Kazakhstan is moving fast to pacify its restive west as a new video circulates in which police shoot and beat retreating oil workers protesting labor conditions. Two reasons: With parliamentary elections three weeks away, President Nursultan Nazarbayev (pictured above) wants to stamp out any political narrative conflicting with his long-time assertion of keeping Kazakhstan stable. Abroad, the jittery global oil market is already starting to factor in a possible disruption of Kazakhstan's 1.5 million barrels a day of oil exports, half of which is an extremely high-quality light variety.
The Kazakhstan unrest -- violence in the western city of Zhanaozen in which some 14 workers were killed -- caps an extraordinarily turbulent year in the world's oil patch. The distribution of power has been shaken up in the Magreb countries of Egypt, Libya and Tunisia, and violence continues to threaten the rulers of Syria and Yemen. Saudi Arabia is spending some $130 billion to stave off its own public dissatisfaction. In Russia, Prime Minister Vladimir Putin's seemingly unassailable hold on power has been challenged by a botched decision to return to the Kremlin, and a rigged parliamentary election. All in all, the uprisings have helped to push annual average oil prices to their highest level in history, exceeding $100 a barrel.
The trouble on the eastern Caspian Sea is the climax of a six-month-long labor strike by some 1,500 oil workers over wages and other grievances. These workers appear to have mounted their strike against two oil companies -- the state oil company, which goes by the acronym KMG, and a Chinese-Kazakh oil company called Karazhanbasmunai (here is a good explanation by Alisher Khamidov at eurasianet.org.). Last weekend, as the country prepared to celebrate the 20th anniversary of its independence, workers protested city plans to turn their strike camp -- the Zhanaozen public square -- into a festive place for dancing and public dining. It turned into a riot, with vehicles and buildings set aflame.
For six months -- ever since the rebel movement took shape in Benghazi -- one of the liveliest guessing games in Libya has been deducing the whys of Qatar's deep intervention in the uprising. After all, for the last decade or so, Qatar ruler Hamad Bin Khalifa al-Thani's main preoccupations have been the accumulation of a fabulous natural gas fortune, and the creation of a wondrously successful all-news TV channel. But now, Sheikh Hamad has deployed jets, military and political emissaries, and tens of millions of dollars to project the influence of his ultra-tiny sheikhdom.
This sudden high profile has generated concern, particularly among those familiar with how similar well-meaning Arab largesse went wrong in 1980s Afghanistan, leading to that nation's long period of jihadism.
Conjecture about Sheikh Hamad's motives has included a desire for regional cachet and an economic payoff (the BBC); a hope to "secure influence and make good friends" (Bloomberg BusinessWeek); and an aim to be a leading voice in Arab nationalism (the New York Times).
But, in a piece this week, the Wall Street Journal delivers contextual reporting that appears to be better anchored. The WSJ story, by Sam Dagher, Charles Levinson and Margaret Coker, describes the Qatari activities in a way reminiscent of the direct Saudi aid that -- in parallel to covert U.S. assistance to the anti-Soviet mujahedin -- went to then-little known Afghan leaders like Jalaluddin Haqqani and Gulbedin Hekmatyar.
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Medvedev stays, according to O&G readers: The betting stage of the Kremlin Contest is concluded, and the results are - 53 percent for Dmitry Medvedev to 47 percent for Vladimir Putin. That is, there is greater than a 50 percent chance that Putin -- the sole maker of big decisions in Russia -- will decide to keep Medvedev (pictured above today at a Tajik reception in Moscow) in place as president when his term expires in March, according to O&G contestants. That goes against the conventional wisdom, which is that Putin will opt to return to the Kremlin for another six-year term.
Some political junkies favor general public opinion surveys; others prefer barroom trash talk (and bloggery). I see significant merit in what is said by folks having sufficient conviction to back it up with a wager, in this case a small non-cash bet. But O&G bettors are outliers even among this group. U.K. bookmaker Paddy Power, for example, gives odds of Putin winning -- 2/7 for Putin and 9/4 for Medvedev, meaning that for a 100-pound bet on Putin winning you'd receive just 28 pounds back, while the same bet for Medvedev would get you 175 pounds (h/t Anatoly Karlin). (For those with a taste for betting who believe Medvedev will get the nod, it appears shrewdest to take the other side of the 2/7 Putin bet at Paddy Power, which if I am reading correctly appears to pay 350 pounds.)
As you recall, I started off the betting by wagering that the tandem would stay untouched, and that Putin would announce his choice on Dec. 9. But O&G's bettors made me a bit ashamed about my wager of a glass of Rioja. Other bets included Secret Aardvark hot sauce of Portland, Oregon; black and white photos of Moscow taken from the same spot -- one dated 1965 and the other 2011; an African warrior mask from Malabo; and aviator sunglasses. Therefore, I am adding a signed copy of The Oil and the Glory (the book).
Divvying up the Libyan booty: When it comes to war, it is said, the victor gets the spoils. The unstated second part of that phrase is that these spoils are transferred in a very public manner. So it is with the unseemly matter of Libyan oil. Led by the influence of fleet-footed writer Bernard-Henry Levy, France leaped into the Libyan fray on the side of the rebels last March and did not let up. Therefore, says French Foreign Minister Allain Juppe, it is "quite logical and fair" that French oil companies have preferential treatment in the divvying up of post-war reconstruction and other oil contracts. Presumably the sentiment is shared by other NATO members such as the United States who bombed Col. Muamar Qaddafi's troops for months. At the Wall Street Journal, David Gauthier-Villars writes that Russia -- which like Brazil and China maintained a comparative arm's length from the rebels -- is miffed by NATO's sense of entitlement. Moscow wants the United Nations to lead the reconstruction. The catfight is similar to one that followed the 2003 fall of Saddam Hussain, when China and Russia initially lost their favorable oil contracts negotiated with the deposed dictator, only to win serious chunks of the oil patch in subsequent deals with the current Iraqi government. A similar outcome is likely in Libya.
Dmitry Astakhov AFP/Getty Images
The guessing game on Libyan oil: Technically speaking, it shouldn't be a big deal to restore Libya's full oil production of 1.6 million barrels a day once Col. Muamar Qaddafi is out of the way. Production has fallen to around 60,000 barrels a day, but Eni, Total and rebel-affiliated Agoco are poised to bring some 600,000 barrels a day on line within just a few months, Platts reports. Then, contractors and companies can tidy up pipelines and infrastructure (such as the Zawiya oil refinery pictured above) bombed by both sides since February, and the whole pre-revolt production could be back.
The problem is that we are not talking about entirely a technical matter. Instead, the bottlenecks are how quickly a new government can be functioning in Tripoli. Which companies will it want to include in future production, and which will it want out, and under what terms? In addition, remember that one large obstacle to getting Iraq's oil and gas up and running after the fall of Saddam Hussain has been who profits from it -- is it local governments? The central government in Baghdad? Whose companies? That scenario will figure in Libya too. So the restoration of Libyan oil is very much a guessing game. This is the way the market perceives the situation -- it's why oil prices haven't plunged with Qaddafi's apparent collapse.
For betting folks, Edward Morse of Citigroup can be counted on for a sensible take, and he is optimistic, Bloomberg reports. Morse thinks the entire pre-revolt production volume will be back by the end of next year.
Filippo Monteforte AFP/Getty Images
We wish all Libyans the right to choose their leader freely, but do we want to pay higher oil and gasoline prices as a cost of our empathy? Decidedly no. Hence, our interest in the Libyan dividend -- a plunge in oil prices if Col. Muammar al-Qaddafi finally falls. As for Saudi Arabia, it would appreciate less pressure to save the world. So far, although rebels are rummaging through Qaddafi's compound this evening and Libyans are dancing in the streets, prices have risen.
Yet, that isn't exceedingly aggravating -- no one in the end except the Libyans themselves can restore their 1.2 million barrels of crude exports. What is truly vexing is that, while we are transfixed on Libya, U.S. companies far from any war zone -- the pioneers of the global oil industry 140 years ago -- have failed to begin building a simple pipeline from Oklahoma to Texas that would help as much as Libya to stabilize oil prices at least in the United States.
We are speaking of Cushing, Oklahoma, a pin-speck town with an outsized impact on global oil prices because of its singular business -- the storage of oil. Cushing currently can store 46 million barrels of oil, or well over double the daily volume consumed by the entire nation. For the last three decades, it has been the pricing point for West Texas Intermediate, one of the world's two main benchmark grades of crude oil. When you hear "oil prices went up today," the chances are the person is talking about WTI.
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The apparently successful Libyan uprising leaves a tattered playbook for the petro-rulers of the Middle East, and forces leaders from the West and especially China to rethink anew their interactions with these stewards of the heart of the global economy. Having learned from early stages of the Arab Spring that conciliation does not guarantee their survival, the toughest of the region's dictators now grasp from Libya that they cannot presume that deadly action will throw off the rabble, either -- they must find a new formula for sticking around. As for politically blithe China, it cannot assume that agnosticism is its best strategy for resource security -- it, too, must recalculate, and probably take an unaccustomed political position rather than straddle the fence.
The self-immolation of Tunisian fruit-seller Muhammad Al Bouaziz in January ignited the repressed aspirations of millions in the region, leading to the important abdications of Tunisia's Zine El Abidine Ben Ali and Egypt's Hosni Mubarak. But it was the Libyan rebellion in February that raised the specter of flaming oilfields in the nations that truly count in the global economy -- the oil-soaked monarchies of Saudi Arabia, Kuwait and Qatar. The price of oil surged (more on this matter below).
More important as far as the rulers were concerned, they seemed secure, but they could not be certain, and the biggest of them all -- the al-Saud family of Saudi Arabia paid out $129 billion to its people in various allowances as a cost of retaining power. Its neighbors did similarly. For the decades to come -- as long as these rulers remain in power -- they will go everywhere with the albatross of al Bouaziz hanging on their necks. Yemeni leader Ali Abdullah Saleh remains in Saudi Arabia, which has been nursing him back to health after he was badly injured in a palace explosion two months ago, but is it in King Abdullah's interest to allow Saleh to return home? Probably not -- if rehabilitation was previously in the cards, today's Tripoli events probably spell the end of Saleh's hopes.
As for outside powers, Western leaders anticipated today's events in Tripoli by demanding the resignation of Syrian leader Bashar al-Assad (who so far has responded by pushing ahead with the bloody end of the two options open to these rulers in the traditional Dictators Playbook). The dancing in Tripoli tells the United States and the European Union that NATO bombing was the right thing to do, and that they must continue to be proactive or lose the Arab street.
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As a reminder, a multinational cast of co-conspirators has opened the spillgates of their strategic petroleum reserves, adding 60 million barrels of oil onto the world market. The reason is economic: Oil prices were already declining, but the consensus is that they would have increased substantially toward the end of the year, with no end in sight, because of Chinese oil demand and constrained supplies, hence complicating the sluggish global economic recovery. Nobuo Tanaka, head of the International Energy Agency, which along with the United States coordinated the intervention with China, India, and Saudi Arabia, along with Japan, Germany, South Korea, and others, said the extra oil is intended to tide over the market until a planned Saudi increase in oil production takes effect.
Yet, as we've discussed, what we'll probably see in response to the intervention -- once traders get up from the mat and dust off their britches -- is a case of brinkmanship. Traders will redouble their bets in the futures casino, gambling correctly that neither the Obama administration nor other members of the Energy Information Agency will have the stomach to continue for long emptying out their reserves onto the market.
This is a wily market. Already U.S. regulators are investigating the possibility that some traders caught wind of the move before it happened and perhaps unlawfully profited, writes Jerry Dicolo at the Wall Street Journal.
A lot of observers have been impressed with the U.S. move. The New York Times, for instance, editorializes that it could provide a boost for the U.S. economy. At the Financial Times, James Macintosh writes that it's meant as a new global economic kick-start since the U.S. Federal Reserve's latest $600 billion pump-primer, known as "QE2" -- or a massive purchase of Treasury bonds whose impact is to lubricate the weak economy -- ends Thursday. And oil analyst Peter Beutel said the move "could work" in terms of helping the economy.
But at Deutsche Bank, oil analyst Paul Sankey said the United States has effectively injected itself into the equation as another speculator, and the result will not be as intended. "Every oil market comment from the White House will [now] become a market-moving event," Sankey writes in a note to clients. "In short, this move has added to oil markets' fear of volatility.
Oil analyst Stephen Schork told Bloomberg that the move will backfire and in fact convince traders that there is something very wrong in the market, which will be reason for them to push prices back up.
One big point is that it's highly unlikely that anyone is going to buy much of the offered-up barrels either from the SPRs or the Saudis, as David Bird and Ben Lefebvre write at the WSJ -- the market is satiated, and stockpiles overflowing. Instead, both the U.S.-led and Saudi interventions are more symbolic gestures -- a message to underscore the point, even for the hardheaded traders, that the market is fully supplied and that there is no reason for them to keep pushing up prices.
But in the end, traders will push up prices. Look for such a move toward the end of the year or the beginning of 2012.
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Members of OPEC will agree to increase their official production today, but that won't do much to lower prices -- the plenitude of energy-related stress across the globe underscores more than ever how power has dispersed out of OPEC's hands. It's not only the civil war in Libya, and the loss of its 1.4 million barrels a day of oil exports, or the chaos in Yemen. From the South China Sea to Alberta, Canada, tempers are flared over the control and movement of oil.
The Vietnamese, the Filipinos and the Japanese are vexed over unneighborly behavior by China, which most recently severed the seismic cables of an oil exploration ship, and fired at fishing trawlers in the South China Sea. For their part, some Chinese call their neighbors plunderers and the U.S. a hegemonist. For now, southeast Asia is more worried about U.S.-Chinese friction over these confrontations than winning the debate of the moment with Beijing, and so the Obama administration has relaxed its posture of last year, when Secretary of State Hillary Clinton declared the dispute a U.S. strategic interest. I exchanged emails on this with Bonnie Glaser, a China expert at the Center for Strategic and International Studies. "I think that if Chinese intimidation of oil exploration activities continues, the U.S. will have to take a stronger stand -- especially if Exxon is involved. But the Obama administration hopes it doesn't come to that," Glaser said.
Fighting continues in Sudan, this time in a contest over the breakaway south's oil, writes Jeffrey Gettleman at the New York Times. Southern Sudan is set to become independent next month, and Sudan President Omar Hassan al-Bashir has taken a hostage -- the entire town of Abyei -- as leverage in order to obtain more oil in the split-up. The south produces about 500,000 barrels of oil a day, and though there appears to be little chance of renewed full-out war as long as the south slices off some of that for the north, there is plenty of violence for now.
In western Pakistan, the Taliban yesterday again blew up U.S. fuel supply tankers destined for Afghanistan (pictured above). Such acts do not change the global picture, but illustrate the Taliban's understanding of the centrality of oil in running the war.
A more peaceful but still hardball struggle has gone on a long time between independent-minded Kurdistan and the central Iraqi government over control of natural gas in Kurdistan. There could be a deal yet as Prime Minister Nuri al-Maliki relies on Kurdish political support, writes Tamsin Carlisle at the National, but not very soon. Meanwhile Canada is grappling with the U.S. over its desire to send the bitumen from its Alberta oil sands to Gulf of Mexico refineries.
And all this excludes the impact of natural disasters, such as we may see with the summer hurricane season. So what OPEC decides will help to bump prices one way or the other, but it may not be the main determinant even today.
Update: We are getting a jump in oil prices this morning after OPEC's announced decision to punt on Saudi's proposed increase in production, and keep output where it is. Traders are engaging in opportunistic buying. This should last for a day or two until the reality of an oil glut settles in again, along with the multitude of other factors influencing prices.
Speculation: how oil prices (often) happen in the real world Over the last couple of days, there has been a bloodbath in the oil market -- a "flash crash" as they call it. Today, prices are dropping further. What is going on? Well, the traders in the casino whom we've been discussing the last several months are taking their winnings off the table in a seriously panicked way and stampeding out the door. Oil is now in the mid-$90-a-barrel range. If this keeps up, gasoline will fall back from $4 a gallon here in the United States.
I raise this because of the news, but also because elsewhere we are seeing pushback from those who argue -- as similar individuals did the last time we had a price runup, in 2008 -- that not trading (speculation) but supply and demand are the motive drivers of oil prices. These folks' refrain goes like this: "People who say traders are behind the whole runup in oil prices are wrong wrong wrong, besides being paranoid and conspiratorial."
What's the problem with this argument? Nothing on its face -- after all, how can any one single factor be responsible in every case of a particular outcome? The law of averages tells you the dice won't come up sevens every time. But when you look underneath it, it falls apart. Why? Because its formulation is faulty. Speculation isn't always responsible for price swings. But often it is.
Back in 2008 -- and now -- a debate raged over steep increases in oil prices. Traders from Goldman Sachs and elsewhere, along with many observers, asserted that this was all about supply and demand (actually they use the code word "fundamentals"): There in fact were traders buying and selling cargoes and futures, but they had no or little ultimate impact because (gobbledygook alert!) "for every buyer, there is a seller," and "futures prices cannot be persistently high without the support of physical fundamentals." On the other side of the debate were lots of screamers using epithets against speculators (spit, spit), in addition to ordinary commodities analysts and reporters who simply watched the action before them, compared that with the movement of prices, and made their own assessment: Psychology drives the price of oil futures up, and down. Traders are aware at all times of supply and demand, but it is what they expect next that propels their trading, and hence prices of futures. After that, their decisions converge directly with what buyers pay in the physical (spot) market.
Again, let's use a betting metaphor. A group of men and women are sitting in a casino playing poker. The pot grows larger as each player discards and picks up new cards, betting in rounds along the way. The question: What is causing the pot to grow? The bettors or the cards in their hands?
The first crowd -- the traders and absolutists -- will say it's the cards (the fundamentals): no cards, no bets. The second crowd will say, sure there are the cards -- no one would bet without their presence; but in the end, it is the bettors whose hubris, knowledge of their own cards, guesswork about others' cards, susceptibility to bluffing, and experience in the game drives how much they do or don't put on the table, and thus how large the pot grows.
Listen to Frank Cholly of Lind-Woldock, speaking after yesterday's selloff with the Wall Street Journal: "It's a mass liquidation. I think it's just hedge funds got scared and everyone's running for the door right now. It just seems to be contagion." Now listen to Douglas Hepworth of Gresham Investment Management, who spoke with the Financial Times: "You want to be the first one out the door because the trip down can be even faster than the trip up."
Finally, watch this video featuring Liam Denning of the Journal, and Oppenheimer's Fadel Gheit, the dean of Wall Street oil analysts. Then look me in the eye and tell me traders and their day-by-day speculation are not singular and dominant factors in the oil price.
As for the morality of all this, are speculators bad people? No. Should they have to pay more to bet in the casino? Yes. Would that higher fee-per-bet cause a catastrophe to "the liquidity of the market," as the gobbledygook purveyors will argue? No.Read on to the jump for Libyan tribal politics, Iraqi oil, and Afghan roads.
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We continue to wonder what is happening in authoritarian Muslim petro-nations outside the Middle East and North Africa. We previously published excerpts of Afghanistan coverage by Muhammad Tahir, Washington correspondent for RFE/RL. With the post below, Muhammad offers his take on Turkmenistan, the natural gas-rich Central Asian republic bordering Iran, Afghanistan and the Caspian Sea. The opinions expressed are his alone, and do not necessarily reflect those of RFE/RL.
Turkmenistan has the brew familiar to observers of recent Middle East events -- obscene volumes of hydrocarbons; a wealthy few and a dirt-poor mass; official corruption ranking among the worst on the planet, according to Transparency International; a delusional and megalomaniacal leader; and an Orwellian sense of reality created by strictly censored state media and a clamp on phone calls and the Internet.
People have not taken to the streets of Ashgabad or any Turkmen city, but the government of President Gurbanguly Berdymukhamedov (pictured above) doesn't seem sure they won't. So there is an absolute blackout on news about the Arab Spring, and stepped-up monitoring of possible rabble-rousers in and out of the country.
In January, a Russian telecoms company named MTS lost a five-year-old contract providing cell phone and Internet service to 80 percent of the Turkmen market, or 2.5 million of the country's 4.5 million inhabitants. Turkmen authorities said the reason was that MTS was profiting too much, and sharing too little with the state in the form of taxes and royalties. But the contract suspension had a knock-on effect, which was to shut off all non-state sources of information and communication in the already heavily censored and monitored country.
The government is worried not only about Turkmen at home. It is also kept awake at night with concern over possible mischief by hundreds of Turkmen living abroad. Reports in Ashgabad are of a government attempt to pressure Turkmen students and workers overseas to return home, and then keep them there. A rumor is circulating that if Turkmen students abroad return home, they run the risk of not being permitted to leave the country again.
The government itself isn't talking about why. But one line of thinking is that these youth might have been influenced by revolutionary ideas, and that they could become further infected the longer they are away from home, and hence run the risk of destabilizing Turkmenistan.
Eric Feferberg AFP/Getty Images
As turmoil has engulfed the Middle East and North Africa, much attention has focused on Saudi Arabia -- if trouble spread there, traders have worried, the global economy could dive into a far more serious recession than the 2008 financial collapse. Nawaf Obaid, a senior fellow at the King Faisal Center for Research and Islamic Studies and a doctoral candidate at King's College London's Department of War Studies on the subject of the rise of Saudi nationalism, thinks the fears are overblown. He kindly agreed to write a guest column, which follows.
Reports in recent weeks have suggested that the mass protests occurring in Arab nations will soon spread to Saudi Arabia. There has been coverage of Facebook pages established by activists calling for a "day of rage," and a "day of revolution." Large, front page articles, illustrated with pictures and charts, have asserted that it is only a matter of time before massive upheavals will bring down the Saudi monarchy. The BBC has reported that the Saudi downfall is inevitable, and weighing heavily on global energy markets, where a fear premium had added 15 percent to the price of oil.
These assertions have been grossly exaggerated: 17,000 Facebook fans or "protesters" do not necessarily translate into 17,000 Saudi rioters, because at the very least it is impossible to verify how many of them actually lived in theKingdom. One cannot forecast events based on a count of virtual fans at a social network.
In this case, the outcome is a dangerous, long-term yet illusory perception: the vulnerability of Saudi Arabia's energy infrastructure.
The logic of this narrative is there: Saudi Arabia holds 25 percent of the world's proven oil reserves, is the largest exporter of oil, is the only nation with significant spare capacity (almost 4 million barrels of oil a day), and is the leading power and sole swing producer in OPEC. A disruption in Saudi oil exports would create what can best be described as a global economic catastrophe. Unlike in the case of the disruption of Libyan exports, in which Plan B is for Saudi Arabia to increase its exports to steady the markets, there is no Plan B if Saudi Arabia goes off line. Because the kingdom possesses about 75 percent of the world's spare capacity -- all of which would now vanish -- oil would probably soar to $200-$300 per barrel in such a scenario. The effects this would have on economies around the world would be devastating. Stock markets would crash as mega non-energy multinational companies would see their energy costs soar, and their market cap valuations drop. The entire transportation sector would go bankrupt. Wall Street would be the most affected -- it would require federal government bailouts that would dwarf those made just a few years ago. The nascent U.S. recovery would grind to a halt, as every extra cent paid at the pump would pull about $1 billion from motorists' pockets per year. The sudden, exorbitant rise in the cost of practically every commodity would cripple global trade.
But this nightmare scenario is extremely unlikely. No system as vast as the Saudi oil complex -- with its scores of rigs, refineries,export terminals and pipelines -- is perfectly protected. But the risks aremuch less serious than widely disseminated.
No sheriff in oil town: The latest Reuters poll of oil traders forecasts oil prices to pass $130 a barrel by the end of the year, which seems a fairly safe bet given that the widely traded U.K. blend went past $124 today. In terms of the whys, it's geopolitics, argues the usually sober-thinking Ed Morse -- the existence of autocratic, sclerotic and unresponsive Middle East governments is old, but not the local reaction to it. Morse writes in the Financial Times:
The prospect of the largest oil-producing countries confronting challenges, such as those seen largely in north Africa so far, is more probable now than a year ago, telescoping the potential day of reckoning and raising the probability of an apocalyptic oil supply disruption.
Leah McGrath Goodman notes the role of the casino -- traders betting on the news out of the Middle East. But, in an overnight note to clients, hedge fund analyst Peter Beutel at Cameron Hanover laments the entire cycle of higher prices -- the "spiral in motion" that we are witnessing. Beutel writes:
It goes like this: A stronger economy helps boost oil prices as investors anticipate stronger future demand. Higher prices (for refined products) hurt consumers and lead to demand destruction. Higher oil prices hurt consumers and their ability to spend money elsewhere. As a result, in order to keep the economy going, the Fed needs to keep rates low or money inexpensive, and that hurts the dollar, which boosts oil prices. A weaker dollar helps exports, and that helps the economy, boosting oil prices, hurting the dollar as well as consumer discretionary spending. It gets absolutely dizzying. It has elements that want to halt the cycle and other elements that keep it in motion. The latter factors are dominant here.
... but investors hedge with clean tech, too: Right alongside the runup in oil prices we are seeing a big rise in investment in green technology, according to the Cleantech Group. Investors poured $2.5 billion into the sector in the first three months of this year, mostly in mature solar and electric-car companies. That was 30 percent higher than the same period a year ago, and the largest sum since the third quarter of 2008. It does not mean that investors are turning back to clean energy -- hardly any money went into startups or companies not yet in the market. Instead, it looks like a hedging strategy -- investors see oil demand destruction ahead given the direction of prices (in 2008, U.S. motorists -- the biggest oil gluttons on the planet -- began to buy a lot less gasoline when prices at the pump reached $4 a gallon), and so are pouring money into already-existing clean-tech products. As for the rest, in the Wall Street Journal, Guy Chazan writes that money is pulling back in biofuels, since it looks like many, many years before any will be competitive with gasoline. Read on for more of the Wrap.
Mario Tama / Getty Images
Tiny Gabon has been among the places that have roiled oil markets this week. Workers in this west African country settled a four-day strike yesterday, but not before helping to send the widely traded U.K.-traded crude benchmark above $120 a barrel for the first time in almost three years. It involved just 240,000 barrels a day of production, but demonstrated the market's jitteriness since Libya's 1.1 million barrels a day of export oil was lost. There is a crisis premium of $15-$20 a barrel in the price of oil, most analysts agree, and probably more.
Yet all this time, between 20 million barrels and 36 million barrels of surplus oil have been anchored in floating storage (ships such as the tanker pictured above) in the Persian Gulf and the Mediterranean Sea, reports Thomas Strouse. This bounty belongs to Iran, which is the object of a U.S.-imposed sanctions regime that among other things seeks to stop its flow of crude oil revenue. If this oil were freely sold, it -- along with Saudi Arabia's increased exports -- would easily compensate for the lost Libyan cargoes for almost a month.
But there is evidence that some of it is being sold onto the market. According to data compiled by Reuters, the surplus oil is contained in a dozen very large crude carriers (VLCCs), which can hold about 2 million barrels of oil each, plus 12 million barrels more in shorter-term storage. Yet that was a smaller fleet of storage than Iran had last year, when up to 25 tankers, mostly VLCCs, were at anchor, the agency reports. So clearly there have been buyers. Read on to the jump.
William S. Steven / Getty Images
Libya has bared an uncomfortable truth to Saudi King Abdullah (pictured right above), Azerbaijan President Ilham Aliyev, Kuwaiti Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (left), and the rest of the petro-autocrats of the world:
When politically expedient, Washington will help to push you out of power.
This sounds obvious, but it's not how it was supposed to be. The United States has been allies with many such leaders as part of Pax Americana. For the most part, this hasn't seemed cynical, but realistic -- factually speaking, the United States and the rest of the West and the world require oil; there are diplomatic missions that only an Arab king or sheikh can fulfill; and the balance of power includes the support of autocratic leaders. Even the peace with Col. Moammar Qaddafi was well-intentioned -- he has considerable blood on his hands, but back in 2003 there was hope he had opted to reform; the most prevalently voiced opinion was that he was a potential template of the new possibilities of the age.
Much of this portrait is different now because of the Arab Spring, under replacement by an as-yet unestablished new set of rules. In the United States, there is an understanding that petro-realpolitik must change because one can no longer be sure that the Emir sitting confidently before you will be there next year, or even next week. In the petro-states, there is an understanding that the long-standing alliance-of-interests underpinning one's relationship with the United States can be much shorter-lived than one originally thought. Hence, no one should be surprised when hearing of an unprecedented breach between the United States and Saudi Arabia -- as we've discussed, the Saudis have played a highly constructive role on behalf of U.S. economic and political interests around the world, but the truth is that there simply is not much support in the United States for families that treat their nation's wealth as a personal treasure trove. From the Saudi side, why should one go out of one's way for a superpower that so rapidly discards its friends?
Yasser al-Zayyat AFP/Getty Images
Nigeria is about to become the crisis du jour, and there is good reason -- Goodluck Jonathan (pictured above) is running for re-election as president this month; so are candidates for Parliament. In the last elections -- in 2007 -- there was so much violence that 1 million barrels of oil a day -- half the country's total production -- was lost to export markets, the Wall Street Journal's Jerry Dicolo reports. If that recurs -- or if traders figure it will -- look for prices to go a lot higher than the $107.94 a barrel that they reached last week. Along with that will rise gasoline prices.
There is a chance that matters will not turn bad. The Movement for the Emancipation of the Niger Delta, or MEND, the most active militant group operating in the oil-rich Niger Delta, has retracted a threat to attack oil installations during the election period, according to local on-line The Nation. Authorities are better-prepared for what trouble does arise, reports Agence France Press. "There will be pockets of violence," Victor Ndukauba, an analyst with Afrinvest Advisers, told the French agency. "However, there is much better awareness of a lot of the [militant] foot soldiers. ... There will be violence, but we don't think it will be as bad." Some analysts actually think that the country will increase production in the coming weeks and months by some 300,000 barrels a day.
The parliamentary elections are Saturday, and the presidential voting on April 16.
But if there is trouble as in the past, this time -- unlike with the loss of Libya's 1.1 million barrels in daily exports -- the United States would be directly affected. That is because the United States currently buys some 960,000 barrels of oil a day from Nigeria. Oil prices would go up for everyone, but the U.S. will have to directly make up the volumes this time from elsewhere.
Bloomberg reports that Nigeria is already figuring into the futures market -- when they opened in Australian this morning, and in before-hours trading in New York, the price of the New York-traded benchmark, called WTI, rose to $108.74 a barrel. The other major crude -- London-traded Brent -- was up to $119.48, which is 0.7 percent higher than its close at $118.70 on Friday.
Pius Utomi Ekepi AFP/Getty Images
While the petro-states of the Middle East are roiled by the Arab Spring, the Islamic countries of the former Soviet Union are mostly quiescent. The richest of them is Kazakhstan, which today is holding the latest in a two-decade string of rigged presidential elections. President Nursultan Nazarbayev, who will be swept into a new five-year term, isn't talking publicly, but his prime minister, Karim Masimov, has weighed in on how the Kazakhs view Cairo, Tunis, Damascus and so on. "What is the biggest difference between them and us? People in Kazakhstan, the young generation in Kazakhstan, have hope and they have an opportunity to go forward," Masimov told Reuters.
One can quibble with that observation -- it's not possible, for example, to follow one's aspirations freely in the oil industry, where the president's son-in-law, Timur Kulibayev, doesn't appreciate interlopers. Still, Masimov's is a fairly enlightened remark when one considers the lesson that some of the Arab states have learned from Cairo and Tunis, which is to shoot first and not negotiate. On the other side of the Caspian, for example, forces of Azerbaijan President Ilham Aliyev yesterday arrested some 200 protestors seeking his ouster, Eurasianet.org reports.
A limited number of U.S. diplomats in the region are leveraging the Arab Spring to drive home long-expressed U.S. agenda items on democracy. "The Arab Spring is a huge gift to anyone in his region who seeks democratic liberalization," one U.S. diplomat in the region told me. Other U.S. envoys disagree that anything is to be gained, and aren't alluding to the Spring in contacts with the autocrats of the countries in which they work. But I personally think the first envoy makes the most sense.
Kazakhstan is not the one-dimensional portrait that it depicts. In the New York Times, Ellen Barry reports that "there is no restless young elite that wants to take over the government," but perhaps she should interview the millionaire Bulat Abilov or the intellectual Oraz Jandosov. They and other members of the political, business and intellectual elite would like to see genuinely competitive politics, and broader political representation, and are proof that, unlike the popular narrative, there are obvious alternative examples of stable rule in Kazakhstan. One of the most common remarks about Kazakhstan is the crisis to come because there is no obvious successor to Nazarbayev, but I think that is wrong -- because Nazarbayev himself hasn't anointed one does not mean that there are not many, many legitimate successors out there. There will be a struggle when Nazarbayev goes, but I do not expect a dangerous crisis, and certainly not violence. Read on for more on this increasingly important petro-state
The uprising tax: Continue to look for Saudi Arabia to dutifully police the price of oil, but the arm of the law will come down a little more leniently -- when oil is at $100 a barrel and above. Call it the Uprising Tax. Because of all the trouble stretching from the Magreb across to Oman, Saudi King Abdullah and the rest of the ruling family are worried about potential trouble at home. To avert that, they have bestowed $130 billion in largesse on the populace in the form of various giveaways. But how to pay for all this generosity, you might ask. The answer is oil revenue. But the price has to be higher than the $68 a barrel that previously resulted in a balanced Saudi budget, according to the Financial Times' Michael Peel and Javier Blas. Now, oil must be at $88 a barrel, plus a margin for error, hence justifying the $107.94 a barrel price at which oil closed today. And four years from now, oil must cost at least $110 a barrel.
Challenging times for Darth Vader: Is Igor Sechin -- aka Darth Vader, the right-hand man to Vladimir Putin -- truly in trouble? The news out of the Kremlin would have us believe so. President Dmitry Medvedev has issued an order stripping Sechin (pictured above with Putin) of his post as chairman of Rosneft, the Russian state oil company. Skeptics suggest that the jury is out whether the dismissal takes effect, or even if it does, whether Sechin can be held back from continuing to exercise effective control, given his relationship with Putin, Russia's most-powerful political figure. Whatever the case, we are specifically interested at the moment because of how Sechin's fate is interwoven with BP's.
As you recall, the geopolitical impact of last summer's Gulf of Mexico oil spill was that BP -- on the outs in the United States -- got into bed with Russia in a big way. In January, BP CEO Bob Dudley did a deal with Sechin in which Rosneft would own 5 percent of BP's shares, BP would own 10 percent of Rosneft's, and the two companies together would explore the granddaddy of Russia's remaining oil mother lode -- the Arctic Sea bed. This narrative has fallen apart as two European tribunals have ruled that BP violated a pre-existing marriage -- a partnership called TNK-BP, which holds rights of first refusal for any deals on Russian soil involving BP. How did Dudley -- who had a previous bad experience with the very same Russian oligarchs behind TNK-BP -- commit such a blunder? And why wasn't Sechin himself able to head off any number of indignant Russian oligarchs? Read on for more about BP, Sechin, and the Wrap.
AFP / Getty Images
President Barack Obama says demand is at the heart of oil prices -- the global economic recovery, he told an audience yesterday at Georgetown University, is responsible for tripling the price of oil from the dregs of $32 a barrel in fall 2008 to more than $100 a barrel now.
Not so, says Phil Flynn, an oil trader at PFG Best whose stuff I follow -- Ben Bernanke is to blame. Flynn has been saying this for a long time -- specifically that the federal government's economic stimulus, and most recently the Federal Reserve's irritatingly named policy of "quantitative easing," are behind the swelling that we observe in our fists as we shake them in anger while filling up at the pump. He repeated this again two days ago on his blog.
Finally, I decided to ring Flynn and ask what on Earth he means. Read on for his reply, and why oil prices may actually be heading back down.
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Back when I was based in Almaty, one of my roommates was Charles Clover, who was the Financial Times correspondent for Central Asia. Charles was an Arabist who decided to shift over to the former Soviet Union, and pretty quickly distinguished himself for investigative work in Central Asia, Afghanistan and Ukraine. He's now the paper's Moscow correspondent, but the editors dispatched him to Libya, where he's distinguished himself again.
This time, Charles (pictured above in Iraq, and in the blue-checkered long-sleeved shirt in the video below) physically defended Eman al-Obeidy, the Libyan lawyer who burst into the Rixos Hotel in Tripoli last Saturday, and told foreign correspondents that she had been taken from her car at a checkpoint, and raped by 15 men over a two-day period. As she was speaking, government security officers disguised as hotel waiters and receptionists leaped on her. Charles stepped in the way, pushed around a couple of the burly security men, then got tackled in the hotel lobby because the authorities wanted to get the iPod on which he had taped his interview with the woman.
Over at the New York Times, David Kirkpatrick describes Charles as "a pretty big and young guy, physically, with the build of a college rugby player." Given Charles' personality, you'd have to do an awful lot to rile him up; I never saw nor heard of him doing anything like that, not in Afghanistan during Taliban days, nor Uzbekistan under Karimov. Which tells you something about what went on in the breakfast room in Tripoli.
Charles was deported the next day, and is back in Moscow now. We've exchanged emails. He says he's got a lot on his plate in Russia. In Libya, the government says the men whom al-Obeidy accused of rape are suing her. She has disappeared. Charles filed this great dispatch.
Courtesy of Charles Clover
Notions can be an indispensible force in the achievement of big leaps in business, science, sports, politics, personal fortune and military conquest. That's how souls among us have taken apart genomes, drilled in ultra-deep water, run the 4-minute mile, put a black man in the White House, earned a billion dollars, and overthrown Mubarak.
Sometimes notions and gigantic personalities combine, and the result can be a determination to go on, and on and on. Such is the case with missile defense. Three decades after Ronald Reagan visited Cheyenne Mountain and got the notion that the United States could shoot down a missile, the United States has spent more than $130 billion to prove the great man correct. In January, for example, the U.S. Missile Defense agency halted deliveries of the core weapon in the American-based system of ground-based interceptor missiles -- a Raytheon-made anti-missile device that failed yet again to hit a target. Yet, a week ago, Defense Secretary Robert Gates was in Moscow, attempting to fulfill one of President Obama's strategic priorities of the year -- getting a missile-defense deal with Russia -- and the Pentagon is asking for $10.6 billion on more development in its next budget.
One matter is the pure indomitability of Reagan's notion. The other is its indomitability in the context of events around the world -- 9/11, the wars in Iraq and Afghanistan, and now the revolutionary fervor in the petro-states of the Middle East. Are we fighting the proverbial last war? "In 1999, 2000, 2001, the Russians were saying, ‘Look you knuckleheads, the real threat is Osama bin Laden and the Taliban.' Then 9/11 happened and they look pretty right," Andrew Kuchins, who runs the Russia and Eurasia Program at the Center for Strategic and International Studies in Washington, told me over the phone.
The question is not whether the Pentagon ultimately will manage to figure out the missile conundrum -- this notion could yet prove itself out. Clay Dillow at Popular Science, for example, reports that Northrop Grumman has achieved a breakthrough with the ability to track a ballistic missile through all phases of flight. Poniblogger at CSIS has some interesting thoughts about missile defense progress.
It is rather whether Western military and security minds ought to be focused on how to adapt to a tectonically different Middle East, including how to secure the world's energy supply. It is whether it's best to continue what's now a 28-year-long effort to engage Russia on missile defense, or to shift the focus to a cooperative policy on energy, arguably a more enduringly strategic problem. It is also what to do about nuclear energy given Fukushima.
To keep power, give it away: The autocrats of the petro-driven Middle East are discovering that ushering in democracy is not an altruistic act, but desperation politics -- if they want to stay in office, there is a good chance they must dispense with the strongman act and accept truly elected representation. For Ali Abdullah Saleh, the president of Yemen, that realization came far too late; he has at most days to go in office, and possibly just hours. What about Syrian President Bashar al-Assad? Possibly next to Saudi Arabia and Iran, Syria is the unlikeliest place in the Middle East for regime change. Today, his troops fired on protesters after Assad attempted to assuage public unhappiness by promising to end 48 years of martial law. Yet more unrest there seems probable as thousands poured into the streets regardless, and reports are of some protesters grabbing away guns from authorities. Libya is the conspicuous outlier -- short of a palace coup, Col. Moammar Qaddafi looks likely to hang on.
My colleague David Rothkopf took President Obama to task this week for a supposedly fuzzy approach toward Libya, but I don't grasp his mystification. The best U.S. course is to allow Middle East events to take their course and not put an American imprint on them, even when they reach nail-biting stage. In the case of Libya, the U.S. rightly held back as long as possible with the idea that perhaps, perhaps the rebels might yet turn back the Qaddafi tide, but when Benghazi was about to be overrun, stepped in to create a level playing field (there is a preference for another Libyan leader, but the policy is not to explicitly overthrow Qaddafi, but to make it as much a fair fight as possible.). The U.S. rightly is not going to install the opposition, but take away the regime's air, armor and artillery advantage. Equally incomprehensible, also here on the pages of Foreign Policy, Bruce Ackerman has declared Obama an imperial president. On the other side, the chest-beaters would like Obama to be more "decisive." Guys -- take a little course in the exercise of influence and power; better yet, take a look at the nature of what's going on in the Middle East. This era is not the time to kick down the door, guns blazing.
The rare earth blues: The Chinese are clamping down ever harder with market hindrances against exports of rare earth elements from the country, this time by raising tariffs on the 17 types of minerals. This has been an issue since last September, when Japan's arrest of a Chinese trawler captain revealed Beijing's ultimate soft spot (which we had thought was Tibet, followed closely by Taiwan) by triggering China's rare earths embargo on the entire global market. But is there a crisis for the high-tech industries and armaments manufacturers who rely on them? This week, I participated in a panel discussion at the Heritage Foundation on the subject. The consensus was that, while there is a current squeeze and prices have almost doubled since last year, a combination of recycling and the fast development of new supplies will resolve it within three or so years. Australia, India, Kazakhstan, Mongolia, not to mention Alaska and California, are all acting in concert to develop new supplies.
Read on for more on this week's news.
The oil balance is back on precarious footing. The shift of events in Yemen -- President Ali Abdullah Saleh seems to be spending his final hours or days in office (see defectors above) -- returns instability to Saudi Arabia's doorstep, and with it may push oil prices higher.
It's not that Yemen itself produces much oil or natural gas - its production volumes are modest. But its northern border with Saudi is porous, and as we've discussed previously, any flow of Yemeni refugees, including armed ones, could destabilize Saudi Arabia. To the east of the kingdom, Saudi forces are helping to tamp down unrest in neighboring Bahrain, but meanwhile face new protests from sympathetic fellow Shias in the city of Qatif, in Saudi's oil-rich Eastern Province. All of this will tempt the trigger fingers of intrepid traders in London and New York.
Oil prices have been relatively calm considering the upheavals in Tunisia, Egypt, Libya, Bahrain and Yemen, not to mention the nuclear crisis in Japan, moving up and down just a few dollars when traders decide they'd like to earn a little money. When prices have moved the most, it has been with an eye on Saudi Arabia, whose massive oil reserves and production underpin global price stability.
With his own eye on the same matter of potential unrest at home, Saudi King Abdullah has added another $93 billion to the previous $36 billion in largesse he laid on his people in order to keep them off the streets. My colleague Jim Traub thinks this is all for nought -- that such regimes are inherently unstable and that, in terms of U.S. policy, it's always a mistake to back them because, for one thing, it puts Americans on the wrong side of history. What Jim omits is that, even if he is right, the self-correction that he is suggesting predictably happens -- if history is any teacher -- would almost always come after many, many decades. Does he suggest the United States having antagonistic relations for the time being and waiting patiently for that day of reckoning before attending to U.S. commercial and other interests? Of course Washington can't. Which is what argues for the current course of dealing with who is in power, making it clear in subtle and explicit ways where Washington stands, and -- short of sending in the cavalry itself -- embracing a population's empowerment when and if it comes.
Ahmad Gharabli AFP/Getty Images
Japan/Libya/Bahrain: trader heaven (or hell) One of the main canards of times such as this is that the markets hate uncertainty. The truth is that traders and investors are in a heavenly time. It's pretty simple - if you are a bettor (which is what oil traders, for example, are), you make money only if the price changes on the volumes you buy. When they do shift either up or down -- and keep doing so -- you win (assuming, of course, that you bet on the correct direction). The last 24 hours have been absolute nirvana for the shrewd trader (though not so much for the laggards). Oil prices were down, then they shot up after Col. Moammar Qaddafi threatened to pursue his enemies into their closets (there is something apparently chilling about that closed-in image; or perhaps it's the shoes?) and the United Nations Security Council voted to bomb him. We were well back up into the $100s-a-barrel prices. Now, after Qaddafi appears to have blinked (deciding perhaps that he prefers not to risk a possible indeterminate period of time confined to a spider hole with a long beard), oil prices have plunged. On each of those movements -- if you were a well-hedged trader -- you have earned big, big bucks. Of course, there are many losers too. Regardless, this is what traders live for -- the profit potential in uncertain times.
Big Oil and the calculus of friendship: Paolo Scaroni, the agile CEO of Italy's Eni, who manages to maintain relations no one in Big Oil can match -- with Russia's Vladimir Putin, with Kazakhstan's Nursultan Nazarbayev and, of course, with Libya's Col. Moammar Qaddafi with -- is bristling at the international sanctions slapped on Libya. Scaroni calls the sanctions "shooting ourselves in the foot."
There is some fear that Eni, along with BP and Exxon, could face contractual problems with Qaddafi, Bloomberg reports. But that isn't how oil deals have really worked in recent decades. Instead, governments have generally honored oil contracts from one regime to another, of course with some possible renegotiation.
So what is Scaroni really up to as he calls on Europe to abandon the sanctions against Qaddafi? Perhaps he is emitting a friendship code intended for others, such as Putin and Nazarbayev, a message that he is not a fair-weather friend.
Coal: When pressed, even the choosey loosen up. Being health-conscious, you thought you'd never eat another cheeseburger -- until you were starving that one day, and McDonald's was the only place open. So it is with electricity producers. Many nations have been moving away from coal-fired electricity, since it's so dirty and spews out so much CO2, but now Japan's dual natural disasters have shaken up those preferences. Coal may be back in a big way, reports the Wall Street Journal (though, for the record, the Journal is also hedging its bets. In addition to today's optimistic coal piece, the paper ran separate optimistic natural gas and nuclear energy stories).
Here is how the dots connect: Japan, having to replace nuclear-produced electricity, is going to buy a lot more coal, and also liquefied natural gas. Some of the LNG is being diverted from Europe. That has made LNG more expensive in Europe and elsewhere as markets tighten. At the same time, Germany has at least temporarily shut down seven nuclear reactors. Put together the higher LNG prices, and the closed German nuclear reactors, and you get more European demand for much-cheaper coal. Make the same calculus in Japan and elsewhere, and you get the larger picture -- more coal demand.
If this is right, much of the clean-air progress made in recent years appears likely to be set back in the coming months. Yet one would be remiss to ignore the shift of public sentiment, and hence political support, in recent years toward a cleaner environment. If that holds -- and that's my bet -- then there may be added use of coal in the short- and medium-term as the market resolves the current uncertainty over nuclear power, but there will also be a mighty hindrance toward a wholesale shift to coal. Instead, there is reason to expect more momentum coming to the natural gas future that we've been discussing.
The Gazprom State: Outbreak of pragmatism. But does Nabucco win? Not to equate Russian gas policy with Col. Moammar Qaddafi's war footing, but are we seeing a case of forced practicality? Qaddafi, after threatening to enter the closets of his enemies in Benghazi, has had a change of heart now that he might be bombed by France and the United Arab Emirates. As for Russia, it's making more noises about reversing a long-standing war-footing in Europe, fought on the battlefield of natural gas pipelines. As we discussed last week, Gazprom, Russia's politically inclined natural gas giant, has sought to reinforce its hold on the European market (where it supplies some 30 percent of the gas) by connecting up a gigantic new pipeline called South Stream. The United States and Europe have countered with Nabucco, their own proposed pipeline starting at the Caspian Sea. At stake, according to the latter folks, is the political independence of eastern and central Europe. But Russian officials are offering more details on possible plans to scrap South Stream and instead ship its gas to Europe in the form of liquefied natural gas.
In our videotaped interview last week with South Stream CEO Marcel Kramer, he said that he was in the dark about any such change of Russian plans. But now a couple of Russian government officials say South Stream may face an "insurmountable" political hurdle in Turkey, and so they are seeking economical alternatives toward accomplishing the same aim, but with LNG.
On first glance, this would appear to be a possible victory for Nabucco. But not so fast. First, Nabucco still doesn't have sufficient gas to be built, mainly because the Turkmen -- as they have done since the 1990s -- won't get with the program and commit to gas shipments and a pipeline. Second, what is the effective difference if Russian gas goes to Europe via pipeline or LNG? True, a pipeline suggests a more permanent marriage. But these days, divorce is mighty common. LNG provides the Russians a lot more flexibility in terms of markets.
Perhaps the Nabucco folks will go LNG as well?
Paul J. Richards AFP/Getty Images
We turn back to the dictator's playbook. As you recall, we've identified the two general options in the dictator's playbook against an uprising -- the Shevardnadze play, referring to the decision by Georgia's Eduard Shevardnadze to step down in the face of massive 2003 protests in his country; and the Karimov play, referring to the calculus of Uzbekistan's Islam Karimov, who in 2005 gunned down hundreds of protesters in the city of Andijan. After weeks of Shevardnadze holding the advantage in the fervor of protests engulfing the Middle East, we see a decided shift in favor of the Karimov play. In Bahrain, Libya and Saudi Arabia, in addition to Azerbaijan and Uzbekistan, autocrats have rejected the example of Tunisia and Egypt (the Shevardnadze play), and are now flouting any obloquy of jailing, attacking or killing protesters in order to keep power.
The shift suggests that, while dictators may have to elevate their game in what had appeared to be a turbulent but politically rigid region, there may be much less immediate change than initially seemed possible.
In Libya, with the United States now backing the establishment of a no-fly zone, the situation could turn around yet again, that is if Col. Muammar al-Qaddafi's forces do not consolidate their rolling triumph before any outside intervention. In the video below, Saif al-Islam (pictured above), the Qaddafi son previously much-heralded in Great Britain, predicts that his father's forces will capture the rebel stronghold of Benghazi "within 48 hours." If that happens -- which at this point would be the betting outcome -- this chapter of the Libyan uprising would be over. Given Qaddafi's remarks in recent weeks, there could be a bloodbath.
Mahmud Turkia AFP/Getty Images
Japan's possibly cataclysmic situation started with an earthquake, went on to a tsunami, and now is essentially an energy event -- a potential catastrophe stemming from long-ago decisions on how to power the world's third-largest economy and among the most affluent lifestyles on the planet. After a wait-and-see period, traders today expressed their anxiety with a panicky sell-off -- they sent oil prices well below $100 a barrel in the United States (Japan's Nikkei stock index unsurprisingly fell by 11 percent, and the New York Stock Exchange has followed suit by dropping more than 250 points at this point, or 2.4 percent). The market is turning brutal against anything related to the nuclear industry -- investors sent down shares of many uranium miners, for example, by double-digit percentages, and of nuclear power plant operators like Exelon and Entergy in the single digits.
What's going on is economic fear, but also a global energy system under severe stress. Over the last several months, we've learned the hard way in incredibly coincidental events that we are in firm control of almost none of our major sources of power: Deep-water oil drilling can be perilous if the company carrying it out cuts corners. Because of chronically bad governance by petrostates, we can't necessarily rely on OPEC supplies either. Shale gas drilling may result in radioactive contamination of water, though who knows since many of the companies involved seem prepared to risk possible ignominy and lawsuits later rather than proactively straighten out their own bad actors. As for much-promoted nuclear power, we know now that big, perfect-storm, black-swan natural disasters can come in twos.
The global trouble is not over yet. In Bahrain today, the king declared martial law for three months amid conflicting reports of the possible killing of a Saudi soldier, among more than 1,000 troops who have intervened to help quell an ongoing uprising there. Saudi Arabia is worried because Bahrain neighbors its own Shiite-majority, oil-rich Eastern Province. In Libya, forces of Col. Muammar al-Qaddafi pushed to the edge of the rebel stronghold of Benghazi, setting up the most direct confrontation yet between the sides, one that could prove decisive in the uprising there.
Yoshikazu Tsuno AFP/Getty Images
As O&G readers know, I've been in Houston at CERA Week -- the Davos of the energy industry, hosted by oil historian Daniel Yergin -- for the past five days. So in today's wrap, the highlights of the conference:
Emergencies drive the market: The news over the last 24 hours punctuated the general message of CERA Week: Bad economic news sent oil prices down, unrest in Saudi Arabia's oil-rich Eastern Province pushed them back up, then the 8.9 magnitude earthquake off Japan's coastline pushed them back below $100 a barrel. Finally, the oil price settled just a bit down, just over $100. The message: the market is incredibly jittery, and is holding pretty close to $100 a barrel regardless of the news.
As oil analyst Ed Morse told me, oil was probably overvalued prior to the Middle East unrest. But the turmoil there has fundamentally changed the political calculus, and with it the oil market for around the next decade and perhaps longer. A risk premium is going to remain in the price, especially since real trouble struck Saudi Arabia yesterday, as I wrote. So gasoline prices, too, are going to stay relatively high (that's a Paris gas station pictured above). All in all, as Christophe de Margerie, the CEO of France's Total, said, the oil industry is in a serious fix.
But what's notable is how muted the response has been in the market. Step back and look at the absolute price movements so far since the turmoil in the Arab world began. If we had just one of these events back in the spare-capacity-short year of 2008,we would have seen huge price movements -- $10 and $20 a barrel. Instead, we are getting shifts of two or three dollars one way or the other. One reason is that there is global surplus production capacity of 3 or 4 million barrels a day that can be brought to bear; another is that, in the short term, the United States and Japan can swamp any sudden oil shortage by releasing millions of barrels of oil from their strategic reserves. These petroleum reserves -- totaling 1.6 billion barrels around the world -- cannot create long-term price stability, because traders will always bet on spare capacity in an emergency. But they can smooth out the bumps.
The next emergencies? Where are the predictable next bumps? Today's planned Day of Rage in Saudi Arabia became, as the Washington Post called it, a day of rest, and we cannot foresee natural disasters. Yet, some are attempting to quantify what is possible. Among those is Bloomberg, which has ranked 20 possibly troubled countries in a Combustibility Index. Of those, 18 are in the Middle East, but interestingly none of the big oil producers top the list.
The five most combustible countries, in descending order, are Libya, Sudan, Yemen, Syria, and Egypt. The bottom five among these combustible states, again in descending order, are Saudi Arabia, Morocco, United Arab Emirates, Kuwait and Qatar.
For the quants among you, the biggest component in the Bloomberg equation is repression, which accounts for 50 percent of the weight of the variables. (To calculate that, among the factors are the size of a country's military per capita, how a ruler came to power -- whether by vote, coup or assassination -- plus how long the ruler has been in power, and whether the ruler came from the military.) The other 50 percent includes GDP adjusted for purchasing power parity, unemployment, median age, income inequality and access to information.
Electric car realities: Another takeaway from the conference is how technological advances are shifting the energy equation, and geopolitics along with them. Among the technological changes are in transportation. I spoke with two big players in the electric-car space: Britta Gross, director of global energy systems for General Motors, and Steven Koonin, the U.S. undersecretary of energy for science. Both of them described the multi-year realities of creating a plug-in hybrid and electric-car industry. Gross said that one reason the GM Volt is currently so expensive is the carmaker's strategy of creating a "wow" factor for buyers -- carving out a market by loading up the Volt with exciting gizmos. When the next generation of the Volt comes out -- perhaps in five years or so -- it may have a lot fewer such electronics, Gross said, which will much-reduce the sticker price. In addition, the cost of parts will probably be less because there may be more competition among suppliers. Here are Gross' remarks:
Koonin, looking at the market from the perspective of a government goal of reducing oil consumption, said that much will be gained by simple efficiencies: 25 percent less gasoline will be used when cars are lighter and engines more efficient. He said that years from now, plug-in hybrids will penetrate a much larger segment of the market and cut more oil consumption. No one is certain that advanced batteries will ever be good enough to make a purely electric car commercially competitive, he said, but the performance of hybrids may mean that they won't be necessary. Here are Koonin's remarks:
Possible Putin shift in pipeline politics: For much of the last decade, Russia and the West have fought a pipeline war in Europe. Russia has sought to tighten its natural gas supply grip on Europe -- Russia's Gazprom supplies about 30 percent of Europe's gas -- by building yet another big pipeline into the continent, called South Stream. The West, led by the United States, has offered up a rival pipeline, called Nabucco, that would carry gas from the Caspian Sea states of Azerbaijan and Turkmenistan into Europe, and hence reduce the continent's dependence on Russian gas. This may sound mighty arcane, but the combatants of pipeline politics treat the game quite seriously.
In any case, Russian Prime Minister Vladimir Putin yesterday added new confusion to the state of play. He suggested that Russia may not build the pipeline after all, but instead a liquefied natural gas terminal that would ship Russia's gas to Europe by tanker. In an interview today, South Stream pipeline director Marcel Kramer told me that he has received no new instructions, and that he is proceeding with his existing orders to make the $21 billion pipeline work. He is attempting to get a final investment decision on the pipeline by the middle of next year so that it can be built by the end of 2015. Here is a clip from our conversation:
Bertrand Guay AFP/Getty Images
The notional has become more real -- the unrest that has roiled the Middle East has reached Saudi Arabia, the foundation of the global oil market. At first, this small protest in the Eastern Province city of Qatif was received calmly by oil traders. But then, at least two protesters and a policeman were shot with rubber bullets in confusing circumstances. On that news, oil traders, who had been bidding down oil prices because it seemed the appropriate casino strategy against negative economic news, decisively reversed themselves, and pushed them back up. Oil prices ended the day yesterday justly slightly down.
Today is a scheduled "Day of Rage" in Saudi Arabia. Organized on the Internet, the protest had been expected to be a likely dud. Now it might be different.
"This has been our biggest fear -- that the unrest infecting the Middle East would surface as violence or bloodshed in Saudi Arabia," Cameron Hanover, an energy hedge fund consultant firm, wrote in an overnight note to clients. "If protests start to create ‘martyrs' in Saudi Arabia, then it could be the beginning of the end."
Here is video of the protest scene:
Henry Kissinger, addressing oil executives at a conference in Houston by live video last night, said that observers expecting the turbulence to result in a breakout of democracy are engaging in "wishful thinking." All that one can say is that protesters have rejected one governing model. "But there is no indication of what the new model will be," he said. "We are in the first act of a five-act drama."
Fayez Nureldine AFP/Getty Images
There's a presumption out there that things look tough in the Middle East, but that soon enough -- maybe by summer -- they will sort themselves out, and becalm the volatile prices of oil and gasoline. Not so, says veteran oil analyst Edward Morse, a student of history who correctly called the 2008 oil bubble while everyone else was still throwing money into the pot. "This is not a one-off disruption," Morse says. Instead, we're in a new age of geopolitical risk that threatens to disrupt the region for a decade or even longer.
As if to reinforce his point, 6,400 miles away in Libya, Col. Moammar Qaddafi has again triggered the all-important Flaming Oil Port Index by having his air force bomb the country's main oil terminal at Es Sider, turning it into a ball of fire. Oil prices shot up.
Given the Libyan uprising, not to mention the trouble in Bahrain, Egypt, Oman, Tunisia and Yemen, even the region's rich petro-states understand the basic math, says Morse -- their demographics (60 percent of the region's population under 25 years old, high unemployment rates, and lopsided income distribution), awakened by the kindling of revolutionary fever, have put all of them in potential jeopardy. "A rapid contagion is spreading," he said. "Even if you think you are relatively safe, this is a new, permanent risk. It will be with us for the next decade," or even two.
Therefore, all the petro-states are going to mimic the recent largesse of Saudi King Abdullah, who distributed $36 billion to his people in the form of higher wages and forgiven loans, and do so on a regular basis. They will also try to figure out how to put all those discontented and often well-educated youth to work.
That's great, but what does that mean for the rest of us? That the break-even point for annual government expenditures in all the states -- meaning the price of oil required to cover regular state obligations like salaries, road repair and defense, plus these new expenses in order to satisfy the restive youth -- has just gone up, says Morse. If they needed $60-a-barrel oil multiplied by the number of barrels they are producing and selling each day to fund the state budget, now they will need much higher prices. Saudi Arabia, Kuwait and other petro-statesmen that previously attempted to keep oil price stamped down to some degree can no longer be counted on to do so. Instead, they will be interested in the kind of price increases we are seeing today. For more Ed Morse, including a video, read on to the jump.
Mohammad Huwais AFP/Getty Images
The global oil industry is in a fix. It's still trying to persuade Washington to revive access to the Gulf of Mexico, one of the world's sole remaining dictator-free oil-rich zones, and it's locked out of Libya for the foreseeable future. Meanwhile, its greatest recent coup -- a technological breakthrough that has unlocked a bonanza of natural gas locked in shale in the United States -- is under threat by homeowners and activists across the country who question whether the method is environmentally safe. On top of all this, global oil demand is rising fast along with robust economic recovery, and the world will pour terrible scorn on the industry if, despite the hurdles, it fails to supply sufficient oil and natural gas to fuel everyone's cars, homes and factories.
Such is the outlook of Christophe de Margerie, CEO of the French oil company Total, and by far Big Oil's most plain-spoken (and most distinctively mustachioed -- see above) representative. He delivered it to a packed house of about 1,500 of his peers, gathered in Houston for the opening session of CERAWeek, the Davos of the oil industry, a conference hosted by Dan Yergin, author of The Prize.
De Margerie's somewhat counterintuitive prescription for the industry? In order:
1. Hunt aggressively for oil and gas;
2. When you find it, make sure to produce it in a way that non-oil industry folks can live with;
3. Meanwhile, get the world to use less oil and gas.
Why should oil companies persuade the world to use less of its product? Because, asserted de Margerie, starting in just a few years, the industry will be incapable of producing as much as the world wants. In his reckoning, demand for oil will surpass the current 87.5 million barrels a day, but various hindrances will prevent the industry from producing much more -- it can increase supply by an additional 8 percent, to about 95 million barrels a day, but "it's impossible to go higher."
Traders have adopted a new yardstick for oil security, and it's influencing the abrupt climb of oil prices. Call it the Flaming Oil Port Index. It's a notional appreciation of how many more OPEC countries may see fighting, taking their oil production with them. Right now, according to CitiGroup, the index shows that at least 3.3 additional barrels of oil are at risk, or another 3 percent of global demand on top of the 1 million barrels a day gone from Libya's output. With the index that high, oil prices began the morning with another ascent.
Here is how CitiGroup looks at the Middle East (H/T: Izabella Kaminska/FT Alphaville):
This is an invidious gauge. It hardly matters what countries are likely to fall apart. The longer that traders see reports of fighting in the oil ports of Libya, the more real seems the possibility of Algeria and Saudi Arabia seeing destructive violence. It is different from no-room-for-error 2008, when global supply only just met demand and reports of a man with a gun in the Nigerian Delta could send prices soaring. Today, OPEC continues to have at least 2.5 million barrels a day of surplus production capacity above and beyond global demand, depending on how much oil you think Saudi Arabia is producing.
One reason is that trouble in Saudi Arabia's oil-belt no longer is notional. Small Shiite protests broke out last week in the kingdom's Eastern Province, resulting in some two dozen arrests. The Saudis have now entirely banned any type of protest.
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.