The geopolitics of bananas, China and over-heated rhetoric: Are oil rigs a strategic weapon? The answer is apparently yes if you are China, which has joined Russia in the league of large nations carrying big petro-spears. The South and East China seas have long been a source of friction between China and its neighbors for reasons of Beijing's naval aspirations, the promise of oil and gas riches underlying the waters, plus the occasional kerfuffle over fish. For a month, China and the Philippines have been in a standoff over a fishing ground called Scarborough Shoal. But now the gloves are off. China has begun to block imports of Philippine bananas, and to suspend tourism in the Philippines. On Monday, an anchor on China's state-run CCTV went so far as to say -- twice -- that the Philippines is in fact a Chinese territorial possession, reports Time's Hannah Beech. Two days later, we heard from Wang Yilin, chairman of the state-owned oil company Cnooc, speaking on the usually staid occasion of the launch of new oil drilling, in this case in the South China Sea off the coast of Hong Kong. "Large deep-water drilling rigs are our mobile national territory and strategic weapon for promoting the development of the country's offshore oil industry," Wang said, according to the state news agency Xinhua. Erica Downs, the China oil watcher at the Brookings Institution, told the Wall Street Journal's China Real Time blog that she suspects that Wang is addressing either domestic political or financial audiences -- seeking favor or more financial support. Look for more such tantrums given the numerous political flaps going on simultaneously in China, along with the scheduled turnover of national leaders.
Abundant oil, and the hope of serendipity: Is the problem with the oil abundance narrative -- the talk that the U.S. is on the cusp of energy independence -- that it relies too heavily on everything going right? Perhaps. Frank Verrastro -- who runs the energy program at the Center for Security and International Studies, and was formerly with Pennzoil, and before that in numerous federal government positions -- thinks that a multitude (and probably too many) stars need to line up for the abundance folks to have their way. There is much oil below ground to be sure, specifically in the shale oil of North Dakota and Texas. The hangups come in extracting it -- little matters such as the cost of production, the impact on water, and the price at which the oil can be sold. "If you are just doing energy resource development balls to the wall, then can you do this because the resource is there? Absolutely," says Verrastro -- as long as you ignore project economics, financing, government regulation, environmental concerns, required infrastructure and rates of return. John Hofmeister, the former president of Shell USA and author of Why We Hate the Oil Companies, also thinks the U.S. oil abundance narrative is optimistic. As field development proceeds, oil production will level off at some point, and not grow as far as the eye can see, Hofmeister told me. Shale oil and gas development will have to slow as it gets closer to population centers, he said. Says Verrastro: "[The forecasts are] way premature. We are in chapter 1, page 10, and some people have us at 18 million barrels by 2020."
For the Sudanese, first it was oil and now it is survival: Sudan broke into two nations last July, and since then has spent much time in virtual war with itself. Apart from the usual ethnic and religious rationale, there are economic reasons: Both states -- Sudan and South Sudan -- are in deep trouble. Before the breakup, Sudan got about 90 percent of its revenue from oil exports. In the first quarter of 2011, the country had a trade surplus of $1.7 billion, Reuters reports; but in the same quarter this year, it has a trade deficit of $540 million. Against these data, opposition leader Hassan al-Turabi is forecasting doom for the regime of his former protégé, Sudan President Omar Hassan al-Bashir. "The economic crisis has intensified and this is very dangerous. If the hungry go out in a revolution, they will break and destroy," Turabi said in the Reuters report. " ... I expect it won't take us long now." South Sudan, which received most of the oilfields in last year's national divorce, cut off oil production in January after accusing the north of stealing shipments. So, in order to stave off collapse, it has been borrowing abroad, reports Bloomberg. South Sudan secured a $100 million line of credit from Qatar National Bank, $500 million from an unidentified benefactor, and expects money from China as well. Will reason prevail? Last year, we thought it already had.
Nichoas Kamm AFP/Getty Images
Sudan has declared war on South Sudan, India has fired a long-range missile, yet oil and gasoline prices are down.What is going on?
Common sense has come over our much-scorned oil trader friends in New York and London.
For months, there has been a global surplus in oil and gasoline, which should mean lower prices than we have seen. Yet, because of geopolitical tension such as the trouble between Iran and the rest of the world, prices have not dropped -- until now.
Oil prices are down again today, a declining trend that seems genuine when you get no bump-up despite official war between two modest oil-producers, and a missile test by a nuclear power with menace toward China.
The turn began two weeks ago with a sharp withdrawal from the futures market by hedge fund and investment bank traders, writes the Wall Street Journal's Konstanin Rozhnov. Venezuela is unhappy about the supply bulge, which has been assisted by growing volumes from Libya and Saudi Arabia. But, short of outright war involving Iran, prices look like they will continue to moderate.
I exchanged emails with Nick Butler, a former top lieutenant to John Browne at BP and now chairman of King's Policy Institute at King's College London. In an op-ed at the Financial Times, Butler forecast a plunge in oil prices, and I asked whether he thinks U.K.-traded Brent crude -- currently trading at over $117 a barrel -- will fall as far as the $80s-per-barrel range. "Who knows?" he replied. "I think [prices] will overshoot going down, and then stabilize back at $95 to $100. But that is probably too rational." Butler does not think, like some of us, that pure good sense has conquered the market for now.
Raveendran AFP/Getty Images
A coming U.S. renaissance -- and an oil price crash: Citibank's Ed Morse unloads a monster, 92-page report forecasting no less than a new American Industrial Revolution. This economic resurgence is carried on the back of low natural gas prices as far as the eye can see (pictured above, hydraulic fracturing in Pennsylvania), in addition to a shale-oil, oil-sands, deepwater-oil boom that makes the U.S. "the new Middle East." In line with other top analysts, notably Deutsche Bank, Morse forecasts a tight global market in the next few years, notwithstanding the U.S. abundance, with the suggestion that prices will be high as well. But nirvana will arrive by the end of the decade with the convergence of U.S. oil abundance and a burst of production from west and east Africa, the Gulf of Mexico, India and the Caspian Sea. By the 2020s, we will see maximum oil prices of $85 a barrel, Morse writes in a teaser at the Wall Street Journal. There are of course potential geopolitical consequences, Morse writes:
It is unclear what the political consequences of this might be in terms of American attitudes to continuing to play the various roles adopted since World War II -- guarantor of supply lanes globally, protector of main producer countries in the Middle East and elsewhere. A U.S. economy that is less vulnerable to oil disruptions, less dependent on oil imports and supportive of a stronger currency will inevitably play a central role globally. But with such a turnaround in its energy dependence, it is questionable how arduously the U.S. government might want to play those traditional roles.
I have noted previously that some of us are suffering whiplash since just a few months ago the conventional wisdom was energy scarcity. One is inclined toward caution regarding the new narrative of abundance, such as we see in the lead story today in the New York Times, where Clifford Krauss and Eric Lipton depict a future of "independence from foreign energy sources." Morse, the dean of oil analysts, must be taken seriously. Yet the forecast oil bonanza is still largely on paper -- the crude is not pumping through the country's petro-arteries. What if oil prices drop? Will the economics still support the type of drilling described? I urge continued and watchful caution.
Go to the Jump for more on the energy boom and the rest of the Wrap.
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The news on the axis of oil -- Africa and South America: A key new travel route for oil executives is the south Atlantic shuttle between the west coast of Africa and the east coast of South America. This is because, geologically speaking, they are "anologues" -- millions of years ago, the two continents were united, so that when oil is found on the coast of one, it can also be found on the coast of the other. Take this week for example. Houston-based EnerGulf Resources announced that it is drilling a supergiant 3.1 billion-barrel oilfield off the coast of Namibia, Bloomberg reports. Meanwhile, across the Atlantic in northern Brazil, BP took a 40 percent stake in an offshore area held by Petrobras for an undisclosed sum of money; for BP, that is on top of a $3.2 billion investment in Brazil last year. On the South America side, this area is called the "equatorial margin," which includes northeastern Brazil, French Guiana, Guyana and Suriname, write Bloomberg's Peter Millard and Rodrigo Orihuela. Companies working the equatorial margin have conviction that they can find oil straight across the sea in Africa as well. The Bloomberg writers quote Bob Fryklund of IHS CERA, a Massachusetts-based energy research firm: "It's one of the hottest trends in the business at the moment. People are marching up and down the coasts to figure out where those fan-shaped deposits are."
Yet the African continent can be perilous, as Chinese companies have discovered. South Sudan has expelled the head of the Chinese-Malaysian partnership conducting most of the country's oil production, reports the Associated Press. Liu Yingcai, chief of Petrodar (81 percent owned by the China National Petroleum Company and Malaysia's Petronas), was given 72 hours to leave after being accused of helping Sudan to steal South Sudan's oil. The alleged theft of more than 2 million of barrels underlies a ferocious row between the two neighbors. South Sudan asserts that Petrodar helped Sudan to build a dogleg pipeline that aided the alleged oil theft. It is the second recent drama involving the Chinese -- last month, 29 Chinese workers in South Sudan were abducted and held for 10 days by rebel forces. Yet, for the reasons stated above, the stakes are too high to leave. China relies on Africa as a whole for 24 percent of its oil imports, writes Reuters' David Stanway, and is not likely to pull back.
For Putin, the price of oil goes up: Russian strongman Vladimir Putin is waging a furious contest for a third term as president. His opponent? Enemies abroad (mainly Americans) who, he suggests, covet Russia's oil, corrupt its citizens into traitorous behavior, and all in all wish harm to the country. To buttress his fiery defense of Russia against a potential new invasion such as Napoleon's of 1812 (yes Putin really cited the French dictator), Putin is promising to dispense billions of dollars -- for higher pay for police and doctors, for cheaper health care, and for a stronger military. The spending, and the sharp-edged confidence behind Putin's politics, both flow from the spigot of Russia's prodigious oil exports, writes the Financial Times' Charles Clover. Many of the world's petro-rulers have become bolder with the rise of oil prices, and more profligate with the revenue given the challenges of the Arab Spring. In Putin's case, it is less than two weeks before a March 4 election that has ignited unprecedented criticism of his rule. That he has resorted to populist spending places enormous demands on Russia's oil income. The state budget already required an estimated $90-a-barrel oil to break even. Now the break-even price could be $120 a barrel, Clover writes. He quotes former deputy energy minister Vladimir Milov: "For Putin to have serious room for maneuver, he needs to have oil at $150 or $200 per barrel. What we have now is not enough." Finances are just one indication of a coming post-election Russian hangover. Putin's jingoism does not seem to be mere electoral politics -- with opponents now able to muster tens of thousands of supporters in the street, Putin will continue to need a bogeyman in order to rule effectively. Look for reset -- the thaw between the U.S. and Russia of the last three years -- to stay stubbornly on the back burner.
Go to the Jump for more of the Wrap.
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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
In the last episode, we were awash in gas: President Barack Obama is using the language of a shale gas enthusiast, crowing this week that the United States has sufficient reserves of the fuel to last 100 years. For that reason, the U.S. ought to push ahead with natural gas development, as long as safety concerns are kept in mind, said Obama (above, pictured this week on the campaign trail). Almost simultaneously, though, large volumes of that gas have vanished. First, the administration's own energy think tank -- the Energy Information Administration -- sharply lowered its estimate of U.S. shale gas reserves: rather than the 827 trillion cubic feet in unproved technically recoverable reserves announced last year, the EIA estimates that the country has 482 trillion cubic feet, or 41 percent less. The drop is understandable -- it has to do with the addition of completed wells, which provides more data points for the EIA to insert into its reserves model. But some serious analysts think even the lowered numbers are soft; Chris Nelder, for instance, writes that all that can be surmised credibly is an 11-year supply of gas at current consumption rates.
Then there is actual production. Chesapeake and ConocoPhillips have both announced the withdrawal of a substantial volume of gas from the market because of firesale prices that prevail, currently $2.77 per 1,000 cubic feet, compared with $13 in 2008. Chesapeake -- the second-largest U.S. gas producer -- said it will sell 8 percent less gas this year than last; Conoco says it will lower production by 4 percent. It is not that the companies are going broke -- as discussed previously, much of the gas is in the same geological formations as highly lucrative oil, so drillers themselves say they earn excellent profit regardless. Yet, they would like to earn greater profit still by driving gas prices higher through the law of supply and demand -- currently, there is a super-glut of gas; they would like to reduce that to a mere glut. Of course, the drillers in part have themselves to blame for sagging U.S. gas demand: In 2009, the shale gas industry vigorously opposed Obama's push for cap-and-trade legislation, under which electric utilities would have accelerated their transition from coal- to gas-fired plants. The drillers would be selling much more gas, and prices would thus probably be higher. Alas, those politics were not to be. The Financial Times' Ed Crooks quotes Oppenheimer's Fadel Gheit: "I would expect all large gas producers without exception to scale back production this year."
These developments are important for a single reason: The U.S. is the epicenter of the global shale gas boom. Because of the U.S. bonanza, for example, Russia has been shaken in Europe. China might be next to join the boom. It is importing U.S. technology; if it succeeds in producing substantial shale gas, it could transform its own set of circumstances. But if the numbers are consequentially smaller than supposed, and if the market is slow to absorb the higher volumes, the geopolitical outcomes will be muted.
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Members of OPEC will agree to increase their official production today, but that won't do much to lower prices -- the plenitude of energy-related stress across the globe underscores more than ever how power has dispersed out of OPEC's hands. It's not only the civil war in Libya, and the loss of its 1.4 million barrels a day of oil exports, or the chaos in Yemen. From the South China Sea to Alberta, Canada, tempers are flared over the control and movement of oil.
The Vietnamese, the Filipinos and the Japanese are vexed over unneighborly behavior by China, which most recently severed the seismic cables of an oil exploration ship, and fired at fishing trawlers in the South China Sea. For their part, some Chinese call their neighbors plunderers and the U.S. a hegemonist. For now, southeast Asia is more worried about U.S.-Chinese friction over these confrontations than winning the debate of the moment with Beijing, and so the Obama administration has relaxed its posture of last year, when Secretary of State Hillary Clinton declared the dispute a U.S. strategic interest. I exchanged emails on this with Bonnie Glaser, a China expert at the Center for Strategic and International Studies. "I think that if Chinese intimidation of oil exploration activities continues, the U.S. will have to take a stronger stand -- especially if Exxon is involved. But the Obama administration hopes it doesn't come to that," Glaser said.
Fighting continues in Sudan, this time in a contest over the breakaway south's oil, writes Jeffrey Gettleman at the New York Times. Southern Sudan is set to become independent next month, and Sudan President Omar Hassan al-Bashir has taken a hostage -- the entire town of Abyei -- as leverage in order to obtain more oil in the split-up. The south produces about 500,000 barrels of oil a day, and though there appears to be little chance of renewed full-out war as long as the south slices off some of that for the north, there is plenty of violence for now.
In western Pakistan, the Taliban yesterday again blew up U.S. fuel supply tankers destined for Afghanistan (pictured above). Such acts do not change the global picture, but illustrate the Taliban's understanding of the centrality of oil in running the war.
A more peaceful but still hardball struggle has gone on a long time between independent-minded Kurdistan and the central Iraqi government over control of natural gas in Kurdistan. There could be a deal yet as Prime Minister Nuri al-Maliki relies on Kurdish political support, writes Tamsin Carlisle at the National, but not very soon. Meanwhile Canada is grappling with the U.S. over its desire to send the bitumen from its Alberta oil sands to Gulf of Mexico refineries.
And all this excludes the impact of natural disasters, such as we may see with the summer hurricane season. So what OPEC decides will help to bump prices one way or the other, but it may not be the main determinant even today.
Update: We are getting a jump in oil prices this morning after OPEC's announced decision to punt on Saudi's proposed increase in production, and keep output where it is. Traders are engaging in opportunistic buying. This should last for a day or two until the reality of an oil glut settles in again, along with the multitude of other factors influencing prices.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.