lunch that the rise of China was never going to be like the rise of Japan in the 1980s. Japan was a commercial power without imperial pretensions; China is both.
At the Financial Times, Geoff Dyer says this is not just the caprice of Chinese rulers, but the prodding "of powerful groups within the party-state system." This includes China's oilmen and other industrial leaders, Linda Jakobson of the Stockholm International Peace Institute tells Dyer, "new actors [who think] it is time for China to take its place on the world stage."
China's leviathan brawl over a single fishing boat captain over the last few days is a territorial issue: China's red line. In 2008, Russia signaled that it could be friends with the West, as long as no one presumptuously trod on its turf. China is saying the same thing now. That, in addition to the value of the yuan, marks out the new arena of tension between it and the West.
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At graduate school, a professor of mine voiced a strong distaste for Steven Rattner, the New York Times' young chief economics reporter, based in Washington. This professor, an adjunct who worked at the World Bank, thought Rattner just didn't get economics; he advised us to rely instead on The Wall Street Journal. Soon after, Rattner left the Times for Wall Street, becoming a billionaire in the employ of the investment bank Lazard Frères (now Lazard), an influential voice in Democratic politics, and generally a guy with serious connections. Last year, President Barack Obama, beset with crises domestic and foreign, asked Rattner to figure out what to do about America's failing car industry. So it is that this week, we get Rattner's memoir of the car company rescue, Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry.
Rattner is getting serious attention. Tom Braithwaite at the Financial Times interviewed him. Jonathan Cohn at The New Republic interviewed him. Holman Jenkins, a writer for The Journal‘s editorial page, didn't praise the book, but did offer free publicity while using it as a platform for yet another swipe at unions and mileage-efficient cars.
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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.
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.
I was struck this week by Harvard economist Edward L. Glaser's fascinating guest post on Tuesday over at the New York Times blog Economix. Glaser describes the Jevons Paradox, first raised by the nineteenth-century English economist William Stanley Jevons, which states that "improvements in fuel efficiency can lead to more consumption of fuel." If we apply Jevons's insight to our present-day energy situation, it might suggest that standards for carbon-emissions or fuel-efficiency can unwittingly create a spike in oil or gas consumption.
Jevons did his work on coal consumption in the 1860s, observing both coal's economic importance to the industrial age but warning that it was a finite resource in Britain (he might have been the Matt Simmons of his time). But Jevons explained that more efficient coal usage would hardly prevent coal stocks from ebbing. Instead, it would "lead to an increase of [coal] consumption" as the efficiencies of the new machinery brought about an "increased demand for the cheapened products" and thus a surge in coal usage. Although Glaser notes that the Jevons Paradox is a bit more complicated than that, requiring certain conditions to take place, the lesson for readers to take away is that "well-meaning policies can easily create the wrong sort of behavioral response."
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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.
The energy world lost one of its most provocative thinkers this weekend: Matthew Simmons, a former investment banker and adviser to President George W. Bush, who died of a heart attack at his home in Maine last night.
For the past five years, Simmons, 67, had been the premier pessimist in an industry that, on the main, tends towards optimism. He was arguably the most thoughtful and influential advocate of the idea that the world's steadily increasing appetite for petroleum would lead to peak oil -- the point at which production capacity can no longer ramp up to accommodate increasing demand -- and that it would happen sooner rather than later.
India -- tired of losing bids for oil assets around the world to China -- is turning to a more aggressive, state-backed approach. One wonders, however, if it's a bit late in the game.
As Bloomberg's Rakteem Katakey and John Duce write, China's national oil companies outbid Indian firms in some $12.5 billion worth of contracts over the last year. The bidding rivalry -- and China's superiority in it -- goes back as far as 2005, when for example China National Petroleum Corp. twice beat out India's state-run Oil and Natural Gas Corp., acquiring the lucrative oil assets of PetroKazakhstan and Calgary-based EnCana Corp.'s oil and pipeline assets in Ecuador. That has stymied India's efforts to satisfy projected demand that, according to the International Energy Agency, will double to 6 billion barrels a year in oil-equivalent energy by 2030. The two Asian giants are not in a death grip -- each is pursuing its own interests. But there's clearly tension, at least on the Indian side.
New Delhi is fighting back. This year, Oil Minister Murli Deora (above right, with Hugo Chávez) has launched a worldwide charm offensive, traveling to Nigeria, Saudi Arabia, Uganda, and Venezuela in order to chat up local oil ministers and their staffs. The national oil firms, ONGC and Oil India Ltd., have been authorized to spend up to $1.1 billion on investment or acquisitions without government approval.
The most decisive action may be the creation of a sovereign wealth fund to back overseas energy investments. In March, the oil ministry proposed such a fund, to draw on India's foreign currency reserves, and last week the government advanced the idea by forming a task force to draw up a more specific plan.
Yet the still-unnamed sovereign wealth fund comes long after China -- as well as the petrostates of the Middle East -- launched their own such vehicles. Beijing already has a $300 million energy sovereign wealth fund, earmarked out of $2.4 trillion in total foreign currency reserves; India's total foreign currency reserves, by comparison, are $277 billion. That is quite a bit of money in India's paws, but you get the picture -- the country could still face trouble in the bidding process.
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Al Qaeda chose three strategic oil assets to attack -- two large Saudi Arabian refineries, two choke points in Southeast Asian sea lanes, and five refinery complexes in and near Houston. In all, the attacks immediately pulled 8 million barrels a day, or about 10 percent of global demand, off the market, and forced the rerouting of another 15 million barrels. Global oil prices spiked to $250 a barrel, as the United States, the Saudi kingdom, and the rest of the world's major nations contemplated how to respond.
So went the scenario at the "energy games," a day-long role-playing exercise yesterday at the Heritage Foundation in Washington. Teams played China, the European Union, India, Iran, Japan, Russia, Saudi Arabia, various parts of the U.S. government, and of course al Qaeda. As a condition of playing -- I was on the European team -- I agreed not to identify the other participants. But suffice to say that those around me were a realistic bunch.
Three countries provided the game's best moments: China, Iran, and Russia. All of them were resource-rich and suddenly cash-rich -- and wanted to exploit the situation for all it was worth. What they did was instructive. In real life, we know that an oil-price spike is probably coming in the middle to late part of the next decade. This is because of an expected oil supply shortage, the result of a decision by oil companies to halt numerous exploration and production projects in the three years since oil prices dipped below $100 a barrel. By the 2020s, oil prices will probably start declining because of a steady and long-term fall in global demand. But if yesterday's energy games were at all representative of the middle period between now and the 2020s, some of the world's resource-rich nations, suddenly in possession of a commodity of unprecedented value, may change the global economic landscape for decades to come.
When the Obama administration's foreign policy team talks about Russia, they do it exuberantly. After almost two decades of on-and-off tension, the U.S. and Russia are on the way to a "normalization" of relations, says Ben Rhodes, deputy National Security Adviser for strategic communications. Michael McFaul, President Barack Obama's special advisor on Russia, says that what's going on is historic in scope. The relationship has gotten the West and Russia away from "the 19th Century Great Game, and the 20th Century Cold War," said McFaul, who along with Rhodes briefed reporters last night by telephone.
The high-fiving was prompted most recently by an impending state visit from Russian President Dmitry Medvedev to Washington tomorrow. At a time when foreign policy successes are hard to come by, the administration appears intent on parading Medvedev as an unqualified triumph of signal importance, involving advances in areas of "core U.S. strategic interests," McFaul said.
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