The world according to Rex Tillerson: What are we to make of the CEO of ExxonMobil, who in a speech lasting just over an hour managed to tarnish journalists covering his industry as "lazy," the public as "illiterate," and critics as "manufacturers of fear"? As for worries about global warming, Exxon's Rex Tillerson suggested they relax about rising seas and disappearing agriculture -- "we will adapt," he said.
Cynics might say, ‘What should one expect from ExxonMobil'? But if so, they would not have been listening to Tillerson since he became CEO six years ago, a period in which he has been much more measured: In flat, evenly delivered and nuanced language, the 60-year-old native Texan has softened Exxon's sharpest and most-criticized edges, most conspicuously repudiating its funding of a clutch of scholars whose tracts -- challenging conventional climate science -- have been seized upon by global warming critics as evidence of a hoax. So was his speech Wednesday before the Council on Foreign Relations in New York simply a bad hair day? Or are we essentially watching a reversion to the days of Exxon's abrasive former CEO, Lee Raymond? Here, watch the video yourself:
The last time we witnessed such a philosophical lurch by Exxon was in January 2009, when Barack Obama was about to take the oath of office, and the sense of Washington politics was the inevitability of a federal cap on carbon emissions. Explaining explicitly that he sensed this political shift, Tillerson appeared at the Wilson Center in Washington, and announced that Exxon now accepted climate science. As an ameliorative, Tillerson proposed that emissions of heat-trapping gases be discouraged through the use of a carbon tax. It was after this speech that Exxon stopped funding hoax die-hards.
Exxon did not respond to two emails seeking to plumb its latest thinking. But with this week's talk, which I describe at EnergyWire, Tillerson seems to comes full circle. Look for the company to pour its lobbying might into campaigns that twin climate adaptation with head-long development of American oil and gas resources.
Go to the Jump for the rest of Rex Tillerson, and more of the Wrap.
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My mom out in California is elated -- gasoline prices in her neighborhood are below $4 a gallon for the first time in four months. Less so are the world's petro-rulers, who are watching the price of oil -- their life blood -- plunge at a rate they have not experienced since the dreaded year 2008. Industry analysts are using phrases such as "devastation" and "severe strain" to describe what is next for the petro-states should prices plummet as low as some fear. No one is as yet forecasting a fresh round of Arab Spring-like regime implosions. But that's the nightmare scenario if you happen to run a petrocracy.
To understand why your average oil king is right to be worried at the moment, grab your calculator. The price of U.S.-traded oil fell to $83.27 a barrel on Monday, and global benchmark Brent crude to $96.05 a barrel; now juxtapose that against the state budgets of Iran, Russia, and Venezuela, which require more than $110-a-barrel Brent prices to break even, according to generally accepted estimates, and you'll see the problem.
Given this already-existing revenue gap, one might fairly wonder what would happen if, as Citigroup's Edward Morse says is possible, prices drop another $20 a barrel for an extended length of time. Oil economist Philip Verleger's forecast is even gloomier -- a plunge to $40 a barrel by November. Or finally, what Venezuelan Oil Minister Rafael Ramirez fears -- $35-a-barrel prices, near the lows last seen in 2008. In Russia, for instance, "$35 or $40, or even $60 a barrel, would be devastating fiscally," says Andrew Kuchins of the Center for Strategic and International Studies. That could damage the standing of President Vladimir Putin, since his "popularity and authority are closely correlated with economic growth," Kuchins told me in an email exchange.
With few exceptions, the same goes for the rest of the world's petro-rulers, whose oil revenue supports vast social spending aimed at least in part at subduing possible dissatisfaction by their populace. Saudi Arabia can balance its budget as long as prices stay above $80 a barrel, according to the International Monetary Fund, although projected future social spending obligations will drive its break-even price to $98 a barrel in 2016.
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Australia's lop-sided economy: Given the jobless, growthless doldrums affecting most of the world's economies, does it pay to rev up your economy and employment rolls with the engine of natural resources, as long as you are careful to avoid the dreaded resource curse? As it happens, this experiment -- being pushed by loud voices in the United States -- has been under incubation for several years in Australia, the leading producer of coal, iron ore and (in coming years) liquefied natural gas for booming Asia. As I write this week at EnergyWire, this raw materials juggernaut has resulted in a 51 percent Australian economic expansion over the last two years alone. And the plans are to go even bigger. The country plans a 20 percent, $23 billion expansion in coal production, adding some 75 million tons a year to the current production of some 350 million tons. On top of that, mining companies have proposed $46 billion in added coal projects that would more than triple current production to some 1,100 million tons.
As one might suspect, there are some problems with these numbers. First, the raw materials boom has not led to economic nirvana for Australia. According to the country's Bureau of Statistics, mining has added 103,000 jobs to the Australian economy over the last four years, but almost an identical number -- 97,200 jobs -- has been lost in manufacturing. Almost all the mining jobs have come in just two provinces -- Queensland and Western Australia. The rest of the country has largely stagnated. Meanwhile, Australians have turned profligate. As the boom has built, Australians have gone into debt -- last year, they owed an average of 156 percent of their disposable household income, more than triple their 49 percent debt load in 1991. "The amount of jobs being generated in the mining sector is really not that many compared with the lost tourism service jobs, the manufacturing jobs," Neil Bristow, managing director of H&W Worldwide Consulting," told me. "The commodities are bringing in significant money to the economy, but it's only very much in part of the economy."
And what about the coal projections themselves? Are they reasonable? Perhaps not, suggests Nikki Williams, CEO of the Australian Coal Association. "Australia has little or no chance of actually delivering growth of this magnitude," Williams told me in an email exchange. "Limitations to our access to capital, human resources and the capacity of our project approvals systems are just some constraining factors." And the projections of Australia's surge as an LNG exporter -- plans to become the world's largest LNG producer, and build from there? Joshua Meltzer, a former Australian diplomat and now a senior fellow at the Brookings Institution, says the scale of LNG production will be "fairly ground-breaking." Yet experts tell me that there simply is insufficient capital, equipment and manpower to manage everything on the drawing boards.
This is part of the point in evaluating the robust projections of oil and gas abundance we are hearing around the world. Paraphrasing Williams, will there be the capital, the people and the pure capacity to actually carry out the projects, presuming that all or most pass muster with the public and government agencies? The answer is most probably no.
Go to the Jump for the rest of the Wrap.
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The million-reason volatility of oil prices: Ever wonder why oil and gasoline prices seem to go inexplicably up, and just as mysteriously down? One reason you are so baffled is that experts themselves provide definitively certain yet quite distinct explanations for these phenomena. Take yesterday at FP for example. On this blog, I suggested that supply, demand and geopolitics are the prime movers. In a piece just a few column inches away, though, three academics -- Bernard Haykel, Giacomo Luciani and Eckart Woertz -- asserted categorically that Saudi Arabia decides prices and, if it wished, could take them lower.
Following these pieces, other experts naturally emailed with their own explanation of what we are seeing (such as high prices in Pakistan, the scene of a protest pictured above). Below I am reprinting a sampling with the authors' permission.
Philip K. Verleger, PKVerleger LLC:
You are looking for the forces moving crude prices in all the wrong places.
The individuals who buy crude know that product prices [such as gasoline and diesel] are set not by crude, but by supply and demand [for products themselves] in the marketplace. Thus, they will look to the value of crude as evidenced by the marketplace [for products] to determine how much they will bid for crude. When product prices rise, they bid up crude prices -- especially the crudes that produce the most desirable products such as diesel. For example, the European Union shift to ultra-low sulfur diesel pushed up diesel prices in 2008. Then Nigerian [oil] production fell. Nigeria produced the crudes that produced the most diesel. Product prices rose, and bidders chased crude higher.
This year it has been gasoline. In case you missed it, gasoline prices are plummeting in the spot market -- and crude is following.
Let me add that these traders do not chase crude up unless they have a buyer. A cargo can cost $100 million to $150 million. At these prices no one -- and I mean no one -- chases crude higher. You need to sit at the desks with physical traders at a trading company for a day.
Now I know my view does not conform. However, I have pushed it since 1981 and have been right most of the time. If you go to www.pkverlegerllc.com, you will see our estimate of the value of light sweet crude. We post it every day. This is the value of Brent crude. This forecast is generated on a daily basis using only changes in product prices. The model has no error correction, and the last information on crude prices I fed to it was for January 1, 1997. Wednesday's forecast was the 3,833rd data point.
Crude tracks products closely except when there is a refinery upset. The model corrects when the upset ends. The only way to send crude higher is to put out a fear of shortages, and panic consumers into buying more gasoline.
Go to the Jump for more on oil prices, and the rest of the Wrap.
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Sudan has declared war on South Sudan, India has fired a long-range missile, yet oil and gasoline prices are down.What is going on?
Common sense has come over our much-scorned oil trader friends in New York and London.
For months, there has been a global surplus in oil and gasoline, which should mean lower prices than we have seen. Yet, because of geopolitical tension such as the trouble between Iran and the rest of the world, prices have not dropped -- until now.
Oil prices are down again today, a declining trend that seems genuine when you get no bump-up despite official war between two modest oil-producers, and a missile test by a nuclear power with menace toward China.
The turn began two weeks ago with a sharp withdrawal from the futures market by hedge fund and investment bank traders, writes the Wall Street Journal's Konstanin Rozhnov. Venezuela is unhappy about the supply bulge, which has been assisted by growing volumes from Libya and Saudi Arabia. But, short of outright war involving Iran, prices look like they will continue to moderate.
I exchanged emails with Nick Butler, a former top lieutenant to John Browne at BP and now chairman of King's Policy Institute at King's College London. In an op-ed at the Financial Times, Butler forecast a plunge in oil prices, and I asked whether he thinks U.K.-traded Brent crude -- currently trading at over $117 a barrel -- will fall as far as the $80s-per-barrel range. "Who knows?" he replied. "I think [prices] will overshoot going down, and then stabilize back at $95 to $100. But that is probably too rational." Butler does not think, like some of us, that pure good sense has conquered the market for now.
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In our now half-decade-old era of regularized black swans, a few energy thinkers are cautioning against a bubble of wishful enthusiasm with regard to U.S. oil -- a widely embraced paradigm shift that, if true, would disrupt geopolitics from here to the Middle East and beyond. A shift is afoot, but not a new world, says Dan Pickering, co-president of Tudor, Pickering, Holt, a Houston-based energy investment firm.
The new abundance model goes like this: Americans currently consume about 18.5 million barrels of oil a day, of which about 8.5 million barrels are imported. But in coming years, the U.S. will have access to another 10 million to 12 million barrels a day of supply collectively from U.S. shale oil, Canadian oil sands, deepwater Gulf of Mexico, and offshore Brazil. Add all that up, and account for dropping U.S. consumption, and not only do you get hemispheric self-sufficiency, but the U.S. overtaking Saudi Arabia and Russia as the biggest oil producer on the planet.
Pickering calls this calculus "a pipedream" founded on the extrapolation of data. Excluding Brazil, whose numbers he finds difficult to nail down, he is forecasting a lift in North American production of around 2.5 million barrels a day -- up to 1.5 million barrels a day from shale oil, and another 1 million barrels a day from Canada. In 2020 and beyond, he says, the U.S. will still be importing some 6 million barrels a day from outside North America.
Technically, that does not make Pickering an outlier: The official U.S. Energy Information Administration also says the U.S. will remain a big importer into the next decade; the EIA import number overshadows Pickering's -- 7.5 million barrels of oil a day in 2020, or 40 percent of U.S. supply (see here, page 11).
Yet in practice Pickering morphs into a contrarian because, according to cacophonous oil CEOs and industry analysts, the trouble with the EIA is that it is sluggish: The EIA shale oil numbers are far too conservative, assert these folks, just as the agency -- like many others -- underestimated the U.S. shale gas boom that has glutted the market and changed part of the global energy calculus.
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A coming U.S. renaissance -- and an oil price crash: Citibank's Ed Morse unloads a monster, 92-page report forecasting no less than a new American Industrial Revolution. This economic resurgence is carried on the back of low natural gas prices as far as the eye can see (pictured above, hydraulic fracturing in Pennsylvania), in addition to a shale-oil, oil-sands, deepwater-oil boom that makes the U.S. "the new Middle East." In line with other top analysts, notably Deutsche Bank, Morse forecasts a tight global market in the next few years, notwithstanding the U.S. abundance, with the suggestion that prices will be high as well. But nirvana will arrive by the end of the decade with the convergence of U.S. oil abundance and a burst of production from west and east Africa, the Gulf of Mexico, India and the Caspian Sea. By the 2020s, we will see maximum oil prices of $85 a barrel, Morse writes in a teaser at the Wall Street Journal. There are of course potential geopolitical consequences, Morse writes:
It is unclear what the political consequences of this might be in terms of American attitudes to continuing to play the various roles adopted since World War II -- guarantor of supply lanes globally, protector of main producer countries in the Middle East and elsewhere. A U.S. economy that is less vulnerable to oil disruptions, less dependent on oil imports and supportive of a stronger currency will inevitably play a central role globally. But with such a turnaround in its energy dependence, it is questionable how arduously the U.S. government might want to play those traditional roles.
I have noted previously that some of us are suffering whiplash since just a few months ago the conventional wisdom was energy scarcity. One is inclined toward caution regarding the new narrative of abundance, such as we see in the lead story today in the New York Times, where Clifford Krauss and Eric Lipton depict a future of "independence from foreign energy sources." Morse, the dean of oil analysts, must be taken seriously. Yet the forecast oil bonanza is still largely on paper -- the crude is not pumping through the country's petro-arteries. What if oil prices drop? Will the economics still support the type of drilling described? I urge continued and watchful caution.
Go to the Jump for more on the energy boom and the rest of the Wrap.
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Look for President Barack Obama to order a significant release of oil from the Strategic Petroleum Reserve, the emergency stockpile held by the federal government. At most, it may trigger a short-lived drop in today's high gasoline prices. But Obama is battling history: Since Richard Nixon, gas prices have snuck up and startled otherwise occupied presidents, and led them into a flurry of actions that, while usually ineffective, have the virtue of making them look like they are doing something. Now is Obama's turn at the rite.
In a news conference yesterday, Interior Secretary Ken Salazar reached further into the past, noting that "all the way back to 1857, but bring it into the post-World War II era, you see the price shocks for both oil and gas that have occurred in this country and the different responses that are made." Salazar might have added that this vexing malady has afflicted not just U.S. leaders, but presidents and prime ministers around the world, most recently Nigerian President Goodluck Jonathan (and, pictured above, British Prime Minister David Cameron).
But the pursuit of sanctuary in history will do little good at the ballot box: Fresh polls in the New York Times and the Washington Post suggest that gas prices might be contributing to a drop in Obama's approval numbers. Though Obama spokesman Jay Carney yesterday assured reporters that "the Administration is not focused on polling data," that is belied by an outbreak of news conferences by members of Obama's team. The White House also yesterday released an update on its energy policy.
Obama's opponents have the knives out. One accusation is that Obama has manufactured high prices to encourage motorists to buy electric cars, to which Carney told reporters:
That is categorically false. This President is absolutely committed to reducing -- to doing everything we can to mitigate the effect of higher gas prices on American families and to lower gas prices. What he is not willing to do is to look the American people in the eye and claim that there is a strategy by which he can guarantee the price of gas will be $2.50 at the pump. Any politician who does that is lying, because it just -- that strategy does not exist. It is a simple fact that there is no such plan that can guarantee the price of oil or the price at the pump.
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The Obama Administration discounts concern that oil sanctions on Iran have ironically succeeded too well, and risk pushing the global economy into recession, say people familiar with the administration's thinking. Against worries that the sanctions have gone too far, too fast -- removing too much Iranian oil from the global market -- the Administration intends to continue trying to choke off Tehran's oil revenue, with the hope of forestalling its nuclear development.
The Administration is pursuing two conflicting containment goals: to halt Iran's acquisition of nuclear weapons, and cap surging oil prices during an election year. Its bet is that it does not have to ease up on the former in order to achieve the latter.
The U.S. Treasury Department has clamped on banking restrictions punishing institutions that facilitate payment for Iranian crude, and U.S. officials have traveled around the world to persuade importing nations to buy less Iranian oil. The European Union meanwhile has decided to halt all Iranian oil imports by July 1. Analysts think that these dual tracks have worked so well that it is as though we are already at July 1 (pictured above, gasoline prices in Los Angeles three days ago).
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Surging oil, but a paradigm shift in the U.S. economy: Against the drumbeat of steadily improving economic numbers, could the U.S. actually be on the cusp of a tumble back into recession and a greater geopolitical comeuppance? If you look at economic history, the answer is yes. Yet history may be changing, according to Citigroup oil analyst Daniel Ahn, with whom I exchanged emails this morning.
In a note to clients yesterday, Ahn (part of Ed Morse's oil team) cites a high correlation between how much the U.S. spends on oil, and the onset of recession. The U.S. is right at that historical spending inflection at the moment -- it spends 6.5 percent of its GDP on oil, smack between the 5-6 percent point at which recessions have resulted. "Historically, all but one U.S. recession since the Second World War was associated with an oil price shock. All but one oil price shock was followed by an economic recession," Ahn writes.
Yet, as we have been writing, many oil scholars believe we are witnessing a topsy-turvy realignment in the hydrocarbon world to which we have become accustomed. According to Ahn, the recessionary impact of oil shocks is changing with it: The U.S. appears to be much more resilient and able to withstand higher proportional oil prices. Only at 7 percent of GDP would oil spending -- around $150-per-barrel oil prices in the U.S. and $175-per-barrel crude in Europe -- trigger recession, Ahn told me. Among the reasons are that the U.S. economy requires less oil to produce the same GDP (a reduction in its so-called energy intensity), that Americans consume less and less gasoline, and that the country is on a ramp-up of domestic oil production. Ahn told me:
It's a tremendous paradigm shift .. and it may be happening faster than originally thought. Nevertheless, it is small consolation to the driver facing $5 gasoline immediately.
Go to the jump for more on oil prices and the rest of the Wrap.
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Oil prices are going through the roof. As usual, we have actors tamping them down, and others pushing them up. All of it links with Iran, meaning there is no visible terminus.
On the tamping-down team, Saudi Arabia has raised exports to 9 million barrels a day -- a 1.5 million-barrel-a-day hike -- to help curb an Iran-driven panic that has kept prices well over $100 a barrel, write Reuters' Jeff Mason and Matthew Robinson. U.S. Treasury Secretary Tim Geithner says the Obama Administration is keeping open the option of providing a jolt of oil to the U.S. market through the Strategic Petroleum Reserve, as it did last year during the Libyan oil crisis. And the U.S. military is putting plans into motion to secure the Strait of Hormuz -- the channel for some 17 percent of the world's daily oil supply -- according to the Wall Street Journal's Adam Entous and Julian Barnes.
Ordinarily, the Saudi move should help. That it hasn't suggests the virulence of the virus it is attacking. Injections of strategic reserves should have little if any impact, since oil prices react to the ability to produce from newly available oil wells -- so-called spare capacity -- and not to sell already-produced oil whose existence is long recognized by the market. As for military preparedness -- that could play a role in the event the Strait is actually closed, but otherwise is no more than grist for barroom discussion.
Meanwhile, the market is putty to the provocateurs, among whose culprits we include the ratcheting up of a Western-led campaign to choke off Iran's oil export earnings, which were $100 billion last year; Iran's own politically minded bellicosity less than a week before hard-fought March 2 parliamentary elections; and general edginess linked to the Arab Spring.
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Russian Prime Minister Vladimir Putin's decision to reclaim the Kremlin is a bet on high oil prices.
The weekend announcement has rattled markets a bit, Reuters reports -- the value of the ruble dropped after the current president, Dmitry Medvedev, fired Russia's rebellious finance minister, Alexei Kudrin, who is much respected abroad. Some of the angst is rooted in Russia's continued reliance on revenue from its 10 million barrels a day of oil production, and continued failure to diversify its economy.
Yet it is this very hydrocarbon foundation that Putin is banking on in a new period as president starting next May. Western financial analysts wring their hands that Russia needs at least $116-a-barrel oil to balance its budget, while the price of the Brent benchmark is just $105 at the moment and is forecast to drop over the next year or so. But, with his move, Putin aligns himself with the longer-term outlook of most oil-price forecasters, who foresee a major spike in prices starting in roughly 18 months or two years and running until the end of the decade. At that point -- 2020 or so -- many forecasters think oil prices will be so high that they will begin to trigger more or less a permanent destruction of much demand as consumers switch to alternatives.
By that time, Putin will be the end of a new 12-year run as president. His last, highly popular 8-year term as Russian president coincided with high world oil prices -- reaching a record high of $147 a barrel -- which he used to boost employment, to build up a war chest of financial savings, to elevate the buying power of ordinary citizens, and to lead a voluble, chin-out foreign policy.
In remarks in recent days, former Finance Minister Kudrin said that Russia already is having problems absorbing the income from oil prices, resulting in the flight of $31 billion in largely oil proceeds out of the country in the first half of the year, Bloomberg reports. But Putin could simply begin to resume socking away the largesse into a rainy-day fund, or a sovereign wealth fund.
Osama, Obama and Uzbekistan [This item has been updated with an interview Saturday with a senior Obama Administration official]: The Obama Administration, concerned about extreme tension with Pakistan since the May killing of Osama bin Ladin, has significantly shifted military supply lines for Afghanistan to Central Asia, say people with knowledge of the move. A senior Administration official tells me that just half of Afghan-bound U.S. military cargo now moves through Pakistan, down from 80 percent, with the other half now moving through Central Asia. But critics are assailing what they say is the result -- that the U.S. is cozying up to Uzbekistan, whose ruler, President Islam Karimov, has a long record of brutality.
The backdrop is that the Bin Ladin killing so embarrassed the Pakistani military, and shook up the Pakistan political edifice, that the already-troubled U.S.-Pakistani relationship became overtly bellicose. Given the risk that Pakistan could abruptly restrict or sever U.S. military supply lines, the U.S. acted to build up an existing alternative route north of Afghanistan called the Northern Distribution Network, people with knowledge of the move told me. U.S. officials have been holding intense meetings with officials across the oil-rich region in order to gain approval for increased traffic, including in Russia, Azerbaijan, Kazakhstan and Uzbekistan.
Uzbekistan actually borders Afghanistan, and has the best direct rail system right into the country. And it is the Uzbekistan discussions that have provoked criticism. Since 2004, U.S. aid to the country has been restricted because of its human rights abuses including summary imprisonments, torture and murder in prison. In 2005, Uzbek troops mowed down civilians in what is known as the Andijan Massacre.
New York-based Human Rights Watch has sent emails and issued statements highlighting an administration lobbying effort in Congress to loosen the aid restrictions. Providing aid in pursuit of the cargo buildup amounts to an attempt to "bribe the Uzbeks into greater cooperation on NDN," the activist group asserts.
The senior U.S. official, who asked not to be identified, argued that the U.S. is not bribing the Uzbeks, but "seeking congressional support so small amounts of non-lethal assistance can be provided so Uzbekistan can defend itself against possible retribution from militants who might attack them for supporting NDN." This assistance includes items such as body armor, he said. Regarding Karimov's intolerance of opponents and critics, he said that the U.S. presses Uzbekistan to improve its human rights record and "we have acheived some progress."
This is not the first time that tradeoffs have been sought to obtain Uzbek approval for greater U.S. cargo shipments. In a Wikileaks cable dated Jan. 10, 2010, the U.S. Embassy in Uzbekistan pushed the State Department to work for a congressional waiver in order to deliver much-desired U.S. military equipment to the Uzbeks. The cable said:
As we prepare to ask for further enhancements to NDN, we must first demonstrate that we can deliver the goods in the military-technical area. This will require ... a clear commitment to pursue the necessary engagement with Congress to facilitate the delivery to Uzbekistan of some sort of military equipment. Follow-through in this area, together with high-level Washington engagement, is necessary to secure expanded Uzbek cooperation and support on Afghanistan and NDN.
Another cable, dated Feb. 10, 2010, said 8,000 U.S. military cargo containers had already passed through Uzbekistan on the way to Afghanistan since early 2009.
Go to the jump for more of the Wrap.
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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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Oil traders are betting as a herd that they are on the cusp of potentially their most profitable period since the Libyan uprising stoked fears of Saudi Arabian oil being lost to the market. Hedge funds, among the biggest players in oil futures, are leading this charge, according to the U.S. Commodity Futures Trading Commission, which tracks such data. They have upped their bets on a serious rise in oil prices three weeks in a row -- the first time that has happened since late February-early March, Reuters reports.
We care about this directional betting because, if the hedge funds are correct, the global economic struggle faced by everyone except China will worsen. Plus, tens of billions of dollars will flow to petro-leaders -- in Russia, Venezuela, Iran -- whose behavior turns increasingly more discourteous when they are richer.
Specifically, here is what we have -- "long" bets on oil prices in the most recent reporting week rose to 182,285. That is far below the casino peak during the Libyan-fever, when there were 350,000 such bets on the table; but it is still up 8 percent over the previous week, a reasonably large jump.
What is causing this betting frenzy? Some will say it's a widely expected tightening of oil supplies later this year. But that explanation is not exceedingly persuasive because the long bet has come abruptly. Something more immediate is likelier at work -- such as the federal debt acrimony in Washington.
Look at the price of gold, for example -- it continued breaking records over the weekend, crossing $1,615 an ounce, a play by bettors perceiving higher investment risk out there.
So it is with oil. The bet is that, even if President Barack Obama manages to strike a debt-ceiling deal with Republicans in the coming days, it will not include sufficient budget cuts to satisfy rating agencies such as Standard & Poor's. The reasoning is that, should S&P downgrade the U.S. credit rating to say AA, traders in the casino will sell off the dollar. When that happens -- when the value of the dollar is driven down -- the price of oil will likely go up.
Update: In his morning note to clients, hedge fund strategist Peter Beutel calls the above bet "a classic case of buying rumors only to need to sell the fact." Meaning, a price runup will be followed by a plunge if traders apply the smell test to any debt deal between Obama and Republicans, and are not impressed.Beutel said,
Raising the debt cap will get us through this immediate crisis, but it won’t lead to a single new job or a dollar in GDP (although its failure would lead to the loss of both). Once traders get over the euphoria of Congress reaching agreement, there will not be much to build on afterwards. And that makes a selloff seem likely after approval.
Spencer Platt/Getty Images
Kremlin Contest: Who will be Russia's next president? Dmitry Medvedev, Vladimir Putin, or a surprising candidate? Put your conjecture to the test in the Kremlin Contest. It's dead easy -- tell me who will be president, who will be prime minister, and what date Putin will make his choice clear. This is a wagering contest - you must bet a small, non-cash item that, should you lose, you can mail to the winner (so far, glasses of alcohol drinks are favorites though no one has said how they will be mailed). The deadline is Sept. 1. Email me from the About this Blog box on the right on the site, or tweet at @stevelevine.
Worms, energy and war: If one ponders the biggest energy stories of the last couple of years, big accidents come to mind -- the BP oil spill in the Gulf of Mexico, the Fukushima nuclear reactor meltdown. But the one that gets overlooked, because most people regard it as a security matter, is Stuxnet -- the attempt by highly sophisticated hackers to seriously hobble Iran's nuclear weapons development program through the use of a diabolical computer worm. The hack had serious though apparently temporary impact, discombobulating hundreds of Iranian centrifuges. Stuxnet overlaps into energy by association -- Iran claims all it is doing is building a nuclear energy industry, while much of the rest of the world thinks that's naked subterfuge. If and when cyberwar becomes more common and dangerous, energy infrastructure will be serious targets, since they are among society's most sensitive nerve centers. In Wired this month, Kim Zetter deconstructs how Stuxnet was deciphered by ingenious cyber detectives. It is must reading.
Oil prices and optimism: There is the joke about the pummeled boxer who, asked by a neighbor how the fight went, replies: I got them best of him -- I hit him in the fist five times with my face. So goes the International Energy Agency's battle with oil traders. Over the last three weeks, traders have battered, spit, stomped and cackled at the IEA and the United States, which surprised them June 23 by announcing the release of 60 million barrels of light crude into the market from their strategic petroleum reserves. The idea was to shock and awe by making traders uncertain that their bets would prove good -- how could they be if IEA members might abruptly put more oil on the market? Nice idea, and it worked at first -- oil prices plunged to about $90 a barrel. But then traders brushed off their trousers and skirts, and piled back in with the implicit taunt: How often are you prepared to tussle with us and with what volume? It was a good bet, because while traders might be wrong-footed here and there, the IEA will not intervene with much frequency -- these are strategic reserves after all, and we are experiencing not Armageddon, but only annoyingly high oil prices. Since then, traders have pushed prices back through the pre-release price into the upper $90s a barrel, daring the IEA to attempt to outgame them again. Yet, like the proverbial boxer, the IEA may not be satisfied with its current bruises. The agency will decide next week whether to intervene again, the IEA's David Fyfe tells the Financial Times' David Blair.
Last Friday, we discussed what happens when one adopts a my-way-or-the-highway approach to energy development, in this case opposition to Canadian oil sands. You get what we already have, which is projections of $150-a-barrel oil and $4.50-a-gallon gasoline, the product of a belief that, starting next year or soon thereafter, oil demand will start to exceed supply. This state of affairs vexes Christophe de Margerie, the CEO of France's Total oil company, who met with a small group over breakfast this morning at the Center for Strategic and International Studies. "If you say no to shale oil, no to heavy oil, no to Iran -- no, no, no, no -- what about life?" de Margerie said. Oil companies must be responsible in how they work, but everyone else must grasp that they actually need oil, and will for many decades to come, he said.
De Margerie is refreshing on two fronts -- his wicked sense of humor (Note to oil CEOs: it is possible to be funny and successful) and among the clearest minds on the oil patch. When we last visited with de Margerie, he was on a similar bent -- he was saying that the world is fast approaching the maximum volume of oil it can possibly produce, which he reckons is about 95 million barrels a day; that's just 8 percentage points higher than the 88 million barrels a day the world consumes at the moment. Today, he dove deeply into the wrong-headedness of attempting, at least at the moment, to weed out large energy supplies that one will and will not accept. When it comes to oil, we need all of it.
We still want to drive our cars at will, and own all the plastic gadgets in our homes. We want to fly off to Costa Rica and Bangkok. Not incidentally, we would like our helicopter-borne armies not to worry if they wish on the spur of the moment to capture Osama bin Ladin. That is the stuff that's at risk.
So among other things, the United States would be shrewd to accept the added 500,000 barrels a day to be produced from oil sands in the Canadian province of Alberta, which has been under long scrutiny because of the pollution produced when it is mined and refined. At the same time, Chesapeake Energy CEO Aubrey McClendon might stop congratulating himself for a billion-dollar venture-capital subsidiary aimed at creating demand for surplus shale gas, and instead act aggressively to become super-transparent and police the bad actors who are driving doubts about his industry.
The Kremlin Contest: Perusing the first week of entries in our friendly, low-risk wagering contest for who will be Russia's next president, I've discovered that I am not alone: Many conclude that Vladimir Putin will step aside and permit Dmitry Medvedev to remain Russia's president. But where are the Putin bettors -- the multitudes who are sure that Putin will return to the Kremlin in elections next year? Get your bets in: You must name who will be president, who will be prime minister, and the date on which Putin will disclose his choice. You must also name your small, non-cash wager (one contestant has wagered a shot glass; I have wagered a glass of Rioja). Remember that, if you lose, you must mail your wager directly to the winner. You can use the email link in the "About this Blog" box on the right, or my twitter address: @stevelevine. The deadline is Sept. 1.
When oil is next door: On paper, the gasoline-guzzling United States has no oil scarcity problem. To the south, Venezuela has 211 billion barrels of oil reserves, second only to Saudi Arabia. To the north, Canada's Alberta province possesses a conservative estimate of 175 billion barrels of oil. At home, there are the newly prolific volumes of the Bakken and Eagle Ford oil shales, and new plays in the Gulf of Mexico. So why do Americans fret about the supposed peaking of oil? Because of geopolitical, environmental and self-imposed impediments that keep these enormous volumes at arm's length.
Alberta is the piece of this picture that's on my mind today. Chip Cummins and Edward Welsch weigh in with a long, page-one piece in the Wall Street Journal on the province's long, grueling campaign to persuade its southern neighbor -- the United States -- to accept a near doubling of current oil exports to 1.1 million barrels a day, and more down the road. The hang-up is that the crude comes from oil sands (pictured above), which get a lot of Americans riled up because of the pollution created during production and refining.
The worries about oil sands have led Alberta and the companies working there to try to make the sands more environmentally acceptable. For instance, unlike shale gas drillers in the United States, who all-but refuse to police themselves and go transparent, Alberta has adopted a pro-active carbon offset program. They say that, all in all, oil sands are now no more polluting than almost any other form of oil drilling.
Over at Time, Tara Thean asks validly whether new doubt is cast on Alberta's plans to pipe more oil to the United States because of a fresh oil spill from an ExxonMobil pipeline in the Yellowstone River. Alberta will have to respond. But if it does -- which one imagines it will -- U.S. environmentalists ought to reconsider their opposition to this expanded oil flow. Hydrocarbon developers have little incentive to repent if environmentalists demonstrate no capacity for compromise.
Read on for more of the Wrap
A friendly wager -- the Kremlin Contest: Among friends, I'm regarded as a bit of an outsider for my call on next year's Russian presidential elections -- a forecast here and elaboration here that strongman Prime Minister Vladimir Putin will opt not to return to the slot he held for eight years, and instead will select his friend, President Dmitry Medvedev (pictured above), to run again next March. Over at the Washington Post, my former colleague Fred Hiatt is upset with the Kremlin's approach to electoral politics, but that's beside the point. The prevailing opinion is that Putin will return to the Kremlin, but I bet a glass of Rioja on Medvedev with the husband of a senior FP editor who sides with the conventional wisdom (she herself declined to reply to the challenge). None of this sways my colleagues. The other day, one fellow in the office called my prediction "implausible."
So I am throwing out a public wager -- an election pool of a sort. Here are the rules: The winner must correctly name who is Russia's next president and prime minister, plus the date when Putin makes the announcement. To be eligible, contestants must toss a small non-cash item into the pot (you will be wise to carefully observe this rule, because unless you yourself prevail, you'll be mailing your contribution to the winner or otherwise arranging for its receipt; I'm throwing in another glass of Rioja, and if necessary will figure out how to deliver it.). The contest is winner take all, to be divided up on my judgment alone in the event of a tie. If the correct date isn't guessed, the winner will be closest to the actual date without going over. The deadline for entry is Sept. 1 since Putin probably won't make his choice clear before then.
This may not be as easy as it sounds. A ringer in the mix for example is metals-and-basketball tycoon Mikhail Prokhorov, who under certain circumstances could be prime minister.
Here are my guesses: President -- Medvedev. Prime Minister -- Putin. Date -- Dec. 9, 2011. Send your own to me, using the email link just above my photograph, in the About This Blog box on the right side of the blog.
The casino moves faster than expected: We knew that oil traders wouldn't stand by and allow the United States and other oil consuming states to think they could bring some order to volatile prices, as the U.S. suggested a week ago. But we didn't suppose that traders could or would move this fast. On June 22, the price of oil closed at $95.41 a barrel. The following day, it plunged to around $90 a barrel when the U.S. along with other members of the International Energy Agency pledged to sell 60 million barrels of oil into the global oil market from their strategic petroleum reserves; it appeared as though consuming states were drawing a line in the sand, and saying they would pay no more for oil. They would drive the price down by making the market more uncertain for traders. But, as we discussed that day and Monday, traders were bound to perceive a dare, and to engage in some brinksmanship. They would make clear that the oil-consuming states were not prepared to keep intervening in the market. And that's precisely what happened. As if to make a point, the price closed at $95.42 yesterday, or a penny above the level just before the intervention.
An official from the U.S. Energy Department says that traders have snapped up the 30 million barrels that the United States offered up for sale, Reuters reports. One reason is that it's light, sweet oil, the type that Libya producers and has been in short supply on the global market. Yet Bloomberg's Paul Burkhardt writes that some of these barrels are destined not for U.S. vehicles, but for U.S. storage tanks. In another gaming move, traders will hope to sell the volumes on again at a profit. (Update: In this document forwarded by an alert reader, Barclays Bank is attempting to snap up 200,000 barrels from yesterday's SPR sale at $104.97 a barrel. If successful, Barclays at today's prices would be able in this case to flip the volumes for an immediate profit since the curent premium for light, sweet crude is about $14 a barrel above the price of U.S. benchmark West Texas Intermediate.)
The takeaway is that oil prices will not moderate through sleight of hand, such as the injection of strategic reserves onto the market, or even Saudi Arabia's planned addition of a half-million barrels a day or more to the global mix. The reason is that traders will always look to demand, and spare production capacity to meet it in a fix. That is, should there be a devastating hurricane, a new Arab Spring uprising, or a well-placed war, is there sufficient unused production capacity to make up for lost volumes? So we are talking a need for a continued rise in Brazil's reserves; more production from the U.S. Baaken and Eagle Ford shales; and so on.
The Gulf of Mexico blame game: Was BP entirely at fault for the blowout of the well it operated in the Gulf of Mexico until April of last year? Pretty much, at least according to the court of public opinion and, thus far, the actions of authorities. But at Bloomberg BusinessWeek, Paul Barrett has a cover story next week laying out the case that Transocean, BP's rig contractor, is ducking what should be shared responsibility. Of the 126 workers aboard the Deepwater Horizon when it blew up, 79 were on Transocean's payroll, Barrett reports. These Transocean workers were carrying out the drilling operation. BP was ultimately in charge -- it called the shots and made the big decisions -- but it was Transocean's practices and expertise that made the rig go. The undertone of piece is the appearance of unseemliness in Transocean's rejection of any responsibility for the blowout, which killed 9 of its employees; a week ago Transocean issued a report laying blame squarely on BP's shoulders. Barrett draws a portrait of a company whose strategy in this case is driven by the bottom line -- if it isn't found absolutely inculpable, it could be driven out of business by the cost of the billions in payouts owed to victims. Therefore, it is shedding all blame onto BP's shoulders.
Dmitry Astakhov AFP/Getty Images
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.
Spencer Platt/Getty Images
For electric cars, a long battle: A misunderstanding about the international electric-car race -- the rivalry for domination of a possibly gargantuan market for electric cars and advanced batteries -- is that the winner will be known soon. It's clear why people would so conclude -- so much hoopla has surrounded the launch of the Volt, the Tesla, the Leaf and other models that the international contest looks a bit like the U.S. Open. We only wish we knew now which one is Rory McIlroy (pictured above). But does this perception conform with other recent examples of big technological adaptations? Not really. Even in our super-charged, accelerated world, laptops took 15 years of scaling up and pricing down before embedding themselves popularly, and cellular phones have been the same. By that measure, it will be the second half of the 2020s before electric cars are a significant part of the highway traffic.
In an upcoming study, the Boston Consulting Group, a management consulting firm, forecasts that electric cars will make their biggest splash from 2035 to 2050 (autonews.com helpfully posted a draft copy of the study). While no one can reliably forecast consumer taste one way or the other, this outlook seems a reasonable dart-throw. Of course, we are talking pure electric vehicles -- when you add in hybrids, penetration will be much faster. The reason is that both manufacturers and consumers are going to be thinking flexibility -- it will be prudent to have hybrid capability. Yet one reason the climb will be long is not just the height of the bar -- making models that travel far enough before requiring a recharge -- but the requirement to beat out gasoline-driven rivals, which for competitive reasons are bound to become far more efficient, as Jeff Bennett writes at the Wall Street Journal.
Read on for more of the Wrap.
Rob Carr/Getty Images
I am adjusting to the knowledge that Shell has left one of its most valuable oilfields vulnerable to enterprising fellows with hacksaws. That's right folks: Shell has declared force majeure on its Nigerian Bonny oilfield, where it produces more than 200,000 barrels of exceptionally valuable light crude a day, because one or more guys with hacksaws went at the line in order to drain off oil for the black market. The loss of Bonny light is among the factors that are currently roiling the global market for Brent crude.
All this time, I had thought that fighting, sabotage and relatively sophisticated theft was responsible for outages in this Niger Delta field, which was producing 500,000 barrels a day until 2005. But that turns out to be terribly naïve.
Are there no pipelines invulnerable to hacksaws? I decided to investigate. As it happens, pipelines are not so formidable, especially if you are in possession of a handy-dandy portable model manufactured by CS Unitec. According to promotional material, the Unitec "will cut 24-inch diameter pipe at 90 degrees in one pass." A single pass! Easy to get away, it would. And, according to this equally handy map available on the Internet, part of the Shell pipeline is precisely 24" in diameter! The ad goes on:
It is ideal for on-site cutting of pipes, tanks, structural steel and many other materials. The hacksaw's compact, lightweight (16 lbs.) design makes it easy to handle and operate, even in confined spaces. With a 1.5 HP air motor, it has the strength and features demanded for tough environments in chemical plants, refineries, power generation, offshore oil, pipeline construction, mining and marine."
Is the Unitec not tailor made for Bonny light (potential target pictured above)? And at just $3,995, it has hydraulic, pneumatic and electric versions.
Enough on the trouble in Nigeria. Elsewhere, we are hearing everything on the global oil spectrum from dire forecasts of calamity including oil-driven confrontation between the West and China, to predictions of a possible price decline into the mid-$80-a-barrel range, made by analyst Phil Flynn of PFG Best. Read on to the jump for more on prices.
Pius Utomi Ekpei AFP/Getty Images
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.
Russian election clues? A couple of weeks ago, I ventured a bet that, contrary to the conventional wisdom, Russian President Dmitry Medvedev will run and win re-election in next year's elections; his mentor, Prime Minister Vladimir Putin, will opt to keep his protégé in place, I wrote. While for a variety of reasons I still think that is the case, it's understandable why many think otherwise: Putin is throwing up a lot of conflicting signals. Take his decision to eradicate much-hated and bribe-laden car inspections for the remainder of the year, worth up to $300, writes Will Englund at the Washington Post. And what about Putin's announcement of a $285 billion program to rebuild Russia's ramshackle roads, another bane of the country (that's Moscow traffic pictured above)? Is Putin announcing such programs from a simple sense of good governance? According to Robert Coalson of RFE-RL, the way Russia's strongman is presiding over the affairs of the ruling United Russia party, he is sending "the strongest signals yet that he intends to return to the presidency in 2012."
This is entertaining -- and convincing -- to be sure. But that's the point. Putin doesn't need to convince anyone -- all of Russia and the rest of the world know that the job of president is his for the taking. So why the show? Because he wants the accolades, the hero-worship, the pleading crowds and so on, but while pushing matters to the brink, in the end he will, for the good of the nation of course, step aside (technically, that is) and maintain the status quo. The system works the way it is. Ask yourself this question: why in the last month (as the Moscow Times rounds up in an editorial) have the killers of Stanislav Markelov been imprisoned; has imprisoned oligarch Mikhail Khodorkovsky, while not released, been permitted a fair hearing on state-run NTV television while announcing a decision to appeal; and has the alleged triggerman of murdered journalist Anna Politkovskaya been captured and charged? Is it because Medvedev is acting against Putin's wishes?
This is where it's possible to lose one's way. What seems dissonant in the tandem in fact isn't. It happens because Putin wants the balance that Medvedev provides. Not incidentally, Medvedev is content with this state of affairs as well. One way to understand Medvedev is as simply another expression of Putin -- that is, even if Putin stepped completely out of the picture, Medvedev would not turn Russia into bastion of liberalness. Rather, when Medvedev's Russia undoes some of the injustices in the country, "what might appear to be the dismantling of Putin's legacy is not a dismantling at all," the Moscow Times editorial board writes. It said:
Khodorkovsky, even if given parole for good behavior, will not be acquitted. Investigators might have found Politkovskaya's killer, but we are unlikely to ever know who ordered the murder. Ultra-nationalism is still not being fought outside the courtroom. And thousands of other murky cases -- such as the death of lawyer Sergei Magnitsky or the beating of Kommersant reporter Oleg Kashin -- have not been properly investigated. Most important, the power vertical, along with its creator, is as strong as ever. Medvedev may stay in the Kremlin without tackling these issues. But if a handful of high-profile cases is all that he has to offer in terms of political reforms, his second term in office will differ little from Putin's policy of status quo. A second Medvedev term might then be best described as 'modernized stagnation.'
Viktor Drachev AFP/Getty Images
Speculators argue that they do not affect oil prices -- we are paying more at the pump, and businesses far more to make their products, because this is the natural state of things: Oil supplies are static while demand is rising, so next year we will be back to the ultra-tight market of 2008, when oil prices sky-rocketed to $147 a barrel. In fact, Goldman Sachs says that is precisely where we are headed -- an average of $140 a barrel next year, the bank said in a note to clients this week.
These are geopolitical prices -- such levels weigh heavily on the economies of oil-consuming nations, such as the United States and Europe, and make producers such as Russia and the OPEC nations fat and mean.
Only, is the Goldman Sachs account of reality true? Let’s start with the 2008 runup -- yesterday, the Commodity Futures Trading Commission charged Parnon Energy, a big U.S. trading house, and two of its European affiliates with oil price manipulation. They bought up and stored a huge percentage of the available oil in Cushing, Oklahoma, in January and March 2008 with the aim of cashing in when the market perceived a drastic shortage of crude, the CFTC alleges. During the whole of these events, Goldman Sachs and other investment banks -- attempting to stave off tighter regulation -- paraded repeatedly before CFTC hearings, congressional committees and public cameras claiming that such activity was almost impossible. The surge was a reflection of fundamentals, and traders were innocent of any impact, they testified. Were they correct? Not if the CFTC case is accurate.
Let’s look at the bigger picture. Spare capacity is an indisputable fundamental factor in oil prices, but it is only what gets the whooping-and-cheering Goldman Sachs, Morgan Stanley and their clients to the casino table. Once they are there, they are standing alongside traditional traders, and pouring their extremely high net worth into the same pot. It’s that piling up of the cash on the table that pumps air into the oil price. Should we ignore that pile while the investment banks divert our attention to the nice flowers and pretty birds? No, we shouldn’t.
Ethan Miller/Getty Images
Our list of factors affecting oil and gas prices already includes war, kidnapping, supply and demand, hurricanes, pipeline explosions and threats to tyrants. Add sexual assault.
Dominique Strauss-Kahn's arrest for allegedly assaulting a maid at the Sofitel in Manhattan is causing havoc not just in oil markets -- gold, currencies, and Asian stocks are all in a kerfuffle. Oil dropped below $98 a barrel; gold fell by $3 an ounce, and silver declined, too; the Euro plunged to a seven-week low against the dollar.
The stated reason is that the 62-year-old chief of the International Monetary Fund was supposed to swoop into Brussels today and tomorrow and help figure out how debt-laden European countries might get bailed out before seriously injuring the economies of the European Union. But why should that be the case since Strauss-Kahn's superlatively able deputy, John Lipsky -- who also has been named as the IMF's interim chief after the arrest -- has stepped in to the breach?
Is this a normal reaction? Out of curiosity, I Googled "sex scandal shakes market." There were 1,220,000 hits, including accusations against lifeguards in Florida ("Sex Scandal Shakes Volusia Beach Patrol"); a 1976 scandal involving then-Rep. Wayne Hays and a long-forgotten clerk named Elizabeth Ray ("Sex Scandal Shakes up Washington"); a sex tape that rattled Turkish politics ("Sex Scandal Shake-Up Reinvigorates Turkish Opposition Party"); and a two-decade-long controversy involving an Indian dessert shop ("Ice Cream Parlour Sex Scandal Returns To Shake Kerala Govt").
This unscientific survey turned up no immediately noticeable direct link between sexual assault and the markets. I was certain that the Monica Lewinsky case must have rattled markets in the mid-1990s -- and readers may recall better than I -- but had no luck with that specific search, either.
Curiosity aside, the Strauss-Kahn case is a wake-up call for those who do not yet realize that we are in a highly jittery moment, and perhaps on the edge of a new global economic dip. Read this piece by John Authers at the Financial Times.
Thomas Coex AFP/Getty Images
Oil price spiral, interrupted: Rex Tillerson, the CEO of ExxonMobil, said this week that the purely economic value of oil is $60-$70 a barrel, or about 29 percent lower than the price at which it closed Friday. Tillerson (pictured at right above) was talking about the cost of producing new crude oil, not the stuff that is already in tankers headed to refineries or in storage. You'd add reasonable profit on top of Tillerson's estimate, but he doesn't claim that this explains the divergence of the price to above $100 a barrel in the last couple of months. He is mystified along with the rest of us.
He was speaking at a Senate Finance Committee hearing that was just one tick in a highly newsy week in oil. The CME Group, which owns the Nymex exchange where speculators trade U.S. oil futures, took some air out of the market by significantly raising the cost to bet on oil -- by a whopping 25 percent (while that's a lot, it's nothing compared with an 84 percent increase this week in the price for betting on silver). Why did CME act? One reason is that speculators are pushing the oil price all over the place. Traders became so overheated Wednesday, for example, that CME actually called a temporary halt to the betting action.
One factor that's played havoc with the market has been two years of government stimulus. Governments around the world -- in Europe, Asia and the United States -- have so feared a catastrophic and prolonged depression that they have lavished public spending on their economies, and maintained super-low interest rates. The U.S. Federal Reserve has even engaged a trick called quantitative easing, which does the same thing as stimulus by putting more cash into the system. All this money staved off the worst for a while, but it had to go someplace, and guess where that is? A lot of it has become "hot money," sizzling up developing markets around the world -- and commodities such as oil. To make things much simpler, the money has gotten into the hands of traders, who have driven up the price of oil (among other commodities including silver). Don't ask me how specifically it got into their hands; that's one of the tricks of speculator types -- they somehow, in every period of economic bubbles, end up at the delivery end of cash faucets.
What importantly isn't often taken account of is that robotic traders are sitting right next to the live players at the casino. These really are robots -- not the kind with artificial intelligence that futurist Ray Kurzweil forecasts will take over our lives in a few short decades, but computerized traders: robotic robots that automatically buy or sell when certain price thresholds are crossed. That was the major cause of the huge price dives over the last 10 days or so. As Reuters reports, there was a perfect storm, and the robots went wild.
As a coda, I have often wondered why this type of what I think is fairly sensible talk makes some people uncomfortable, and I think I've discovered why -- they think that if you point out the role of speculators, you are calling for their abolition. But why would that be so? If one suggested for example that the presence of wild quantities of trout results in a spurt in the issuance of fishing licenses, would you fear the eradication of fishing? I think the speculation deniers should relax. We all know that trading (speculation) has a healthy function in markets. Yet we also know that it can move markets. It is the latter factor that is under discussion.
For those who want it from the horse's mouth, here is a video of Tillerson at Thursday's Senate hearing.
Read on for more of the Wrap.
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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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Osama bin Ladin is dead. So why haven't oil and gasoline prices moderated? We are paying $4.25 a gallon for regular gasoline here in Washington, D.C., much less than the $8 and more a gallon that Europeans face, but still a lot for us. At first, prices tried to go down after the slaying Sunday -- oil prices dropped overnight and into yesterday morning as traders (the folks whose casino behavior helps to determine prices) saw Osama's death as a reason for optimism. But then their opinion abruptly turned: Traders callously recalculated and decided that Bin Ladin and the group he fathered -- al Qaeda -- now rarely if ever threaten oil supplies, and sent prices back up.
During this irresolution, the price swung below $111 a barrel and as high as $114.83 before settling at $113.52 a barrel, the final dip resulting from the intrusion of a larger, new personality -- Ben Bernanke and the organization he runs, the U.S. Federal Reserve. Specifically, the ultra-weak dollar showed some spark and pushed the oil price down a bit.
Some traders and analysts think that Bernanke and the dollar are even bigger right now than Libya's Moammar Qaddafi or any other single Arab leader. Among them is hedge fund adviser Peter Beutel, president of Cameron Hanover, whose overnight note to clients said Bernanke looms larger:
As days pile upon days, the Fed almost certainly has its arms around more of them, with Bernanke's words ringing in the ears of more traders than the ramblings of Moammar Khadafi. Khadafi is the better quote. [But] Bernanke almost certainly gets more traders to reach for their wallets.
In a strange and perhaps dubious way, Bernanke emerges from Bin Ladin's death a clear winner -- it's settled now who is king when it comes to influence over oil prices. Who are some other winners and losers? A list follows in the jump, but please feel free to add your own in the comments box below.
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.