Tag: Oil

The Diffusion of Oil Income Transparency

This is a guest post by Jeff Colgan, an assistant professor in the School of International Service at American University.

Policy responses to the resource curse are diffusing in the international community. In August, the U.S. enacted rules that could reduce corruption, promote political accountability, and maybe even reduce the probability of war. The decision was encouraged transnationally by actors from developing countries. Now the European Union and other countries are taking up the torch. All of this points to an intriguing transnational pattern of policy diffusion of which scholars ought to take note.

Some background: in August, the Securities and Exchange Commission (SEC) finally enacted long-overdue regulations stemming from the Dodd-Frank Act which will require any oil company that is publicly listed on a U.S. stock exchange to report its tax, royalty, and other payments to foreign governments. Previously, companies were able to conceal this information, making it difficult for civil society in developing countries to hold their leaders accountable, thereby exacerbating the resource curse.

Intriguingly, the campaign for transparency on oil revenues is transnational, and often includes actors in developing countries that want help in binding the hands of their own governments. Policymakers in developing countries are demanding transparency, as a recent NY Times op-ed by a Libyan official shows. This seems to follow a pattern of transnational advocacy described by Keck and Sikkink.

Now the U.S. policy is being copied by other countries. The European Parliament recently held a committee vote that would require oil, gas, mining and forestry companies listed on EU stock exchanges to disclose their payments to foreign governments, country by country and for each project. Canada is also considering transparency rules for its mining industry that mimic the SEC rules, though the oil industry does not seem to be included (yet?). Interestingly, it is some of the leading mining firms that are pushing for the rule changes in Canada, in contrast to the general industry opposition seen in the U.S. So in addition to transnational advocacy, we now have the kind of policy diffusion noted by Simmons and others.

This policy proliferation is good news. As I argued in Foreign Policy, the rule change is not just beneficial for development, but also for international security. If oil money is not managed well, it often gets used to fund civil and international wars. In particular, oil-producing states led by revolutionary governments are more than three times as likely to instigate militarized interstate disputes as a typical state. Oil income can make petrostates aggressive, which leads to wars like Iraq’s invasion of Kuwait and Libya’s various battles with Chad and other neighbors. Those wars often draw in the United States  (My book on this subject, Petro-Aggression: When Oil Causes War, is forthcoming in 2013).

Still, transparency is not a panacea. I view transparency as a “probably necessary, and certainly not sufficient” condition for promoting good governance in the extractive industries. But we’d also like to know what else a country needs to do to avoid the resource curse. I think there’s an opening here to study the extent that transparency actually enables the kind of political accountability and good governance that advocates hope it does. (Some work on this issue is already underway: see Gillies and Dykstra in Cheng and Zaum, 2011)

There is also, it appears, an increasingly important opportunity to study the proliferation of resource-income transparency rules as an exemplar of transnational advocacy and diffusion.


New Zealand’s Oil Spill and the myth of its ‘100% Pure’ image

With the rugby world cup semi-final only a few days away, it would take something like a broken ship dumping tons of oil and chemicals onto the country’s beaches to get the country to talk anything besides the All Blacks… Wait… New Zealand is all about environmental protection, green energy, clean air (and funny guys like Jemaine Clement from Flight of the Concords) isn’t it? I mean, what is a ship with oil even doing near this environmental mecca?

Given that the country prides itself on its green and clean image, and given that there is an election in a month, you would think this would be a major story here. Yet, a week after a cargo ship loaded with oil and other toxic materials hit a reef off the cost of the North Island, most Kiwis are remain more fired up about the upcoming match between the All Blacks and the Australian Wallabies. No one seems to mind that the ship may break at any moment, or that it is dumping oil at a rate five times higher than originally projected. It took nearly a week before its major newspaper, the Dominion Post, featured the story on its cover (not a huge surprise considering that it recently featured a cover with two birds that collided mid-air and today is covering the story of a family that got lost in a corn maze in Massacusetts, of course). The gallons of oil dumping into the ocean and the apathetic media and public in New Zealand seems at odds with its lucrative 100% Pure tourism campaign.

Perhaps this is Peter Jackson’s fault with the Lord of the Rings, or perhaps its just because the country is do damn far from everywhere else that few people actual get to check the place out and see if the reality lives up to the hype/myth. Having lived here for almost two and a half years now I can say with confidence that there are three myths associated with New Zealand that are just fallacy.

1. New Zealand is not 100% Pure
2. Kiwis are just like Canadians and New Zealand is just like Canada
3. New Zealand is a feminist country, with progressive policies related to women.

The first myth is the most important for the moment. The myth here is that New Zealand is not only clean and pure- it is cleaner and more pure than most other places in the world.
By contrast to the stunning images of mountain ranges and untouched native bush and forest, an unfortunate reality is that New Zealand has increasingly relied on farming- especially diary farming- as a primary industry. This isn’t the kind of farming that involves a few dozen cattle crazing on pristine grass- it is a massive industrial, clear cutting, dirty industry.

Greenpeace New Zealand has directly attacked the 100% Pure campaign, focusing on the growing dairy industry in the country and its environmental impacts. 49% of emissions come from the agricultural sector- the growth of the sector has resulted in massive deforestation of native forest, the use of fertilizers and chemicals in the soil, and industries burn coal to process dairy milk powder for exportation- Fonterra (the largest dairy producer) alone burns 450,000 tonnes of coal per year. This combined with the gasses that the cattle themselves emit contributes to a massive environmental problem for a small country. Also, although NZ does use a great deal of wind power, there is evidence that wider environmental policies are relatively weak with WWF New Zealand recently criticizing the local Emissions Trading Scheme for making “further extensions of the loopholes in an already weakened and flawed scheme.”

As for the last two myths- I’ll leave those for now because as a Canadian living in Kiwi-land I’m not exactly objective. Sorry New Zealand. You are truly amazing- beautiful, slow, and isolated- but like many countries, your myths are preventing you from dealing with reality. When the rugby world cup hangover subsides the country will have to wake up and face a serious environmental disaster washing up on the North Shores.


Anti-Iran Protests in Afghanistan

In 1991, with the Soviet Union on the verge of collapse, the rump regime of Mohammad Najibullah finally cut a deal with Iran. The Iranians were allowed to supply the Hazarajat in central Afghanistan with armaments and other goods through direct flights to Bamiyan in exchange for supplying petroleum to western Afghanistan, including to the Kabul regime’s military forces. The arrangement provided Tehran with unfettered access to an area which since 1981 was increasingly under its patronage. The Iranians hoped that they would be able to use this access to strengthen their proxies (i.e. Hezb-i Wahdat) in the conflict against Saudi backed Sunni groups (see Rubin 1995, p. 264). Throughout the tumultuous period that followed, Iran continued to expand its influence in western and central Afghanistan.

The deal highlighted the dependency of the Kabul regime on Tehran for petroleum and Iran’s stake in the character of the government in Afghanistan. Twenty years later, Iran is again flexing its muscles in Afghanistan through petroleum politics. Iran’s decision to block (at least) 700 Afghan owned fuel trucks from transiting to western Afghanistan has resulted in a major spike in fuel prices just as winter sets in.  Fuel prices in Herat are at an eight year high. Afghanistan has witnessed several protests directed against Iran in recent days.

Why is Iran doing this now?

Professor Juan Cole argues that Iran’s decision is a response to the US led sanctions regime imposed through the United Nations. Through Iran’s chairmanship of OPEC and its supply links to western Afghanistan, Iran can directly punish the Americans and reap a windfall profit. Iran will not allow OPEC to meet to revise production quotas which might ease the current price of petroleum. By halting fuel supplies to western Afghanistan through a virtual blockade, Afghanistan will have to rely primarily on a supply route through Pakistan which is vulnerable to Taliban attacks. Some supplies could also come through Uzbekistan, but Iranian officials have apparently also limited shipment through that route according to Afghan traders. Iran assumes that this will further impair the American occupation. And while ordinary Afghans will also suffer, Iran does not appear to be intentionally targeting the civilian population (although there are some speculative arguments that Iran is unhappy that the TAPI pipeline was not also routed through its territory). As Cole points out the Iranian strategy is brilliant: American consumers will compensate Iran for the sanctions regime and Iran will have the added bonus of making life difficult for the US in Afghanistan.

The only problem with the strategy is that if Iran persists in blocking fuel supplies, it will lose influence within Afghanistan. Afghanistan’s Chamber of Commerce and Industry has warned that it will seek to cut trade ties with Iran if the fuel trucks are not allowed to enter Afghanistan. Afghans argue that by international law, since much of the fuel was apparently purchased in Iraq, Azerbaijan, and Turkmenistan, the Iranians do not have the right to stop the flow of these goods particularly as they do not constitute a direct threat to Iran’s security. However, Afghanistan remains reliant on the goodwill of its neighbors to keep supply routes open.  Afghanistan is again caught in the struggle between foreign powers and ordinary Afghans will bear the brunt of the suffering.

[Cross-posted from my Afghan Notebook]


Taking it Personally

Earlier this year, all eyes were focused on Iceland in a very negative way for the second time in 18 months. First their banks collapsed in 2008 which caused many in Europe who had savings accounts there to take a rather substantial financial hit. For example, in the UK local councils were estimated to be at risk for up to £840 million in cash. And secondly, as is pretty well known, the Icelandic ash cloud basically paralysed Europe for the better part of April. (There’s the whole “whaling” thing too – but that’s relatively long-standing.)

The Icelanders, for their part, couldn’t do much. While their government may have been able to do something about the first problem, there wasn’t much they could do about the second: a fact not lost on the Eurovision this year. But still, people directed their anger at the island nation, who single-handedly destroyed weddings, reunions, holidays and possibly Swindon Council’s ability to pick up its recycling.

Making the international personal ain’t exactly a new thing. I know many Americans who wanted to keep a low profile in Europe during the George W. Bush years lest they become the object of a drunken rage on Iraq. Similarly, Israelis, regardless of their political persuasion, get blamed for the policies of their government. Germans of my generation still face WWII jokes – particularly around World Cup time.

But the way the British media has been going on about the criticism of BP, you’d think that Obama had basically taken a giant dump on a portrait of Elizabeth II. The rhetoric, they suggest, is anti-British. Americans and Obama are personally blaming this green and pleasant land for causing the worst oil spill in history.

I’m kind of surprised that this is the case. While there is always much worry about British brands and how the UK is perceived in the world, no one in my mind has ever really gone out of its way to slap the Union Jack on BP (whose name is formally “BP” and no longer “British Petroleum”). Certainly the case isn’t helped that possibly the worst spokesperson in history speaks with a posh British accent – the same posh British accent that every politically correct villain has today in a Hollywood movie (well, maybe other than a Texas accent.)

But the Brits, stiff upper lips and all, are proving to be a sensitive lot. As if Obama could not get mad at a British person without the whole country taking it personally.

But there may be other motivations at stake. Pension funds (probably including mine) heavily invest in BP. Policies which force the country to dole out billions of dollars over the next decade or so could seriously going to hurt a lot of those with retirement plans…

But other than my pension contribution, this raises an interesting question – when is it right to play the international blame game? Does blaming a corporation automatically imply blaming its host country? Does the criticism of BP imply a latent American hostility to Britain? Or should the UK just make itself a pot of tea and calm down again?

After all, regardless of who is to blame, the Gulf is still a mess, BP is in it for billions and Hollywood’s inclination to cast individuals who can put on a good Oxbridge accent as villains, is seemingly well justified.


America’s resource curse

With much of the country focused on the oil disaster in the Gulf, it’s clear that America’s energy policy is a wreck. My native state of North Dakota is booming from a major oil find. But, it too, is realizing the costs and curse of oil. The Bismarck Tribune is running an excellent series on the changing landscape of western North Dakota and worth a read.


Pirates get ambitious

Just when you thought that the Pirates couldn’t get any more ambitious than seizing a freighter full of Ukrainian weapons…

Somali Pirates seized a Saudi supertanker Tuesday. The tanker, one of the largest ships on the ocean, is the size of a US Aircraft carrier and three times a heavy when full. It has a crew of 25 (by comparison, an air craft carrier has a crew of over 5000). It carries over a quarter of Saudi Arabia’s daily crude output.

It is, perhaps, one of the most valuable targets that the Pirates could have seized. Its contents are estimated to be worth over $100 million. Of course, that will fluctuate with the price of crude, but still.

You wonder if this will prompt some more serious counter-piracy actions.

Update: The Indian Navy has sunk a Pirate Mother Ship, with the Pirates firing first, and the Indian ship returning fire and sinking the mother ship, while at least one smaller pirate craft got a way.


Blog math: tire-pressure edition

Wander around the political blogsphere and chances are, at any given moment, you’ll find partisans of all stripes bravely stripping away the deceit of their rivals. Indeed, despite the best efforts of the “MSM” to mislead us all, the bloggers will uncover the facts.

In 2004 they poured over maps of the Mekong Delta to prove Kerry’s falsehoods. They blustered about partisan weighting to prove that Bush was really behind in the polls. They continue their efforts in this cycle. Even as we speak (to take but one example), fearless keyboard detectives will reveal the frightening truth about Obama’s ineligibility to run for President.

Sure, sometimes bloggers get it right. News organizations (and governments) now use Photo-Shopped pictures at their peril. But, more often than not, the amateurs really do reveal themselves as such: they make elementary errors, subject impromptu remarks to laser-beam scrutiny, and so on.

Recent efforts of bloggers at the websites that brought you “How Japanese Internment Won World War II” and “HIV doesn’t cause AIDS” illustrate the pitfalls of google and all-too-quick calculations.

Ed Morrissey explains why Obama’s comment that keeping tires inflated and tuning up cars can save us as much oil as “drilling” is the biggest gaffe since “Poland isn’t under Soviet domination.”

However, Obama clearly stated that we could get just as much oil from tire inflation and tune-ups as we can get from drilling — a ludicrous statement well deserving of ridicule.

Jim Geraghty calculated at the time that, assuming a 10% improvement in gas efficiency, we could save about 330,000 barrels of oil a day through proper tire inflation. Most experts put the actual improvement at 3%. With our present consumption of 20 million barrels a day, that comes to a savings of 1.65% at the most generous assumptions, and more likely about 0.5%. Current production of American oil is 8 million barrels a day; expanding drilling to the OCS and to interior shale would eventually provide millions more per day, not just the 100,000 barrels we’ll get out of our tires.

David Price at Dean Esmay’s Place writes:

How silly is this statement? Doing the math, it looks like he’s off by about an order of magnitude. The DOE link says you can save 3.3% and U.S. consumption is 20.8M barrels a day, half of which is gasoline, so even if fully half the population is driving on very poorly inflated tires you’re talking about only about 165,000 barrels a day, a tenth or less of the millions of barrels a day we could add in production. Hell, the mean estimate for ANWR alone is 780,000 bpd.

So let’s take this slow.

First, let’s give everyone the benefit of the doubt and assume Obama’s reference to “drilling” includes both loosening restrictions on offshore drilling and opening up ANWR (I can’t find a full transcript buried underneath the search results).

Second, let’s note that any oil production from non-drilling sources, such as Shale, is irrelevant to this discussion.

Third, let’s remember that Obama is referring to across-the-board maintenance, not just tire pressure, and use the Federal figures (and not, say ones from a automobile service shop). Now, I have no idea how many cars would benefit, or at what magnitude (these numbers are “up to”), but let’s use Geraghty’s assumption of 1/3 at maximum benefits. So that’s 1/3 of automobiles gaining about 19% efficiency. Let’s use what appears to be a low-end figure of how much of every barrel refined in the US goes to automobile gasoline (45%). We’ll also exclude multipurpose fuels, such as diesel, to make things easier.

So a high-end estimated decrease in consumption (bbl/day) is ((X•.45)•.19)/3.

At 2005 consumption levels, that works out to ((20,800,000•.45)•.19)/3 or 592,800 barrels/day in 2005 (this will be important later).

When I first glanced at Price’s source, I thought something was odd. Figure 2 (p. 9) gives four scenarios for the percentage of imported oil in 2030: (1) 54% with no ANWR, (2) 52% with low-end ANWR production, (3) 51% with mean ANWR production, and (4) 48% with high-end ANWR production. These strike me as marginal gains, but I’m not qualified to make that judgment.

Anyway, it would seem that about a .5% drop in US oil consumption (which one gets at using Obama’s critics’ fugures) translates into something much less than a potential .5% decrease in oil imports? That couldn’t be right.

Then it hit me. Price is comparing the efficiency gains for 2005 oil consumption to ANWR output in 2030.

The report itself assumes a number of breaks on increased US consumption, including continued high oil prices and higher CAFE standards (p. 11): this actually translates into lower US consumption than at present (17 million barrels/day).

Regardless, to put this all in perspective, in 2005-2006 the EIA estimated that total US consumption of oil will increase to a bit over 25 million barrels per day, with an increasing share in the transportation sector. If we use, for the sake of argument, the same formula above that yields a savings of ((25,000,000•.45)•.19)/3, or 712,500 barrels per day, which is a heck of a lot closer to the “mean” estimate from ANWR production in that same year.

True, the high-end estimate here is less than the mean ANWR estimate, let alone the combination of hypothetical offshore drilling and the mean ANWR estimate, but not by an “order of magnitude” or any other number to make Obama’s impromptu statement seem worthy of ridicule.

Moreover, the EIA report doesn’t do a great deal to help the case of the pro-drilling contingent. It notes that OPEC would likely cut production to compensate for ANWR, thus leading to little impact on price.

Assuming that world oil markets continue to work as they do today, the Organization of Petroleum Exporting Countries (OPEC) could neutralize any potential price impact of ANWR oil production by reducing its oil exports by an equal amount (p. 11)

As USNWR summarized the report:

But the U.S. Energy Information Administration, an independent statistical agency within the Department of Energy, concluded that new oil from ANWR would lower the world price of oil by no more than $1.44 per barrel—and possibly have as little effect as 41 cents per barrel—and would have its largest impact nearly 20 years from now if Congress voted to open the refuge today. EIA produced the analysis in response to a request by Republican Sen. Ted Stevens of Alaska, who noted that the last time the agency had taken a look at the economics of ANWR production was in 2000, when oil was $22.04 a barrel.

Higher world oil prices don’t necessarily mean that oil companies could pull more crude out of ANWR, the EIA said. Some advanced methods of extraction may be limited by the features of the Alaska North Slope; for example, steam injection could endanger some of the permafrost, the EIA noted.

The agency pointed out, however, that higher prices would make it more attractive to go after small fields that are near the larger fields that would be the first targets for development, and some advanced, expensive techniques of extraction could become more attractive in the later years if oil prices stay high.

However, EIA predicted these high-tech methods wouldn’t have an impact until after 2030, beyond the horizon of the agency’s forecast of the global energy situation.

So EIA assumed little change—and in fact, a slight decline—in ANWR’s productive capacity since 2000, when it projected that the production in the refuge could reach 650,000 to 1.9 million barrels per day. In the new analysis, EIA says that production could range from 510,000 barrels to 1.45 million barrels per day.

So, let’s review the story so far:

• Opening ANWR would have virtually no impact on prices, for reasons that suggest similarly tiny improvements from expanded offshore drilling.

• Obama’s blogger critics only use consumption gains from inflating tires.

• Obama’s blogger critics compare peak production figures (that are decades away) with efficiency gains based on US oil consumption three years ago.

• If the gains from such measures are low in 2030, that will be because of continued high oil prices and efficiency policies that most Republicans oppose.

• On top of this, let me add that all the critics’ quips about jet fuel neglect the fact that the figures they’re using, as best I can tell, only include gasoline consumption by automobiles.

But it gets better. Price slams the “MSM” for using Bush administration figures from offshore drilling of 200K barrels/day as “a number that seems out of step with published estimates of 250,000 to 1 million bpd.” The link supplied is to a MSM New York Times article, which reads:

Supporters of the Republican position put estimates for potential oil production from new areas at 1 million barrels a day or more. That would be a notable improvement in domestic production, of about 5 million barrels a day. The United States consumes more than 20 million barrels of oil a day, importing most of it.

Democrats call the Republican estimates inflated, and some independent analysts agree. David Kirsch, an oil analyst at PFC Energy, a consulting firm, said that if the most promising areas off Florida and California were opened for drilling, their peak production in a decade could be as little as 250,000 barrels a day — less than a quarter of what the gulf produces now.

“It’s almost a desperate attempt to take advantage of the political climate brought on by high energy prices to steamroll through legislation that won’t fundamentally address those high energy prices,” Mr. Kirsch said.

The truth seems to be that we have no idea what’s out there; the EIA estimates about 18 billion barrels total, but that, apparently, includes California fields unlikely to be tapped and won’t become available for years.

Now, the current “talking point” is that even the “commitment” to open these resources will magically reduce prices. The reasoning appears to be that speculators (who may or may not be driving prices) will bid lower knowing that there will be significant, and secure, petroleum reserves coming on-line in ten or twenty years. Not only does the timeframe make the entire story implausible, but it ignores how little the existence of secure production in the North Sea and Russia, and the high possibility of secure production in Brazil in the future, has done to keep prices in check. And, I should add, this reasoning implies that significant anticipated decreases in US consumption would have a similar impact (as they already may be). If those steps could be taken quickly, that impact would be much faster.

At the end of the day, my best guess is that the efficiency gains I estimate are way too high. By the same token, they’ll make a much larger difference over the next few years–or even decades–than opening up ANWR and the Florida coast to drilling.

But when it comes down to it, I don’t really have much confidence in any of the estimates people like me are throwing around.

That’s really the point of this exercise: neither I, nor David Price, nor Ed Morrissey, nor Jim Geraghty have a clue how to make sense of this controversy. All we did was use our search engine of choice, find links that supported (or, if we didn’t read them too closely, appeared to support) our claims, and then amplify one of the partisan sides of this debate. This kind of stuff isn’t investigative anything, it’s nothing more than back-of-the-envelope calculations by unqualified people.

Let me rephrase: our analysis is basically worthless. Ignore it.

(h/t Scott Lemieux).

Image source: https://www.dartmouth.org/classes/57/101ranch.htm


No-nothing politics

What should we consider the limits of responsible campaigning?

Like many people, my ideal campaign would focus on policy issues rather than attacks on character. A President’s character matters, of course, and I see no ethical reason why attacks on character should be “out of bounds” in a Presidential campaign (but the qualities that make someone a good leader of the Executive Branch are, I would argue, quite different than those the electorate fixates upon).

We can all agree, I imagine, that dishonest attacks–those predicated on clear cut falsehoods–have no place in an ethical political campaign. But what are the limits of cynical opportunism?

Let’s consider four examples: the “celebrity” narrative, support for a “gas tax holiday,” a tax on “windfall profits,” support for expanded offshore oil drilling, and the “tire pressure” attack on Obama.

Aspects of the McCain campaign’s attempt to paint Obama as a “celebrity” strike me as icky. But if McCain ran them against a white candidate there would be no issue of racial overtones. The problem isn’t so much the “celebrity” attack itself, but particular ways Obama’s opponents advance it. So I’m not prepared to consider this line of attack, at least in principle, “out of bounds.”

McCain’s and Clinton’s embrace of a “gas tax holiday” was obviously an act of political expediency. There’s no reason to believe that the drop in gas taxes would be passed on, in any significant way, to the consumer. The net effect would likely be to shift revenue away from the Government and into the hands of companies that hardly need it.

I also view proposals for a tax on petroleum comapnies’ “windfall profits” as rather dubious. There are plenty of good reasons to reduce (direct and indirect) subsidies to oil companies, and even to increases taxes on consumption as part of an overall effort to shift US energy usage away from fossil fuels. But the “windfall profits” tax strikes me as mainly about blaming “big oil” for the price of the goods they supply, when most of the immediate supply and demand dynamics are outside of their control.

It also shouldn’t surprise anyone that I also look down upon an expansion of offshore drilling. It would do little to reduce US oil dependency; those in favor of it, by and large, are seizing on public frustration with high gasoline prices to do a favor to petroleum companies at the expense of the natural environment.

So while all three of these proposals amount to cynical attempts to push bad policies for political purposes, I don’t see them as out of bounds. Why? Because proponents can mount plausible arguments in their favor given specific policy preferences and political values.

Which leaves us with the “tire pressure” attack on Obama. Here I do think the McCain campaign has crossed a line. Why? Because it is unequivocally true that following Obama’s (and Schwarzenegger’s) advice would immediately increase the supply of gasoline, and would do so, in fact, more than offshore drilling [clarification: in the short term; see my most recent post].

A consequence of the attack–one unrelated to the legitimate goal of defeating Obama–is therefore to make many Republicans believe that it is prima facie absurd to take low-cost steps to reduce their gasoline consumption. Thus, the attackers are actively misleading their own supporters, and attempting to mislead the population, on an issue in which there really isn’t any grounds for debate.

The premise of the attack: you want to pay less at the pump. The consequence of the attack itself: some proportion of GOP supporters will pay more at the pump.



Sunday, the Washington Post launched a 4 part series giving an in-depth look at Oil. Sunday’s part 1 gave a very solid primer on the global Oil economy, and today’s installment looks at the impact that China’s growing consumption has on both China and the world Oil market.

Oil is a complex thing. It ties together nations who otherwise would have little need to interact. It turns regions into strategic security choke points, it lifts and crashes major economies, and it, broadly speaking, shapes an entire way of life. It brings together some of the most important issues in international relations–security, trade, IPE, development, international organization, and more.

And, its something that few bother to truly understand or appreciate despite its direct impact on and source in your everyday life. They have a great graphic about the composition of your $4.00 price per gallon–reflecting the influence of market factors, security factors, geology, and even currency prices. It is a very tangible and teachable moment about the complexity and inter-connectivity of international relations and you.

What I also appreciate about the Post story is how they are able to show this as a Global issue. It certainly has its roots in the US economy, but the run-up in oil prices is making its mark around the world–China is but one example.

Not to be outdone, the NYT also chimes in with its own Oil story on the cost of gas price subsidies around the world. Many governments subsidize the price of a gallon of gas, and the increase in gas prices is going to hurt quite a bit.

The post series, along with the accompanying graphics is certainly worth your time.


The hazards of burning oil

Thanks to the calendar, the U.S. is about to celebrate the July 4 holiday with a long weekend. For many people, July 3 (today) will be like the Wednesday before Thanksgiving or New Year’s Eve. You might be in the office, but you aren’t likely to get much work accomplished and you probably plan to leave early.

In that spirit, may I offer an entertaining video that addresses something on most travelers’ minds this holiday — the supply of oil:

Hat tip: Simon Dalby.


Shell games

On Tuesday, I mentioned that second rule of Russia watching is “follow the money”. The only problem is that following the money is not easy.

I’ve been asked on occasion whether I think Mikhail Khodorkovsky, the former head of YUKOS oil now in prison for tax evasion and fraud, is guilty or were the charges against him politically motivated.

My answer: “Yes.”

Khodorkovsky gained control of YUKOS in the notorious loans-for-shares auctions, which were a breathtakingly audacious scheme to defraud the Russian government (and thereby the Russian people) at a time when the government was on the verge of fiscal (and possibly political) collapse.

Once he held the reins of YUKOS, however, Khodorkovsky seems to have run it more or less in the style of a western public company. YUKOS was widely praised for its wise and productive investment decisions, which resulted in higher productivity, and its comparatively high level of corporate transparency. But Khodorkovsky wasn’t satisfied with running Russia’s most successful oil company. He started to dabble in politics–and in doing so, violated the bargain between the Kremlin and the oligarchs: you stay out of our business and we’ll stay out of yours.

Khodorkovsky is now in a Siberian prison, and YUKOS was split up and put back on the auction block to pay its tax debts to the Russian state.

Much like the loans-for-shares auctions, these auctions have been less than transparent–but in these cases, the prime beneficiaries of the shady dealing have been the energy parastatals: Rosneft and Gazprom. Borrowing a page from the oligarchs’ strategy book, they’ve used shell companies to pick up YUKOS assets while disguising their own role in the bidding. One of YUKOS’ prime assets, its Yuganskneftegaz subsidiary, was purchased by a mysterious company named Baikalfinansgrup. This company, which at the time of the auction had its address registered to a small office-building in the provincial city of Tver and had been in official existence for only two weeks, nevertheless managed to secure $1.7 billion in financing from the state-owned savings bank Sberbank. The only other registered bidder in the auction was the Rosneft-Gazprom joint venture Gazpromneft (which should not be confused with the former Sibneft, now owned by Gazprom and called Gazprom Neft), which ultimately declined to bid, leaving Baikalfinansgrup to acquire Yuganskneftegaz for a fraction of its market value. Baikalfinansgrup was later revealed to be a subsidiary of Rosneft, created specifically for the acquisition of Yuganskneftegaz.

If your head is spinning after reading that, I can’t blame you. It’s hard to keep track of all the maneuvering and switching. But wait, there’s more.

The big mystery currently occupying YUKOS watchers concerns the very last lot of YUKOS assets, which was auctioned off earlier this spring. Everyone expected that this last lot, which included YUKOS’ Moscow headquarters, would be acquired by Rosneft. But at the last minute, a previously unknown company, OOO Prana, appeared out of nowhere and outbid Rosneft, driving the final sale price up to over 100 billion rubles ($3.9 billion) from a starting price of 22 billion rubles.

Who is this mysterious company, and why was it willing to pay so much for this lot? Moscow real estate is expensive, but not that expensive. Details have started to dribble out, starting with the news that the lot included not only the real estate, but also numerous other assets, including accounts receivables of over $1 billion. Kommersant has made some serious effort to sort this out, though it’s still a bit murky. The biggest question, though–who’s behind Prana?–is still a mystery. Rosneft denies any connection, though phone records suggest a potential connection to Gazprom via Gazprombank.

Now Rosneft is in negotiations to acquire some of those assets purchased by Prana, possibly at a hefty discount. There’s also speculation that oligarch Roman Abramovich is somehow behind all of this. Before break-up of YUKOS, it was set to merge with Sibneft, which was at the time controlled by Abramovich. When the deal was cancelled, Abramovich ended up short. Could this be a way of paying him off?

Stay tuned, and we’ll keep trying to follow the money.


Chavez’s Challenge (or the fatal flaw in his grand plan)

Hugo Chavez is talking a tough game, challenging the USA, and the Bush Administration in particular, all over the globe. He’s rallying leaders in Latin America, meeting with ‘rogues’ world-wide, and even calling Bush the “devil” at the UN.

But he’s got a problem. In a fascinating story, The Washington Post reported that:

[A] new study of trade and oil consumption data shows that Venezuela appears ever more dependent on selling its oil to the country Chávez calls “the cruelest, most terrible, most cynical, most murderous empire that has existed.” And U.S. government energy trade data show the United States is slightly less dependent on Venezuela, which at one time challenged Canada, Mexico and Saudi Arabia as the No. 1 provider of foreign oil but now tussles with up-and-coming Nigeria for the fourth spot.

Chavez is able to run such a strong Anti-US campaign because he is flush with cash from the high price of Venezuela’s exported Oil. But, more and more, the source of that cash is the very enemy he’s railing against. Despite his anti-US policies, he’s become more dependent on the voracious US appetite for Oil.

Yet the country’s once-vaunted oil industry has seen its production and capacity to produce decline over the last decade, according to oil analysts and statistics from the U.S. Energy Department and the International Energy Agency in Paris.

The world’s fourth-largest oil exporter a decade ago, Venezuela is now seventh, according to the BP Statistical Review of World Energy. The 1.1 million barrels of crude that Venezuela exports to the United States every day amount to less than 11 percent of American imports, down from 17.3 percent in 1996. By contrast, the No. 1 supplier to the American market, Canada, is now sending more than 1.8 million barrels a day and topped 2 million barrels daily in November.

During most of Chávez’s eight years in office, more than 60 percent of the country’s total crude exports have gone to the United States, up from 50 percent throughout much of the 1990s, according to Ramón Espinasa, a former chief economist at PDVSA who is now a consultant in Washington. The trend is due to growing U.S. demand, Venezuela’s rising consumption and what oil analysts say is the state’s inability to diversify its base of clients to include big consumers.

As Chavez spends money helping his global political pals, he’s investing less in his national Oil company. The nasty secret about Venezuela’s Oil is that, though bountiful, is really thick, like sludge. Unlike Saudi light sweet crude which is easy to refine anywhere in the world, Venezuelan heavy crude is so heavy that only select refineries dedicated to processing such a heavy grade of Oil, can handle it.

So a country less capable of producing oil, analysts say, is more tied to the United States, where refineries wholly or partly owned by PDVSA refine Venezuela’s molasses-like oil. The installations exist nowhere else, which makes some analysts skeptical that Venezuela is exporting as much to China as it claims.

“It’s three months by tanker to China, five days to the East Coast of the United States, so the American client is too important for Venezuela.”

So, at any point, the US could end Chavez’s antics with a simple Oil embargo. He’s got no where else to send his product. Would it hurt? Maybe a little (though with gas already over $3.00/gallon, I guess we can tolerate more than most people ever thought we could…), but it would hurt him a heck of a lot worse than it would hurt us.


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