Green's Moment of Truth?

Today's breathtaking surge of oil prices through $120 a barrel and on toward $121 underscores a possible shift in the U.S. -- Americans may be finally recovering from their seduction with the road.

An insightful piece by my Business Week colleague Christopher Palmeri details how America's demand for oil appears to be dropping. They are traveling less, and when they do, doing so in smaller vehicles -- they are buying more compact cars, and fewer SUVs.

Caution is in order, since the country is in recession, and these statistics are for a single quarter. Yet the tightness in global oil supplies isn't likely to lift -- Russian production is stuck at about 10 million barrels a day and dropping, and the Saudis are probably at or near their own production peak, according to a piece today by my former Wall Street Journal colleague Neil King. The only big unknown is whether Iraq and Iran come on the market with large new supplies. But even if they do, what are we talking about -- another collective 4 million barrels a day? Five million barrels tops? That's not much of a global cushion, and not sufficient to relieve the tightness as Asian demand continues to grow. Arjun Murti over at Goldman Sachs says that oil may soar to $150 to $200 a barrel in the next couple of years, according to a piece by Bloomberg's Nesa Subrahmaniyan.

Goldman has been prescient on oil prices. And the stars do seem lined up for high commodity prices of all types. But if demand truly is dropping in the biggest gas-guzzling country on the planet, there is reason to give some credence to the opposite outcome -- that the price will stabilize, and even drop. Not too much. Perhaps a bargain $100 a barrel? A firesale $90?

Yet that could be sufficient to trigger an era of proving time for the conviction of investors and innovators in renewable fuels. In an excellent contrarian piece, my Business Week colleague John Carey says that corn ethanol has wrongly suffered a black eye over its impact on the food supply. Corn ethanol isn't as much a villain as it's made out to be.

But that's irrelevant to the current environment. What's driven billions of dollars into venture capital has been the runup in oil prices. As long as prices keep rising, that money will probably keep flowing (although probably not into corn ethanol). But if the price surge slows, or reverses, look for an impact in the constellation of renewable companies.

Which venture capitalists have the conviction and stomach to put more into technologies many of whose genuine value won't be known for years and years? And which technology will they decide has the right stuff to succeed in the long term? The air is likely to go out of some of the fledgling companies' perceived value.

Turkmen Subjected to More Sanity: My friend David Stern, the New York Times writer in Central Asia, writes that Turkmenistan leader Gurbanguly Berdymukhamedov is dismantling yet another vestige of the deceased buffoon he succeeded. After having reinstated full schooling for children, and reopened local circuses, libraries and even the ballet, Berdymukhamedov is removing the Arch of Neutrality, a revolving statue of his predecessor, Saparmurat Niyazov, from the center of the capital of Ashkabad. Perhaps next he will start issuing visas to foreigners.

Photo: ndanger
Rights: Creative Commons

Annals of the Rising Lilliputians

The center of gravity of power is shifting relentlessly from the West. The most successful cars are made in Japan. The power of the purse is shifting to less profligate countries like Singapore, and petro-powers like Kuwait. Manufacturing has gone to China. Energy is in the hands of Saudi Arabia, Russia and others.

Much of this shift affects the legendary Big Oil companies, which are being pummeled from all sides.

Now comes another hit. Until now, even if they couldn't control the resources, at least they could buy the oil and natural gas and earn the markup from lucrative finished products. But the world's petro-powers are no longer satisfied earning hundreds of billions of dollars from the mere sale of $100 oil. They want the entire profit chain from their oil and natural gas -- from power generation, retail sales at the pump, refining and chemical-making.

To the degree this happens, it takes away the daily bread of the oil companies, and shifts more power into the hands of the petro-powers. They have even more money to influence global finance, buy up pieces of the Western economies, and if they so desire -- as Russia does -- to sway political events.

Two pieces in today's New York Times go into this topic. One, by Peter Goodman and Louise Story, talks about the purchase of pieces of the economy. The story is decent as a survey, but makes a common mistake by evaluating these purchases in the context of the entire economy, and thus diminishing their importance.

The more relevant context is within industries and slices of industries, for instance in banking and specifically investment banking. As we've discussed on this blog previously, some investment bankers predict that so-called sovereign wealth funds -- the investment arms of these cash-rich states -- will eventually outright control the global finance sector.

In the second piece, Jad Mouawad talks about the aspirations of Saudi Arabia. The article describes a giant new petro-chemical complex under construction in the Saudi city of Rabigh, and the king's idea to build six new industrial cities. This is all reliant on $100 oil, which makes one suppose that the kingdom will do all it can to keep prices right about there.

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