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.
Karen Bleier AFP/Getty Images
There is a comforting thought for those alarmed by Vladimir Putin's large electoral triumph, in which he suggested that his opponents are traitors and foreigners out to commandeer the Russian state. It is oil and gas, which while they fuel Putin's confidence, could also step in and serve as a leash on his tendency to over-reach.
Putin's history closely tracks the inclination of petro-rulers to shift from hubris to malleability with the decline of oil prices. Oil and gasoline prices are currently high, but they also seem close to a tipping point at which consumer tolerance could break, demand fall, and prices plunge. Deutsche Bank's Paul Sankey is forecasting a more-than 25 percent long-term plummet from that inflection point, which he puts at $135 a barrel for European-traded Brent crude. If this scenario materializes, look for Putin to revert to a friendlier form.
Are there other under-appreciated aspects to Putin's return to the Kremlin? I asked a few O&G readers specializing on Russia to weigh in. Andrew Kuchins, who runs the Russia program at the Center for Strategic and International Studies in Washington, replies that insufficient attention has been paid to the impact for U.S. foreign policy in places like the Middle East. Kuchins writes:
While Putin may be conservative and pragmatic by nature, with the United States his emotions are more raw and palpable. We are likely to need Russia's support even more in the future in management of the Afghan drawdown and Iran, and his bargaining is likely to be tougher. And if domestic troubles intensify and he feels more threatened, certainly that will not bode well for ties with Washington. Already we see inclinations for closer ties with Beijing, and, in the context of the Arab Spring, with Iran as well. It is not hard to envision further drift in this direction given certain domestic and/or external developments.
Alexey Druzhinin AFP/Getty Images
Russia, Ukraine and Europe's big chill: It is that time of year in Europe, when a serious chill sets in, Russia and Ukraine bicker, and a lot of people freeze to death. No one has attributed any of Europe's fatalities -- 139 reported at the time of this writing -- to the routine winter row between the former Soviet neighbors. But customers such as Italy (pictured above, St. Peter's Basilica at the Vatican), Hungary and Poland say their imports from Russia -- which supplies 100 percent of the gas consumed by some European nations, and a quarter of the continent's demand as a whole -- are down considerably during Europe's worst cold snap in some six years. Russia is blaming Ukraine, reports Reuters. Gazprom deputy CEO Alexander Medvedev says that Russia has actually stepped up gas exports to Europe, but that Ukraine is siphoning off more than its fair share. Ukraine replies that it is meeting its contractual obligations. Thus, neither country answers the question -- are they or are they not supplying the gas that Europe requires to stave off the cold? The backdrop is mostly that Russia simply cannot handle all the demand in such extreme temperatures. But another dimension is the continuing contractual warfare between Russia and Ukraine -- Ukraine wants to reduce the volume of gas it's contractually required to buy from Gazprom, which it says charges too much when compared to the spot market. Other European countries also gripe about Russian gouging, and Gazprom has responded by cutting gas prices for some of them (not Ukraine).
Edward Chow, an analyst at the Center for Strategic and
International Studies, suggests that much of the problem would be resolved
if Ukraine's corruption was reduced, and it pumped more of its own natural gas.
As it is, the bickering is directly responsible for a tense pipeline rivalry
between the West and Russia -- Russia is building new gas export pipelines in
order to bypass Ukraine, Poland and other unfriendly neighbors, and the West is
trying to build and fill up its own new pipeline from the Caspian Sea to serve
Europe. One suspects that Russia will again be the loser in this game of
tit-for-tat. Scenes such as Hungarian
villagers "scavenging for coal with their bare hands," as Reuters' Marton Dunai reports, will make
Russia look heartless.
Go to the jump for more of the Wrap
Tiziana Fabi AFP/Getty Images
The geopolitics around us -- mainly Iran and Nigeria -- are keeping oil prices aloft. But should traders lose the fear of Tehran closing the Strait of Hormuz, and Nigeria's Goodluck Jonathan not managing to make peace with his striking countrymen, look for the air to go out of prices that, despite the continuing European economic crisis, exceed $100 a barrel. And if they drop far enough -- into the low-$80s-a-barrel range -- some key petro-states are going to be in serious trouble, according to a couple of analysts from the Eurasia Group.
In a blog post at the Financial Times, Eurasia's Chris Garman and Robert Johnston scrutinize Russia, Nigeria, Venezuela and Saudi Arabia. Garman and Johnston's presumption is that oil demand remains soft in the U.S. and Europe, and erodes the impact of an expected rise in Asian oil consumption. As a result, Saudi Arabia attempts to retain a floor under prices by reducing production, but that just creates a vicious circle: Lower actual Saudi production necessarily means higher idle production capacity, also known as spare capacity. As far as petro-states are concerned, that is a deadly brew.
Oil prices are determined at precisely that inflection point -- spare capacity. Oil traders in London and New York compare global oil demand and the capacity of petro-states to meet it, and if the gap between the two numbers is exceptionally narrow -- if there is barely enough production capacity to satisfy demand -- then traders will bid up the price. When they do so, they are betting on the blowup risk of an event like anti-Iranian sanctions or Nigeria's street protests, and the loss of existing oil exports. This risk is based on the following question: Do or do not states such as Saudi Arabia possess sufficient spare capacity to make up for those lost exports?
Similarly, if the gap between the numbers is super-wide -- such as would occur this year in the Eurasia scenario -- traders will bid down the price, since it almost wouldn't matter what geopolitical event occurred: There is still plenty of spare capacity to compensate for almost any loss of production.
Juan Barreto AFP/Getty Images
Bad year for petro-tyrants: Did today's trouble for petrocrats truly originate with Muhamad al-Bouazizi, the Tunisian fruit-and-vegetable seller whose self-imolation a year ago preceded the Arab Spring? I don't think so. Before Tunisia and Egypt, before the crumbling of the Berlin Wall and the Soviet collapse, before the rise of Benazir Bhutto, and before even the fall of Chun Doo-Hwan and the birth of South Korean democracy -- there was Corazon Aquino's People Power revolution in the Philippines. At this moment 26 years ago, yellow-clad Aquino supporters with their ubiquitous "L" signs, made with outstretched thumb and forefinger (in photo above, re-enacted earlier this year in a Manila celebration), seemed quaintly outmatched by then-dictator Ferdinand Marcos as they prepared for a snap presidential election. Yet, just two weeks after a fraudulent count gave Marcos the victory, a pair of military men defected, setting off the massive crowds of EDSA, Marcos' ignominious flight out of the country aboard a U.S. aircraft, and his exile in Hawaii. The remarkable string of democratic breakouts in the quarter-century since -- regardless of their imperfection in action -- began on EDSA, with the Laban hand signs, and Freddie Aguilar's haunting renditions of "Bayan Ko."
I am reminded of the Philippine events not because of the anniversary -- I witnessed the revolution as a young correspondent in my first foreign posting -- however, but some similarities with current events in Russia. The fatal cracks in the Marcos edifice were defections, starting with the Catholic church; then government election-commission computer workers; and finally the desertion of Marcos' defense minister, Juan Ponce Enrile, and his vice chief of staff, Fidel Ramos. In Moscow, Patriarch Kirill I, the leader of the Russian Orthdox Church, is an outspoken critic of this month's Russian parliamentary elections, reports the New York Times' Sophia Kishkovsky (the Wall Street Journal's Greg White and Rob Barry have produced a must-read systematic evaluation of the elections.). A regional executive of the powerful state company Gazprom -- Sergei Filippov -- has called for a full accounting of the indications of fraud, reports the NYT's Michael Schwirtz. An unidentified official in the city of Vladimir sums up the quandary for Putin and the ruling United Russia party: "This is probably what United Russia is scared of most: that someone from the inside will start to talk," this official tells Schwirtz.
This unnamed Vladimir official is right. A truly massive public uprising in Russia appears all but impossible, not the least since there is no unifying opposition figure. Lucian Kim writes that that is not necessarily a bad thing -- Putin, he argues, is actually a pretty good reformer. Yet, recalling those days in Manila, I do not recollect a single colleague or source forecasting Marcos's ouster, either.
Go to the Jump for more of the Wrap.
Ted Aljibe AFP/Getty Images
Kazakhstan is moving fast to pacify its restive west as a new video circulates in which police shoot and beat retreating oil workers protesting labor conditions. Two reasons: With parliamentary elections three weeks away, President Nursultan Nazarbayev (pictured above) wants to stamp out any political narrative conflicting with his long-time assertion of keeping Kazakhstan stable. Abroad, the jittery global oil market is already starting to factor in a possible disruption of Kazakhstan's 1.5 million barrels a day of oil exports, half of which is an extremely high-quality light variety.
The Kazakhstan unrest -- violence in the western city of Zhanaozen in which some 14 workers were killed -- caps an extraordinarily turbulent year in the world's oil patch. The distribution of power has been shaken up in the Magreb countries of Egypt, Libya and Tunisia, and violence continues to threaten the rulers of Syria and Yemen. Saudi Arabia is spending some $130 billion to stave off its own public dissatisfaction. In Russia, Prime Minister Vladimir Putin's seemingly unassailable hold on power has been challenged by a botched decision to return to the Kremlin, and a rigged parliamentary election. All in all, the uprisings have helped to push annual average oil prices to their highest level in history, exceeding $100 a barrel.
The trouble on the eastern Caspian Sea is the climax of a six-month-long labor strike by some 1,500 oil workers over wages and other grievances. These workers appear to have mounted their strike against two oil companies -- the state oil company, which goes by the acronym KMG, and a Chinese-Kazakh oil company called Karazhanbasmunai (here is a good explanation by Alisher Khamidov at eurasianet.org.). Last weekend, as the country prepared to celebrate the 20th anniversary of its independence, workers protested city plans to turn their strike camp -- the Zhanaozen public square -- into a festive place for dancing and public dining. It turned into a riot, with vehicles and buildings set aflame.
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.
Professional autocrats have practical reasons for playing their cards close to the chest: Neither friends nor enemies can confidently strategize against you; your vital aura of mystery remains in place; and you demonstrate who is truly in charge. So it is with Vladimir Putin, who seems to have confided to just one intimate his intention of reclaiming the mantle of Russian president. Friends and respected others say this is no surprise. Yet I am baffled -- there is almost no upside for Putin in sitting in the Kremlin, and much disadvantageous in doing so.
Let's start with some housekeeping. Over the weekend, I too hastily announced two winners of the Kremlin Contest, the betting competition on who would serve as Russia's president for the next six years. The winners -- Michael Perice of New Jersey and Theo Francis of Washington, D.C. -- submitted identical entries: They both guessed that Putin and President Dmitry Medvedev would swap places, with Putin announcing the decision Dec. 8, which was the closest date. But since then, Russia's finance minister extraordinaire -- Alexei Kudrin (pictured above, exchanging mutual glares with Putin) -- has openly rebelled and declined to serve a Medvedev-led government. Kudrin has so much domestic and international economic cachet -- he had himself been seen as a potential prime minister -- that observers think his brinkmanship can't be ignored. Putin may have to seriously consider running with him, not Medvedev. Since we have contestants who bet on a Putin-Kudrin ticket, we've withdrawn the declaration of the winners and will stand by while the dogs fight under the carpet.
The Kudrin surprise is important whatever the case -- Putin appears to have tipped his decision only to Medvedev, who had to know because he was the one who made the announcement at a United Russia party convention Saturday. That it openly did not go over well is telling.
A few years ago, such secretiveness would have been no problem. But Russia is a different place from 2008, when Putin elevated Medvedev and became prime minister. Now, Kudrin -- appearing to have been blindsided and possessing the chops to confidently complain -- has forced Putin into a possibly awkward position of not appearing as all-powerful as he likes.
What ails Russia? In large part it is Russians themselves, says President Dmitry Medvedev. In a penetrating interview with the Financial Times, the best I've seen with the 45-year-old leader (abbreviated video here), Medvedev describes his economic program for transforming the world's largest country, but says that, ultimately, Russians need to look in the mirror. "Our main enemy is inside us -- in our perceptions, our habits and cumbersome bureaucratic apparatus," Medvedev told the newspaper. "Indeed, if we manage to overcome these habits, reform will be more successful. I mean, one has to admit that we have a strong paternalist thinking. It goes for many people and even statesmen." He said:
For a variety of reasons, people in this country invested all their hopes in the kind Tsar, in the state, in Stalin, in their leaders, and not in themselves. We know that any competitive economy means reliance on oneself in the first place, on one's own ability to do something. This is the challenge every person has to deal with. Certainly, this is not done by a decree or with a stroke of the pen, but this is the problem anyway.
One cannot get carried away with the significance of Medvedev's remarks, since unlike prior Russian leaders who thought critically and fundamentally -- Mikhail Gorbachev; Yuri Andropov; and, reaching far back, Peter the Great -- Medvedev isn't actually in charge of either the nation's or even his own destiny. Prime Minister Vladimir Putin occupies that role.
Yet that is precisely the point. If one presumes that Medvedev relies on Putin's good will for his position, then one also must assume that such remarks do not come from left field -- Medvedev has first market-tested them in rough or polished form with Putin. This does not mean that Putin agrees with all of Medvedev's thinking. But he does not object to Medvedev so expressing himself if he wishes. My colleague Josh Keating suggests that at least some of the photographs of these fellows demonstrating camaraderie are so much empty staging. But it seems to me that you get what you see -- Putin and Medvedev actually do collaborate in a respectful manner; they agree on a ruling strategy, with Putin holding the deciding vote; and they genuinely are fond of each other. While the photos are not all spontaneous and must be opportunistic, I think the men themselves are not faking. Read on to the jump.
Dmitry Astakhov AFP/Getty Images
The upside of BP's latest brawl in Russia is how much we are learning about how the place works.
As you recall, in January BP CEO Bob Dudley trotted out a bodacious deal in which BP and Russia's state-owned Rosneft would swap shares -- thus owning $8 billion in each other's company -- and go on to develop the completely untapped motherlode of oil underneath the Arctic Sea. Only, this aggravated BP's Russian partners -- four oligarchs collectively calling themselves AAR -- who said BP had violated a monogamy covenant, and persuaded two European tribunals to halt the deal. One immediate victim was Igor Sechin, Putin's right-hand man and the holder of dual posts as deputy prime minister and Rosneft CEO. When the deal went south, Russian President Dmitry Medvedev kicked the corpse (pictured above, neither looks thrilled to be in the other's company) with an order prohibiting Sechin or anyone else from holding a simultaneous position in government and a state-owned company.
Though Medvedev's was a wholly reasonable directive, inRussia conflicts of interest can be a novel and even controversial idea, especially when it regards members of Putin's entourage. So it is that one prominent narrative out there right now is that the whole affair demonstrates not ethics, but Medvedev's political strength -- the rug, Reuters suggests, has been partly pulled out from under Putin. Medvedev's purge of Putin's allies at state-owned enterprises, it is said, is all part and parcel of Medvedev and his own allies preparing him for a run at re-election next year.
We have two things going on at once. One is that BP's Dudley wholly misunderstood Russia's apportionment of power (That's not a categorical black mark, because so did Sechin.). In this video, the Financial Times' perspicacious John Authers and Vincent Boland say that the Rosneft fiasco is as bad for BP as was last year's Gulf of Mexico oil spill. Dudley had perceived a company saver, but instead derived yet another symbol of BP's executive mismanagement. Now, not only does BP seem unlikely to capture prize Arctic acreage, but Dudley has seriously annoyed his Russian partners in the TNK-BP partnership, which comprises a full quarter of BP's total global reserves.
BP cannot afford to jeopardize the partnership. It is very simple. Unless Dudley gets his Russian affairs under control by a Thursday deadline, both BP and he -- emphasis on the latter -- are in real trouble. Chris Weafer, the uber-analyst at UralSib Bank, expects a deal to be cut, if not voluntarily by the principals in the deal, then by force -- that's how important the stakes are."There will be a lot more pressure applied this week," Weafer wrote in a briefing he emailed me, "and if no agreement is reached by Thursday, then [there will be] direct intervention by the state." But if these steps still don't work, among the dangers, some say, is that again BP risks a hostile takeover. This piece from the Daily Telegraph in London suggests that former BP CEO Tony Hayward may lose his current position as a board member at TNK-BP. But the biggest news right now is that Dudley could lose his job. So poor has his judgment and execution been. Read on for the Russian political angle.
Notions can be an indispensible force in the achievement of big leaps in business, science, sports, politics, personal fortune and military conquest. That's how souls among us have taken apart genomes, drilled in ultra-deep water, run the 4-minute mile, put a black man in the White House, earned a billion dollars, and overthrown Mubarak.
Sometimes notions and gigantic personalities combine, and the result can be a determination to go on, and on and on. Such is the case with missile defense. Three decades after Ronald Reagan visited Cheyenne Mountain and got the notion that the United States could shoot down a missile, the United States has spent more than $130 billion to prove the great man correct. In January, for example, the U.S. Missile Defense agency halted deliveries of the core weapon in the American-based system of ground-based interceptor missiles -- a Raytheon-made anti-missile device that failed yet again to hit a target. Yet, a week ago, Defense Secretary Robert Gates was in Moscow, attempting to fulfill one of President Obama's strategic priorities of the year -- getting a missile-defense deal with Russia -- and the Pentagon is asking for $10.6 billion on more development in its next budget.
One matter is the pure indomitability of Reagan's notion. The other is its indomitability in the context of events around the world -- 9/11, the wars in Iraq and Afghanistan, and now the revolutionary fervor in the petro-states of the Middle East. Are we fighting the proverbial last war? "In 1999, 2000, 2001, the Russians were saying, ‘Look you knuckleheads, the real threat is Osama bin Laden and the Taliban.' Then 9/11 happened and they look pretty right," Andrew Kuchins, who runs the Russia and Eurasia Program at the Center for Strategic and International Studies in Washington, told me over the phone.
The question is not whether the Pentagon ultimately will manage to figure out the missile conundrum -- this notion could yet prove itself out. Clay Dillow at Popular Science, for example, reports that Northrop Grumman has achieved a breakthrough with the ability to track a ballistic missile through all phases of flight. Poniblogger at CSIS has some interesting thoughts about missile defense progress.
It is rather whether Western military and security minds ought to be focused on how to adapt to a tectonically different Middle East, including how to secure the world's energy supply. It is whether it's best to continue what's now a 28-year-long effort to engage Russia on missile defense, or to shift the focus to a cooperative policy on energy, arguably a more enduringly strategic problem. It is also what to do about nuclear energy given Fukushima.
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
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.