The AWOL environmental lobby: Over the last several months, this blog has posted a series of lengthy contemplations of a momentous and unnerving new trend -- the possibility of yet another in the century-and-a-half-long cycle of global oil and gas surpluses. According to a consensus of leading analysts, the world -- led by North America -- is on the cusp of a surprising flood of new oil. This week, six of these analytical voices appeared together to scrutinize whether this new age will actually materialize, and if it does, what geopolitical implications will result. We gathered at the New America Foundation for a two-hour, live TV debate.
A couple of interesting takeaways: The new golden age of fossil fuels indeed has an aspirational quality -- the stars must line up, such as oil prices, which must stay pretty well above $70 a barrel in order to sustain most of the new fields. (That may sound easy, given the scale of prices to which we have become accustomed the last couple of years. But one forecast of the new age is that so much oil floods the market that it forces down prices.)
A second aspect of the discussion was the conspicuously little discussion of global warming, which would be seriously exacerbated, as I wrote last month. One reason for this near-omission of global warming was the nature of the discussants -- these are oil market and geopolitical analysts, not climate experts. Yet that in itself is illuminating. I must be missing some folks, but I can think of no one in the climate field who has injected him- or herself into the contemplations of this new age (unless one includes movement activists such as writer Bill McKibben and NASA scientist James Hansen.). One has the sense of an entire sector of business, academia and civil society -- the green energy industry, climate scholars and environmental activists -- on the verge of being obliviously bulldozed by an unseen force. McKibben and Hansen will say "game over" for the planet should the age proceed. The thing is, it appears to be proceeding of its own accord.
As I have criticized the natural gas industry for a self-destructive failure to be fully transparent, I wonder about the green sector's absence from the careful dissection of this powerful trend with the aim of formulating best policies.
You can watch the video yourself:
Mladen Antonov AFP/Getty Images
How to incentivize bad behavior for the greater good: Last year, Mark Dubowitz, a Washington-based advocate of regime change in Iran, was mulling a conundrum with a colleague -- how to clamp painful oil sanctions on Tehran while harming no one else. They knew that members of both political parties opposed cutting off Iranian access to the global export market if it meant an oil-price surge. And that, since everyone thought a price spike was inevitable, nothing was consequently done as oil revenue continued to flow freely into Tehran. So Dubowitz and Reuel Marc Gerecht, his colleague at the Foundation for Defense of Democracies, looked for an improbable, sanitized cordoning of fiscal pain. That's when they hit an apparent brainstorm -- a simple form of game theory that they thought would work.
The game went like this: You divide players into the "white hats" and the "black hats." Global players likely to honor sanctions (the white hats) would be incentivized to do just that -- completely stop buying Iranian oil. But nothing would be done to discourage global players likely to ignore the sanctions from following those very dastardly instincts (the black hats, primarily China, but also India and perhaps another country or two). If everything worked right, Iran -- selling only to this latter, much narrower band of tough-bargaining buyers -- would wield much-diminished pricing leverage. It would consequently be forced to yield substantial discounts, putting great pressure on the regime's ability to finance itself.
In November, Dubowitz and Gerecht distributed the idea as a confidential, 32-page white paper to the White House and Congress, in addition to European capitals, titled "Oil Market Impact of Sanctions Against the Central Bank of Iran." Synthesizing the idea in an op-ed in the New York Times, the pair argued that to move Iran, one needed "to learn how to leverage greed." As Dubowitz told me over palak paneer and dal yesterday, "You give market power to the black hats and allow them to push down the price to earn money."
As we know, the current sanctions regime closely resembles the devilishly clever white paper -- you get obstinate forces and inveterate violators of norms to do what you want by appealing precisely to their baser instincts. Which made me wonder -- what other big problems might be solved using the same logic?
I drew up with a short list of names, along with possible vulnerabilities for use as leverage. How about you -- what problematic situation could you see shaken up?
Go to the Jump for the suggested list, and the rest of the Wrap
Atta Kenare AFP/Getty Images
To understand the Iranian drama requires dual lenses. To the left are the nuclear talks, in which international negotiator Yukiya Amano has announced a potential breakthrough -- Tehran may agree to serious scrutiny of its nuclear research installations. To the right are Western-led sanctions, an attempt to motivate Iran as regards the left lens by slashing its main source of hard cash -- oil export revenue.
We are focused today on that right lens. But to dispense with the left first, Amano, head of the International Atomic Energy Agency, yesterday publicly announced the potential for a new day with Iran (above left, with Iranian nuclear negotiator Said Jalili). IAEA inspectors might for the first time in a half-decade take a look at all the sites, and interview all the players, that they have sought in order to remove the conclusion that Iran is bent on possessing a game-changing nuclear weapon. Later talks could focus on the end-game, which is elimination of Iran's weapons-grade nuclear material.
This announcement instantly unsettled my antennae. In most processes, announcements coincide with the peak achievement. According to that logic, the peak should be an actual binding agreement. That we get it when the peak is simply anticipated makes me suspicious that something less is forthcoming. Amano, himself a past doubter as to Iran's genuineness, says he perceives real movement this time.
Putting that aside, let's skip to the right lens -- the sanctions. As of July 1, they deny Iran access to the international banking and insurance system, without which it is very, very difficult to conduct a large-scale oil business. This blog has been skeptical that the sanctions will work -- the history of Iraq and South Africa, for example, shows that stubborn nations can work around apparently crippling sanctions. Iran specialists say the evidence is that Tehran is either anticipating or already feeling the pain, hence its presence and attitude at the talks. We are watching.
In an angle missed by everyone else as far as I can tell, the Financial Times' Javier Blas, James Blitz and Geoff Dyer report on Western sanctions tinkering. This is an attempt to address a serious flaw in the sanctions strategy that, if left untended, could seriously boomerang on the international community.
[Update: at Eurasia Group, David Gordon reminds me that their own Greg Priddy and Cliff Kupchan pointed out this problem, and its solution, a week ago at the New York Times a week ago. It is a must-read.]
The flaw involves tanker insurance, which no tanker will go without and risk the potential of billions of dollars in liability should there be an accidental spill or other incident. The tinkering is to waive the sanctions to allow insurance for certain volumes essentially to four countries -- China, India, Japan and South Korea. These are the biggest customers for Iran's 2.2 million barrels a day of oil exports. The last three have agreed to cut back their purchases, but still intend to buy some, which the West actually has encouraged. But the worry is that they won't buy any at all if there is no tanker insurance, or that rogue insurers could step in and offer so much insurance that the sanctions could become meaningless.
You see, in a perfect sanctions world, the punishment is bad for the victim, and does not inconvenience anyone else. However, should too much Iranian oil vanish from the global market, prices could surge, which would be very inconvenient, say, to President Barack Obama, currently a candidate for re-election, not to mention the struggling economies of Europe.
So the idea is to exchange this insurance tinkering -- they are calling it a shipping waiver -- for an Iranian "pledge" not to develop nuclear weapons. The trick is to do this in a way that does not appear weak, since pledges are not enforceable. To check this logic, I queried Daniel Byman, a Middle East analyst and professor at Georgetown University. Byman:
A pledge would be viewed with a lot of suspicion; [it would be] better than nothing, but most would doubt. And Obama could not publicly embrace this politically.
Yet Byman also thinks the story is credible. "Europeans are far more amenable to this than the U.S.," he told me. "It depends what the [Iranian] guarantees are in practice."According to the FT, the U.S. is together with Europe in the shipping waiver idea, the strategy being to lock in the cuts to Iranian exports, and no more. Here is what Citibank's Ed Morse told me about the report:
The shipping waiver is a bone. It enables the original sanctions to go into effect globally but enables those governments who limited the amount of oil being imported to have insurance coverage for that amount of oil. It reduces the impact of the unintended consequences of ancillary sanctions on insurance and makes for smoother relations with allies.
What troubles me is the attempt to be clever. When you try to be perfect in real life, you can end up with some imperfect results. Take our economic history of the last decade.
Hamed Jafarnejad AFP/GettyImages
Let's say you are Iran. You are either developing nuclear arms, or for whatever reason wish to convey the impression that you are. And you want to continue doing so. But now your main flow of cash -- your oil export earnings -- is jeopardized by Western concerns that it is the former: You pose the threat of becoming a new, activist nuclear power. For financial and insurance reasons, but mainly to avoid the wrath of the United States and Europe, many of your usual international customers want less of your oil, or none at all.
If you are Iran, you adopt a dual strategy: You start talking with the West (above, chief Iranian nuclear negotiator Said Jalili at talks over the weekend). And you act to make it possible for risk-takers to buy your oil.
To accomplish the latter, you go stealth -- you set up a mechanism so buyers of your crude can hide that they are defying U.S. and European wishes.
In a scoop, Reuters' Christopher Johnson and Peg Mackey report one way this is happening: Iran's oil tanker company, known for short as NITC, has switched off the tracking devices on most of its 39-ship fleet. By international maritime law, these GPS-based transponders are installed on all such ships plying the seas.
In order to figure this out, Johnson and Mackey took a list of the 39 ships (like this one), and put it up side-by-side against the constant reporting carried out on this web site) by MaritimeTraffic.com. Then they interviewed a lot of traders. The result is a must-read.
I pulled up the sites last evening and this morning, and saw just two of the 39 ships listed - the Afagh and the Amol. In their check, Johnson and Mackey found reporting for seven of NITC's 25 very large crude carriers, and two of its nine smaller Suezmax tankers. You can take a look yourself.
Bulent Kilic AFP/Getty Images
The mysterious psychology of price: The well-established wisdom is that consumers respond to psychological price points -- offer your product at $9.99, and shoppers are far more likely to buy it than at just a penny more, or $10. So it has been with gasoline: In 2008, American car-buyers fled gas-guzzling vehicles when fuel crossed the $4-a-gallon price point, bought more fuel-efficient models, and generally drove much less. This year, the same seems to have occurred, as I wrote -- with gasoline again approaching an average of $4 a gallon, we see far greater sales of fuel-efficient vehicles. Yet is it so simple? Perhaps not, says Paul Hunt, president of Pricing Solutions, a Toronto-based firm that advises companies on how to price their products. Hunt told me that consumers may only seem to be responding more negatively to $4 than to $3.99 a gallon, but that something else may actually be going on in their collective heads. It is not the per-gallon rate that sets a motorist's hair on fire, Hunt said. It is the $66.81 total price of filling up.
But when it comes to buying, are gasoline and shoes truly such different creatures? Surely, I asked Hunt, the sight of $4 on the gasoline station signboard is enough to drive off immediately to the Kia showroom. Only in the big picture, he replied. "People really look at the total fuel bill and make sure they can go to a restaurant once a week rather than pay for fuel," he said.
Maybe in 2008 it looked like people were making a decision because of $4 gas, but actually it was the total price that influenced them. [They are thinking], ‘It cost me $85 to fill up, and I want to save $10 a week.' They do the math.
Furthermore, the price has to stick. Even that $85 gas bill won't have a lasting impact unless a driver thinks that will be the price for a long time to come.
In a curious footnote, Hunt said that although price-per-gallon is not the pivotal fact on the way up, it can be on the way down. Motorists watch the signboard for a price that to them signifies "cheap." Then "they go hit the pumps," Hunt told me. "When prices are moving down, people have something that attracts them."
Go to the Jump for more of the Wrap.
Joe Raedle/Getty Images
A coming U.S. renaissance -- and an oil price crash: Citibank's Ed Morse unloads a monster, 92-page report forecasting no less than a new American Industrial Revolution. This economic resurgence is carried on the back of low natural gas prices as far as the eye can see (pictured above, hydraulic fracturing in Pennsylvania), in addition to a shale-oil, oil-sands, deepwater-oil boom that makes the U.S. "the new Middle East." In line with other top analysts, notably Deutsche Bank, Morse forecasts a tight global market in the next few years, notwithstanding the U.S. abundance, with the suggestion that prices will be high as well. But nirvana will arrive by the end of the decade with the convergence of U.S. oil abundance and a burst of production from west and east Africa, the Gulf of Mexico, India and the Caspian Sea. By the 2020s, we will see maximum oil prices of $85 a barrel, Morse writes in a teaser at the Wall Street Journal. There are of course potential geopolitical consequences, Morse writes:
It is unclear what the political consequences of this might be in terms of American attitudes to continuing to play the various roles adopted since World War II -- guarantor of supply lanes globally, protector of main producer countries in the Middle East and elsewhere. A U.S. economy that is less vulnerable to oil disruptions, less dependent on oil imports and supportive of a stronger currency will inevitably play a central role globally. But with such a turnaround in its energy dependence, it is questionable how arduously the U.S. government might want to play those traditional roles.
I have noted previously that some of us are suffering whiplash since just a few months ago the conventional wisdom was energy scarcity. One is inclined toward caution regarding the new narrative of abundance, such as we see in the lead story today in the New York Times, where Clifford Krauss and Eric Lipton depict a future of "independence from foreign energy sources." Morse, the dean of oil analysts, must be taken seriously. Yet the forecast oil bonanza is still largely on paper -- the crude is not pumping through the country's petro-arteries. What if oil prices drop? Will the economics still support the type of drilling described? I urge continued and watchful caution.
Go to the Jump for more on the energy boom and the rest of the Wrap.
Spencer Platt/Getty Images
The Obama Administration discounts concern that oil sanctions on Iran have ironically succeeded too well, and risk pushing the global economy into recession, say people familiar with the administration's thinking. Against worries that the sanctions have gone too far, too fast -- removing too much Iranian oil from the global market -- the Administration intends to continue trying to choke off Tehran's oil revenue, with the hope of forestalling its nuclear development.
The Administration is pursuing two conflicting containment goals: to halt Iran's acquisition of nuclear weapons, and cap surging oil prices during an election year. Its bet is that it does not have to ease up on the former in order to achieve the latter.
The U.S. Treasury Department has clamped on banking restrictions punishing institutions that facilitate payment for Iranian crude, and U.S. officials have traveled around the world to persuade importing nations to buy less Iranian oil. The European Union meanwhile has decided to halt all Iranian oil imports by July 1. Analysts think that these dual tracks have worked so well that it is as though we are already at July 1 (pictured above, gasoline prices in Los Angeles three days ago).
Kevork Djansezian/Getty Images
The war of tight oil: Are we in an age of oil plenty, or a stubborn era of scarcity? The folks with skin in the game are among those who cannot agree. At Citigroup, Seth Kleinman leads a group of analysts (including the venerable Ed Morse) who issued a note to clients this week declaring "the death of the peak oil hypothesis," a belief that there is a limit to how much oil can be produced. The actor in this murder is shale oil, the sister to shale gas, which is being unleashed from hard underground shale through the application of hydraulic fracturing. "The U.S. appears to be on course, after many weak starts, to achieve energy independence this decade," Kleinman writes. In a shot over the bow of doubters, the Citi team snickers at those who cannot notice the truth before their eyes: "We expect industry expectations to lag behind reality, just as they did with shale gas for many years." They go on to tally up how they see the new oil patch:
U.S. crude and product imports are now about 11 million barrels a day, with about 3 million barrels a day of product exports. This leaves import reliance at 8 million barrels a day. If shale oil grows by 2 million barrels a day, which we think is conservative, and California adds its 1 million barrels a day to the Gulf of Mexico's 2 million barrels a day, we reduce import reliance to 3 million barrels a day. Canadian production is expected to rise by 1.6 million barrels a day by 2020, and much of this will effectively be stranded in North America, and there is the potential to cut demand both through conservation and a shift in transportation demand to natural gas by at least 1 million barrels a day and by some calculations by 2 million barrels a day.
Voila, U.S. energy independence.
Not so fast, say the analysts at Barclays Capital, who issued their own, nearly simultaneous note to clients saying the opposite. The note, by Paul Horsnell and Amrita Sen, suggests that Barclays' clientele guard against "the near-euphoria surrounding the potential of oil shales in the U.S., together with a natural bias in the market to be overly optimistic on oil supplies." The oil market is extremely tight, made the more so by political upheaval, says the Barclays team. They write:
While posing some stirring prospects following almost a decade of dismal performance by non-OPEC supply, oil shales alone are simply not enough to offset the decline in other parts of non-OPEC and meet all the incremental demand growth. The scale of growth in U.S. output really needs to be put into perspective. North Dakota still only produces 0.5 million barrels a day, which in a weak year, incremental Chinese oil demand alone can consume all of and more. Does shale oil help the U.S. reduce its dependence on foreign oil? Yes, it does. But does it remake the U.S. into the next Saudi Arabia? No, at least not yet.
There you have it.
Go to the Jump for more of the Wrap.
STRDEL AFP/Getty Images
In the last episode, we were awash in gas: President Barack Obama is using the language of a shale gas enthusiast, crowing this week that the United States has sufficient reserves of the fuel to last 100 years. For that reason, the U.S. ought to push ahead with natural gas development, as long as safety concerns are kept in mind, said Obama (above, pictured this week on the campaign trail). Almost simultaneously, though, large volumes of that gas have vanished. First, the administration's own energy think tank -- the Energy Information Administration -- sharply lowered its estimate of U.S. shale gas reserves: rather than the 827 trillion cubic feet in unproved technically recoverable reserves announced last year, the EIA estimates that the country has 482 trillion cubic feet, or 41 percent less. The drop is understandable -- it has to do with the addition of completed wells, which provides more data points for the EIA to insert into its reserves model. But some serious analysts think even the lowered numbers are soft; Chris Nelder, for instance, writes that all that can be surmised credibly is an 11-year supply of gas at current consumption rates.
Then there is actual production. Chesapeake and ConocoPhillips have both announced the withdrawal of a substantial volume of gas from the market because of firesale prices that prevail, currently $2.77 per 1,000 cubic feet, compared with $13 in 2008. Chesapeake -- the second-largest U.S. gas producer -- said it will sell 8 percent less gas this year than last; Conoco says it will lower production by 4 percent. It is not that the companies are going broke -- as discussed previously, much of the gas is in the same geological formations as highly lucrative oil, so drillers themselves say they earn excellent profit regardless. Yet, they would like to earn greater profit still by driving gas prices higher through the law of supply and demand -- currently, there is a super-glut of gas; they would like to reduce that to a mere glut. Of course, the drillers in part have themselves to blame for sagging U.S. gas demand: In 2009, the shale gas industry vigorously opposed Obama's push for cap-and-trade legislation, under which electric utilities would have accelerated their transition from coal- to gas-fired plants. The drillers would be selling much more gas, and prices would thus probably be higher. Alas, those politics were not to be. The Financial Times' Ed Crooks quotes Oppenheimer's Fadel Gheit: "I would expect all large gas producers without exception to scale back production this year."
These developments are important for a single reason: The U.S. is the epicenter of the global shale gas boom. Because of the U.S. bonanza, for example, Russia has been shaken in Europe. China might be next to join the boom. It is importing U.S. technology; if it succeeds in producing substantial shale gas, it could transform its own set of circumstances. But if the numbers are consequentially smaller than supposed, and if the market is slow to absorb the higher volumes, the geopolitical outcomes will be muted.
Go to the Jump for more of the Wrap
Ethan Miller/Getty Images
U.S. and European lawmakers may give Iran the right to earn some cash from natural gas sales -- as long as Russia might get it in the gizzard as a consequence.
The European Union yesterday voted to ban Iranian oil imports to all member states as of July 1, and to freeze the assets of Iran's Central Bank, reports the Wall Street Journal's Farnaz Fassihi and John Biers. U.S. and Europe also stopped transactions with Bank Tejarat, the last Iranian bank handling large purchases and sales of the nation's oil; the move means that any institution anywhere in the world doing business with the bank could be subject to sanctions of its own, reports Bloomberg's Indira Lakshmanan. The moves are part of a significant financial tightening of Iran's capacity for earning any money that could assist its presumed efforts to build a nuclear weapon (above, Tehran's money bazaar, which had a run on the rial yesterday).
But EU and British officials, along with the London-based oil company BP, think that a gigantic natural gas project in the Caucasus country of Azerbaijan ought to be exempted from the noose. The BP-led Caspian Sea project, known as Shah Deniz, contains the oil equivalent of about 6 billion barrels of natural gas and gas liquids. By 2019, BP plans to hit peak annual exports of about 25 billion cubic meters of gas from Shah Deniz.
The catch is that Iran's state-owned Naftiran Intertrade possesses a 10 percent ownership stake, so stands to earn quite a bit alongside BP and other shareholders. Iran obtained the share in the 1990s, when the local politics favored including as many big neighboring and international players as possible to encourage the stability of the project. But now BP - along with the British government, for whom BP is the country's largest publicly traded company -- fears a serious stumbling block should the international wrangling with Iran drag on through the decade.
Atta Kenare AFP/Getty Images
The geopolitics around us -- mainly Iran and Nigeria -- are keeping oil prices aloft. But should traders lose the fear of Tehran closing the Strait of Hormuz, and Nigeria's Goodluck Jonathan not managing to make peace with his striking countrymen, look for the air to go out of prices that, despite the continuing European economic crisis, exceed $100 a barrel. And if they drop far enough -- into the low-$80s-a-barrel range -- some key petro-states are going to be in serious trouble, according to a couple of analysts from the Eurasia Group.
In a blog post at the Financial Times, Eurasia's Chris Garman and Robert Johnston scrutinize Russia, Nigeria, Venezuela and Saudi Arabia. Garman and Johnston's presumption is that oil demand remains soft in the U.S. and Europe, and erodes the impact of an expected rise in Asian oil consumption. As a result, Saudi Arabia attempts to retain a floor under prices by reducing production, but that just creates a vicious circle: Lower actual Saudi production necessarily means higher idle production capacity, also known as spare capacity. As far as petro-states are concerned, that is a deadly brew.
Oil prices are determined at precisely that inflection point -- spare capacity. Oil traders in London and New York compare global oil demand and the capacity of petro-states to meet it, and if the gap between the two numbers is exceptionally narrow -- if there is barely enough production capacity to satisfy demand -- then traders will bid up the price. When they do so, they are betting on the blowup risk of an event like anti-Iranian sanctions or Nigeria's street protests, and the loss of existing oil exports. This risk is based on the following question: Do or do not states such as Saudi Arabia possess sufficient spare capacity to make up for those lost exports?
Similarly, if the gap between the numbers is super-wide -- such as would occur this year in the Eurasia scenario -- traders will bid down the price, since it almost wouldn't matter what geopolitical event occurred: There is still plenty of spare capacity to compensate for almost any loss of production.
Juan Barreto AFP/Getty Images
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.