Saturday, June 6, 2015

ISIS and the Oil War

A while ago I wondered why we seem to be so intent on ignoring what is clearly an ongoing collapse around us. That article was focused on "austerity" in Europe, but reading the article below, it seems the Middle East is undergoing what used to be the outlandish worst-case nightmare scenario that some people feared at the conclusion of the Gulf War - failed states, the rise of Islamic fundamentalism, torching oil wells, and destabilizing Saudi Arabia which is the world's swing producer. Much of this is seeming to be going on right now. Again, I find it ironic that the battle for civilization is continuing exactly where it began.

I’m wondering why this isn’t front-page headlines in the U.S. Wait, I know, we’re paying attention to more important issues like Caitlin Jenner. That’s much more important to the American news media than the entire Middle East exploding in revolution or world oil supplies being cut off.

This is a great summary: ISIS is making the biggest threat to oil prices even worse (Business Insider) From the article:

- The Islamic State is torching oil refineries. This is a change of tactic, as formerly IS would keep the refineries functioning to be able to sell the oil to fund the movement.They torched the enormous Baiji oil refinery about 100 miles north of the capital which supplies about a third of Iraq’s domestic fuel supplies (!!). The victory at Baiji sent shockwaves across world oil markets.

-“ The problem for the US and the rest of the industrialised world is that the Middle East controls 60pc of proven oil reserves and with it the keys to the global economy. Should Isil capture a major oil field in Iraq, or overwhelming the government, the consequences for energy markets and the financial system would be potentially catastrophic.”

- The chaos began in Syria, but threatens to destabilize the entire region.

- “Iraq, Saudi Arabia, the Gulf states and Iraq – which together account for two thirds of the cartel's production – are all now affected by the inexorable march of the Isil jihadists but appear powerless to prevent it due to the widening sectarian schism between the Sunni and Shia Muslims across the region in the wake of the Arab spring uprisings five years ago.”

-Until now, the political chaos that threatens to engulf the entire Middle East has not been reflected in the oil prices, but they are a major threat. Iraq is the second largest producer after Saudi Arabia, and if ISIL presses deeper into Iraq, oil prices could spike back up to $100.00 a barrel. "Isil presents a whole new reality for the region, which just isn't reflected in the oil market at the moment," said [Danilel] Yergin. "It's an increasingly grave situation for most of Opec and the Middle East. At some point the security issues will start to come back into the price of oil… What is so startling is that geopolitics has been stripped out of the oil price for now but sooner or later it will be factored back in."

-Saudis have been pumping oil like crazy to bring down the price in order to bankrupt “unconventional” oil producers like the fracking wells in North Dakota, as well as to tamp down demand for renewable technologies like wind and solar. The North Sea oil fields have already lost many jobs, causing governments to step in with subsidies to keep the unconventional producers going.In the US, oil companies began to shut down drilling rigs at a record rate. According to Baker Hughes, rig numbers have fallen for 24 straight weeks to 659 rigs as of last week compared with a record 1,609 rigs operating last October. In high-cost production areas such as the North Sea the impact of Opec's decision to allow oil prices to fall naturally has shaken the industry to its core.
Oil prices have gained roughly 30pc since the beginning of the year to trade at around $65 per barrel, with major banks and trading houses. However, traders have so far ignored the risks posed by Isil now to oil supplies, or the danger of a major terrorist attack on oil facilities in Saudi Arabia. Goldman Sachs has instead forecast that prices could again fall to $45 per barrel by October as US shale drilling picks up.

According to Mr Yergin this analysis ignores the dire political situation in the Middle East and the US government's reluctance to acknowledge the danger to the wider global economy. Many of these analysts have focused on the continuing glut of new oil supplies from Saudi Arabia and Iraq. Both nations appear to be fighting for greater market share by filling the gap that is opening up in the oil market as higher cost production is shut down.

Swing producer Saudi Arabia is now pumping more than 10.3m bpd of crude, a record for the kingdom which maintains the capacity to produce up to 12m bpd if required. Despite the encroachment of Isil, which now controls the country's largest province, Iraq has also dramatically increased its oil production over the past six months.

Iraq is poised to lift its exports by as much as 800,000 bpd to around 3.75m bpd next month as the government in Baghdad desperately tries to increase its revenues, which have been crippled by falling prices. In either case, a major terrorist attack on oil export facilities would shatter confidence and the notion that $100 oil is a thing of the past.
This should send a chill down your spine:
Although most of Iraq's major oil fields are located in the south of the country, which are Shia Muslim heartlands, the failure of the Iraqi army to deal with the threat of Isil is a sign of their vulnerability to isolated attacks. Meanwhile, Saudi Arabia is in a virtual state of lockdown after the bombing by Isil militants of a Shia mosque in the oil-rich Eastern Province. The brutal attack, which appeared designed to provoke sectarian unrest in the kingdom, killed 21 worshippers and injured 80 others.

Saudi authorities have stepped up security at the country's vast oil installations. The kingdom, which accounts for 12pc of global oil supply, is effectively under siege. To the north, jihadists threaten its borders from Iraq and Syria. In the south it launches air strikes against Iranian backed Houthi rebels in Yemen but has so far failed to defeat the tribes, which have continued to make territorial gains.

To add to the problems facing Saudi Arabia's new ruler, King Salman bin Abdulaziz al-Saud, his kingdom is also facing insurgency from the so-called Al Qaeda in the Arabian Peninsula terrorist group which is intent on destabilising the regime.
There is some criticism of Obama describing climate change as a bigger threat than ISIL, despite the fact that massive drought was one of the root causes of the destabilization of the Middle East, and climate change threatens every region of the globe simultaneously (floods in Texas, drought in California, heat waves in India, refugees from Africa overwhelming Europe, entire island nations submerged, etc.). Obama is criticized for ignoring the "special relationship" with Saudi Arabia started by Roosevelt in the 1930''s and not securing the oil in the Middle East with the enormous U.S. military (what else is it for?):
The Obama administration's reluctance to intervene marks the end of a US policy to protect the region's oil which has remained in existence since President Franklin D Roosevelt first met with modern day Saudi Arabia's founder King Abdulaziz in 1945...However, Mr Obama's lack of a viable alternative foreign policy for the region has put world energy markets at risk.
And there are a lot of internal political tensions between OPEC members themselves. Some of them want oil cheap to keep the age of oil going and fend off unconventional oil producers and energy alternatives, while other want it dear to fix budgets and fund their pet political activities:
Although Opec makes it a rule to stay away from politics, tensions between its 12 members are never far from the surface when they gather in Vienna...Iran opposed Saudi Arabia last November when the kingdom's oil minister, Ali al-Naimi, insisted that the group should stand on the side lines and allow market forces to drive down the oil price in order to render high-cost oil such as US shale unprofitable. Years of sanctions have crippled Iran's economy and eroded its oil industry, which has added to pressure on the regime to agree to a nuclear deal with America under any terms. However, Iran needs oil prices above $100 per barrel in order to support its Shia Muslim allies, including the Houthis fighting Saudi Arabia in Yemen, in the wider Middle East. Insiders say Saudi Arabia will get its way once again in Vienna and expect Opec to agree to "roll over" their production settings. With vast foreign currency reserves Riyadh and its Arab allies in the Persian Gulf can weather the storm better than Iran, while the continuation of lower oil prices will limit Tehran's ability to support Saudi's enemies in Yemen.
Things look dire on the oil front, but will renewables save us? I read something recently that I hadn't thought about - the marginal cost of extracting each additional barrel is going UP (as we know), but since solar panels are a manufactured commodity, the marginal cost of producing each new panel is going DOWN.

This article: How Much Longer Can the Oil Age Last? frames it in terms of "Peak Oil Demand."
...[I]f we take the example of the solar industry, where the cost of an average photo voltaic panel is declining at a rate of more than 10% per annum we see that, in spite of reduced global investments, renewables still hold a lot of promise. Some of the major integrated oil and gas companies such as Shell, Total and Statoil have actually been slowly and steadily increasing their renewable related investments. Shell is investing big time in biofuels, while Total, with its stake in Sunpower, is investing substantially in the solar sector while Statoil is placing its bets on wind energy. This shows that renewables are a phenomenon that many believe can give oil a run for its money.

“No one can set the price of oil – It is up to Allah”, this is what Saudi Arabia’s oil minister Ali Al Naimi had to say while speaking to CNBC recently. OPEC, which holds around 40 % of the world’s crude output, is showing no signs of reducing its production levels, even if Iran starts pumping more oil after sanctions are lifted should the international nuclear deal with P 5+ 1 counties prove successful. Many see this move by OPEC as a means to protect its market share and drive US shale players out of business. But is the decision of OPEC (especially Saudi Arabia) part of a much bigger game? The Saudis, who lead OPEC, would obviously be very interested in delaying ‘Peak Oil Demand’ after which global demand for oil would start declining steadily, along with Saudi oil revenues.

According to Bank of America and Merrill Lynch commodity researchers, if crude prices stay in the range of $50 – $70, peak oil demand would be pushed beyond 2030. This delay in peak oil demand would definitely hurt renewables and anyone who is investing in them. As per Alex Thursby, Chief Executive at the National Bank of Abu Dhabi, “Renewable energy technologies are far further advanced than many may believe: solar photovoltaic (PV) and on-shore wind have a track record of successful deployment, and costs have fallen dramatically in the past few years. In many parts of the world, indeed, they are now competitive with hydrocarbon energy sources. Already, more than half of the investment in new electricity generation worldwide is in renewables. Potentially, the gains to be made from focusing on energy efficiency are as great as the benefits of increasing generation. Together, these help us to reframe how we think about the prospects for energy in the region.”

Yes, OPEC has sensed the end of its glory days. And it is obvious that Saudi Arabia, with 85% of its export revenues coming from petroleum exports does not want the oil age to end anytime soon.
Ambrose Evans-Pritchard is also bullish that oil is on the way out:
The political noose is tightening on the global fossil fuel industry. It is a fair bet that world leaders will agree this year to impose a draconian “tax” on carbon emissions that entirely changes the financial calculus for coal, oil, and gas, and may ultimately devalue much of their asset base to zero.

The International Monetary Fund has let off the first thunder-clap. An astonishing report - blandly titled "How Large Are Global Energy Subsidies" - alleges that the fossil nexus enjoys hidden support worth 6.5pc of world GDP.

This will amount to $5.7 trillion in 2015, mostly due to environmental costs and damage to health, and mostly stemming from coal. The World Health Organisation - also on cue - has sharply revised up its estimates of early deaths from fine particulates and sulphur dioxide from coal plants.

The killer point is that this architecture of subsidy is a "drag on economic growth" as well as being a transfer from poor to rich. It pushes up tax rates and crowds out more productive investment. The world would be richer - and more dynamic - if the burning of fossils was priced properly.

This is a deeply-threatening line of attack for those accustomed to arguing that solar or wind are a prohibitive luxury, while coal, oil, and gas remain the only realistic way to power the world economy. The annual subsidy bill for renewables is just $77bn, trivial by comparison.
Fossil industry faces a perfect political and technological storm (The Telegraph)

The problem, it seems, is that if the demand for renewable energies goes up too high it too could produce a dilemma - there are not enough rare earth metals to completely replace fossil fuels and there could be a shortage:

Rare material shortages could put gadgets at risk (BBC)

A Scarcity of Rare Metals Is Hindering Green Technologies (Yale 360)

Metals Used in High-Tech Products Face Future Supply Risks (Yale360)

The modern economy depends on dozens of obscure metals. What happens if we run out? (WaPo)

And then there is the pollution issue: The dystopian lake filled by the world's tech lust (BBC)

The latest C-Realm podcast is also about the geopolitics of oil: 468: Energy Geopolitics in a Contested World


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