As part of the tumult roiling the petro-producing world, we took the plunge last week and pondered who would succeed the aging president of one much-obscured corner of the globe should he become incapacitated or die. That corner was Kazakhstan, and we found good reason to settle on oil tycoon Timur Kulibayev to succeed his father-in-law, long-time Soviet-era ruler Nursultan Nazarbayev. In short order, we have received a form of validation in commentary by a court aide to Nazarbayev. In a pinch, the aide argued sensibly, Kulibayev would step in as a stabilizing force and "continue the president's strategic program."
For certain Kazakh individuals -- meaning the ruling class and all present-day oligarchs -- those were reassuring words. Is that why this aide was directed to convey them so publicly? We cannot know. With the political graveyards of Kazakhstan mottled with the remains of past would-be presidential successors, Kulibayev himself was like a deer in the headlights, James Kilner suggests at the Daily Telegraph in London. "Honestly, for me this statement came as a complete surprise. I have never positioned myself as a politician. To say these things about the current president and after the hype in the press about his health is, to say the least, improper," Kulibayev said in a statement to the Kazakhstan press.
Yet, this is one of the vital questions of the moment in large parts of the world -- what happens if our national leader suddenly goes? Read on to the jump.
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When you are the wealthy and powerful leader of a petro-state, what gets you up in the morning? Saving your job -- which has occupied Saudi King Abdullah on and off -- can be motivational. But when you have $130 billion to throw around for such purposes, it still goes only so far. The same with fun missile strikes at a neighbor, the one-time preoccupation of Saddam Hussain -- you can aim at only so many targets before it gets old.
Which brings us to the time-honored geopolitics of the court entertainer. In 1801, Alessandro Volta regaled French Emperor Napoleon Bonaparte about his exciting invention of the battery, and Bonaparte named Volta a knight and a count. Three centuries previous, Leonardo da Vinci worked under the tutelage of Milanese duke Ludovico Sforza, for whom he designed the airplane and the tank long before the internal combustion engine made them feasible.
The capacity to command such fealty from the stars of the creative world has always been a marker of a leader's arrival. It is street cred, an integral factor of geopolitical power.
But autocrats must be cautious because creative souls can also be mercurial. In the version of our age, last weekend Sting backed out of a long-advertised singing gig for the birthday of Kazakhstan President Nursultan Nazarbayev, the softest of Central Asia's autocrats (pictured above). Why did Sting stand him up? He was shocked to discover from folks with Amnesty International that there is a labor strike going on in the republic. "Hunger strikes, imprisoned workers and tens of thousands on strike represents a virtual picket line which I have no intention of crossing," Sting said.
Joanna Lillis accuses Sting of sanctimony. Josh Foust says it's part of Kazakhstan going "bizarro." What about plain bad manners? (In the interest of fairness, we note that Sting may be just suffering a lapse since in 2009 he sang for Gulnara Karimova, the daughter of Uzbekistan dictator Islam Karimov, despite the latter's "appalling reputation in the field of human rights, as well as the environment," as he responded to later criticism.)
Elton John did not back out of his appearance before Nazarbayev. Mariah Carey and Beyonce showed up to entertain the family of Muammar Qaddafi. Sharon Stone (in preparation for her pro-democracy venture to Georgia), Goldie Hawn and Gerard Depardieu provided fawning attention to Russia's shy petro-leader Vladimir Putin. We ask Sting -- are you not a professional?
Nazarbayev will recover by and large from the slight. But he may also wonder whether in the recesses of the minds of Kazakhstan's clan leaders and populace, and those of neighboring Central Asian leaders and fellow dictators further afield, there is a shred of doubt regarding his rightful place in the pantheon of petro-leaders. He will ponder the innocent snicker. Such is the lot of kings who choose to arise from bed.
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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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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?
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To keep power, give it away: The autocrats of the petro-driven Middle East are discovering that ushering in democracy is not an altruistic act, but desperation politics -- if they want to stay in office, there is a good chance they must dispense with the strongman act and accept truly elected representation. For Ali Abdullah Saleh, the president of Yemen, that realization came far too late; he has at most days to go in office, and possibly just hours. What about Syrian President Bashar al-Assad? Possibly next to Saudi Arabia and Iran, Syria is the unlikeliest place in the Middle East for regime change. Today, his troops fired on protesters after Assad attempted to assuage public unhappiness by promising to end 48 years of martial law. Yet more unrest there seems probable as thousands poured into the streets regardless, and reports are of some protesters grabbing away guns from authorities. Libya is the conspicuous outlier -- short of a palace coup, Col. Moammar Qaddafi looks likely to hang on.
My colleague David Rothkopf took President Obama to task this week for a supposedly fuzzy approach toward Libya, but I don't grasp his mystification. The best U.S. course is to allow Middle East events to take their course and not put an American imprint on them, even when they reach nail-biting stage. In the case of Libya, the U.S. rightly held back as long as possible with the idea that perhaps, perhaps the rebels might yet turn back the Qaddafi tide, but when Benghazi was about to be overrun, stepped in to create a level playing field (there is a preference for another Libyan leader, but the policy is not to explicitly overthrow Qaddafi, but to make it as much a fair fight as possible.). The U.S. rightly is not going to install the opposition, but take away the regime's air, armor and artillery advantage. Equally incomprehensible, also here on the pages of Foreign Policy, Bruce Ackerman has declared Obama an imperial president. On the other side, the chest-beaters would like Obama to be more "decisive." Guys -- take a little course in the exercise of influence and power; better yet, take a look at the nature of what's going on in the Middle East. This era is not the time to kick down the door, guns blazing.
The rare earth blues: The Chinese are clamping down ever harder with market hindrances against exports of rare earth elements from the country, this time by raising tariffs on the 17 types of minerals. This has been an issue since last September, when Japan's arrest of a Chinese trawler captain revealed Beijing's ultimate soft spot (which we had thought was Tibet, followed closely by Taiwan) by triggering China's rare earths embargo on the entire global market. But is there a crisis for the high-tech industries and armaments manufacturers who rely on them? This week, I participated in a panel discussion at the Heritage Foundation on the subject. The consensus was that, while there is a current squeeze and prices have almost doubled since last year, a combination of recycling and the fast development of new supplies will resolve it within three or so years. Australia, India, Kazakhstan, Mongolia, not to mention Alaska and California, are all acting in concert to develop new supplies.
Read on for more on this week's news.
The oil balance is back on precarious footing. The shift of events in Yemen -- President Ali Abdullah Saleh seems to be spending his final hours or days in office (see defectors above) -- returns instability to Saudi Arabia's doorstep, and with it may push oil prices higher.
It's not that Yemen itself produces much oil or natural gas - its production volumes are modest. But its northern border with Saudi is porous, and as we've discussed previously, any flow of Yemeni refugees, including armed ones, could destabilize Saudi Arabia. To the east of the kingdom, Saudi forces are helping to tamp down unrest in neighboring Bahrain, but meanwhile face new protests from sympathetic fellow Shias in the city of Qatif, in Saudi's oil-rich Eastern Province. All of this will tempt the trigger fingers of intrepid traders in London and New York.
Oil prices have been relatively calm considering the upheavals in Tunisia, Egypt, Libya, Bahrain and Yemen, not to mention the nuclear crisis in Japan, moving up and down just a few dollars when traders decide they'd like to earn a little money. When prices have moved the most, it has been with an eye on Saudi Arabia, whose massive oil reserves and production underpin global price stability.
With his own eye on the same matter of potential unrest at home, Saudi King Abdullah has added another $93 billion to the previous $36 billion in largesse he laid on his people in order to keep them off the streets. My colleague Jim Traub thinks this is all for nought -- that such regimes are inherently unstable and that, in terms of U.S. policy, it's always a mistake to back them because, for one thing, it puts Americans on the wrong side of history. What Jim omits is that, even if he is right, the self-correction that he is suggesting predictably happens -- if history is any teacher -- would almost always come after many, many decades. Does he suggest the United States having antagonistic relations for the time being and waiting patiently for that day of reckoning before attending to U.S. commercial and other interests? Of course Washington can't. Which is what argues for the current course of dealing with who is in power, making it clear in subtle and explicit ways where Washington stands, and -- short of sending in the cavalry itself -- embracing a population's empowerment when and if it comes.
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Japan/Libya/Bahrain: trader heaven (or hell) One of the main canards of times such as this is that the markets hate uncertainty. The truth is that traders and investors are in a heavenly time. It's pretty simple - if you are a bettor (which is what oil traders, for example, are), you make money only if the price changes on the volumes you buy. When they do shift either up or down -- and keep doing so -- you win (assuming, of course, that you bet on the correct direction). The last 24 hours have been absolute nirvana for the shrewd trader (though not so much for the laggards). Oil prices were down, then they shot up after Col. Moammar Qaddafi threatened to pursue his enemies into their closets (there is something apparently chilling about that closed-in image; or perhaps it's the shoes?) and the United Nations Security Council voted to bomb him. We were well back up into the $100s-a-barrel prices. Now, after Qaddafi appears to have blinked (deciding perhaps that he prefers not to risk a possible indeterminate period of time confined to a spider hole with a long beard), oil prices have plunged. On each of those movements -- if you were a well-hedged trader -- you have earned big, big bucks. Of course, there are many losers too. Regardless, this is what traders live for -- the profit potential in uncertain times.
Big Oil and the calculus of friendship: Paolo Scaroni, the agile CEO of Italy's Eni, who manages to maintain relations no one in Big Oil can match -- with Russia's Vladimir Putin, with Kazakhstan's Nursultan Nazarbayev and, of course, with Libya's Col. Moammar Qaddafi with -- is bristling at the international sanctions slapped on Libya. Scaroni calls the sanctions "shooting ourselves in the foot."
There is some fear that Eni, along with BP and Exxon, could face contractual problems with Qaddafi, Bloomberg reports. But that isn't how oil deals have really worked in recent decades. Instead, governments have generally honored oil contracts from one regime to another, of course with some possible renegotiation.
So what is Scaroni really up to as he calls on Europe to abandon the sanctions against Qaddafi? Perhaps he is emitting a friendship code intended for others, such as Putin and Nazarbayev, a message that he is not a fair-weather friend.
Coal: When pressed, even the choosey loosen up. Being health-conscious, you thought you'd never eat another cheeseburger -- until you were starving that one day, and McDonald's was the only place open. So it is with electricity producers. Many nations have been moving away from coal-fired electricity, since it's so dirty and spews out so much CO2, but now Japan's dual natural disasters have shaken up those preferences. Coal may be back in a big way, reports the Wall Street Journal (though, for the record, the Journal is also hedging its bets. In addition to today's optimistic coal piece, the paper ran separate optimistic natural gas and nuclear energy stories).
Here is how the dots connect: Japan, having to replace nuclear-produced electricity, is going to buy a lot more coal, and also liquefied natural gas. Some of the LNG is being diverted from Europe. That has made LNG more expensive in Europe and elsewhere as markets tighten. At the same time, Germany has at least temporarily shut down seven nuclear reactors. Put together the higher LNG prices, and the closed German nuclear reactors, and you get more European demand for much-cheaper coal. Make the same calculus in Japan and elsewhere, and you get the larger picture -- more coal demand.
If this is right, much of the clean-air progress made in recent years appears likely to be set back in the coming months. Yet one would be remiss to ignore the shift of public sentiment, and hence political support, in recent years toward a cleaner environment. If that holds -- and that's my bet -- then there may be added use of coal in the short- and medium-term as the market resolves the current uncertainty over nuclear power, but there will also be a mighty hindrance toward a wholesale shift to coal. Instead, there is reason to expect more momentum coming to the natural gas future that we've been discussing.
The Gazprom State: Outbreak of pragmatism. But does Nabucco win? Not to equate Russian gas policy with Col. Moammar Qaddafi's war footing, but are we seeing a case of forced practicality? Qaddafi, after threatening to enter the closets of his enemies in Benghazi, has had a change of heart now that he might be bombed by France and the United Arab Emirates. As for Russia, it's making more noises about reversing a long-standing war-footing in Europe, fought on the battlefield of natural gas pipelines. As we discussed last week, Gazprom, Russia's politically inclined natural gas giant, has sought to reinforce its hold on the European market (where it supplies some 30 percent of the gas) by connecting up a gigantic new pipeline called South Stream. The United States and Europe have countered with Nabucco, their own proposed pipeline starting at the Caspian Sea. At stake, according to the latter folks, is the political independence of eastern and central Europe. But Russian officials are offering more details on possible plans to scrap South Stream and instead ship its gas to Europe in the form of liquefied natural gas.
In our videotaped interview last week with South Stream CEO Marcel Kramer, he said that he was in the dark about any such change of Russian plans. But now a couple of Russian government officials say South Stream may face an "insurmountable" political hurdle in Turkey, and so they are seeking economical alternatives toward accomplishing the same aim, but with LNG.
On first glance, this would appear to be a possible victory for Nabucco. But not so fast. First, Nabucco still doesn't have sufficient gas to be built, mainly because the Turkmen -- as they have done since the 1990s -- won't get with the program and commit to gas shipments and a pipeline. Second, what is the effective difference if Russian gas goes to Europe via pipeline or LNG? True, a pipeline suggests a more permanent marriage. But these days, divorce is mighty common. LNG provides the Russians a lot more flexibility in terms of markets.
Perhaps the Nabucco folks will go LNG as well?
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We turn back to the dictator's playbook. As you recall, we've identified the two general options in the dictator's playbook against an uprising -- the Shevardnadze play, referring to the decision by Georgia's Eduard Shevardnadze to step down in the face of massive 2003 protests in his country; and the Karimov play, referring to the calculus of Uzbekistan's Islam Karimov, who in 2005 gunned down hundreds of protesters in the city of Andijan. After weeks of Shevardnadze holding the advantage in the fervor of protests engulfing the Middle East, we see a decided shift in favor of the Karimov play. In Bahrain, Libya and Saudi Arabia, in addition to Azerbaijan and Uzbekistan, autocrats have rejected the example of Tunisia and Egypt (the Shevardnadze play), and are now flouting any obloquy of jailing, attacking or killing protesters in order to keep power.
The shift suggests that, while dictators may have to elevate their game in what had appeared to be a turbulent but politically rigid region, there may be much less immediate change than initially seemed possible.
In Libya, with the United States now backing the establishment of a no-fly zone, the situation could turn around yet again, that is if Col. Muammar al-Qaddafi's forces do not consolidate their rolling triumph before any outside intervention. In the video below, Saif al-Islam (pictured above), the Qaddafi son previously much-heralded in Great Britain, predicts that his father's forces will capture the rebel stronghold of Benghazi "within 48 hours." If that happens -- which at this point would be the betting outcome -- this chapter of the Libyan uprising would be over. Given Qaddafi's remarks in recent weeks, there could be a bloodbath.
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As O&G readers know, I've been in Houston at CERA Week -- the Davos of the energy industry, hosted by oil historian Daniel Yergin -- for the past five days. So in today's wrap, the highlights of the conference:
Emergencies drive the market: The news over the last 24 hours punctuated the general message of CERA Week: Bad economic news sent oil prices down, unrest in Saudi Arabia's oil-rich Eastern Province pushed them back up, then the 8.9 magnitude earthquake off Japan's coastline pushed them back below $100 a barrel. Finally, the oil price settled just a bit down, just over $100. The message: the market is incredibly jittery, and is holding pretty close to $100 a barrel regardless of the news.
As oil analyst Ed Morse told me, oil was probably overvalued prior to the Middle East unrest. But the turmoil there has fundamentally changed the political calculus, and with it the oil market for around the next decade and perhaps longer. A risk premium is going to remain in the price, especially since real trouble struck Saudi Arabia yesterday, as I wrote. So gasoline prices, too, are going to stay relatively high (that's a Paris gas station pictured above). All in all, as Christophe de Margerie, the CEO of France's Total, said, the oil industry is in a serious fix.
But what's notable is how muted the response has been in the market. Step back and look at the absolute price movements so far since the turmoil in the Arab world began. If we had just one of these events back in the spare-capacity-short year of 2008,we would have seen huge price movements -- $10 and $20 a barrel. Instead, we are getting shifts of two or three dollars one way or the other. One reason is that there is global surplus production capacity of 3 or 4 million barrels a day that can be brought to bear; another is that, in the short term, the United States and Japan can swamp any sudden oil shortage by releasing millions of barrels of oil from their strategic reserves. These petroleum reserves -- totaling 1.6 billion barrels around the world -- cannot create long-term price stability, because traders will always bet on spare capacity in an emergency. But they can smooth out the bumps.
The next emergencies? Where are the predictable next bumps? Today's planned Day of Rage in Saudi Arabia became, as the Washington Post called it, a day of rest, and we cannot foresee natural disasters. Yet, some are attempting to quantify what is possible. Among those is Bloomberg, which has ranked 20 possibly troubled countries in a Combustibility Index. Of those, 18 are in the Middle East, but interestingly none of the big oil producers top the list.
The five most combustible countries, in descending order, are Libya, Sudan, Yemen, Syria, and Egypt. The bottom five among these combustible states, again in descending order, are Saudi Arabia, Morocco, United Arab Emirates, Kuwait and Qatar.
For the quants among you, the biggest component in the Bloomberg equation is repression, which accounts for 50 percent of the weight of the variables. (To calculate that, among the factors are the size of a country's military per capita, how a ruler came to power -- whether by vote, coup or assassination -- plus how long the ruler has been in power, and whether the ruler came from the military.) The other 50 percent includes GDP adjusted for purchasing power parity, unemployment, median age, income inequality and access to information.
Electric car realities: Another takeaway from the conference is how technological advances are shifting the energy equation, and geopolitics along with them. Among the technological changes are in transportation. I spoke with two big players in the electric-car space: Britta Gross, director of global energy systems for General Motors, and Steven Koonin, the U.S. undersecretary of energy for science. Both of them described the multi-year realities of creating a plug-in hybrid and electric-car industry. Gross said that one reason the GM Volt is currently so expensive is the carmaker's strategy of creating a "wow" factor for buyers -- carving out a market by loading up the Volt with exciting gizmos. When the next generation of the Volt comes out -- perhaps in five years or so -- it may have a lot fewer such electronics, Gross said, which will much-reduce the sticker price. In addition, the cost of parts will probably be less because there may be more competition among suppliers. Here are Gross' remarks:
Koonin, looking at the market from the perspective of a government goal of reducing oil consumption, said that much will be gained by simple efficiencies: 25 percent less gasoline will be used when cars are lighter and engines more efficient. He said that years from now, plug-in hybrids will penetrate a much larger segment of the market and cut more oil consumption. No one is certain that advanced batteries will ever be good enough to make a purely electric car commercially competitive, he said, but the performance of hybrids may mean that they won't be necessary. Here are Koonin's remarks:
Possible Putin shift in pipeline politics: For much of the last decade, Russia and the West have fought a pipeline war in Europe. Russia has sought to tighten its natural gas supply grip on Europe -- Russia's Gazprom supplies about 30 percent of Europe's gas -- by building yet another big pipeline into the continent, called South Stream. The West, led by the United States, has offered up a rival pipeline, called Nabucco, that would carry gas from the Caspian Sea states of Azerbaijan and Turkmenistan into Europe, and hence reduce the continent's dependence on Russian gas. This may sound mighty arcane, but the combatants of pipeline politics treat the game quite seriously.
In any case, Russian Prime Minister Vladimir Putin yesterday added new confusion to the state of play. He suggested that Russia may not build the pipeline after all, but instead a liquefied natural gas terminal that would ship Russia's gas to Europe by tanker. In an interview today, South Stream pipeline director Marcel Kramer told me that he has received no new instructions, and that he is proceeding with his existing orders to make the $21 billion pipeline work. He is attempting to get a final investment decision on the pipeline by the middle of next year so that it can be built by the end of 2015. Here is a clip from our conversation:
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There's a presumption out there that things look tough in the Middle East, but that soon enough -- maybe by summer -- they will sort themselves out, and becalm the volatile prices of oil and gasoline. Not so, says veteran oil analyst Edward Morse, a student of history who correctly called the 2008 oil bubble while everyone else was still throwing money into the pot. "This is not a one-off disruption," Morse says. Instead, we're in a new age of geopolitical risk that threatens to disrupt the region for a decade or even longer.
As if to reinforce his point, 6,400 miles away in Libya, Col. Moammar Qaddafi has again triggered the all-important Flaming Oil Port Index by having his air force bomb the country's main oil terminal at Es Sider, turning it into a ball of fire. Oil prices shot up.
Given the Libyan uprising, not to mention the trouble in Bahrain, Egypt, Oman, Tunisia and Yemen, even the region's rich petro-states understand the basic math, says Morse -- their demographics (60 percent of the region's population under 25 years old, high unemployment rates, and lopsided income distribution), awakened by the kindling of revolutionary fever, have put all of them in potential jeopardy. "A rapid contagion is spreading," he said. "Even if you think you are relatively safe, this is a new, permanent risk. It will be with us for the next decade," or even two.
Therefore, all the petro-states are going to mimic the recent largesse of Saudi King Abdullah, who distributed $36 billion to his people in the form of higher wages and forgiven loans, and do so on a regular basis. They will also try to figure out how to put all those discontented and often well-educated youth to work.
That's great, but what does that mean for the rest of us? That the break-even point for annual government expenditures in all the states -- meaning the price of oil required to cover regular state obligations like salaries, road repair and defense, plus these new expenses in order to satisfy the restive youth -- has just gone up, says Morse. If they needed $60-a-barrel oil multiplied by the number of barrels they are producing and selling each day to fund the state budget, now they will need much higher prices. Saudi Arabia, Kuwait and other petro-statesmen that previously attempted to keep oil price stamped down to some degree can no longer be counted on to do so. Instead, they will be interested in the kind of price increases we are seeing today. For more Ed Morse, including a video, read on to the jump.
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How to moderate oil prices: Vladimir Putin, Hugo Chávez and Mahmoud Ahmadinejad, plus the leaders of a bunch of other oil-producing states, are benefitting from high oil prices. But not motorists, and so we are being treated to the latest round of American politicians insisting that the White House open up the brimming, 727-million-barrel U.S. Strategic Petroleum Reserve. Sen. Jay Rockefeller (pictured above), the great-grandson of John D. Rockefeller, is the latest voice advocating the liberation of this sea of oil in order to bring down gasoline prices. His colleague, Sen. Jeff Bingaman, who chairs the Senate Energy Committee, says the following: "Between the lost production in Libya, the crude oil dislocation associated with additional Saudi production and the prospect of further turmoil in the region, we are now unquestionably facing a physical oil supply disruption that is at risk of getting worse before it gets better."
No, we are not facing what these two senators suggest, which is a supply shortage. Even if we were, the huge reserve would not influence gasoline prices. The single factor that would calm the markets would be more surplus production capacity, in other words not more oil, but the capacity to produce more oil. When traders are bidding up and down the price as they earn paper profits, then cash them in, they are not leveraging the perception of a supply shortage. They are trading on the perception of a lack of surplus capacity to produce more oil -- they are betting that the chaos in Libya could spread to one or more additional OPEC states, remove more oil from the global market, and reduce spare production capacity to a sliver, or even erase it completely. When there is no spare capacity, it portends a battle for resources.
So simply putting more oil on the market, as these senators suggest, would have almost zero impact. In fact, Michael Levi argues that invoking the petroleum reserve could have the perverse impact of spooking the market, much as Saudi King Abdullah did a week ago by promising $36 billion to the country's suffering masses. Levi asserts that releasing the reserves could "validate fears in the market --after all, it would signal that the United States government was worried."
Traders watch videos such as the one below, and rub their hands with glee. The politics and the panic are part of this volatile casino.
The Chinese are not suicidal: The Chinese have given us the latest evidence that some of the major presumptions regarding their fixations aren't as valid as some think. Zhou Shengxian, China's environment minister, said pollution could hinder Chinese economic growth and social stability. That was after Prime Minister Wen Jiabao said the country would aim for slower, cleaner GDP growth over the next five years -- not the double-digit rates of the last quarter-century, but more like 7 percent.
We have suggested that China may continue using a lot more coal -- it currently accounts for half the world's demand for the fuel -- but that, for the very reason cited by Zhou, its demand will not rise at the breakneck rate that is conventionally suggested. Simply put, the Chinese Communist Party is not suicidal; it wants to continue in power, and if pollution gets out of control, there could be serious public unrest. Less-than-projected coal consumption in China carries a lot of implications, such as lower-than-presumed CO2 emissions and generally a cleaner country going forward than the received wisdom suggests.
… but they are still pretty territorial: China has demonstrated yet again that territory is a red line. Two Chinese patrol boats appear to have ordered a Filipino oil exploration vessel to leave an area of the disputed Spratly Islands in the South China Sea. The confrontation was ended when a Philippines military aircraft swooped over. The Spratlys are a long-time source of antagonism among several nations that claim them -- Taiwan, Brunei, Malaysia, and Vietnam, in addition to China and the Philippines. The Chinese call them the Nansha islands, and appear likely to continue pressing their case that they have "indisputable sovereignty" over them, as a spokesman for the Chinese Embassy in Manila said.
Win McNamee/Getty Images
The spreading turmoil in the Middle East is spooking oil traders, who have bid up the price of oil and gasoline to two-year highs, and may be about to claim its third official victim -- President Ali Abdullah Saleh of Yemen has agreed to state by the end of the year when he will leave office, suggesting to critics that the date will be soon after. Even the relatively mild King Mohammed VI of Morocco appears to be in trouble. But should all the region's petro-monarchs and -dictators be detested with equal venom?
In an interesting essay in the Financial Times, Robert Kaplan argues no, they should not. For instance Libya's Col. Moammar Qaddafi and Oman's Qaboos bin Said (pictured above) are both rulers of Middle East petrostates, producing a combined 2.7 million barrels a day, or 3 percent of the world's total supply. But the two men are "not remotely in the same category," Kaplan says -- the former should be overthrown, but not the latter, who is a "benevolent dictator."
Yet the paradox is that, for different reasons -- because benevolent dictators such as Qaboos observe a social contract with their people, and their youth come to "expect more and more -- he, too, faces people in the street and possibly "his own eventual downfall."
This particular brand of turbulence in the always-roiling Middle East looks unlikely to die down soon. A peace deal could quiet Libya, as reports suggested this morning. Yet everyone, including the region's more visionary rulers, seems less solidly in place than just a month ago.
That is what is also roiling the oil markets, and seems likely to continue to do so. The first quarter of this year is looking more and more like 2008, when a perfect storm of events kept sending up prices. Even though it's highly unlikely that every single ruler of every petro-state in the region will be swallowed up in this tidal wave, oil traders -- finding their wedge in the uncertainty -- are bidding up the price. Where will it end -- can the wave reach the Caspian Sea's own dug-in autocrats?
One hopes that the outside world continues to keep a distance and not go to war -- the strength of the movement is that it's been indigenous. That said, on a coda, one notes that not only are U.S. warships headed to the Libyan coast, but so are four Chinese planes and a frigate.
Mohammed Mahjoub/AFP/Getty Images
Libya falls squarely into the central aim of this blog, which is to identify and follow the geopolitical impact of energy events. Libya is fundamentally an energy event. After decades of ostracism because of his terrorist attacks and links, Col. Moammar Qaddafi was re-embraced by the international community in 2003, led by the United Kingdom and the United States, for one primary reason -- he said he would open his oilfields to their companies. Oh, there was the renunciation of terror, too -- no trivial matter -- but then-British Prime Minister Tony Blair reversed Britain's stand on the Libyan-ordered Lockerbie airline bombing specifically to shoehorn BP, Britain's biggest company, into some monstrous new oilfields. The same went for the rest of Europe and the U.S., where ConocoPhillips, Hess and Occidental also got oil deals.
Eight years later, we observe the geopolitical impact in the spectacle of Qaddafi provoking an unnecessary civil war, and roiling world oil markets, all so he can continue his almost 42-year rule. The energy-geopolitical takeaway -- political and financial compromise with a certain class of petro-tyrant can rebound back on you profoundly, destabilize a region, and shake up economies, all while tarnishing you with the same brush. One also doesn't know if, in the end, the deals themselves will all hold up.
Peter Macdiarmid/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.
Patrick Baz AFP/Getty Images
Trouble has been going on in the Middle East for weeks, so why have oil prices suddenly gone up precipitously today? Mainly because two major presumptions underlying our understanding of the world changed in the last 24 or so hours and in doing so shook up the global economic calculus (for the audio-inclined I discuss this on NPR's Diane Rehm Show today).
First, we have long been accustomed to Saudi Arabia's calming, sonorous voice when events have shaken the world of oil, which as we know is the underpinning of the entire global economy -- no oil equals no economy, no conveniences, and so on. As it has in previous crises since the 1970s, Saudi Arabia has told the world -- do not worry, we will moderate prices, and should there be a loss of oil supply from one or more other countries, we will compensate for it with our own plentiful production capacity. A current corollary of this mantra has been that the kingdom is safe from the turbulence that has struck so many of its neighbors -- its citizens, cosseted by generous government subsidies, are simply too happy to rise up.
Yet yesterday, King Abdullah (on the billboard above) returned home after three months abroad for medical treatment and immediately announced a $36 billion payout to his citizens, including a 15 percent salary increase for public employees, "reprieves for imprisoned debtors and financial aid for students and the unemployed," as the Financial Times reports.
So oil traders can be forgiven if they thought to themselves, "If the Saudis are so immune from unrest, why did King Abdullah, as soon as he touched home soil, move to buy off his people?" The FT headline this morning put it bluntly: "$36 billion Saudi bid to beat unrest."
Result: panic buying on the oil market.
For the second punctured presumption, read on to the jump.
Fayez Nureldine AFP/Getty Images.
We need some balance in the Libyan oil story. Is this north African nation an unmitigated disaster for those elsewhere in the world running an economy or driving a gas-guzzling vehicle? Notwithstanding the turmoil, the answer so far is no.
For good reason, much attention is focused on Libya's oilfields, since they are the whole reason why the United States, Great Britain and a host of oil companies have been courting Col. Moammar Qaddafi since he reopened the country to the outside eight years ago. An as-yet unknown volume of Libya's 1.6 million barrels a day has been shut down. Traders have bid up oil prices above $100 a barrel for the first time since 2008, though that's not very surprising -- what are traders supposed to do with such uncertainty (read: opportunity) staring them in the face? In addition, there's valid concern about the stability of the Middle East's big oil monarchies -- Kuwait, Qatar and Saudi Arabia. As Cameron Hanover, the energy analytical firm, wrote clients in an overnight note: "With unrest all around them, is there any really strong reason to believe that the [United Arab Emirates] or Kuwait or even [Saudi Arabia] itself can remain oases in this swirling, engulfing sandstorm?"
Still, when it comes to oil, things are going surprisingly well in Libya considering the turbulence.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.