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
Another front has opened for geopolitical oil trading - Nigeria, which is again a potential destabilizing force in global oil, alongside Iran. The trigger is dual -- a decision by President Goodluck Jonathan to cancel a highly popular fuel subsidy, which today sent a diverse crowd of thousands of Nigerians into the streets of Lagos, and a murderous slaughter by a militant Islamic group called Boko Haram. The public strike has already halted local trading in the national currency. Now, look for global oil traders to bid up oil prices if they sense a disruption in the export of Nigeria's 2.2 million barrels a day of oil, suggest Bloomberg's Chris Kay and Elisha Bala-Gbogbo.
Trouble in Nigeria is not new -- oil thieves, kidnappers and assorted other gangs have long preyed on Shell, Chevron and ExxonMobil, which have large oil-production operations in the Niger Delta. These fellows get into their boats, attack one of Big Oil's platforms, and before you know it, oil prices have surged around the world. Coming from the Niger Delta himself, Jonathan has credibility that predecessors lacked. Building on initiatives launched by his predecessor, Jonathan has stewarded over comparatively pacific times in the Delta.
But tamping down the Delta has been only one of Jonathan's tasks since becoming president almost two years ago -- he also has sought to reduce corruption, bring some discipline to the overspent state budget, and to build a less volatile economy, all of it toward parlaying Nigeria's immense oil wealth into broadly dispersed prosperity. That was the thinking behind his move Jan. 1 to end fuel subsidies, which he said cost an unaffordable $8 billion a year, mostly benefitting a bunch of middlemen.
Only, gasoline prices have since doubled, infuriating much of the country, illustrating the truism that it is easy to enact a subsidy, but extremely tricky to lift one (Saudi Arabia, too, ought to lift a lavish fuel subsidy, but hesitates to because of this de facto rule of economics, reports the Wall Street Journal's James Herron). Nigeria's lower house of parliament has backed the strikers, and opposed Jonathan on the issue.
In addition to the fuel trouble, Jonathan has declared a state of emergency over a deadly rampage by Boko Haram, which has ordered Christians to leave its northern areas. Some 500 people have died so far in the killing over the last year, including an estimated 43 victims of a Christmas Day bombing at a church in the capital of Abuja. Jonathan has said he suspects that people within his own government and security services secretly back Boko Haram.
Geopolitics have been a primary driver of oil prices since 2006 or so, when the cushion of excess global supply began to become exceedingly thin. Absent the threat of new supply disruptions, prices would probably be considerably lower -- in the $80s-per-barrel range. But there is no sign of a let-up in the Arab Spring, Iran's nuclear ambitions, or in the challenges to Goodluck Jonathan.
PIUS UTOMI EKPEI/AFP/Getty Images
Chasing the runaway anti-fracking train: An industry-led group suggests that shale gas drillers be required to disclose the chemical composition of their drilling fluid, which critics say can contaminate drinking water. This assessment (located half-way through a new report issued by the National Petroleum Council, and led by two big shale-gas drillers -- Anadarko's Jim Hackett and Chesapeake's Aubrey McClendon -- plus Daniel Yergin, the oil historian) isn't surprising in content: The industry has been under enormous pressure to do so, because as it stands these drillers may be jeopardizing the potentially enormous economic and geopolitical benefit of shale gas. There is that much of a perception problem about the drilling method called hydraulic fracturing, or fracking.
Yet is one fully persuaded by this high-profile attitudinal turnaround? More than half of the 46-page report -- the entire first half -- is a paean to the shale gas bonanza. When it finally gets to the doubts surrounding the industry, it does so by first again praising its environmental performance. Even when it suggests that the Interior Department require all frackers to join Frac Focus, a Web-based chemical registry, the report limits that suggestion to federal lands. As for these federal lands, there too the report writers hedge -- they do not recommend a mandate for full disclosure, meaning all chemical content, but only to "participate" in Frac Focus, a very different thing. In fact, very little about the report suggests an embrace of oversight. And what's wrong with that? I think it will not quell the storm of doubts (consider this latest investigative piece by ProPublica's Abrahm Lustgarten and Nicholas Kusnetz, describing the impact of wastewater stored in open pits near fracking sites). The industry must go demonstrably overboard in its zeal for transparency if it wants not to stunt production.
I talked on the topic of fracking over beers with Peter Robertson, the former vice chairman of Chevron, who was in Washington to present a new report by Deloitte about fracking in North America. Robertson seemed flabbergasted by the magnitude of the shale gas reserves, sufficient, he said, to produce the equivalent of 6 million barrels a day of oil. Yet he was also worried about the public relations problem. For purposes of illustration, Robinson compared the U.S. shale gas industry with Saudi Arabia, where one company produces some 10 million barrels a day of oil from a few hundred wells. Shale gas is produced by some 2,000 companies "from hundreds of thousands of wells," he said. "You're only as good as the weakest link," Robertson said. "We have to win the public over on this one. We are not doing this in some corner, but in towns, villages and cities. They could progressively shut them down."
We have to set high standards, and we have to find a way to police, to self-police, this industry so that we do this right.
On chemical disclosure, Robertson wondered why "we don't just do it."
Why don't we don't just say ‘Of course we're going to tell you' [what is in the fracking fluid]. Because we are, actually. It's almost like we're just fighting it till the end. Because we're going to lose this one.
Oil whiplash in the Saudi kingdom: Saudi Arabia, which may or may not have raised oil exports to compensate for the loss of Libyan crude, is now talking internally about increasing spare production capacity to meet an expected surge in oil demand in coming years. That's according to Petroleum Intelligence Weekly, which has been solid on the highly opaque Saudis.
The Wall Street Journal notes this week that confusing information about Saudi production has exacerbated the volatility of the oil market -- the kingdom is by far the world's largest crude exporter, and it cultivates a reputation as a stabilizing force. In February, the Saudis made it known that they were putting more crude on the market in order to compensate for lost Libyan volumes. But this week, Energy Minister Ali Naimi said that in March the kingdom actually lowered production by 800,000 barrels a day for lack of demand. Some traders believe that, before the Saudis made that steep cut, they had been producing about 9 million barrels a day since November for domestic reasons, and simply used Libya as a pretext to make it public.
Whatever the case, PIW reports that the Saudis are now thinking of raising their production capacity to 15 million barrels a day, which would be a 20 percent increase from their current capacity of 12.5 million barrels a day. The discussions revolve around concern about surging Asian demand.
Bidding, not setting: When traders are in the casino, they bid up and down the price of oil -- this week above a smoking $112 a barrel. But are they also counting cards? As soon as you ask such a question, suggesting that trading is a conspiratory sport, you are getting pretty far out there -- manipulation happens (just ask Enron's many victims), but not often enough to be looking over one's shoulder. This week, President Obama fed such suspicious thinking by forming a task force to investigate whether high oil prices are a result of fraud or manipulation. Okay, he is running for re-election. But if you want to reduce some of the spikes up and down in oil prices, charge a higher fee for traders to bet. If it costs more for a seat at the table, betters have more reason to think twice before sitting down.
Anger to the left me, anger to the right: When oil prices shook off the Goldman Sachs malaise this week and went back through a new roof, not only Obama was angered. In Shanghai, truckers went on strike to force down fuel costs and port fees, the Financial Times reported; it was another opportunity for the ultra-paranoid Chinese government to worry about the Arab Spring, and remove any speck of news from the Internet. Meanwhile, Russia's Transneft is on the warpath against China over the price of oil. Transneft wants world prices for the crude it's shipping to China through Skorovodino, in Siberia, but somehow the two sides have a different idea of what that world price is, reports John Helmer on his blog. Prices are not going down soon, as we see in the worsening trouble reflected by Syria, and the world is only becoming more complicated, as I discussed with Scott Tong this week on Marketplace. And it's not even summer yet.
Good or bad luck in Nigeria? There is peace in the Niger Delta, but fury in the north as Nigeria -- the source of some 10 percent of the United States' crude oil supply -- prepares for its next round of voting, this time for local offices. So will we have debilitating trouble in another important oil state? Much depends on the actions of President Goodluck Jonathan, who won the right to continue for a full term in office after taking power on the death of his predecessor. Jonathan is from the south, which is generally what infuriated the north and supporters of his opponent. Writing in the New York Times, Dele Olojede, who edits the Nigerian newspaper NEXT, observes worrying signs in the unprecedented violence and disrespect of hallowed officials present in the north. Olojede calls for statesmanship by Jonathan and former military ruler Muhammadu Buhari, whom he defeated in the election.
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
Seven years ago, Michael Peel -- a journalist for the Financial Times -- took a boat into the mangrove creeks of Nigeria's oil-rich Niger Delta looking for the country's most infamous rebel. The man was Alhaji Mujahid Dokubo-Asari, or just Asari as everyone knew him. He was ruthless, deft, and had a reputation for luring young men to the creeks to fight for his cause. He spoke eloquently about his aim to kick international oil companies out of the Niger Delta and at last win a fair share of the country's oil wealth for the very region from whose soil it was drawn. "Protests against big oil in the Delta had gone on for many years, but Asari had stepped up the violence and the rhetoric," Peel explains. "From his self-promotional talk, expertly fed into the international media, you would have thought he was Nigeria's Robin Hood, the creeks and mangroves his Sherwood Forest."
In 2007, I made the same journey. Asari had long been unseated as rebel du jour-co-opted by the very government he once fought against. When I arrived in the Delta, a stalky, robust man named Ateke Tom was running the show, hiding out in what had been dubbed the Evil Forest. Ateke, like Asari, walked with a delegation of boys trailing him, watching his every move, ready to serve his every beck and call. Ateke was a patron to those men and to the community; his illicit activity was their entire economic system. Dressed in tacky designer suits that made his sweat run, gold necklaces dangling on his chest, Ateke's bling seemed to shine all the more given where he was from: one of the poorest communities in one of the poorest regions of the globe.
At that moment, Ateke seemed like the most powerful man in the bush. But Ateke also fell-bought out by the government in 2009, just like Asari had been.
History repeats itself in Nigeria. And this is one of the key precepts of Peel's new book about Nigeria, A Swamp Full of Dollars. From the oily delta to the presidential palace in Abuja, time seems almost suspended. One criminal replaces another, the characters falling like dominos once they've sucked the state for their share and fallen victim to their own vices. Throughout the book, Peel seems to be trying to answer the question plaguing his mind: Why and how can the human spirit tolerate so much corruption? It's obviously something that fascinates him-the very anthropology of what's going on. And with an anthropologist's eye, he unpacks a series of morally bereft situations, trying to make sense of them. He concludes that the present is a product of the past, repackaged and re-enacted, over and over.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.