Among the most literary of the diplomatic cables released this week by WikiLeaks come from the U.S. embassy in Kazakhstan. Of those, most interesting for me is the unusual, realtime window into the emotion, the ambition and the palpable anger embedded in the struggle for control of the country's oil and the power that goes with it in this nascent petrostate. Front and center on stage are among the biggest oilfields in the world -- Tengiz, Kashagan, and Karachaganak -- in addition to Chevron and Shell, President Nursultan Nazarbayev, and his powerful son-in-law, the princely Timur Kulibayev.
The takeaway: Not much has changed since Richard II.
One main pawn in the dramas is Maksat Idenov, a super-competent administrator who was put in charge of the Kazakh oil company KazMunaiGas, or KMG, but who is exposed in a pair of cables to be slow to grasp political reality: Nazarbayev obviously had flattered Idenov by telling him that his job was to administer the state's crown jewels -- its oilfields. And Idenov -- willfully ignoring the history of Nazarbayev conveying just such nonsense to one foolish minister after another over the last couple of decades in order to keep the trains running on time, while in fact his trusted son-in-law, Kulibayev, actually ran things -- had chosen to believe him.
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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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I was surprised to learn on a visit to Brussels last week that the confusion is worse than I had thought among Europeans regarding Nabucco, the object of a long and thus-far-quixotic effort to connect Central Asian natural gas supplies with Europe.
Nabucco, a proposed natural gas line intended to reduce Europe's reliance on Russia's Gazprom, has seemed to me until now primarily an American fixation. But it seems that the Europeans are obsessed as well -- and also a bit in denial. In a nutshell, there seems to be a serious need for a primer on Turkmen politics.
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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."
Do you ever get the feeling that some people want the world to run out of oil, really really soon? That runs through my mind sometimes with the flood of peak-oil material at conferences, in books and in the media. Among the latest are a couple of new reports with yet more alarming findings. The headline: We're in trouble.
At the University of California Davis, researchers use a novel approach to reach the conclusion that we will run out of oil a full century before any alternative can take its place, reports Karin Zeitvogel of Agence France-Presse. Needless to say, that's a long time in the dark.
The Davis researchers -- engineering professor Debbie Niemeier and postdoc researcher Nataliya Malyshkina -- published their conclusions in Environmental Science & Technology. Their methodology involves inferring the behavior of oil and alternative fuel companies through their stock prices, and then mathematically reaching the conclusion that oil runs out three or four decades from now -- somewhere between 2041 and 2054 (in their equations, alternative energy scales up only around 2140).
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One truth that few people watching the energy space seem to grasp is that the world will not shift away from its absolute dependence on coal any time soon -- certainly not in the first half of this century, and probably not in the second, either. Coal provides half the U.S. electricity supply, and an even higher percentage of China's. Cleaner natural gas can and will provide a sharply growing percentage of the fuel needed to produce electricity, and more nuclear power plants will be built. But coal's advantages -- its plenitude, its cost, its carbon density -- all put it leagues ahead of the competition. Therefore, for those concerned about a rise in ground temperatures because of the increase in carbon dioxide levels, coal -- the dirtiest of the fossil fuels -- must be cleaned up.
As it turns out, China, which recently surpassed the United States as the biggest carbon dioxide polluter on the planet, is engaged in a typically gigantic enterprise to accomplish just that. In concert with experts from the United States and elsewhere, China is rolling out experimental coal-burning plants which, their managers hope, will eventually allow them to trap or sequester carbon, or to gasify coal instead of burning it, on a massive scale.
There: In 210 words we have synthesized James Fallows's 8,157-word opus gracing the cover of next month's Atlantic. Not to be snarky -- you can read the whole thing if you wish -- but that is basically the entire story.
Here are a couple of added snippets that were interesting, both from David Mohler, Duke Energy's chief technology officer. Mohler describes how his company, lacking the ability to road test its ideas in the highly regulated United States, finds synergies in China, which can and does roll out gargantuan new enterprises in the blink of an eye: "We have some advanced ideas. They have the capability to deploy it very quickly. That is where the partnership works." Mohler also riffs on the scale of future energy demand that is driving China's clean-coal research:
We learned that China is preparing, by 2025, for 350 million people to live in cities that don't exist now. They have to build the equivalent of the U.S. electrical system (that is, almost as much added capacity as the entire U.S. grid) by 2025. It took us 120 years."
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 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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Chevron is drilling again in the Gulf of Mexico, and the rest of Big Oil won't be far behind now that the Obama administration has cleared the way, the Financial Times' Lex columnists report. As for the South China Sea and the Gulf of Guinea, they are under siege by upstarts like PetroVietnam and Ghana National Petroleum Co.
It's not news that the age of Big Oil is waning, as national oil companies like Petrobras and the Chinese National Petroleum Co. drill their own reserves, and venture abroad as well. But PTT Exploration and Production? As Tim Johnston writes in the FT, Thailand's state-owned oil group is hunting oil, gas and coal assets in Brunei, Indonesia and Madagascar with a $1.9 billion war chest. It may not seem like much considering the sums that Big Oil throws around, but Thai companies in general have been successful acquirers in recent months.
The rare earths imbroglio continues. The New York Times' Keith Bradsher has another report on the slowdown of rare-earth exports from China: This time, he wrote, the flow of the strategic elements has slowed to not just the United States but also Europe. The Obama Administration ordered an investigation into the report. Two weeks before the U.S. mid-term elections -- in which the dastardly Chinese are already emerging as a popular bogeyman -- the elements are likely to come up as a political issue.
Sanctions tighten on Iran. The United States succeeded in further tightening oil sanctions on Iran this week, when Japan's Inpex said it would join European companies and halt its relationship with Tehran, which Washington is attempting to push to the negotiating table over its nuclear development program. (The Iranian government, meanwhile, played down Inpex's announced withdrawal from development of the Azadegan natural gas field.) That now leaves China as the last major country with significant energy investments in Iran, John Pomfret reported in The Washington Post.
Did Britain just institute a carbon tax? Earlier this year, Britain's Department of Energy and Climate Change launched a carbon emissions reduction policy that would have levied a pollution charge -- about $22 per ton of carbon -- on Britain's 4,000 biggest energy users, then paid the money back to the same companies in the form of energy efficiency incentives. It was a revenue-neutral approach -- until Wednesday, when the government quietly decided to keep the money, on the order of $1.58 billion a year. David Roberts at Grist explains.
China braces for a flood of LNG. If you want to gauge how much liquefied natural gas a country plans on using in the coming years, look to the shipyards. Case in point: The Chinese shipbuilding company that has built all of China's LNG tankers to date is ramping up its tanker construction efforts in preparation for what it anticipates will be a quadrupling of LNG imports between now and 2015, one of the company's top executives told Bloomberg News on Thursday. China's LNG consumption, if it lives up to the current projections, will have ramifications far beyond the country's shores -- just ask the companies building pipelines in Alaska.
Another $1.5 billion for biofuels in the United States. After the collapse of efforts to pass cap-and-trade legislation and hopes fading for even more modest renewable energy legislation, these are not the best of times for the clean energy industry in Washington -- unless, of course, you're in the biofuels business. Reuters reports that the U.S. Department of Agriculture is throwing another $1.5 billion at the industry in an effort to meet congressionally mandated targets for the production of still-commercially-unproven advanced biofuels by 2022. As for the 54-cents-a-gallon tariff on imported ethanol -- a reliable source of teeth-grinding for Brazil's government and sugar cane industry -- Agriculture Secretary Tom Vilsack says it's probably sticking around, though it's likely to be phased out in the future. File that in the "I'll believe it when I see it" folder.
Chevron drills deeper. Well, that didn't take long -- barely a week after the Obama administration lifted its moratorium on deepwater drilling in the Gulf of Mexico, Chevron announced Thursday that it would develop two fields in the Gulf estimated to contain some 500 million barrels of oil. The project is pegged at $7.5 billion, and would involve drilling wells deeper than BP's ill-fated Macondo operation. "In the end, the United States needs the oil and gas and other countries need the oil and gas, and some of the best places to explore are deepwater environments," Bobby Ryan, Chevron's vice president for global operations, told the New York Times' Clifford Krauss.
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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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.
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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.
For the Chinese National Offshore Oil Co., otherwise known as CNOOC, the summer of 2005 must seem like ages ago. That's when the entirety of the U.S. foreign policy apparatus, the state of California and all good American patriots arose in unison and said no, a Chinese company could not buy the highly important strategic U.S. asset known as Unocal. So it was that Chevron swallowed Unocal, and CNOOC (pronounced Shnoss) and other Chinese companies went on to acquisitions elsewhere in the world.
Over the weekend, CNOOC closed a $1.1 billion deal to help finance Chesapeake Energy's enormous gamble on shale oil and gas drilling, the big new rush in the energy industry. Specifically, the money will go for Chesapeake's shale oil play called Eagle Ford, in south Texas.
Has anyone heard a peep from the anti-foreign investment crowd this time around? Not me.
Tianjin climate talks get underway -- but does anyone care? A new round of international climate talks opened on Monday, as delegates from 177 countries met in the northeastern city of Tianjin for preliminary discussions on a carbon emissions agreement to replace the Kyoto Protocol, which is set to expire in 2012. The talks are to be followed by a more formal climate summit in Cancun set to open on November 29, and the Tianjin meeting was a chance for delegates to discuss the complex legal framework and cost estimates that will come with instituting a global emissions reduction scheme. The finger-pointing that plagued the abortive Copenhagen talks last December resurfaced, as Chinese officials accused developed countries of not doing enough to reduce their own carbon emissions and argued that those countries should accommodate the growth of emerging economies such as China. The conference stalled as Beijing repeatedly refused to discuss a global emissions reduction scheme, favoring a system of varying individual commitments. Although China has great ambitions in clean energy development, it has long been reluctant to adopt any globally-binding set of carbon reductions for fear of curbing its economic growth.
Shale gas boom could turn U.S. into exporter. The U.S. is continuing to experience a shale gas boom, as companies sunk $21 billion into the shale gas investments for the first half of 2010, according to a report by consultancy Wood Mackenzie. High-profile investments in gas have also come this week, as Barclays paid $1.15 billion for some of Chesapeake Energy's shale assets and General Electric announced its $3 billion acquisition of Dresser, which makes gas engines used in natural gas production. As new extractive technologies have made shale gas commercially viable, U.S. gas supplies have continued to grow ever larger, pushing prices down to some of their lowest levels in the last decade. But despite the adverse pressures of a domestic gas glut and low prices on U.S. gas production, companies are eager to enter the market for what they see as a potential growth prospect. As Sheila McNulty reports in the Financial Times, that growth could come increasingly from U.S. natural gas exports, as some companies are already looking to refit expensive liquefied natural gas import terminals for export. Natural gas exports would give a boost to U.S. gas producers by raising the price slightly at home and thus discouraging cutbacks in production. While natural gas prices in Asia remain high thanks to strong demand, U.S. gas exports could join those from Russia, Qatar, and Australia in bringing down world natural gas prices for years. The upside from this domestic gas glut? Lower prices could see gas continue to become a highly attractive and cleaner alternative to coal and oil as a power source, though admittedly, as McNulty writes on the FT's Energy Source blog, U.S. energy policy and infrastructure have a way to go before that happens. So for now, look for exports to be the path to profitability for U.S. gas producers.
First U.S. wind farm finally moves forward. The Cape Wind development off the coast of Massachusetts, the first U.S. offshore wind farm project, cleared the last regulatory hurdle this week nine years after it was submitted for approval, as Interior Secretary Ken Salazar signed the federal lease for the project on Wednesday. The project is expected to generate enough electricity to power 400,000 homes, but it had faced stiff opposition from wealthy landowners and local businesses on Cape Cod and neighboring islands. The Obama administration is expecting news of the project's green light is shore up its commitment to green energy, particularly after an accompanying announcement this week that the Interior Department has approved the first solar power plants to be constructed on federal land.
How the Senate energy bill was lost. Ryan Lizza at the New Yorker has a detailed and comprehensive piece out this week chronicling the failure of the Senate's climate change bill. According to Lizza, the Senate and the Obama administration had a golden opportunity to pass a comprehensive climate change bill in 2009 and early 2010, especially as bipartisan support in the Senate seemed likely. Sens. John Kerry, Joe Lieberman, and Lindsay Graham had formed a working partnership to getting a bill passed. But the bill foundered as the administration's commitment to climate change took a backseat to healthcare reform, and the White House repeatedly gave up concessions -- such as an easing of offshore drilling restrictions in March -- that the three senators had planned on using as bargaining chips to attract Republican support. The bill was further strained by the influence of utility special interests, and as the political atmosphere ahead of the midterm elections turned increasingly partisan, the partnership at the heart of the bill ultimately disintegrated.
Oil continues rally to new highs this week. Crude oil remained above the $80 mark this week, reaching five-month highs above $83 a barrel on Wednesday and Thursday before declining late Thursday. Crude rebounded on Friday, currently trading at $82.56 per barrel in New York. The price climb has been driven primarily by a weak dollar, which hit a 15-year low against the Japanese yen this week. Contributing to the dollar's decline was speculation that the Federal Reserve would act soon to print more money in order to bolster the economy, a procedure known as quantitative easing. The release of the Labor Department's jobs report on Friday, which detailed no change in the unemployment rate for September 2010, only fed that speculation, lessening the appeal of the dollar and boosting the appeal of crude, which are denominated in dollars and become attractive when the currency weakens. As OPEC prepares to meet next week in Vienna, the cartel is unlikely to respond to the recent price rise by increasing production quotas.
As the saying goes, people gravitate to public service to do good, and stay on to do well. In any case, that apparently is Peter Galbraith's motto. In the 1980s, this foreign policy maven (and son of economist John Kenneth Galbraith) became known for his part in exposing Saddam Hussain's gassing of the Kurds, and for being one of Benazir Bhutto's best allies in America; in the 1990s, he was a key diplomat in the Balkans; and most recently, he was fired as deputy United Nations envoy in Afghanistan, then accused the Kabul government of massive fraud in the 2009 presidential election.
Late last year, we learned from the work of journalists at the Norwegian newspaper Dagens Naeringsliv (Galbraith's wife is from Norway) and the New York Times that Galbraith also has cashed in on his long work in Kurdistan. After the 2003 U.S. invasion of Iraq, Galbraith was instrumental in Kurdistan gaining as much independence from the central government in Baghdad as it did. Now we know fairly well how much Galbraith's work was worth -- between $55 million and $75 million, as established yesterday by a British court presiding over a commercial lawsuit.
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Today, the Taliban set 22 NATO fuel tankers ablaze in the southern Pakistani border city of Quetta. That's a day after a fuel tanker was blown up at Torkham, the border post leading into Afghanistan. On Monday, the Taliban set 20 NATO oil tankers afire in Rawalpindi, outside the Pakistani capital of Islamabad.
In all, the Taliban's oil war has gone on for a week straight. This is a page straight out of the histories of the two world wars, in which access to -- and the absence of -- oil was the deciding factor in both making and breaking enemies.
Until now, the attacks have been explained as the Taliban capitalizing on a standoff between the United States and Pakistan over Pakistani casualties in drone attacks, to which Pakistan has responded by closing the border at Torkham, and leaving the fuel trucks exposed. But that doesn't explain today's attack in Quetta.
In fact, as the U.S. military has clearly documented, long fuel convoys have been among the main sources of American casualties in both Iraq and Afghanistan. The Taliban are Exhibit No. 1 as to why the military is working to untether itself from fossil fuels.
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In the world of oil reserve forecasting, Iraq is hunky, handsome, and -- to its dissatisfaction -- often overlooked. Today, it sought to rectify this negligence with the announcement of a whopping 24 percent increase in its estimated reserves. With a poke in the eye to a traditional rival, Iraq's oil minister said the country had overtaken Iran as the world's fourth-largest petrostate, with 143 billion barrels of oil, or more than half of Saudi Arabia's mother lode.
Hussain al Shahristani appears to be targeting two audiences with his announcement, write Bloomberg's Kadhim Ajrash and Nayla Razzouk: cash-rich foreign oil companies and, more importantly, the Organization of Petroleum Exporting Countries (OPEC), which at some point will reassign Iraq a production quota.
Bluntly speaking, Shahristani was giving the following notice to OPEC: We are big, really big, and can shake up global oil prices if left to our own devices. Meaning that the house of petulance and jealousy that is OPEC is going to have to move back and create a significant space for Iraq, which has ambitions of producing 12 million barrels of oil a day, and might get halfway there. (Currently, Iraq produces about 2.4 million barrels of oil a day.)
Not everyone is impressed. Reuters, for example, queried a number of nonplussed industry analysts. Bassan Fattouh, at the Oxford Institute for Energy Studies, noted that OPEC determines quotas based on actual production, not reserves. "So I'm a bit surprised by the statement," Fattouh told Reuters. "I expect OPEC to continue having a wait-and-see approach and deal with this when Iraqi output and exports actually start increasing." Andy Sommer, of the Swiss trading firm EGL, agreed. "I do not see Iraq getting any OPEC quota for the time being until production reaches something like 4 million barrels per day, which is similar to Iran's production. … Everyone knows Iraq needs every penny it earns from oil to rebuild the country."
Phil Flynn, an analyst with PFG Best, is impressed, but for different reasons, he wrote in his daily column today. "Oh well," he said, "another setback for peak oil theorists."
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One of the strongest current global trends, as we've been discussing, is the world's growing glut of natural gas. We are swimming in it, and yet more keeps coming. This has both financial and political implications. On the financial side, nations relying on gas income -- Australia and Qatar among them -- have years to wait until prices recover from their current fire-sale lows. On the political side, the ocean of gas is likely to push its way on a much larger scale into China, which will be a much cleaner industrial power than feared.
But how much of a game-changer is this surplus? Could it, for example, seriously curb the world's appetite for abundant and cheap, but dirty, coal? If it does, it will mean an additional political shift, since coal is the key driver of current projections of the rise of heat-trapping gases over the coming decades. John Malone, an analyst with New York-based Ticonderoga Securities, tells me that the chessboard extends to developments in India, East Africa and South Korea, and that a general gas-triggered shift away from coal "seems inevitable:"
On the supply side, there's all the sources you mention, plus the domestic unconventional gas potential, plus the Turkmenistan supply, and further out, as Central Asian infrastructure supplying gas to China expands, you could finally see a real outlet for the world's second-largest gas reserves next door in Iran. And there are going to be plenty of significant gas finds as exploration ramps up in East Africa, where I suspect the Chinese will be bumping up against India and the old-school Japanese and Korean LNG players to get export plants lined up.
On the demand side I think gas has a lot of support as well -- plentiful, diversified supply, relatively cheap and clean (especially important given the anecdotes I've heard about local disturbances over pollution). China is putting serious effort into electric transportation, which gas will support until renewables take hold. They have the right idea about transportation -- take the pain now of building the infrastructure needed to solve the chicken/egg problem, then use every means possible (gas, coal, hydro, solar, etc) to make the power -- an electron's an electron, doesn't matter how it's created. And after all that Beijing gets to brag about Chinese greenhouse gas cuts, all for doing something they'd have done regardless of the emissions reduction. Not a bad deal.
If you've been looking for a sign as to where Alaska will ship its latest bonanza -- a mother lode of natural gas -- it came yesterday, when ConocoPhillips CEO Jim Mulva announced that his company was reviewing its plans to work with BP on a $32 billion pipeline project. Translation: the winds are blowing to Asia, specifically China, and away from the Lower 48. Why is this important? Because it could transform China's future energy appetites -- for the better.
The backstory is this: ConocoPhillips and BP have the gas equivalent of 6 billion barrels of oil stranded on Alaska's North Slope. The oil flow from the north is dropping, and now Mulva and BP CEO Robert Dudley -- and the whole state of Alaska, whose population relies on annual dividend checks from their hydrocarbon bounty -- need to figure out how to make up for the revenue loss by getting that gas to people who will buy it.
There have been two options: piping the gas to the Lower 48, or to a West Coast port, from which it would be shipped to Asia in the form of liquefied natural gas. ConocoPhillips and BP's project -- a $32 billion, 1,700-mile pipeline called Denali that would carry the gas to Alberta, Canada, from which it would continue on to Chicago -- would have done the former.
Speaking to reporters in Houston, Mulva said two things: First, he's reassessing the Denali project. Second, he‘s shutting in already-producing gas wells in the United States, waiting for prices -- which are currently in the gutter -- to rise to profitable levels. "We'd rather keep it in the ground for when it will have greater financial impact," Mulva told Bloomberg.
Now, you tell me: If Mulva is shutting in U.S. wells, are there any appreciable odds favoring the construction of Denali to the United States? Let's deconstruct the industry jargon:
Conventional dictionary: Think anew; reconsider.
Oil dictionary: Get the heck out of Dodge.
The Conoco-BP pipeline isn't the only Alaska gas project on offer. Exxon Mobil and Trans-Canada are also in the game, and hedging their bets by proposing two options: a similar pipeline to the Lower 48, and an 800-mile, $20 billion line to an as-yet-unbuilt LNG terminal in the West Coast port of Valdez (yes that Valdez). In the latter case, the gas would be liquefied and loaded aboard ships from Valdez to Asia and elsewhere.
The Exxon-TransCanada team stopped accepting bids at the end of July, and BP-Conoco's bid deadline is next week. The announcement of a winner probably won't come before the end of the year or even early in 2011 because of the required negotiations with ostensible shippers, according to the federal official in charge.
Of course, both teams could decide to punt for now, and return to the question in a few years -- the current gas glut is that intimidating. But if there is a decision to proceed, look for the Valdez option to win. Forbes' Christopher Helman explains the already-growing Chinese appetite for gas here. Injecting an Alaskan gas supply route to Asia's fast-growing mega-economy could have huge consequences. Just as demand creates supply, the inverse is also true: The growing global glut of natural gas seems headed toward a tipping point in which China and other big energy users massively embrace the fuel, and use far less dirty coal than expected.
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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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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.