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

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

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.

Photo: Realmiamibeach
Rights: Creative Commons