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.

Photo: thelastminute
Rights: Creative Commons

The Dislodging of Another Leg From Western Primacy

The news isn't grand for those accustomed to calling the shots for the last century and more. And it all gets back to oil.

As has been discussed on this blog and elsewhere, Big Oil is being eclipsed by national oil companies. Exxon, Chevron, BP, Shell -- the western companies that have swaggered their way through the halls of power since the beginning of the last century -- are losing out to Aramco, Gazprom, PetroChina, and so on.

Now another underpinning of Western primacy in the world -- global finance -- is going the same way. Take a look at this piece in the latest Business Week by Emily Thornton and Stanley Reed. It's on the so-called sovereign wealth funds, the diversified investment vehicles for the oil profits siphoned away by the six most important Gulf states: Saudi Arabia, Kuwait, Qatar, Abu Dhabi, Dubai and Oman.

Takeaways from this article: These states have amassed a stunning $1.7 trillion in their sovereign wealth funds, as much as all the hedge funds in the world combined. And their $180 billion in 2007 profit on these investments amounted to more than half their total $315 billion in profit from oil and gas. The money quote from Gregory A. White, managing director at Thomas H. Lee Partners: Soon "they will be the industry. We will be working for them."

When you add on the $156 billion held in Russia's Stabilization Fund and the $20 billion in Kazakhstan's National Oil Fund, these investment vehicles are buying up pieces of Western companies from Texas to Hong Kong and changing the finance world.

Merrill Lynch needs a $4 billion infusion to shore itself up after an expected $15 billion in mortgage writedowns, as The Wall Street Journal and The New York Times reported in the last couple of days? Don't be surprised if it's one of these funds coming to the rescue. Both Merrill and Citigroup have already received a combined total of some $13 billion in cash through stock sales to Abu Dhabi's sovereign wealth fund. The Journal reported yesterday that both are back in the Middle East to get more cash. Citigroup needs some $10 billion, according to the piece.

These are not silent investors, as were the Middle Eastern petro-states in the 1970s and 1980s. I watch Russia most closely in this regard, and Moscow has discovered that, in the 21st century, it's easier to march across Europe doing business than with an Army.

It's another dimension in the shift of the center of gravity of global influence.

UPDATE: The Wall Street Journal is reporting that the Chinese Development Bank and Saudi billionaire Alwaleed in Talal are part of a group coming to the rescue of Citigroup. Alwaleed already is Citigroup's second-largest individual shareholder.

Photo: IJsendoorn
Rights: Creative Commons