Consider the latest news from the Middle East and North Africa, and one grasps why many U.S. oil and geopolitical analysts are cheering what they see as a prospect that the country will seriously trim its oil imports.
At the Financial Times, Javier Blas describes a drop in Saudi Arabia's pivotal capacity for bailing out the global oil market in a pinch, quoting a new report by the International Energy Agency; the IEA says natural oil field decline has eroded Saudi's spare production capacity. Nearby in Iran, the standoff with the West has resulted in a 15 percent risk premium on top of market oil prices, writes Bloomberg's Ayesha Daya; traders worry of a loss of much oil to the market should the tension escalate.
Meanwhile in Iraq, oil giant ExxonMobil -- hard-pressed like the rest of the industry to find new reserves -- has been barred from a new round of presumably world-class oil leases, reports the Wall Street Journal's Hassan Hafidh; Exxon is subject to this punishment for signing an independent oil deal with the northern Iraqi region of Kurdistan, with which Baghdad is in a long spat over revenue sharing.
And in Northern Africa, Sudan has reportedly seized another 2.4 million barrels of oil from South Sudan, which continued a two-week-old halt to its 350,000-barrels-a-day of oil exports, writes Reuters, and an outbreak of fighting between the neighbors seems possible.
Against this exceptional Middle East turmoil -- events with reverberations around the world -- Lou Pugliaresi of the Washington-based Energy Policy Research Foundation tells me that in just five years, U.S. oil imports by sea are likely to fall to 4 million barrels a day, or less than half today's level (see slide eight). Pugliaresi credits a rise in oil production from far more predictable places -- a 1.5 million-barrel increase in U.S. unconventional oil production (oil shale and tight oil from North Dakota, Texas and elsewhere), plus more oil sands imports from Canada.
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In his State of the Union address last night, President Barack Obama spoke of the United States' unaccustomed new impact on global energy -- in addition to its habitual role as a world-class oil glutton, the U.S. is delivering a growing volume of oil and natural gas that has already shaken assumptions, and looks likely to roil geopolitics in a way favorable to Americans.
The speech put a spotlight on a new trend of plenty in the U.S. oil patch: On Monday, the U.S. Energy Information Administration reported that the U.S. is in the midst of a dramatic turnaround -- by the year 2035, U.S. demand for imported oil will have fallen by 18 percent, to some 7.36 million barrels a day, or a respectable 1.6 million barrels a day less than last year's volume.
Obama was citing the shift as a way to outflank Republican opponents and oil industry lobbyists who, as we've discussed, intend to spend outsized sums of campaign dollars on claims that he is choking oil production and jobs creation. Against that, Obama threw the oil and gas bonanza into a package, and said that the U.S. must both drill and spend much on futuristic clean-energy technology. The Republican response, by Indiana Gov. Mitch Daniels, suggested that Obama is an anti-oil ideologue.
That is politics, and we are sure to hear much on this subject from both sides through November. What is most interesting from my own standpoint is the sober feel of the EIA's findings after the growing accumulation of punch-drunk forecasts from others: From an array of our best energy minds -- at ExxonMobil, BP, Daniel Yergin's CERA and others -- we have heard that, with the help of Canada and Mexico, the U.S. on the verge not only of the bright future described by the EIA, but of achieving the mythical state of energy independence (strike the operatic score.). These Wise Men foresee a doubling of North American production to a whopping 22 million barrels a day.
Among the geopolitical impacts of such a shift would be far more proportional influence from Middle Eastern and other petro-potentates. There would be more political balance.
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.
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.
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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.
Ahmad Gharabli AFP/Getty Images
Japan's possibly cataclysmic situation started with an earthquake, went on to a tsunami, and now is essentially an energy event -- a potential catastrophe stemming from long-ago decisions on how to power the world's third-largest economy and among the most affluent lifestyles on the planet. After a wait-and-see period, traders today expressed their anxiety with a panicky sell-off -- they sent oil prices well below $100 a barrel in the United States (Japan's Nikkei stock index unsurprisingly fell by 11 percent, and the New York Stock Exchange has followed suit by dropping more than 250 points at this point, or 2.4 percent). The market is turning brutal against anything related to the nuclear industry -- investors sent down shares of many uranium miners, for example, by double-digit percentages, and of nuclear power plant operators like Exelon and Entergy in the single digits.
What's going on is economic fear, but also a global energy system under severe stress. Over the last several months, we've learned the hard way in incredibly coincidental events that we are in firm control of almost none of our major sources of power: Deep-water oil drilling can be perilous if the company carrying it out cuts corners. Because of chronically bad governance by petrostates, we can't necessarily rely on OPEC supplies either. Shale gas drilling may result in radioactive contamination of water, though who knows since many of the companies involved seem prepared to risk possible ignominy and lawsuits later rather than proactively straighten out their own bad actors. As for much-promoted nuclear power, we know now that big, perfect-storm, black-swan natural disasters can come in twos.
The global trouble is not over yet. In Bahrain today, the king declared martial law for three months amid conflicting reports of the possible killing of a Saudi soldier, among more than 1,000 troops who have intervened to help quell an ongoing uprising there. Saudi Arabia is worried because Bahrain neighbors its own Shiite-majority, oil-rich Eastern Province. In Libya, forces of Col. Muammar al-Qaddafi pushed to the edge of the rebel stronghold of Benghazi, setting up the most direct confrontation yet between the sides, one that could prove decisive in the uprising there.
Yoshikazu Tsuno AFP/Getty Images
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:
Bertrand Guay AFP/Getty Images
The notional has become more real -- the unrest that has roiled the Middle East has reached Saudi Arabia, the foundation of the global oil market. At first, this small protest in the Eastern Province city of Qatif was received calmly by oil traders. But then, at least two protesters and a policeman were shot with rubber bullets in confusing circumstances. On that news, oil traders, who had been bidding down oil prices because it seemed the appropriate casino strategy against negative economic news, decisively reversed themselves, and pushed them back up. Oil prices ended the day yesterday justly slightly down.
Today is a scheduled "Day of Rage" in Saudi Arabia. Organized on the Internet, the protest had been expected to be a likely dud. Now it might be different.
"This has been our biggest fear -- that the unrest infecting the Middle East would surface as violence or bloodshed in Saudi Arabia," Cameron Hanover, an energy hedge fund consultant firm, wrote in an overnight note to clients. "If protests start to create ‘martyrs' in Saudi Arabia, then it could be the beginning of the end."
Here is video of the protest scene:
Henry Kissinger, addressing oil executives at a conference in Houston by live video last night, said that observers expecting the turbulence to result in a breakout of democracy are engaging in "wishful thinking." All that one can say is that protesters have rejected one governing model. "But there is no indication of what the new model will be," he said. "We are in the first act of a five-act drama."
Fayez Nureldine 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.
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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.
Oil and gasoline prices -- currently continuing their rise through the roof -- are doing so in their role as a mirror on history. We will never look at the Middle East the same way again -- contrary to what we generally thought, the region's monarchs and dictators are all susceptible to the popular will. What one might call the Susceptibility Index is a relative one -- the globally crucial petrostates of Saudi Arabia, Qatar, and Kuwait seem comparatively secure. Yet, since so many articles of faith have already been punctured -- Mubarak is gone; Qaddafi looks like he will be behind him; the 230-year reign of the al-Khalafis of Bahrain is threatened -- we cannot rely on assurances that these geopolitical big wheels are absolutely secure either. And so oil prices are surging for a second day.
Here's how Helima Croft and Amrita Sen at Barclays Capital sum it up in a note to clients today:
The foundation that has held the region together for the past 30 years has been shaken and the first cracks that appeared in the tectonic plates with the uprising in Tunisia and Egypt is now causing widespread ruptures in the region.
Therefore, the economic models on which the big industrial nations, Wall Street, and the banks are operating will have to be reconfigured to take account of this new risk premium to the global economy. But Croft and Sen go on to say that oil history also shows that one should not fret too much -- markets correct themselves, and the flow of energy that feeds the global economy will probably not be damaged. Read on for their thoughts.
Update: I discuss the big oil picture out of Libya and the Middle East this evening on Marketplace.
Mahmud Hams AFP/Getty Images
More on the dictator's playbook: A couple of weeks ago, we suggested a test for dictatorial leadership called the "Dictator's Playbook." When faced with popular unrest, are you statesmanlike, or brutal? As models, we pointed to Georgian President Eduard Shevardnadze's resignation in 2003 (he was not a dictator, but it was clear from protests that people wanted him out), and the 2005 massacre of protestors by Uzbekistan President Islam Karimov. After the comparatively peaceful ouster of the leaders of both Egypt and Tunisia -- the Shevardnadze play -- we have the alternative side of the playbook this week in Bahrain and Libya. Yesterday, forces in Bahrain stormed Pearl Square at 3 a.m., shooting at will and killing five protestors, and Libyan security forces killing perhaps two dozen people protesting the continued rule of Col. Muammar el-Ghaddafi. The clear signs are that we may have seen the extent of imminent regime collapse in the region.
In Iran, one hears the usual calls for the execution of opposition leaders, but interestingly a letter is also circulating in which senior officers in the Revolutionary Guard request a guarantee from superiors that they will not be asked to fire on anti-government protestors. The money call is on the current regime, but this one bears watching.
Bahrain borders Saudi Arabia, the linchpin of the global oil industry, but is trouble possible in the latter? In the Wall Street Journal, Karen Elliott House delivers a take well worth reading on the fragility of the al-Saud family's hold on power. House's view: It is fragile indeed. However, most of the smart analysts believe there is very little chance of a Tunisian-style uprising that could upend the Saud grip on power.
The trouble with pirates: The thing about pirates is that they are inherently working outside the box. If they were always doing what people expected, they wouldn't survive very long. Hence the international strategy adopted to combat Somali pirates was never a long-term one. The Greek-flagged Irene SL, a supertanker carrying 2 million barrels of oil worth some $200 million, discovered that a little over a week ago when it was captured in ostensibly peaceful waters 900 nautical miles from Somalia. The oil was Kuwaiti and headed to the United States.
The world's seafaring countries -- the United States, Europe, China, Russia -- have succeeded in making it difficult for pirates operating around Somalia proper (though as we see in the picture above, Mohamed Garfanji, one of Somalia's top pirate bosses, remains on the loose). So now they have figured out how to venture further out, reports Robert Wright at the Financial Times. Write quotes Lt. Commander Jimmie Adamsson of the European Union's anti-piracy Navfor mission: "It is like squeezing a balloon.If you squeeze a balloon in the Gulf of Aden, it will definitely expand in other directions because we're not there."
What is it like to be hijacked aboard an oil tanker in supposedly safe seas? In 2009, Saudi Arabia paid $3 million to gain release of the Sirius Star, a supertanker with $100 million in oil aboard that was hijacked more than 600 nautical miles from Somalia. Here are two illuminating videos with a British crew member of the Sirius discussing the experience:
Criminalizing cleverness in China: Many times, the definition of opportunity is recognizing what's sitting before your face when almost no one else does. In China, that can be a serious violation of the law, as Xue Feng has discovered in the oil business. Xue, a Chinese-born American who successfully negotiated the purchase of an apparently open oil database for the U.S. consultant firm IHS (which also owns Dan Yergin's outfit, CERA), has lost an appeal of his conviction and eight-year prison sentence for spying. Three Chinese nationals have been imprisoned in the same case.
Oilfield data is regarded as a state secret in large parts of the world -- much of the former Soviet Union and the Middle East, for example. But one is pressed to think of another place that imprisons foreigners for collating and paying for apparently open data. What's the definition of what Xue was doing? Business.
Gas in, coal out, but when? It has seemed clear that the global glut of natural gas will ultimately trigger a demand response in the countries most thirsty for more electric power like Japan and China - they will use much more gas than currently planned, an event that is part of an ongoing shakeup in energy-driven geopolitics. But when exactly will that happen?
Not soon enough as far as Alaska and Russia are concerned. In Alaska, ConocoPhillips and Marathon are closing Kenai, a liquefied natural gas plant on the Cook Inlet that had exported LNG to Japan since the 1960s. I asked Conoco spokesman John Roper why the plant would be closed given rising natural gas demand. He replied in an email that the glut is simply too formidable. "The current market conditions in Asia and our inability to get commercial supply contracts there made the facility no longer economically viable," Roper said. In Russia, the news is that the gigantic Shtokman natural gas field in the Arctic is again being delayed, and now isn't envisioned for startup until the end of the decade. Shtokman has been wholly intended for export.
The Alaska decision bears watching because of what it says about efforts by BP and ExxonMobil to export the gas equivalent of 6 billion barrels of oil from the North Slope. These two companies are leading rival efforts to build a pipeline to ship out the gas, but they have been delayed because of the gas glut in the market-of-choice -- the United States. It's been presumed that if the U.S. market won't work, they can ship the gas by LNG tanker to fast-growing Asia. But at the Alaska Daily News, Tim Bradner wonders whether the Kenai decision signals that the Asian market has fundamentally changed, too.
More likely is that one must maintain a long-term view, and meanwhile economize, economize, economize. Consider news going the opposite direction - Bloomberg reports that demand is so high for LNG that a surplus of tankers is drying up, and doubling freight rates. Exxon has designed its own LNG tankers for this purpose, the Q-Max, which effectively make gas as fungible as oil in terms of the ability to ship it anywhere economically. There is also the sound of what one does not hear -- news of Exxon closing in any of its gigantic and ever-growing LNG supply in Qatar. Whatever trouble Conoco and Russia are having with their future marketing plans, Exxon has the largest LNG project in the world, and is not scaling back.
Roberto Schmidt AFP/Getty Images
The 800-pound Saudi gorilla: Egypt is a significant country -- when its people took to the streets and shook the regime of President Hosni Mubarak to the bone, observers gave serious thought to the possibility that any Middle East autocracy could be up for grabs. Tunisia's ouster of President Zine el-Abidine Ben Ali led to Egypt, but simply did not send the same fears up the spine of the region's strongmen. Yet as the week ends with Cairo's so-called Day of Departure and the White House caucuses on how to smooth Mubarak's exit, what is truly on the minds of decision-makers? For many of them, it's Saudi Arabia. If unrest spreads there, all bets are off in global markets of all types, and particularly the oil market. Saudi Arabia produces 10 percent of the world's crude and in addition is the main "spare capacity" cushion keeping prices relatively stable. The calmest voices among us point out that Saudi -- and really the rest of the big petrostates in the Persian Gulf -- is a completely different case from Egypt, Jordan, Yemen, and other states under threat from internal discontent. The main difference is the power of the purse -- the Saudi regime has plenty of cash to spread around so that it does not have a gigantic, teaming mass of poor with a long history of deep, festering, and unresolved grievances. If you have not yet seen it, it's worth watching Christiane Amanpour's interviews with both Mubarak and his new vice president and intelligence chief, Omar Suleiman:
Big Oil's fork in the road: How to navigate the uncertain shoals of oil over the next two and three decades? The smartest minds in Big Oil are not sure and at the fork of the road have all taken different paths, write Sheila McNulty and Ed Crooks at the Financial Times. BP has shrunk and gotten into bed with Russia; ExxonMobil and Shell are turning themselves into natural gas companies; Chevron is sticking with the orthodox model of hard-core exploration; and ConocoPhillips has turned away from the Big Oil, grow-as-big-and-burly-as-possible model and sought big returns by being a Medium Oil company. So far, the market has rewarded Conoco the most, pushing up its share price by a third over the last year; Shell is up 26 percent, Chevron by 19 percent, but Exxon's up by just 7 percent. BP is down 12 percent.
Pipeline politics in Europe: One must admire Europe's newfound determination to create another source of natural gas and prevent Russia from exerting undue petropower on the continent. Despite history suggesting a quixotic effort, European Union Energy Commissioner Günther Oettinger has gotten both Azerbaijan and Turkmenistan to agree in principle to supply gas to the long-proposed Nabucco natural gas pipeline. Now, Oettinger is attempting to embarrass the pipeline's European partners into lining up the financing and starting construction of the $11 billion line before the two Caspian Sea republics sign actual commitments to ship their gas volumes, Reuters reports. The Turkmen and Azeris say the Europeans have to move first. The Europeans say the Caspian republics do. History suggests that the Europeans are right to wait -- the Turkmen and the Azeris aren't going to sign anything until Russia informs them that there will be no punishment for doing so. Next stop for Oettinger: Moscow.
The groundhog factor: Punxsutawney Phil, a groundhog from Pennsylvania, had bad news for natural gas producers, but good news for the rest of us -- winter will end early, and spring will be upon us in no time. Why do we bother occupying our time with the thoughts of a rodent? According to Wikipedia, "The Groundhog Day celebration is rooted in a German superstition that says if a hibernating animal casts a shadow on Feb. 2, the Pagan holiday of Imbolc, winter will last another six weeks. If no shadow was seen, legend said spring would come early." In the interest of balance, we offer up Phil and a rival, Woody the Woodchuck, who did see her shadow, indicating six more weeks of winter.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.