We are suffering whiplash: For nearly four decades, OPEC -- the cartel formally known as the Organization of Petroleum Exporting Countries -- has been a major economic and geopolitical force in our collective lives, driving nations to war, otherwise self-respecting world leaders to genuflect, and economists to shudder. The last half-dozen years have been especially nerve-wracking as petroleum has seemed in short supply, oil and gasoline prices have soared to historically high levels, and China has gone on a global resource-buying binge. Russia's Vladimir Putin has strutted the global stage, bolstered by gas and oil profits, and Venezuela's Hugo Chávez has thumbed his nose at los Yanquis.
Yet now we are hearing a very different narrative. A growing number of key energy analysts say that technological advances and high oil prices are leading to a revolution in global oil. Rather than petroleum scarcity, we are seeing into a flood of new oil supplies from some pretty surprising places, led by the United States and Canada, these analysts say. Rather than worrying about cantankerous petrocrats, we will need to prepare for an age of scrambled geopolitics in which who was up may be down, and countries previously on no one's A-list may suddenly be central global players.
One primary takeaway: North America seems likely to become self-sufficient in oil. "This will be a huge potential productivity shock to the U.S. economy," says Adam Sieminski, director of the U.S. Energy Information Administration, a federal agency. "It could grow the economy, grow GDP, and strengthen the dollar."
OK, we get it -- we will need to relearn our basic geopolitics. But how so? Last week, the New America Foundation gathered six leading energy analysts to take a guess as to the winners and losers over the next few decades from the unfolding new age of fossil fuel abundance (video here). Here's what they told us:
The United States: Jobs increase, wages and productivity go up, the dollar strengthens, the current account deficit becomes negligible, and America has a new day as an economically dominant superpower. It is far and away the biggest winner of the new age, the analysts agreed. As far as Americans are concerned, what's not to like? Citigroup's Ed Morse waxed rhapsodic: "We will no longer be kowtowing to despotic rulers and feudal monarchs whose oil supply lines are crucial to other aspects of foreign policy. Those tradeoffs will be eliminated." Perhaps a bit Pollyanna-ish, but we get the general idea.
New petrostates: Aren't we forgetting those unsung nations that, depending how they manage the new age of plenty, can also very well end up with far more robust economies and as geopolitical players? The following 10 countries -- all of them burgeoning new petrostates -- make the winner's list because, even if they ultimately botch the moment and send most of the profit into private Swiss bank accounts, the coming energy boom gives them a much greater chance at big economic prosperity: Cyprus, Ethiopia, French Guiana, Israel, Kenya, Mozambique, Sierra Leone, Somalia, Tanzania, and Uganda.
Cooperation: Western suspicion of China has been fueled by its aggressive acquisition of natural resources around the world, especially oil and gas fields. But "in a world of plenty," said Ed Chow of the Center for Security and International Studies, "the zero-sum nature of the discussion could come out of the equation." Chow thinks we are already seeing the first stages of this more relaxed future in the U.S. attitude toward billions of dollars in recent Chinese investment in U.S. shale gas and oil fields. That is far different from 2005, when public and political opinion aborted China's attempt to buy Unocal almost before it reached a serious stage. Chow likes this new atmosphere. "It was never a very healthy phobia that we had to begin with," he said. Looking ahead, Chow wonders whether the United States might end up collaborating with China and India in patrolling the Persian Gulf.
Go to the Jump for the Losers in the new age.
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Iraq -- drilling in a (former) war zone: With the U.S. military role in Iraq officially over, so vanishes the main official outside protection afforded Big Oil, which is working there in droves. Iraq is the largest potential new oil bonanza on the planet -- it has the second-largest known reserves next to Saudi Arabia. For oilmen, this is a bracing new day: One can hire an army of former commandoes as security -- which the companies do -- but the presence of a friendly Western security force is a qualitatively different and assuring thing. Bombings are a regular occurrence; as the Wall Street Journal's Hassan Hafidh reports, BP temporarily stopped producing oil in part of southern Iraq's Rumaila field after someone bombed pipelines.
Yet business goes on: Big Oil's stomach for badlands rises in proportion with the potential output, and in the case of Iraq's three big southern fields -- West Qurna and Zubair (pictured above), in addition to Rumaila -- the companies have pledged to produce 6.8 million barrels a day. That is a massive goal, considering that the same companies -- BP, Italy's Eni and ExxonMobil -- plan to produce just one-sixth of that daily volume from fields of similar collective size on the Caspian Sea. The Iraqi government has a stake in ensuring the companies' relative safety as its ambitions are even greater -- it hopes to raise the country's production to 12 million barrels a day by 2017. Virtually everyone outside the country regards the higher aim as fantasy. One reason is that, quite apart from the security situation, Iraqi bureaucrats make it hard for the companies to operate, reports Bloomberg. "The red tape companies encounter in Iraq -- when they apply for employee visas, for example, or try to import equipment or seek payment -- seems to reflect attitudes rooted in the past," the agency writes.
Go to the Jump for more of the Wrap
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.
TNK-BP: Clutch play by Dudley puts momentum back with BP? Counter-intuitively, the momentum may have shifted back to BP in its latest high-wire negotiations in Russia. BP's Bob Dudley (pictured above), attempting to turn around the company's fortunes after the costly Gulf of Mexico oil spill a year ago, in January dived into a highly tenuous tie-up with Russia's state-owned Rosneft, with whom it hoped to explore the oil-rich Arctic Sea. The tenuous part came because BP's long-time Russian partners, the grouping of four oligarchs known as AAR, blocked the partnership through tribunal rulings in Europe. As late as yesterday, BP and Dudley seemed to be in deep trouble -- BP had offered to buy out AAR's 50 percent of their Russia-based partnership for $27 billion; AAR apparently counter-offered with an ask of $35 billion, part of which would be paid through 10 percent share holdings of both BP and Rosneft. Dudley balked at the shareholding part, and possibly the money too. But just when hope seemed lost, Dudley got Rosneft to extend what had been a drop-dead deadline yesterday for completing their tie-up. Now BP has until this time next month.
Now a curious thing has happened. In a statement issued today, AAR CEO Stan Polovets advises BP to find a way to honor their partnership agreement faithfully. "We trust that BP will use the extension it has got from Rosneft to ensure that both the Arctic opportunity and the share swap are pursued through a structure consistent with BP's obligations under the TNK-BP shareholder agreement," he said. It's curious because Polovets said almost the identical thing yesterday.
If one is in the catbird seat, one generally remains sphinx-like. Hence, the signal that AAR is a bit uncertain. BP now has time to turn the tables. Chris Weafer, an analyst at UralSib, thinks that the long time extension suggests that the Kremlin intervened at the last minute to keep the deal alive.
Even if he was miserly with the cash -- $35 billion does not seem like too much money for the unlisted company -- Dudley was right to refuse AAR's share demands. He would be a fool to hand over 10 percent of BP -- and hence a board seat -- to the litigious and shark-like AAR, who have shown over the last 15 years a zest for a bloody brawl. Nothing personal, of course.
Should the shale gas tent be folded up? If Cornell Professor Robert Howarth and a couple of his colleagues are correct, there is precious little hope -- very close to none -- of getting greenhouse gas emissions under control and preventing some of the less-pleasant repercussions of climate change. This week, the Howarth team published a paper disputing one of the main assumptions accompanying the U.S. boom in shale gas drilling -- that it is a positive development because natural gas emits half the greenhouse gases of coal, and a third less than oil. Gas, it has been said here and elsewhere, is a "bridge fuel" until an as-yet undetermined non-fossil fuel technology is scaled up to propel the global economy along with the world's private vehicles. But Howarth says that, when one takes into account the methane released during shale gas production, coal in fact comes out cleaner. Given the hoopla surrounding shale gas, Howarth's paper has attracted much attention, including prominent display in the New York Times. But is he right?
Over at the Council on Foreign Relations, Michael Levi isn't so sure. There is no dispute regarding the hazards of methane -- this gas is pernicious. But Levi takes Howarth to task for relying on "isolated cases reported in industry magazines" along with the performance of notoriously bad Russian pipelines for his conclusions regarding how much methane escapes into the atmosphere during hydraulic fracturing, the method by which shale gas is extracted. Levi is at his most brutal in an apparent scientific gaffe -- Howarth used comparative gigajoules in order to measure the methane emissions of shale gas against those of coal. The problem is that gas produces a lot more electricity than coal gigajoule-by-gigajoule, something that Howarth doesn't take account of. For that reason, Levi favors kilowatt-hours for comparison purposes, and regards Howarth's failure to do so as "an unforgivable methodological flaw; correcting for it strongly tilts Howarth's calculations back toward gas, even if you accept everything else he says." Ouch.
Howarth explicitly states his data are thin and that more research is necessary -- methane is under-examined. Levi agrees with him there.
Here is where we return to one of the industry's own big failures to get out in front, figure out its weak points before critics do, and fix them. We have previously suggested that the error-prone shale gas industry ought to police itself, put peer pressure on its own bad actors to straighten up, and openly disclose the content of its fracking fluid. Now a new front has opened up. It could be too late to recover entirely -- the industry is headed for serious federal regulation, the very thing it has sought to avert.Read on for more of the Wrap
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As turmoil has engulfed the Middle East and North Africa, much attention has focused on Saudi Arabia -- if trouble spread there, traders have worried, the global economy could dive into a far more serious recession than the 2008 financial collapse. Nawaf Obaid, a senior fellow at the King Faisal Center for Research and Islamic Studies and a doctoral candidate at King's College London's Department of War Studies on the subject of the rise of Saudi nationalism, thinks the fears are overblown. He kindly agreed to write a guest column, which follows.
Reports in recent weeks have suggested that the mass protests occurring in Arab nations will soon spread to Saudi Arabia. There has been coverage of Facebook pages established by activists calling for a "day of rage," and a "day of revolution." Large, front page articles, illustrated with pictures and charts, have asserted that it is only a matter of time before massive upheavals will bring down the Saudi monarchy. The BBC has reported that the Saudi downfall is inevitable, and weighing heavily on global energy markets, where a fear premium had added 15 percent to the price of oil.
These assertions have been grossly exaggerated: 17,000 Facebook fans or "protesters" do not necessarily translate into 17,000 Saudi rioters, because at the very least it is impossible to verify how many of them actually lived in theKingdom. One cannot forecast events based on a count of virtual fans at a social network.
In this case, the outcome is a dangerous, long-term yet illusory perception: the vulnerability of Saudi Arabia's energy infrastructure.
The logic of this narrative is there: Saudi Arabia holds 25 percent of the world's proven oil reserves, is the largest exporter of oil, is the only nation with significant spare capacity (almost 4 million barrels of oil a day), and is the leading power and sole swing producer in OPEC. A disruption in Saudi oil exports would create what can best be described as a global economic catastrophe. Unlike in the case of the disruption of Libyan exports, in which Plan B is for Saudi Arabia to increase its exports to steady the markets, there is no Plan B if Saudi Arabia goes off line. Because the kingdom possesses about 75 percent of the world's spare capacity -- all of which would now vanish -- oil would probably soar to $200-$300 per barrel in such a scenario. The effects this would have on economies around the world would be devastating. Stock markets would crash as mega non-energy multinational companies would see their energy costs soar, and their market cap valuations drop. The entire transportation sector would go bankrupt. Wall Street would be the most affected -- it would require federal government bailouts that would dwarf those made just a few years ago. The nascent U.S. recovery would grind to a halt, as every extra cent paid at the pump would pull about $1 billion from motorists' pockets per year. The sudden, exorbitant rise in the cost of practically every commodity would cripple global trade.
But this nightmare scenario is extremely unlikely. No system as vast as the Saudi oil complex -- with its scores of rigs, refineries,export terminals and pipelines -- is perfectly protected. But the risks aremuch less serious than widely disseminated.
No sheriff in oil town: The latest Reuters poll of oil traders forecasts oil prices to pass $130 a barrel by the end of the year, which seems a fairly safe bet given that the widely traded U.K. blend went past $124 today. In terms of the whys, it's geopolitics, argues the usually sober-thinking Ed Morse -- the existence of autocratic, sclerotic and unresponsive Middle East governments is old, but not the local reaction to it. Morse writes in the Financial Times:
The prospect of the largest oil-producing countries confronting challenges, such as those seen largely in north Africa so far, is more probable now than a year ago, telescoping the potential day of reckoning and raising the probability of an apocalyptic oil supply disruption.
Leah McGrath Goodman notes the role of the casino -- traders betting on the news out of the Middle East. But, in an overnight note to clients, hedge fund analyst Peter Beutel at Cameron Hanover laments the entire cycle of higher prices -- the "spiral in motion" that we are witnessing. Beutel writes:
It goes like this: A stronger economy helps boost oil prices as investors anticipate stronger future demand. Higher prices (for refined products) hurt consumers and lead to demand destruction. Higher oil prices hurt consumers and their ability to spend money elsewhere. As a result, in order to keep the economy going, the Fed needs to keep rates low or money inexpensive, and that hurts the dollar, which boosts oil prices. A weaker dollar helps exports, and that helps the economy, boosting oil prices, hurting the dollar as well as consumer discretionary spending. It gets absolutely dizzying. It has elements that want to halt the cycle and other elements that keep it in motion. The latter factors are dominant here.
... but investors hedge with clean tech, too: Right alongside the runup in oil prices we are seeing a big rise in investment in green technology, according to the Cleantech Group. Investors poured $2.5 billion into the sector in the first three months of this year, mostly in mature solar and electric-car companies. That was 30 percent higher than the same period a year ago, and the largest sum since the third quarter of 2008. It does not mean that investors are turning back to clean energy -- hardly any money went into startups or companies not yet in the market. Instead, it looks like a hedging strategy -- investors see oil demand destruction ahead given the direction of prices (in 2008, U.S. motorists -- the biggest oil gluttons on the planet -- began to buy a lot less gasoline when prices at the pump reached $4 a gallon), and so are pouring money into already-existing clean-tech products. As for the rest, in the Wall Street Journal, Guy Chazan writes that money is pulling back in biofuels, since it looks like many, many years before any will be competitive with gasoline. Read on for more of the Wrap.
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Tiny Gabon has been among the places that have roiled oil markets this week. Workers in this west African country settled a four-day strike yesterday, but not before helping to send the widely traded U.K.-traded crude benchmark above $120 a barrel for the first time in almost three years. It involved just 240,000 barrels a day of production, but demonstrated the market's jitteriness since Libya's 1.1 million barrels a day of export oil was lost. There is a crisis premium of $15-$20 a barrel in the price of oil, most analysts agree, and probably more.
Yet all this time, between 20 million barrels and 36 million barrels of surplus oil have been anchored in floating storage (ships such as the tanker pictured above) in the Persian Gulf and the Mediterranean Sea, reports Thomas Strouse. This bounty belongs to Iran, which is the object of a U.S.-imposed sanctions regime that among other things seeks to stop its flow of crude oil revenue. If this oil were freely sold, it -- along with Saudi Arabia's increased exports -- would easily compensate for the lost Libyan cargoes for almost a month.
But there is evidence that some of it is being sold onto the market. According to data compiled by Reuters, the surplus oil is contained in a dozen very large crude carriers (VLCCs), which can hold about 2 million barrels of oil each, plus 12 million barrels more in shorter-term storage. Yet that was a smaller fleet of storage than Iran had last year, when up to 25 tankers, mostly VLCCs, were at anchor, the agency reports. So clearly there have been buyers. Read on to the jump.
William S. Steven / Getty Images
Libya has bared an uncomfortable truth to Saudi King Abdullah (pictured right above), Azerbaijan President Ilham Aliyev, Kuwaiti Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (left), and the rest of the petro-autocrats of the world:
When politically expedient, Washington will help to push you out of power.
This sounds obvious, but it's not how it was supposed to be. The United States has been allies with many such leaders as part of Pax Americana. For the most part, this hasn't seemed cynical, but realistic -- factually speaking, the United States and the rest of the West and the world require oil; there are diplomatic missions that only an Arab king or sheikh can fulfill; and the balance of power includes the support of autocratic leaders. Even the peace with Col. Moammar Qaddafi was well-intentioned -- he has considerable blood on his hands, but back in 2003 there was hope he had opted to reform; the most prevalently voiced opinion was that he was a potential template of the new possibilities of the age.
Much of this portrait is different now because of the Arab Spring, under replacement by an as-yet unestablished new set of rules. In the United States, there is an understanding that petro-realpolitik must change because one can no longer be sure that the Emir sitting confidently before you will be there next year, or even next week. In the petro-states, there is an understanding that the long-standing alliance-of-interests underpinning one's relationship with the United States can be much shorter-lived than one originally thought. Hence, no one should be surprised when hearing of an unprecedented breach between the United States and Saudi Arabia -- as we've discussed, the Saudis have played a highly constructive role on behalf of U.S. economic and political interests around the world, but the truth is that there simply is not much support in the United States for families that treat their nation's wealth as a personal treasure trove. From the Saudi side, why should one go out of one's way for a superpower that so rapidly discards its friends?
Yasser al-Zayyat AFP/Getty Images
Nigeria is about to become the crisis du jour, and there is good reason -- Goodluck Jonathan (pictured above) is running for re-election as president this month; so are candidates for Parliament. In the last elections -- in 2007 -- there was so much violence that 1 million barrels of oil a day -- half the country's total production -- was lost to export markets, the Wall Street Journal's Jerry Dicolo reports. If that recurs -- or if traders figure it will -- look for prices to go a lot higher than the $107.94 a barrel that they reached last week. Along with that will rise gasoline prices.
There is a chance that matters will not turn bad. The Movement for the Emancipation of the Niger Delta, or MEND, the most active militant group operating in the oil-rich Niger Delta, has retracted a threat to attack oil installations during the election period, according to local on-line The Nation. Authorities are better-prepared for what trouble does arise, reports Agence France Press. "There will be pockets of violence," Victor Ndukauba, an analyst with Afrinvest Advisers, told the French agency. "However, there is much better awareness of a lot of the [militant] foot soldiers. ... There will be violence, but we don't think it will be as bad." Some analysts actually think that the country will increase production in the coming weeks and months by some 300,000 barrels a day.
The parliamentary elections are Saturday, and the presidential voting on April 16.
But if there is trouble as in the past, this time -- unlike with the loss of Libya's 1.1 million barrels in daily exports -- the United States would be directly affected. That is because the United States currently buys some 960,000 barrels of oil a day from Nigeria. Oil prices would go up for everyone, but the U.S. will have to directly make up the volumes this time from elsewhere.
Bloomberg reports that Nigeria is already figuring into the futures market -- when they opened in Australian this morning, and in before-hours trading in New York, the price of the New York-traded benchmark, called WTI, rose to $108.74 a barrel. The other major crude -- London-traded Brent -- was up to $119.48, which is 0.7 percent higher than its close at $118.70 on Friday.
Pius Utomi Ekepi AFP/Getty Images
As we begin another week of turmoil in the Middle East, and countries further afield batten down the hatches in an effort to preclude being next, here are some of the things we don't know:
-- Whether oil prices are going up to $220 a barrel (and $5 at the pump), or down to $70 a barrel and more like $2.50 for a gallon of gasoline in the United States;
-- Whether Saudi Arabia really increased its oil production last week, or if the truth is a bit different;
-- And, finally, whether Russia's gentleman president, Dmitry Medvedev, has been rummaging through Vladimir Putin's archive of paranoid off-the-cuff remarks, and truly does not grasp what is happening around him.
It was Nomura Securities that, in the Goldman Sachs style of hype-as-part-of-corporate-promotion, last week forecast oil prices of $220 a barrel. Nomura predicated its forecast on Algeria devolving into chaos, and shutting down its 1.8 million-barrels-a-day of oil production. Since that would be on top of Libya's current cutoff of around 1 million barrels a day, the combined loss to the market would rub right up against the industry's total spare production capacity of 4 million barrels a day. Hence, prices would rise steeply because at once we would be back to 2008, with almost no margin for error for any other mishap like a hurricane, a Nigerian pipeline explosion -- or more Middle East unrest.
Yet, why the figure $220? Do we go up in fifths now? We side with the cooler-headed Dave Kansas at the Wall Street Journal, who calls Nomura's projection "fraught."
But are we headed as low as $70 a barrel either? That's what Almir Barbassa, the CFO of PetroBras, the Brazilian oil giant, told MarketWatch. For the reason he says that, read on.
Laurent Fievet/ AFP/Getty Images
The Saudis' power to calm: We all know by now that oil prices have soared not specifically because of Libya, but because traders are worried about what happens next. In particular, they are worried about Saudi Arabia -- whether it can truly step up to the plate with big volumes of oil to compensate for a shortfall elsewhere, even if it itself falls victim to the unrest roiling the Middle East. To be more precise, the question on many lips is: Will or will not the Saudis announce an increase in oil production in order to calm roiling global markets? I discuss this topic today on the Brian Lehrer Show at WNYC.
The answer is that they may already have quietly done so.The Oil Daily is reporting today that Saudi Arabia has lifted production to 9 million barrels a day, which if accurate would be about 4 percent, or 400,000 barrels a day, higher than its most recent reported volume. That's a serious uptick in production -- sufficient, one would think, to persuade traders that the kingdom in fact possesses the capacity and will to tamp down market volatility when it's called for. It should be sufficient to lower prices well into the low $90-a-barrel range. It should be, that is, if the Saudis actually tell the market that it has done so. Instead, the Saudis are going around simply asserting that they will step in as soon as they are truly needed.
Is this just the Saudis playing coy? No, writes the Oil Daily: "Saudi Arabia has been quiet about its output hike, most likely because of the political sensitivities in the region and the internal dynamics of OPEC, where members are expected to produce at target levels." In other words, if Saudi Arabia wishes to remain the uber-alpha male in OPEC, it must not be unilateral or bumptious, but navigate the shoals of the cartel with diplomacy.
Okay, I get that. But doesn't that defeat the purpose? If the market doesn't know that you've added the volumes -- which otherwise would be like apologizing to your wife for an egregious mistake by writing it on a piece of paper and putting it in your pocket -- why bother? I suppose there are just things about the Saudis that we are doomed never to grasp.
Speaking of Libya's impact, readers emailed me the nifty charts below. In the first chart, produced by the International Energy Agency, you can see that Ireland is the most exposed country in the world to Libya, which supplies almost a whopping quarter of its oil. Italy is next with about 22 percent reliance on Libya. Indeed, Europe in general is on the hook. As for the United States, it's relatively inoculated -- Libya satisfies just 2-3 percent of its demand.
In this chart, produced by the Russian news agency RIA Novosti, you can see Libya's export reliance. It by far sells the most of its oil to Italy -- almost a third of its export total. Ten percent of its oil goes to China, and 6 percent to the United States.
The fallacy about China's oil companies: One prevailing wisdom about China's global resource grab is that it's all a centrally devised plan. So that when China's oil companies hand out big loans to Brazil, Russia and Kazakhstan in exchange for oil supply and access to fields, they are effectively following Communist Party orders. Not so, says the Paris-based International Energy Agency. In a new report, the IEA says that not only do the China National Petroleum Co., Sinopec and the rest operate autonomously and commercially, but they also have added volume to the world supply of oil and gas. Julie Jiang, who co-wrote the IEA report with Jonathan Sinton, said, "These are far from puppet companies operating under control of the Chinese government, as many have assumed. Their investments in recent years have been driven by a strong commercial interest, not the whim of the state." At the Wall Street Journal, James Areddy called the report "eye-catching."
Out one door, through two more: World power is shifting from west to east, and so is BP's portfolio of assets. Over the last month or so, the British company has announced $15 billion in operational tie-ups and share swaps with Russian and Indian oil companies, including a $7.2 billion deal this week with India's Reliance Industries, headed by Mukesh Ambani, one of the richest men in the world. At the same time, BP is reducing its foothold both in the United States and at home in the United Kingdom. All of this has followed BP's disastrous oil spill in the Gulf of Mexico last year. For BP, the strategy is a bet that, by gambling in Russia and India, it can increase its reserve base by about a third, to some 80 billion barrels of oil and natural gas, according to a Citibank estimate cited by the Financial Times.
Let's look at the bigger picture: Will Wall Street eversee BP the same again after the Gulf of Mexico, and bid up its share price astraders did for almost all the other major oil companies this week? Probably. Butit could be a long time. Production in Russia's Arctic region is a long way off -- perhaps a decade. So for now the value of these deals is largely notional.
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A senior Saudi Arabian oil official said in 2007 that the kingdom has 388 billion barrels of recoverable crude oil reserves, about 45 percent more than official public estimates. But about the same time, a retired Saudi Aramco executive met with U.S. diplomats in Dhahran and asserted that the country's figures in general are wildly overblown, and that it is headed for a production peak around 2020, followed by a slow decline according to new WikiLeaks cables.
The issue is pivotal. Put simply, the price of oil -- the price you are paying at the pump, indeed the cost of everything in your home -- is wholly determined by what oil traders think Saudi reserves and production capability really are. As an example, oil plunged yesterday to its lowest price of the year -- $87.87 a barrel -- when Saudi Arabian Oil Minister Ali al-Naimi (pictured above) suggested that the kingdom will put new oil supplies on the market to compensate for any uptick in global demand.
The thing is, the Saudis are highly secretive about these figures -- unlike almost every important petrostate on Earth outside the Middle East, the Saudis will not permit their oil fields to be independently audited. One might wonder why that would be the case, and the late Matt Simmons, for example, made much hay suggesting that the reason is that the Saudis simply don't have as much oil as they claim. I myself got ahold of documents back in 2008 suggesting the same. Sensible voices, however, said such are the thoughts of the conspiratorial-minded and that the Saudis genuinely possess what they claimed -- they were denying the right to verify because … well because that's just what they do. Here is classic Simmons:
In recent years, the Saudis have brought more productive capacity on line, giving them the capability of producing about 12 million barrels of oil a day. Since the Saudis are currently producing about 8.6 million barrels of oil a day, according to the U.S. Energy Information Administration, that means they alone are providing the world about 3.4 million barrels a day of "spare capacity," the key metric for oil prices. Basically, traders looking to earn really big money on the tick up or down of daily oil prices focus intently on global supply -- for example, tons of money have been earned in recent weeks speculating on the question of what happens if events in Egypt spiral out of control, and force the closure of the Suez Canal, the transit route for about 1.5 million barrels of oil a day. But the existence of a healthy cushion of spare capacity works against such fruitful speculation, because even if the Suez Canal does become totally bottled up, the Saudis can turn up the spigot, and it won't matter a whit. Which is one big reason why oil prices are down again.
Which brings us to the latest Wikileaks cables, so read on.
Fayez Nureldine AFP/Getty Images.
Hundreds of thousands of Egyptians are in the streets, Bedouins are threatening the Suez Canal, and one of the West's most reliable Arab allies is on his way out. As a result, oil prices soared last week by ... 23 cents a barrel.
That's right, folks. Oil traders turned Friday into a manic scene of futures buying -- trading on the U.S. side of the Atlantic was at an all-time high, according to Bloomberg -- yet did not push the oil price through $90 a barrel. In the United Kingdom, Brent crude butted up against $100 a barrel, but again did not penetrate the psychological barrier. As of this morning, oil prices are down.
The takeaway: We are again seeing the intersection of so-called "spare capacity" -- how much surplus oil can be produced above and beyond current demand -- and the base desire of oil traders to earn really big money really fast.
A lot of traders did do well on Friday by pushing up the price by 4 percent (which compensated for losses earlier in the week), though they did so by hammering hedge funds that had earlier bet the other direction, Bloomberg reports.
Officially, the world's oil producers have about 6 million barrels a day of spare capacity -- their daily productive ability above and beyond what the market needs. But a lot of observers think the official number is exaggerated - they think spare capacity is more like 4.5 million barrels a day. The belief in the lower number is what is allowing traders sometimes to push up prices in a crisis such as Egypt.
Over at OPEC, there is consternation over prices. In a speech in the United Kingdom, OPEC secretary general Abdalla el-Badri noted that oil inventories are above their five-year average, and repeated a complaint of other OPEC officials in recent years -- in effect, oil traders drive up the price, and OPEC gets the blame. Bloomberg quotes him:
OPEC has consistently said in recent times that prices are disconnected from the physical oil market and are increasingly subject to the paper market. Consequently the market is dominated by financial players, which is misleading when it comes to understanding the behavior of the oil market.
Few oil traders are actually worried about the Suez Canal, through which about 1.8 million barrels a day of oil and oil products flow. Here is a snippet from a note to clients sent by Helima Croft and Amrita Sen of Barclays Capital:
We believe the Canal does not appear to be under immediate threat from the current political crisis in Egypt. Although the industrial city of Suez has witnessed some of the worst violence during the past week, there have been no reported attempts to target ships. Even if Western companies become a major target for the protestors, we believe that shipping traffic through the Canal is unlikely to be seriously imperiled, though some individual ships docked in port might be at risk of attack if the situation deteriorates further. Even in the unlikely event that the there is an attempt by some groups to disrupt shipping traffic, it would not necessarily be easy to accomplish. There are no indications that the protesters in Egypt have yet developed the intent or capabilities to carry out organized attacks on tankers like that seen in the case of the USS Cole.
That final sentence of course refers to the 2000 al-Qaeda attack on a U.S. naval vessel in Yemen.
Instead, we are seeing classic casino behavior. Here is Frank Verrastro, director of the energy at the Center for Security and International Studies in Washington, in an email conversation over the weekend: "Even if no barrels were impacted, the bullish run on oil will use this or any other supply threat to push prices up. "
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.