The New World of Tumult

Here's the news today: Russian security officers have again raided BP's offices in Moscow. Nigeria has ordered Exxon and Shell to pay up $1.9 billion of their oil revenues. Exxon's Rex Tillerson is under mounting pressure to give up one of his titles, that of company chairman. And oil futures brushed up against $140 a barrel.

Welcome to the new world of energy tumult.

Taken separately, these events don't necessarily seem new -- the petro-powers have been flexing their muscles for some time; Exxon has put down previous attempts to appoint an independent chairman; and the surge in oil prices has seemed inexorable.

Yet the last two items merit attention.

The pressure on Exxon -- renown for going its own way regardless of attempts to influence it -- can no longer be put down to fringe dissidents. The more serious situation began with a push by the Rockefellers for an independent chairman and more attention to research on renewable fuels. And now, a growing number of investors are supporting the Rockefellers publicly ahead of next week's annual shareholder meeting in Dallas. Here is a piece about British investors posted by my colleagues at Business Week.

But today's $9.50 rise in oil futures, to $139.50 a barrel, resembles a panic. It looks like a tipping point in market sentiment about so-called peak oil -- traders seem convinced that indeed the tightness in world supply is a chronic problem, and not something to be overcome by added exploration and drilling.

Among the men of Big Oil, one of the most reasonable assessments is delivered by Christophe de Margerie, the chairman of France's Total. De Margerie says that the world has plenty of oil, but not the financial and technical means to deliver much more than it currently does to the market.

So the tightness in world supplies -- the fundamental reason behind this year's incredible runup in prices, and by extension the emboldened behavior of petro-powers like Russia and Nigeria -- is not going to lift any time soon, short of some economic debacle, or a dramatic public shift to the bicycle.

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Worried About the Wave; Refinery Remorse

Tidal Wave: We’re hearing that one of the most popular topics at this year’s meeting of uber-egotists in Davos, Switzerland, is sovereign wealth funds – the hundreds of billions of dollars in oil profits abroad awaiting investment in assets around the world.

Many of the world's petro-states, such as Russia, Kuwait, Abu Dhabi and most recently Saudi Arabia, have formed such investment funds to hold their oil profits and turn them into diversified assets. According to Morgan Stanley, these funds, now totaling some $2.5 trillion in assets, stand to skyrocket in size over the next dozen or so years until they are at $28 trillion in 2022, or twice the size of the current U.S. economy.

All this cash in the hands of countries that perhaps have different agendas from the West's is behind a call from some quarters for an unspecified "code of conduct" among such funds. The implication is that, short of unspecified "transparency," recently even inserted as an issue into the presidential campaign by Hillary Clinton, Washington would put its foot down.

How is Washington going to put its foot down when it's not the funds, but the likes of Morgan Stanley and CitiGroup that are pleading to be saved by these funds because good, solid Americans like Warren Buffett don't see the upside?

The truth is that control over global finance is shifting East, largely to these petro-states but also to other countries such as Singapore that manage their wealth better than the U.S. has. And the U.S. isn't going to have much control over it.

Refining backsliding: It's a sign of how far matters have deteriorated that $87 oil is regarded as a blessing. Could oil fall as low as $70 a barrel if there's a severe, prolonged recession such as Larry Summers has predicted for months over at the Financial Times? And would prices at the pump drop commensurately? Sure. But that's still a historically high number.

And one of the biggest reasons for expensive oil is a shortage of the right kind of refineries around the world. Meaning that there's plenty of really bad quality oil -- so-called heavy oil, laden with sulfur that must be removed. But there aren't enough refineries capable of rapidly processing it. So you get a backup of this surplus crude, and a runup in prices of the light, low-sulfur crude that the refineries can process.

In short, $87 oil is really the price of that much-demanded light, low-sulfur crude, not the heavier stuff. If there was a way to process the heavier stuff, the price of all crudes would drop.

The Saudis themselves have been among the chief gripers about this state of affairs.

The bad news is stated in an analysis in the venerable Middle East Economic Survey. There are huge delays in a planned near doubling of refinery capacity in the Saudi kingdom. The report was posted by Engineerlive.com.

The Saudis currently can refine about 2.1 million barrels of oil a day. And they have another 1.8 million barrels a day of new capacity on the drawing boards. Their partners in these refineries are ConocoPhillips and France's Total, both of which according to this report are getting cold feet about cost overruns. Will they come on line by late 2012 -- almost five years from now? -- perhaps.

Which brings me to India. Why is it that Mukesh Ambani's Reliance Petroleum can put up a completely new, world-class refinery capable of processing the worst crudes on the planet in just 18 months, and ConocoPhillips, Total and Aramco cannot?

Ambani is set to complete a near doubling of his 660,000 barrel-a-day refinery in Jamnagar, in southern India, by the end of December. That's a turbo-charged pace.

It's also more proof of why Big Oil is on the decline. It has trouble competing with the aspirations of people like Ambani.

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Finding An Honest Man in Big Oil

Those who follow oil seem forever doomed to be in a way like Diogenes, strolling with a lantern, looking for an honest man. There's always the nagging suspicion that one isn't getting the whole story about the state of global energy, and prices at the pump.

Christophe de Margerie, the walrus-mustached CEO of France's Total, champions himself as that singular candid man. A member of a select club that's traditionally delighted in its mysteriousness, De Margerie is the much-deplored, indiscreet fellow who spills the group's secret handshake to the world.

In this case, the whiskey-swilling Frenchman has been telling the world that the oil industry has or is about to reach a peak in the volume of oil it can produce. Furthermore, he's quoted in a piece posted today by the Economist, all his brother oil bosses “think the same. It's just a question of whether we say it.” The article is worth reading.

Where the fierce debate on peak oil gets mucked up is on the geology -- has the world used up half its available oil resources or not? De Margerie neatly ducks that labyrinth by saying it's irrelevant.

What matters isn't how much oil is there, but how much can be produced. He says there simply isn't sufficient skilled manpower, technical equipment and willingness in the petro-states to produce much more than current levels of about 85 million barrels per day.

De Margerie makes a lot of sense. If one extrapolates, there will be much more motivation for fuel economy technologies, the development of non-carbon fuels, and general demand reduction. That's because, even if the West's fuel appetite is more or less stagnant, the economies of India and China are becoming hungrier and hungrier for energy. So there's going to be more competition for that somewhat limited volume of oil.

Report: What the Kashagan Deal May Look Like

Milano Finanza, the daily in the home city of Italy's Eni, is reporting the skeleton of a final settlement of the Kashagan dispute that includes a surprising sweetener for holdout Exxon. The report quotes no sources. I found Thompson Financial's pickup of the piece but not the original.

With at least 13 billion barrels of proven reserves, Kashagan is the largest discovery in the world in the decades. New work there has been suspended for months in the dispute over a five-year delay in producing first oil, and a huge cost overrun.

The basics of the agreement as reported by Milano Finanza are a $3.5 billion fine and relinquishment of a total of about 8% of the supergiant field, which would double Kazakhstan's stake to about 16%, equivalent to top shareholders Eni, Exxon, Shell and Total.

But that's been more or less known for months. The more interesting part is that Exxon -- the squeaky wheel -- may have gotten a bit more than anyone else for its hard-nosed stubbornness. Recall that Exxon has been the holdout for weeks, seeking to make clear that, unlike its rivals, it's no pushover.

The report says that Exxon will receive unspecified new exploration rights plus an extension of the longevity of its deal at Kashagan's sister field, Tengiz. If that's accurate, one has to applaud the company. It would mean that it continues to challenge the newly powerful petro-states and at key times be treated differently from its competitors. Recall that so far it's the only major not to buckle under pressure in Russia.

Confirmation of the settlement may be known Friday, when Kazakhstan's President Nazarbayev has called together the representatives of all the foreign partners. When he makes such moves, he usually has the terms of a deal in mind.

Update: Gabriel Kahn at The Wall Street Journal reports that the Nazarbayev meeting is delayed until at least Sunday.

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Note to Presidential Candidates II: Plateau Oil

Dick Cheney famously called conservation a lifestyle issue, but the pragmatist’s case for sharply reduced demand for gasoline keeps getting stronger.

Quite apart from security and environmental issues, the folks who have the oil have made it plain that they’re not able or willing to produce more simply because China and India are growing gangbusters, and Americans wish to drive SUVs.

That is, Russia, Saudi Arabia, Venezuela, Kazakhstan and so on – the nations whose state-owned companies control more than 80% of the world’s known reserves – are placing a deliberate restraint on supply, as Ed Crooks blogged yesterday at the FT.

It's partly why some oil company chairman are predicting an "oil plateau" -- a production level of 100 million barrels of oil or so a day that simply won't be regularly exceeded. That's just 20% above the 87 million barrels a day produced now.

I raise this in part because of an article posted yesterday by The Economist, titled “Peak Nationalism.” The piece identifies the above-noted countries as part of the supply problem. For some reason, they don’t want to suck their fields dry. But, the magazine says, “politicians might console themselves with the thought that even the most recalcitrant petro-regime is more malleable than the brute realities of geology.”

The ordinarily sensible Economist has somehow missed the last 35 years of history, in which what it calls “politics” have played an integral role in the world’s oil supply. The policies of nations – in the West and the Middle East – influence both demand and supply. And petro-states see it in their own best interests to stretch out the income stream into the next generations.

That’s not recalcitrant. That’s rational.

It's a central issue for the U.S. presidential candidates. A previously election-oriented post urged more attention to Russia and its oil pipeline policy in Europe. This is a corollary issue. Even higher mileage requirements for vehicles, accelerated retooling of Detroit, more encouragement of non-carbon energy technology all are needed.

At some point, someone will inform Washington that ethanol, while it does satisfy the lobbies of the corn-growing states and their companies, isn't the future. But there could be an answer in the laboratories of Big Oil and the Silicon Valley.

Here's a brief rundown from CNN on the main candidates' positions on energy.

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What $100 Oil Means

Yesterday's runup in oil prices was a mere blip -- two publicity-seeking traders appear simply to have sought barroom talk as the guys who made history's first buy over $100, then quickly sold at a small loss. But, coming the first business day of the new year, it's dramatized the new energy world in which we live.

I recommend an excellent piece today by my former colleagues at The Wall Street Journal -- Neil King, Chip Cummins and Russell Gold -- that sums up the themes we've been discussing on this blog, and takes them further.

In the hundred-dollar carbon fuel world, Big Oil is no longer in charge. Exxon, Shell and Chevron have been overtaken by Gazprom, Aramco and Qatar Petroleum. If you're an investor, the best long-term bets are some of these majority state-owned energy companies, and the technology-rich oil services companies being hired to work for them.

One takeaway point from the Journal piece is that Exxon -- the most successful of any of the Big Oil giants -- has only the 13th-largest oil reserves among the world's oil companies. The twelve biggest are all state-owned. This is a hugely important factoid -- Wall Street bases its valuations of oil companies on the reserves they own. So, logically speaking, they are headed for lower valuations. "Western oil companies now control only about one in ten barrels of the world's proven reserves," the piece says.

Another point is the enormous shift of wealth to these petro-states from consuming nations such as the U.S. At current prices, the Middle Eastern and Central Asian producers will earn around $750 billion this year.

For motorists, all of this means that, short of a recession, gasoline prices aren't likely to go down this year, but only up. If there's a hard hurricane season, they're likely to go extremely high.

The causes are an enormous increase in demand from China and India, along with only slowly rising production from the petro-states. There's actually a lot of oil sloshing around the world, but much of it is the wrong kind. It's heavy and sulfur-laden crude, which most refineries can't process. New refineries that can are on the way, but it'll be three or four years before they come on line.

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For Motorists, 2008 Starts Out With Bad Omen

For motorists, the good news could be if former Treasury Secretary Larry Summers is right and we're headed for a huge, deep, global recession. Otherwise, 2008 looks like another expensive year on the road.

An uptick in violence in distant Nigeria helped to send crude oil prices through the roof today. A couple of crudes meant for delivery next month are at or near triple digits -- West Texas Intermediate rose to $100 a barrel, and Brent to $99.35. (Wall Street Journal piece)

This again highlights the global shortage of the types of light crude that most refineries can process into gasoline, something that won’t change until more flexible refineries come on line in three or four years. Unless demand drops -- the Summers scenario -- we're going to continue to have the tight supplies that are keeping gasoline prices high at the pump.

Meanwhile, an article in a journal published by OPEC says the world shouldn’t expect long-term relief from the Middle East. Ayoub Kazim, executive director of Dubai Knowledge Village, a government-run education center, wrote the article in the December issue of the OPEC Review. (abstract)

Carbon fuel optimists usually point to Middle East reserves as evidence that the world needn't worry about declining production in other leading petro-states, including Russia. But Kazim says that, between 2024 and 2048, OPEC countries like Saudi Arabia, Kuwait and others will be unable to satisfy their part of global demand.

If true, Kazim’s analysis would conform with the notion of an “oil plateau,” in which various constraints on production, such as equipment, manpower and expense, put an effective ceiling on total daily supply.

I’ve spoken with a number of plateau advocates, and their arguments are rational.

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Book discussion note

I'm delighted that The Issue is featuring The Oil and the Glory this week in a discussion of the last hurrah of Big Oil, and what comes next in the industry. The blog has placed it beside one of my favorite current books, Zoom: The Global Race to Fuel the Car of the Future, by my colleagues at the Economist, Vijay Vaitheeswaran and Iain Carson. By agreement with Alex Welles over at The Issue, comments can be left at this blog. Just press the comments link below.

Explosion: The Age of Pipeline Power

The explosion on the Canada-to-U.S. oil pipeline should help people close to home grasp why the big powers are spending so much time these days worrying about the oil and natural gas flow from the Caspian Sea.

Yesterday's explosion in Minnesota shut off the flow of about a million barrels of oil a day from Canada to the U.S., and that temporarily sent crude oil prices up by $4 a barrel. Even though they settled down fast, the AAA says the accident may push up U.S. gasoline prices in the northeast and midwest for several weeks.

That's just a million barrels -- one-twentieth of the daily U.S. oil diet.

Further afield, NATO is helping to secure the Baku-Ceyhan oil pipeline, the million-barrel-a-day line carrying Caspian crude to the Mediterranean. The U.S. applied enormous diplomatic pressure to get the line built. It came on line last year. Within a decade, the Caspian will be exporting between 4.5 million and 5 million barrels of oil a day.

Now the U.S. and Europe are pitted against Russia to secure natural gas from another part of the Caspian -- the republic of Turkmenistan, which has the world's fourth-largest supply of the fuel.

Again, the matter is pipelines. Russia has actually obtained a contract allowing it to buy much of Turkmenistan's gas supply, move it north through new and refurbished pipelines, and ship it on to Europe and elsewhere at a huge markup. The U.S. and the European Union haven't given up, though. They are championing a competing pipeline that would take Turkmen natural gas West, skirting Russia.

They aren't the only players -- China would also like to grab a big share of Turkmenistan's gas and ship it east.

These countries understand that one big dimension of power and influence today is control not necessarily of oil and natural gas supplies themselves, but over their flow to the market. Similar to the long battle over sea lanes in prior centuries, they are doing all they can to take control over the pipelines that carry former Soviet oil and natural gas to the rest of the world.

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Petro-States: $4 Trillion Dollars in Change

Steve Weisman has a strong piece in today's New York Times on the spending habits of the world's new and long-time petro-states. According to his reporting, they have $4 trillion dollars on hand.

The oil-rich states, including Saudi Arabia, the UAE, Russia and Kazakhstan, are looking to invest the money wisely. But they are also wary of the type of political backlash that Dubai suffered last year in the attempted purchase of U.S. ports by D.P. World, Weisman writes. So they are spreading the property purchases into Europe although the U.S. is still their leading investment, he says.

Chip Cummins and Rick Carew, my former colleagues at The Wall Street Journal, have an extremely detailed piece on the same topic.

As a leading example, both pieces point out the Abu Dhabi Investment Authority's $7.5 billion purchase of a large slice of Citigroup's shares.

Officials in Russia and Kazakhstan have both said they intend to invest the proceeds of their oil wealth in western properties. In most of the cases, we are simply talking about investment. But Russia seems always to provoke concerns about a possible political agenda, and the coming buying spree will heighten them.

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Interesting Stories

When the U.S. economy begins its expected downturn late next year, oil prices will fall a bit with it. Until then, reports my former Wall Street Journal colleague Russell Gold in tomorrow's paper, we will remain in the neighborhood of current record-breaking prices. Gold wrote the story as oil closed over $98 a barrel for the first time, and analysts surveyed by the Journal saw nothing that will soon pop the bubble.

The Economist argues in its current edition that, if Vladimir Putin is seeking his country’s best interests, it’s not always clear what they are.

Blogger Jeff “Maximos” Martin has an interesting if ultimately flawed tirade against U.S. involvement in the Caspian Sea region.