Oil Price and Politics

[Stavros]

Those of you who follow this will be aware that the price of oil per barrel is going down, currently around $84/bbl from over $110/bbl earlier this year. Setting aside the possibility of sod's law kicking in, that having said it the price may well now rise, the decline does pose some curious questions.

Two outstanding reasons for the decline are a decline in demand for the product, and the corresponding surplus of it in the markets. OPEC has not responded with a coherent long term strategy; a belief that Iran would seek a cut in production to maintain oil prices at a steady $100/bbl lapsed at their latest meeting but they might try again next month.

Low oil prices hurt Iran and Russia -Saudi Arabia and the Gulf states can cope with oil at less than $80/bbl ($60/bbl is I believe their point of no return) but note too that when IS are not raking in millions of $$ from ransom fees for hostages and daylight robbery in the towns and villages under their brutal occupation, they too are selling oil, so a low oil price also means lower revenues for IS -and I assume they have to sell way below $80/bbl anyway given the illegality of it.

Is this part of a campaign to undermine revenues in states hostile to the 'west'? Bear in mind the theory that the collapse in the price of oil in the 1980s -particularly between 1982-1986- was instrumental in the dissolution of the USSR.

Obama is currently unpopular, even among Democrats who don't want him to visit their locale in advance of the mid-term elections, yet the Obama administration has presided over a major increase in US domestic petroleum production, creating thousands of jobs and while the 'shale revolution' may be over in the mid-to longer term (in 10 years time?) and has other -mostly environmental- issues to deal with, this aspect of US industry has also contributed to the decline in the price of oil.

The Obama administration has been good for the corporate sector, has presided over an increase in jobs and house-building, and it is argued the debt is under control (and quantitative easing will end soon) so that after the dark years of the previous decade the US is in better shape than, say, Europe or Japan.
A comparison of the US economy with Italy or France would be an embarrassment to the two latter.
However, some say these developments have taken place despite rather than because of Obama's leadership, but this might be political bias (both ways). And while corporate America might be healthier than it was in 2008, I wonder if the stagnation of wages for most Americans is not a toxic issue -after all it is how voters feel on election day when they put their hands in their pockets that counts.

Links:

Contrasting views on Obama's role in the recovery:
http://www.bloomberg.com/news/2014-1...ower-debt.html

Articles on oil prices (Telegraph), and then economic growth/debt problems worldwide (FT):
http://www.telegraph.co.uk/finance/m...continues.html

http://www.ft.com/cms/s/0/4df99d28-4...#axzz3G1ZBfwnl

[Stavros]

For those of you who are interested in these things, one of the oil industry's inside journals has published this short editorial on the way in which Russia has dodged sanctions by selling oil to China in Renminbi rather than the dollar. One wonders if there is a long term threat to the petrodollar -it might be attractive to rogue elements like IS, assuming their ability to recover and trade oil continues which itself assumes their overstretched 'caliphate' survives. On the other hand if Iran is brought in out of the cold it could compensate for what the dollar loses from Russia, and Russia can't be isolated for ever....anyway this is the text with the link.

Posted: 06/02/2015 12:00:00 AM EDT
“Civilisations die from suicide, not by murder.” - Arnold J. Toynbee (1889 – 1975)

A year after the formation of the Donetsk People’s Republic (DPR) on the Black Sea coast, there has been a seismic shift in the Russian Federation. And, for once, it has nothing to do with allegations of military intervention in Eastern Europe.

On Friday, Gazprom Neft - the oil-producing arm of the world’s largest natural gas producer - revealed that they have been selling oil to The People’s Republic of China (PRC) in renminbi since the beginning of 2015.

In May 2014, the CEO of Gazprom, Aleksey Miller, and the President of the Chinese National Petroleum Corporation (CNPC), Wang Dongjin, signed a historic 30-year gas contract amounting to approximately $400 billion. One month later, it was decided that these contracts could be settled in either Russian roubles or Chinese yuan.

Gazprom Neft’s latest announcement confirms that transaction of both oil and gas are now happening in local currencies, in a clear distancing from the one-time ubiquitous petrodollar.
The petrodollar pact was negotiated between US President Richard Nixon and Saudi King Faisal bin Abdulaziz Al Saud in 1973, and by 1975 the dollar became the de facto legal tender of the oil trade, acting as the beams and base that underpinned the US dollar as the world’s reserve currency.
The move towards a non-dollar trading oil environment makes sense from the point of view of sanctions-crippled states like Russia and Iran who could circumnavigate the Scylla and Charybdisof financial chaos by switching away from a dollar-denominated system.

Ironically, punitive sanctions that engender a general flight from the dollar, may be equally damaging to the US in the long run. Civilisations commit suicide, but can currencies?
http://www.oilandgasiq.com/strategy-...-3BT5TW2&disc=

[Stavros]

Here we are again, but the context is both different, and more alarming. A sudden and sharp decline in demand for crude oil and refined products has seen the price of a barrel fall, but what is Saudi Arabia dong? Raising production. The argument is that it is doing so to damage the opposition in the market, in Russia and the US, and that Crown Prince Mohammed bin Salman is calculating that Saudi Arabia can manage a lower oil price better than its two most potent competitors.

Brent crude is currently trading at around $25 a barrel, but West Texas Intermediate already at $20.41 which is the borderline for shale production, which has been set at around $40 a barrel to be profitable (some put it at $50) but sustainable for a short time at lower levls, maybe even $20. Note these prices per barrel change rapidly and may even be out of date tomorrow.

So far the White House has hinted it might offer protection for shale oil companies, and the Russians have shrugged off the Saudi move, an FT article claimiing the Russians can even sustain production at $15 a barrel. (see link below).

These declines in demand and prices do not look like they are going to bottom out soon, because we expect more countries to fall victim to Covid 19 with corresponding falls in demand for the product, and even if there is a revival of the European and North America economies in the second half of this year, I doubt it will mean a return to the levels of activity we had on the 1st January as many businesses may never open again, mostly in the service sector in towns where those coffee shops and restaurants used to be. In the UK alone popular restaurants like Carluccio's and Wagamama are in deep trouble and may not open again if the struggling owners can't find a buyer.

The Saudi position is an odd one, because the Kingdom of 9/11 and the source of President 45's 'lovely dollars', is still fighting a hugely expensive and unwinnable war in the Yemen ('Houthi' rebels even attempted a missile attack on Riyadh yesterday), while financing its boyfriend dictators -or wannabe dictators- in Libya and the Sudan and a motley collection of nutcases from West Africa to Afghanistan and Sri Lanka. How long is this geo-politics financially sustainable, and intriguingly, if one adds in potential disruption from Covid 19, has MbS taken Saudi Arabia over the edge, and will there be an internal resistance to his harebrained schemes?

But, if the US shale industry does collapse, or retract significantly, where will the oil come from when the time comes that they need it? Er...Saudi Arabia?

https://www.ft.com/content/87196fa8-...3-cdf18d5fabc8
https://www.bbc.co.uk/news/business-35245133
https://www.cnbc.com/2020/03/25/oil-...-in-focus.html

[Stavros]

The deal that was struck last week between OPEC and the Russians was to cut production by 10% and in so doing give oil prices a lift. They have sunk again, with West Texas Intermediate falling below $15 a barrel overnight, though Brent Crude has risen a bit to $33.86.

This does not sound good, given the role that oil revenues play in the Pension funds in Europe and the US, and it is particularly difficult for the Shale sector in the US as noted in posts above. The longer term problem is that just as we don't know when our economies are going to 'return to normal' we might be in a position where businesses survive the lock-down but don't survive the revival. In the case of oil it is basic: lack of demand means lower oil prices, but even as production declines, there is still so much surplus they are loading it onto tankers to sail around the world until someone wants to buy it. They, and we could be in for a long haul.
But if the share prices fall, then maybe the best time to buy stock -if the market contracts severely there may be a new round of mergers and acquisitions to match those of the late 1990s -but do not take my advice on this, ask a professional!

[Stavros]

In the space of hours after I wrote the post above, the price of WTI per barrel collapsed. The situation is far worse than I thought, and helps to measure the absolute mess the US economy is in. I can't be sure, but unless there is a spectacular rate of growth when the lockdown ends, I see no significant rise in WTI for a year, maybe even two. This is worse than the 1980s but in so volatile a market a lot remains to be seen how the US manages this sector in the US and in relation to the OPEC cartel and the Russians.

If I were a doomster, I would suggest this is the end of the USA's dominance in the global economy, based on the surge in unemployment, the staggering levels of debt that a reckless, careless President has aggravated not by billions, but trillions, with trillions more to be borrowed -but has the time come when nobody will lend to the US because they can't see how the US can pay it back? This seems to be a mirror image of the President's slide into bankruptcy in the 1990s when his business failure and the debts he accrued were so great not one American bank would lend him a dime. The mess he made of his own finances he has now visited on the US, but this is a bankruptcy he can't walk away from with Chapter 11 tucked under his arm and some tax loophole that gets the US taxpayer to refund his losses. In this one, everyone loses, and in time, everyone will pay.


This is the report from Oil & Gas Journal-

"The May West Texas Intermediate (WTI) crude oil futures, due to expire Apr. 21, plunged into negative territory at minus $38/bbl—far below the previous all-time front-month contract low of $10.42/bbl set on Mar. 31, 1983.

The price comes amid fears that the key storage center in Cushing, Okla., will soon approach capacity.
For months, there have been warnings about storage hitting max capacity in mid-May. Traders without access to storage can no longer accept volume deliveries as the May contract expires and traders with storage access are happy to short the market.
“It’s like trying to explain something that is unprecedented and seemingly unreal! The simplest explanation for negative oil prices is that midstream players are now paying ‘buyers’ to take oil volumes away as the physical storage limit will be reached. And they are paying top dollar!” said Louise Dickson an oil markets analyst at Rystad Energy.
“That pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars to get rid of what they produce. Traders have been gobbling up cheap oil and pumping storage full, and now, in the case of WTI and Cushing, storage has reached a physical limit - we estimated that there was only 21 million bbl of free storage left.”
“There is little to prevent the physical market from the further acute downside path over the near term,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “Refiners are rejecting barrels at a historic pace and with US storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former.”
https://www.ogj.com/general-interest...tive-territory

[Stavros]

One by-product of the oil price collapse has been an argument that Saudi Arabia could be facing the most intense challenge to its rule since 1925, if one discouts the siege of the Grand Mosque in Mecca in 1979 as a serious challenge to the Kingdom. Mark Almond wrote about this in the Telegraph yesterday (behind a paywall) but it is part of growing concern with the fate of the Kingdom, whose implosion sits at the back of most Foreign Offices like an unwanted visitor who won't go away.

On the face of it, Saudi Arabia is in a strong position -it remains the largest producer of crude, which costs less than $3 to lift, but the problems have mounted because 'Vision 2030'- the ambitious plan devised by Crow Prince Mohammed bin Salman -MbS- to diversify the Saudi economy is costing the Kingdom billions, at a time when the source of its revenue is falling even with cuts in production, and the Kingdom has been involved in a costly and unwinnable war in the Yemen, while also spending substantial sums of money attempting to insert itself into the politics of Somalia, the Sudan and Libya, all projects that could turn out to be losers if the Saudi sponsored 'leaders' in those countries don't make it to the Presidential Palace, or die while trying.

But on top of the foreign adventures, is the domestic problem created by the fact that 'Vision 2030' has not been managed well, and the IPO of Aramco was not going as well as planned, thus:

"After failing to attract sufficient international interest, MBS pressured wealthy Saudis to step up and buy a piece of the company. The IPO raised a record $29.4bn, effectively valuing the firm at $1.7 trillion- well shy of the $2 trillion MBS had originally sought.

Now, the oil price war is hammering shares of Saudi Arabian Oil Co -as Aramco is officially known.
The stock fell 12 percent last week and continued to slide on Sunday, after Aramco announced it is cutting capital spending this year in response to coronavirus, and reported a 21 percent decline in 2019 net profits due to lower oil prices."
https://www.aljazeera.com/ajimpact/s...151301575.html

It may be the case that investors should always hang on to their investments for years, but right now there must be a lot of Saudi investors who are fuming while some might have assumed they would be able after six months or so to sell a proportion of their shares to pay back the money they borrowed to buy them. If the oil price does not rise, and the estimate is that because of its domestic and foreign budget commiments Saudi Arabia needs a base $80 per barrel (Brent, not WTI), the gap between income and expenditure will grow, even if it is rumoured MbS has $500 bilion in his bank account(s).
Thus the problems mounting are seen as MbS's fault, in the sense that he devised the extravagant 'Vision 2030', he has lumbered Saudi Arabia with expensive foreign adventures, he was the man who arrested members of his family, not once, but twice; he encouraged his wealthy citizens to spend and borrow to buy Aramco shares, and he started the oil price 'war' with Russia -and by extension, Iran- that has as they used to say in the East End, 'come a cropper' owing to externalities he did not predict, with the Kingdom still dependent on one primary source of wealth:

"Multi-trillion dollar investments are needed so that these projects can both wean Saudi Arabia off its hydrocarbon addiction and also create more than 6 million jobs to employ Saudi Arabia's youth. If the economy crashes on the back of an oil price war then MBS may find his key projects and, by extension, his legacy under threat. "
https://oilprice.com/Energy/Energy-G...y-Started.html

If MbS has alienated many citizens as well as the Princes of his own family, and there are hundreds of them, can MbS survive the death of King Salman when the time comes to name a successor? Right now, all bets are off, but I am not sure if it will mean the implosion of Saudi Arabia, I guess a lot depends on how MbS handles the succession, whether he has the military on his side, and whether or not his opponents believe they can successfully deny him the Crown.

[sukumvit boy]

I recently read "Blowout" by Rachael Maddow and found it to be eye opening and a good read.
https://en.wikipedia.org/wiki/Blowout_(book)

[Stavros]

I have not read the book by Rachel Maddow and I doubt that I shall do more than skim through it if I can find it in a bookshop, if the bookshop in town (yes, we have one- we used to have three) remains open. The problem is that the oil industry invites what Lawrence Stone once complained are parachutists -I think he was criticising Foucault's use of historical examples for his books on ideas-people who jump out of their armchair and into an indusry and a year later publish a book.
Here, for example, is the opening of a review which quotes Maddow-

"The oil and gas industry, according to MSNBC host Rachel Maddow, is "ranging like a ravenous predator on the field of democracy." It is "Godzilla over downtown Tokyo." It is "the richest, most powerful, and most destructive industry on the globe." "
https://www.npr.org/2019/10/02/76637...=1588262462905

The question is -is the oil industry so powerful and destructive? Oil and gas did not dominate the energy sector until the 1960s, so in the context of the industrial revolution, coal and wood had been burning for 150 years before oil matured, causing what environmental impact on the climate? And it is not as if coal disappeared as China was so backward in the 20th century at one time what crude oil it had went straight into factories because they could not refine it, and most of the country used coal anyway, and it remains an important source of Chinese energy today.

I am not trying to diminish the role played by fossil fuels in the generation of climate change itself and of its energy challenges, but we are seeing states make better efforts to make the transition away from fossil fuels a practical reality.

This is also why oil+cash=corruption is so limited a perspective, when in the UK, for example, oil revenues are a key component of pensions, and pension funds are a solid, central performer on the stock market. Consider the difference a decade makes when oil prices have ranged from over $100 a barrel to today when the price has fallen to historic lows. Ten years ago the companies were swimming in cash, this year they are swimming for their lives. If oil and gas are the basis of power for Putin, Saudi Arabia and Iran, all three, plus the UK, Norway and the US now suffer, perhaps most of all the US where shale oil is so expensive to produce.

And here is the more curious question: does oil and gas have as much power, politically, as computing software?

I am not sure, but it seems to me that political power, being based on knowledge and human interactions at the level of personal as well as industrial and State communications, means software is like the veins of the body, carrying information in and out of the brain at every moment of the day. We are not just wired up, we are wired up in the same network, and the networks inside the networks -is this a more comprehesive power than oil and gas? Is it creative, destructive -or both? Does it promote democacy, or obsruct it?

Pegasus can be used to hack into your phone, my phone, the President's phone, and if he has one, the Pope's phone. Compared to oil and gas, neural networks appear to an advanced oil refinery what that refinery is to the miller's wheel.
In Blade Runner, the all-encompassing powerful corporation that dominates the world is not an oil and gas company, it does computing.

Sorry to sound like I am sneering at your recommendation, I believe some of the book is entertaining, but I think the time has come to move beyond the soft targets like Exxon and Shell, and ask where does real power now reside- does anyone actually control the diversity of 'telecomms', and what has most influence over the voters: the price of a litre of gas, or a Facebook post?

And I don't actually know the answer to that. But I suspect its not the price of oil.

[sukumvit boy]

I'm now reading about the rise of the 'oligarchs' in "Sale of The Century" first published in 2000 and revised in 2005 and further discussed in "Blowout" published in 2019 .Out of the 7 original oligarchs Mikhail Khodorkovsky seems to have emerged as an almost honorable figure after the horrendous treatment he suffered under Putin's kleptocracy and 10 years in Russian prisons.
https://en.wikipedia.org/wiki/Mikhail_Khodorkovsky

[Stavros]

Yes, but isn't Khodorkovsky one of the kleptocrats? (There used to be a 'Kleptocracy Tour' in London).

Like Vladimir Potanin and some others, Khodorkovsky was a Communist. Though his parents were dissidents, albeit too scared to be active, and shielded their son from their true beliefs, Mikhail not only joined the Komsomol at University, he worked for them on graduation. Putin probably joined the KGB before the Party, I doubt one could be member of one and not the other, but not sure. The deeper question thus, other than their Communist pasts, is: what happened to the money?

Khodorkovsky was warned by Putin not to get involved in politics but did it anyway, and lost his oil company -and when Putin 're-structured' the ownership and shares in Russia's petroleum companies, including those which had to bring in Exxon, Shell and BP in 1991 because the Russian/Soviet industry was 20 years or more behind the rest of the world, who was the major beneficiary, if it was not the life-long Communist Vladimir Putin?

And as Khodorkovsky languishes in exile from Russia, is he living on benefits? No, because though Putin froze his wealth assesed at around $15 billion, he now finds himself in London down to his last $100-250 million, hard times indeed.

Consider that Two-thirds of the weallth of Ukraine left the country as their venal oligarchs voted with their dollars, and bankrupted their homeland. One of the most venal and corrupt men in the Ukraine just happened to be the State Prosecutor Vikor Shokin who Joe Biden agitated against, much to the ire of the 45th President of the USA who has described Shokin as 'wronged man' (!). Not to mention Shokin's successor, Yuriy Lutsenko...but that is another thread.

Follow the money, and you end up in the Caribbean va Cyprus,; Florida, Manhattan, London and the Shires - Eaton Square in London is also known as 'Red Square', not withut reason (see Irish Times link below). And Khodorkovsky, let's just say that whatever he suffered in prison, he doesn't have to work again in this lifetime.

Irish Times in the oligarchs in London-
https://www.irishtimes.com/news/worl...ians-1.3438072

Poor old MK, down to his last $150m -?
https://www.theguardian.com/world/20...ia-richest-man

And the Boss?
https://www.occrp.org/en/putinandthe...e-putin-money/