We are suffering whiplash: For nearly four decades, OPEC -- the cartel formally known as the Organization of Petroleum Exporting Countries -- has been a major economic and geopolitical force in our collective lives, driving nations to war, otherwise self-respecting world leaders to genuflect, and economists to shudder. The last half-dozen years have been especially nerve-wracking as petroleum has seemed in short supply, oil and gasoline prices have soared to historically high levels, and China has gone on a global resource-buying binge. Russia's Vladimir Putin has strutted the global stage, bolstered by gas and oil profits, and Venezuela's Hugo Chávez has thumbed his nose at los Yanquis.
Yet now we are hearing a very different narrative. A growing number of key energy analysts say that technological advances and high oil prices are leading to a revolution in global oil. Rather than petroleum scarcity, we are seeing into a flood of new oil supplies from some pretty surprising places, led by the United States and Canada, these analysts say. Rather than worrying about cantankerous petrocrats, we will need to prepare for an age of scrambled geopolitics in which who was up may be down, and countries previously on no one's A-list may suddenly be central global players.
One primary takeaway: North America seems likely to become self-sufficient in oil. "This will be a huge potential productivity shock to the U.S. economy," says Adam Sieminski, director of the U.S. Energy Information Administration, a federal agency. "It could grow the economy, grow GDP, and strengthen the dollar."
OK, we get it -- we will need to relearn our basic geopolitics. But how so? Last week, the New America Foundation gathered six leading energy analysts to take a guess as to the winners and losers over the next few decades from the unfolding new age of fossil fuel abundance (video here). Here's what they told us:
The United States: Jobs increase, wages and productivity go up, the dollar strengthens, the current account deficit becomes negligible, and America has a new day as an economically dominant superpower. It is far and away the biggest winner of the new age, the analysts agreed. As far as Americans are concerned, what's not to like? Citigroup's Ed Morse waxed rhapsodic: "We will no longer be kowtowing to despotic rulers and feudal monarchs whose oil supply lines are crucial to other aspects of foreign policy. Those tradeoffs will be eliminated." Perhaps a bit Pollyanna-ish, but we get the general idea.
New petrostates: Aren't we forgetting those unsung nations that, depending how they manage the new age of plenty, can also very well end up with far more robust economies and as geopolitical players? The following 10 countries -- all of them burgeoning new petrostates -- make the winner's list because, even if they ultimately botch the moment and send most of the profit into private Swiss bank accounts, the coming energy boom gives them a much greater chance at big economic prosperity: Cyprus, Ethiopia, French Guiana, Israel, Kenya, Mozambique, Sierra Leone, Somalia, Tanzania, and Uganda.
Cooperation: Western suspicion of China has been fueled by its aggressive acquisition of natural resources around the world, especially oil and gas fields. But "in a world of plenty," said Ed Chow of the Center for Security and International Studies, "the zero-sum nature of the discussion could come out of the equation." Chow thinks we are already seeing the first stages of this more relaxed future in the U.S. attitude toward billions of dollars in recent Chinese investment in U.S. shale gas and oil fields. That is far different from 2005, when public and political opinion aborted China's attempt to buy Unocal almost before it reached a serious stage. Chow likes this new atmosphere. "It was never a very healthy phobia that we had to begin with," he said. Looking ahead, Chow wonders whether the United States might end up collaborating with China and India in patrolling the Persian Gulf.
Go to the Jump for the Losers in the new age.
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BP and the Russian squeeze: BP may be moving toward yet another comeuppance in Russia. This chapter in the company's nine long years of Russian misery goes back to January 2011, when it announced a coup -- it was bouncing back from the devastating 2010 Gulf of Mexico oil spill, and forming a turbo-partnership with the Russian state oil company Rosneft to drill for oil and gas super-giants in the Arctic Circle. But then things went horribly wrong: BP's regular Russian oligarch partners accused the Britons of violating their rights of first-refusal for any BP deal in Russia. The oligarchs, collectively known as AAR, sued and scuttled the BP-Rosneft deal, and sought billions of dollars in alleged damages. Early this month, BP finally threw in the towel, and said it is assessing offers to buy its half of TNK-BP. Here is where the fresh trouble starts. BP has suggested that there are at least two bidders -- AAR and an unidentified state-run Russian company. Among stock analysts, the general thinking is that, whoever buys the 50 percent, BP could walk away with some $25 billion. But now it appears that that sort of payday will arrive only if AAR fails to have its way. Sadly for BP, the record supports the opposite outcome. In a note to clients on Wednesday, Citigroup's Alastair Syme said that, given the oligarchs' aggressively pursued, $13 billion lawsuit against BP, the Britons are unlikely to achieve the $25 billion figure. How much are they likely to receive? AAR (which believes that BP is bluffing about there being another suitor) is thinking more like $7 billion, right around the figure that BP paid for its share of TNK-BP in 2003 (the Financial Times' Guy Chazan first reported the $7 billion figure, which we have confirmed). In the Russians' apparent view, that would allow BP to save face by leaving with all the money it originally gambled on TNK-BP.
But that may not be the end of BP's latest shellacking. The company is thought to be seeking to leverage its exit from TNK-BP into a position on the resource-rich Arctic, similar to deals struck by ExxonMobil, Italy's ENI and Norway's Statoil, as I write at EnergyWire. But it should not expect kid-gloves treatment by the Russian government. The reason is that President Vladimir Putin and his oil lieutenant, Igor Sechin (pictured above, right and left, respectively), will have closely monitored the latest TNK-BP deal. They will see that BP can be shellacked with impunity. If indeed BP proceeds with the sale of its TNK-BP share, expect this sequence of events: BP sells out for a firesale price to AAR; AAR resells that share or more to a state-run company such as Rosneft at a markup, but less than the $25 billion market price; and BP gets a place on the Arctic, but on far more advantageous terms for the Russian side than achieved with the other western companies.
Go to the Jump for the rest of the Wrap.
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My mom out in California is elated -- gasoline prices in her neighborhood are below $4 a gallon for the first time in four months. Less so are the world's petro-rulers, who are watching the price of oil -- their life blood -- plunge at a rate they have not experienced since the dreaded year 2008. Industry analysts are using phrases such as "devastation" and "severe strain" to describe what is next for the petro-states should prices plummet as low as some fear. No one is as yet forecasting a fresh round of Arab Spring-like regime implosions. But that's the nightmare scenario if you happen to run a petrocracy.
To understand why your average oil king is right to be worried at the moment, grab your calculator. The price of U.S.-traded oil fell to $83.27 a barrel on Monday, and global benchmark Brent crude to $96.05 a barrel; now juxtapose that against the state budgets of Iran, Russia, and Venezuela, which require more than $110-a-barrel Brent prices to break even, according to generally accepted estimates, and you'll see the problem.
Given this already-existing revenue gap, one might fairly wonder what would happen if, as Citigroup's Edward Morse says is possible, prices drop another $20 a barrel for an extended length of time. Oil economist Philip Verleger's forecast is even gloomier -- a plunge to $40 a barrel by November. Or finally, what Venezuelan Oil Minister Rafael Ramirez fears -- $35-a-barrel prices, near the lows last seen in 2008. In Russia, for instance, "$35 or $40, or even $60 a barrel, would be devastating fiscally," says Andrew Kuchins of the Center for Strategic and International Studies. That could damage the standing of President Vladimir Putin, since his "popularity and authority are closely correlated with economic growth," Kuchins told me in an email exchange.
With few exceptions, the same goes for the rest of the world's petro-rulers, whose oil revenue supports vast social spending aimed at least in part at subduing possible dissatisfaction by their populace. Saudi Arabia can balance its budget as long as prices stay above $80 a barrel, according to the International Monetary Fund, although projected future social spending obligations will drive its break-even price to $98 a barrel in 2016.
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By the end of the decade, Israel will probably satisfy all its own natural gas requirements, and become a serious exporter of liquefied natural gas. Argentina might produce the world's third-largest volume of shale oil. Mozambique seems likely to become one of the largest LNG exporters in the world. And the United States may meet most of its own liquid-fuel needs.
Which is to say that the geopolitical fabric with which we have grown up seems to be unraveling in spots, and a new patchwork taking its place in Africa, the Middle East, North and South America, and beyond. Settled power and influence are giving way to a maelstrom of moving parts.
The backdrop is a global revival in the oil and gas business, ignited by energy companies that, after two decades of largely standing still, are finally drilling with purpose. These companies could yet self-destruct if they are not environmentally watchful. Clean-tech could achieve massive advances and economies of scale. But as of now, the colossal hydrocarbons industry -- long the tipping point, and at times the singular force, behind countries becoming rich, or falling behind -- is serving as the weaver of the new geopolitical fabric.
What could geopolitics look like? It is premature to detect concrete shapes, as Citigroup's Ed Morse wrote in a much-read recent note to clients. Yet we can discern outlines of the potential appearance of the new world.
We already know, for example, that the heft of the U.S. shale gas boom has challenged Russia's natural gas grip on Europe. Saudi Arabia also fears shale gas, whose abundance could ultimately contribute to the erosion of U.S. oil demand, as Chris Weafer said last week on this blog (also see remarks below by oil scholar Philip Verleger.).
Saudi has valid reasons to worry, as it seems almost-certain that the fresh big oil finds on other continents will whittle away at the centrality of the mighty nations of OPEC, the bain of Western economies for 35 years. OPEC seems far less likely to call the shots in global oil and, according to Citigroup and other analysts, the per-barrel price its members earn could be much-reduced. The wild card will be demand, meaning China's future oil appetite, and the continued progress of energy efficiency.
Similarly, Russia, the world's other current major oil-exporter, will probably be forced into serious political and economic reforms or face decline. Its government spending is too high, its non-hydrocarbon economy too anemic, and now its oil and gas sectors under challenge.
On the other side of the ledger, numerous heretofore basket-case nations up and down Africa's coasts will have to decide whether to squander their unexpected new petro-fortunes, or build middle classes and stable societies. In addition to Mozambique, that includes Tanzania, Kenya, Cameroon, Cote d'Ivorie, and more. Similar prosperity would be in the line of sight of numerous South American nations.
As for the United States (pictured above, drilling in Pennsylvania), a small but growing number of economists see the potential for a resurgent economy, built on the back of cheap natural gas. Leading the pack is Citigroup's Morse, who in the report cited above says the U.S. may more than halve its budget deficit by 2020, and experience a radical economic "revitalization and reindustrialization."
Likewise, we have a dissection of a coming U.S. boom in the Financial Times from Philip Verleger, who ran the Office of Energy Policy in the Treasury Department during the Carter Administration, and is a fellow at the Peterson Institute for International Economics.
With all of this turbulence, is it an article of faith that China will rule the world in the second half of the century, as many presume? China still looks on track to have the largest economy, but the many moving parts -- including its challenging demography, as the Economist reports -- make its trajectory seem less certain.
I separately emailed Verleger asking his opinion of the bullish forecasts of shale oil that we are seeing from Morse and others -- what is the data backing up these predictions? Verleger had an answer, but was mostly interested in laying out a case for what he calls a "Kodak Moment" of marginalization for the U.S. oil industry. The email is provocative, and I reprint in full after the Jump.
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Energy Independence Edition
How do you know you are living in a petro-state? With all the talk of a historic U.S. oil boom, I wondered how Americans can truly know whether and when they are again residing in an official petro-state, like in the days of John D. Rockefeller. Given the invective-laced presidential election, I wondered whether we might see either Barack Obama or Mitt Romney, shirtless, hunting a tiger while hurling curses at one another. Then I turned to a few regular O&G readers. Here is a smattering of their responses:
**"Hollywood celebrities attach Texas longhorn bull horns to the hoods of their cars. ExxonMobil acquires Saudi Aramco. The American Petroleum Institute buys out the Center for American Progress, Sierra Club and the Natural Resources Defense Council."
John Hofmeister, author and ex-president of Shell USA
**"Barack Obama discovers ancient urns while inspecting oil spill damage on the Gulf Coast."
Michael Levi, Council on Foreign Relations
**"Secessionist movement breaks out in North Dakota."
Ed Chow, Center for Strategic and International Studies
**"Americans see buying an electric vehicle as unpatriotic, vilify companies that make them as government stooges, and proudly fly the flag from the top of their new 16 mile-per-gallon SUVs."
Andrew Holland, American Security Project
**"When did the US *stop* being a petro-state?"
David Biello, Scientific American magazine
Go to the Jump for the rest of the Wrap.
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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
A question of power in Saudi Arabia: The al-Saud family of Riyadh has two principal tasks -- securing its rule, and guaranteeing the smooth, long-term flow of oil income. When these dual objectives come in conflict -- such as they have in the Arab Spring -- the former takes precedence. So it is that, with King Abdullah having allocated a whopping $129 billion in social spending over five years in order to pre-empt restiveness within his population, he has cancelled plans for a $100 billion buildup of the Kingdom's oil production capacity. Saudi Arabia can currently produce about 12.5 million barrels of oil a day, and it had plans to increase capacity to 15 million barrels a day by 2020. In the Financial Times, Aramco CEO Khalid al-Falih said the expansion is no longer necessary because of increased supplies announced elsewhere. The new Saudi plans could exacerbate a projected significant tightening of global supplies in the coming years. But Barclays Capital's Amrita Sen, quoted in the FT, suggested that the rationale is the family's core agenda: "The current focus of Saudi is on domestic social spending on the back of [the] Arab Spring."
Go to the Jump for more of the Wrap
The Arab Spring has added the appearance of fragility to almost all petro-states regardless of their location. In Venezuela, President Hugo Chavez, back in Cuba for follow-up cancer treatment (pictured above on arrival in Havana with his daughter Rosa and Raul Castro), has triggered speculation on what will happen should he become incapacitated or die. Among the questions -- would Chavez's successor revive an oil industry whose reserves have officially surpassed Saudi Arabia's but whose production is just a third of the kingdom's? Similar questions are being asked anew about oil-rich Kazakhstan, prompted by the 11-day disappearance of leader Nursultan Nazarbayev, who it turns out was undergoing secret prostate surgery in Hamburg, reports Germany's saucy newspaper Bilt.
The root of all this inquiry is the Saud family of Saudi Arabia -- a few months ago, oil prices went through the roof over the issue of what would happen to the global economy if the guardians of the entrepot of global oil went south. That shudder didn't last long because the premise was thin, and became thinner when King Abdullah laid some $130 billion in largesse on his population, and sent troops to shore up the neighboring monarchy in Bahrain, home to the U.S. 5th naval fleet.
Till today, though no full-fledged petro-state has been caught up in the Arab Spring, we remain jittery because of the possibility for more economic havoc should the turbulence strike a big oil producer. Yet Venezuela tells us that the range of possible outcomes includes not only the recurrence of a Yemen or Libya scenario; it is also changes to the market status quo in a simple change of leadership.
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Oil whiplash in the Saudi kingdom: Saudi Arabia, which may or may not have raised oil exports to compensate for the loss of Libyan crude, is now talking internally about increasing spare production capacity to meet an expected surge in oil demand in coming years. That's according to Petroleum Intelligence Weekly, which has been solid on the highly opaque Saudis.
The Wall Street Journal notes this week that confusing information about Saudi production has exacerbated the volatility of the oil market -- the kingdom is by far the world's largest crude exporter, and it cultivates a reputation as a stabilizing force. In February, the Saudis made it known that they were putting more crude on the market in order to compensate for lost Libyan volumes. But this week, Energy Minister Ali Naimi said that in March the kingdom actually lowered production by 800,000 barrels a day for lack of demand. Some traders believe that, before the Saudis made that steep cut, they had been producing about 9 million barrels a day since November for domestic reasons, and simply used Libya as a pretext to make it public.
Whatever the case, PIW reports that the Saudis are now thinking of raising their production capacity to 15 million barrels a day, which would be a 20 percent increase from their current capacity of 12.5 million barrels a day. The discussions revolve around concern about surging Asian demand.
Bidding, not setting: When traders are in the casino, they bid up and down the price of oil -- this week above a smoking $112 a barrel. But are they also counting cards? As soon as you ask such a question, suggesting that trading is a conspiratory sport, you are getting pretty far out there -- manipulation happens (just ask Enron's many victims), but not often enough to be looking over one's shoulder. This week, President Obama fed such suspicious thinking by forming a task force to investigate whether high oil prices are a result of fraud or manipulation. Okay, he is running for re-election. But if you want to reduce some of the spikes up and down in oil prices, charge a higher fee for traders to bet. If it costs more for a seat at the table, betters have more reason to think twice before sitting down.
Anger to the left me, anger to the right: When oil prices shook off the Goldman Sachs malaise this week and went back through a new roof, not only Obama was angered. In Shanghai, truckers went on strike to force down fuel costs and port fees, the Financial Times reported; it was another opportunity for the ultra-paranoid Chinese government to worry about the Arab Spring, and remove any speck of news from the Internet. Meanwhile, Russia's Transneft is on the warpath against China over the price of oil. Transneft wants world prices for the crude it's shipping to China through Skorovodino, in Siberia, but somehow the two sides have a different idea of what that world price is, reports John Helmer on his blog. Prices are not going down soon, as we see in the worsening trouble reflected by Syria, and the world is only becoming more complicated, as I discussed with Scott Tong this week on Marketplace. And it's not even summer yet.
Good or bad luck in Nigeria? There is peace in the Niger Delta, but fury in the north as Nigeria -- the source of some 10 percent of the United States' crude oil supply -- prepares for its next round of voting, this time for local offices. So will we have debilitating trouble in another important oil state? Much depends on the actions of President Goodluck Jonathan, who won the right to continue for a full term in office after taking power on the death of his predecessor. Jonathan is from the south, which is generally what infuriated the north and supporters of his opponent. Writing in the New York Times, Dele Olojede, who edits the Nigerian newspaper NEXT, observes worrying signs in the unprecedented violence and disrespect of hallowed officials present in the north. Olojede calls for statesmanship by Jonathan and former military ruler Muhammadu Buhari, whom he defeated in the election.
TNK-BP: Clutch play by Dudley puts momentum back with BP? Counter-intuitively, the momentum may have shifted back to BP in its latest high-wire negotiations in Russia. BP's Bob Dudley (pictured above), attempting to turn around the company's fortunes after the costly Gulf of Mexico oil spill a year ago, in January dived into a highly tenuous tie-up with Russia's state-owned Rosneft, with whom it hoped to explore the oil-rich Arctic Sea. The tenuous part came because BP's long-time Russian partners, the grouping of four oligarchs known as AAR, blocked the partnership through tribunal rulings in Europe. As late as yesterday, BP and Dudley seemed to be in deep trouble -- BP had offered to buy out AAR's 50 percent of their Russia-based partnership for $27 billion; AAR apparently counter-offered with an ask of $35 billion, part of which would be paid through 10 percent share holdings of both BP and Rosneft. Dudley balked at the shareholding part, and possibly the money too. But just when hope seemed lost, Dudley got Rosneft to extend what had been a drop-dead deadline yesterday for completing their tie-up. Now BP has until this time next month.
Now a curious thing has happened. In a statement issued today, AAR CEO Stan Polovets advises BP to find a way to honor their partnership agreement faithfully. "We trust that BP will use the extension it has got from Rosneft to ensure that both the Arctic opportunity and the share swap are pursued through a structure consistent with BP's obligations under the TNK-BP shareholder agreement," he said. It's curious because Polovets said almost the identical thing yesterday.
If one is in the catbird seat, one generally remains sphinx-like. Hence, the signal that AAR is a bit uncertain. BP now has time to turn the tables. Chris Weafer, an analyst at UralSib, thinks that the long time extension suggests that the Kremlin intervened at the last minute to keep the deal alive.
Even if he was miserly with the cash -- $35 billion does not seem like too much money for the unlisted company -- Dudley was right to refuse AAR's share demands. He would be a fool to hand over 10 percent of BP -- and hence a board seat -- to the litigious and shark-like AAR, who have shown over the last 15 years a zest for a bloody brawl. Nothing personal, of course.
Should the shale gas tent be folded up? If Cornell Professor Robert Howarth and a couple of his colleagues are correct, there is precious little hope -- very close to none -- of getting greenhouse gas emissions under control and preventing some of the less-pleasant repercussions of climate change. This week, the Howarth team published a paper disputing one of the main assumptions accompanying the U.S. boom in shale gas drilling -- that it is a positive development because natural gas emits half the greenhouse gases of coal, and a third less than oil. Gas, it has been said here and elsewhere, is a "bridge fuel" until an as-yet undetermined non-fossil fuel technology is scaled up to propel the global economy along with the world's private vehicles. But Howarth says that, when one takes into account the methane released during shale gas production, coal in fact comes out cleaner. Given the hoopla surrounding shale gas, Howarth's paper has attracted much attention, including prominent display in the New York Times. But is he right?
Over at the Council on Foreign Relations, Michael Levi isn't so sure. There is no dispute regarding the hazards of methane -- this gas is pernicious. But Levi takes Howarth to task for relying on "isolated cases reported in industry magazines" along with the performance of notoriously bad Russian pipelines for his conclusions regarding how much methane escapes into the atmosphere during hydraulic fracturing, the method by which shale gas is extracted. Levi is at his most brutal in an apparent scientific gaffe -- Howarth used comparative gigajoules in order to measure the methane emissions of shale gas against those of coal. The problem is that gas produces a lot more electricity than coal gigajoule-by-gigajoule, something that Howarth doesn't take account of. For that reason, Levi favors kilowatt-hours for comparison purposes, and regards Howarth's failure to do so as "an unforgivable methodological flaw; correcting for it strongly tilts Howarth's calculations back toward gas, even if you accept everything else he says." Ouch.
Howarth explicitly states his data are thin and that more research is necessary -- methane is under-examined. Levi agrees with him there.
Here is where we return to one of the industry's own big failures to get out in front, figure out its weak points before critics do, and fix them. We have previously suggested that the error-prone shale gas industry ought to police itself, put peer pressure on its own bad actors to straighten up, and openly disclose the content of its fracking fluid. Now a new front has opened up. It could be too late to recover entirely -- the industry is headed for serious federal regulation, the very thing it has sought to avert.Read on for more of the Wrap
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No sheriff in oil town: The latest Reuters poll of oil traders forecasts oil prices to pass $130 a barrel by the end of the year, which seems a fairly safe bet given that the widely traded U.K. blend went past $124 today. In terms of the whys, it's geopolitics, argues the usually sober-thinking Ed Morse -- the existence of autocratic, sclerotic and unresponsive Middle East governments is old, but not the local reaction to it. Morse writes in the Financial Times:
The prospect of the largest oil-producing countries confronting challenges, such as those seen largely in north Africa so far, is more probable now than a year ago, telescoping the potential day of reckoning and raising the probability of an apocalyptic oil supply disruption.
Leah McGrath Goodman notes the role of the casino -- traders betting on the news out of the Middle East. But, in an overnight note to clients, hedge fund analyst Peter Beutel at Cameron Hanover laments the entire cycle of higher prices -- the "spiral in motion" that we are witnessing. Beutel writes:
It goes like this: A stronger economy helps boost oil prices as investors anticipate stronger future demand. Higher prices (for refined products) hurt consumers and lead to demand destruction. Higher oil prices hurt consumers and their ability to spend money elsewhere. As a result, in order to keep the economy going, the Fed needs to keep rates low or money inexpensive, and that hurts the dollar, which boosts oil prices. A weaker dollar helps exports, and that helps the economy, boosting oil prices, hurting the dollar as well as consumer discretionary spending. It gets absolutely dizzying. It has elements that want to halt the cycle and other elements that keep it in motion. The latter factors are dominant here.
... but investors hedge with clean tech, too: Right alongside the runup in oil prices we are seeing a big rise in investment in green technology, according to the Cleantech Group. Investors poured $2.5 billion into the sector in the first three months of this year, mostly in mature solar and electric-car companies. That was 30 percent higher than the same period a year ago, and the largest sum since the third quarter of 2008. It does not mean that investors are turning back to clean energy -- hardly any money went into startups or companies not yet in the market. Instead, it looks like a hedging strategy -- investors see oil demand destruction ahead given the direction of prices (in 2008, U.S. motorists -- the biggest oil gluttons on the planet -- began to buy a lot less gasoline when prices at the pump reached $4 a gallon), and so are pouring money into already-existing clean-tech products. As for the rest, in the Wall Street Journal, Guy Chazan writes that money is pulling back in biofuels, since it looks like many, many years before any will be competitive with gasoline. Read on for more of the Wrap.
Mario Tama / Getty Images
Libya has bared an uncomfortable truth to Saudi King Abdullah (pictured right above), Azerbaijan President Ilham Aliyev, Kuwaiti Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (left), and the rest of the petro-autocrats of the world:
When politically expedient, Washington will help to push you out of power.
This sounds obvious, but it's not how it was supposed to be. The United States has been allies with many such leaders as part of Pax Americana. For the most part, this hasn't seemed cynical, but realistic -- factually speaking, the United States and the rest of the West and the world require oil; there are diplomatic missions that only an Arab king or sheikh can fulfill; and the balance of power includes the support of autocratic leaders. Even the peace with Col. Moammar Qaddafi was well-intentioned -- he has considerable blood on his hands, but back in 2003 there was hope he had opted to reform; the most prevalently voiced opinion was that he was a potential template of the new possibilities of the age.
Much of this portrait is different now because of the Arab Spring, under replacement by an as-yet unestablished new set of rules. In the United States, there is an understanding that petro-realpolitik must change because one can no longer be sure that the Emir sitting confidently before you will be there next year, or even next week. In the petro-states, there is an understanding that the long-standing alliance-of-interests underpinning one's relationship with the United States can be much shorter-lived than one originally thought. Hence, no one should be surprised when hearing of an unprecedented breach between the United States and Saudi Arabia -- as we've discussed, the Saudis have played a highly constructive role on behalf of U.S. economic and political interests around the world, but the truth is that there simply is not much support in the United States for families that treat their nation's wealth as a personal treasure trove. From the Saudi side, why should one go out of one's way for a superpower that so rapidly discards its friends?
Yasser al-Zayyat AFP/Getty Images
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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Traders have adopted a new yardstick for oil security, and it's influencing the abrupt climb of oil prices. Call it the Flaming Oil Port Index. It's a notional appreciation of how many more OPEC countries may see fighting, taking their oil production with them. Right now, according to CitiGroup, the index shows that at least 3.3 additional barrels of oil are at risk, or another 3 percent of global demand on top of the 1 million barrels a day gone from Libya's output. With the index that high, oil prices began the morning with another ascent.
Here is how CitiGroup looks at the Middle East (H/T: Izabella Kaminska/FT Alphaville):
This is an invidious gauge. It hardly matters what countries are likely to fall apart. The longer that traders see reports of fighting in the oil ports of Libya, the more real seems the possibility of Algeria and Saudi Arabia seeing destructive violence. It is different from no-room-for-error 2008, when global supply only just met demand and reports of a man with a gun in the Nigerian Delta could send prices soaring. Today, OPEC continues to have at least 2.5 million barrels a day of surplus production capacity above and beyond global demand, depending on how much oil you think Saudi Arabia is producing.
One reason is that trouble in Saudi Arabia's oil-belt no longer is notional. Small Shiite protests broke out last week in the kingdom's Eastern Province, resulting in some two dozen arrests. The Saudis have now entirely banned any type of protest.
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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.
Let's say that Libya's entire oil production shuts down, a process that currently seems under way. Would Saudi Arabia genuinely make up the difference, as its energy minister, Ali al-Naimi (pictured above), has said in Riyadh? The answer is crucial -- everyone from the presidents of the world's leading industrial nations to the CEOs of the Fortune 500 to Wall Street expects Naimi to step up to the plate with Saudi's 4 million barrels a day of excess production capacity should there be an oil shortage. It's not an exaggeration to say that the global economy relies on this presumption.
Yet, not everyone thinks the answer is as pat as the conventional wisdom suggests. For instance, in its overnight note to clients, Cameron Hanover, an energy analysis firm, cast doubt on Saudi Arabia's ability to keep the market supplied:
OPEC, namely Saudi Arabia, pledged to make up any oil lost from Libya, which exports around 1.6 million barrels of oil per day. Of course, that only works as long as Saudi Arabia avoids contagion. And we have not read of contagion ever spreading with greater speed than has been seen these last few weeks. The spread has rivaled the spread of the Black Plague 650 years ago. That very speed may be the factor that has oil markets most on edge.
So now we come to where the rubber hits the road with the turmoil in the Middle East: Just what is the risk of the entire global economy going south, which is what would happen if the Saudis couldn't compensate for a global oil deficit as they have done in the past?
Fayez Nureldine AFP/Getty Images
Oil prices are going through the roof today, and gasoline prices at the pump will follow, as we get the first regime-rattling news in a major oil-producing state. What's happening is that the sketchy news out of Libya makes the country look like it's on fire - Col. Muammar Qaddafi may be spending his last days in power. And even though no oil supplies have been disrupted, traders are engaging in some casino behavior and bidding up prices to new two-year highs. Here is some video:
Look for more of the same going forward if -- as seems as likely as not -- unrest strikes Saudi Arabia. That is because Saudi is the linchpin of global oil prices, satisfying a full 10 percent of total global demand, and possessing by far the majority of the capacity to produce much more in the case of an emergency -- such as if Libya's 1.6 million barrels a day of oil production abruptly is taken off the global oil market.
We keep hearing that al-Saud rule is safe (and the al-Sabahs of Kuwait, along with the al-Thanis in Qatar). But retaining power is only one metric for oil price stability. The chink in the Saudi armor is its oil-saturated, Shia-dominated Eastern Province. Here is Dharan, the headquarters of Saudi Aramco; the humongous 5-million-barrel-a-day Ghawar oilfield; the 800,000-barrel-a-day Qatif and Abu Safa oilfields; the gigantic Ras Tanura oil port; and the Abqiaq processing center. Because of all this, the king has nailed down every movable part in the province with overlapping protection -- private Aramco security, Interior Ministry forces, the National Guard, and the military, all of them manned largely by Sunni personnel and loyal to the royal family.
Even so, if the Shia population does start protesting, we will see the oil market's version of pandemonium.
Greg Priddy, a global oil analyst at the Eurasia Group, a New York-based political risk firm, tells me that there is "a definite threat of a spillover" of trouble. "I won't be surprised if there is unrest in the Eastern Province," Priddy told me over the weekend.
Hassan Ammar AFP/Getty Images
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.