Tabloid Edition

Naomi Klein on Canadian Oil

Absolutely amazing this piece by Naomi Klein. She's managed to grasp two basic economic points:

This isn't the boom in Iraq sparked by the proposed new oil law - that will come later. This boom is already in full swing, and it is happening about as far away from the carnage in Baghdad as you can get, in the wilds of northern Alberta.

Yup, she's discovered that oil is a global market. You never know, next she might learn the meaning of the word "fungible". She does, sadly, rather miss a point though, in her eagerness to pin this all on the Iraq war. The oil sands were opened up once before, in the early 80s, when prices rose (in inflation adjusted terms) above current ones.

Both techniques are costly: between $18 and $23 per barrel, just in expenses. Until quite recently, that made no economic sense. In the mid-80s, oil sold for $20 a barrel; in 1998-99, it was down to $12 a barrel. The major international players had no intention of paying more to get the oil than they could sell it for, which is why, when global oil reserves were calculated, the tar sands weren't even factored in. Everyone but a few heavily subsidised Canadian companies knew that the tar was staying put.

Then came the US invasion of Iraq. In March 2003, the price of oil reached $35 a barrel, raising the prospect of making a profit from the tar sands (the industry calls them "oil sands"). That year, the US Energy Information Administration "discovered" oil in the tar sands. It announced that Alberta - previously thought to have only 5bn barrels of oil - was actually sitting on at least 174bn "economically recoverable" barrels. The next year, Canada overtook Saudi Arabia as the leading provider of foreign oil to the US.

And there we have her second major enlightenment. Changes in prices and technology create resources.

You think we might manage to get her to believing in markets anytime soon, she does seem to be getting some other economic points?

Kovykta

I will admit that when BP first linked up with TNK I thought it would all end in tears.

BP faces a huge loss in revenues from its joint venture in Russia after the state-owned energy group Gazprom demanded to take a 75pc interest in one of the world's largest gas fields.

This isn't just Putin: standard Russian negotiating technique is, what's our's is our's, what's your's is negotiable. I've  invested time and effort in businesses over there but I wouldn't be happy  trying to control an asset.

Oil Sands Cost Explosion

As we know, the oil sands and oil shales of Canada are put forward as one of the reasons why oil isn’t running out, why there is still a century or more of supplies to use. So this doesn’t look good:

SHELL is facing a cost explosion in the expansion of the Athabasca Oil Sands Project, a mining venture that extracts oil from bitumen deposits in the Canadian province of Alberta.

The first phase of expansion, intended to add 100,000 barrels daily to the current 155,000 barrel per day output was budgeted at C$7.3 billion (£3.6 billion) only a year ago. It is now expected to cost as much as C$11 billion, according to estimates published by Western Oil Sands, Shell’s partner in the project.

However, before the peak oil crowd start crowing about how it shows that the process will never make sense, will never really amount to much, it’s worth looking at what (well, at least what Shell say) is the problem. It isn’t the process itself, isn’t something wrong with the whole idea. It’s simply a result of an overheated market:

The Dutch oil giant is the leading player in an overheated market where the high price of steel, cement and a chronic shortage of skilled labour is weighing on investors.

Make of it what you will.

Monbiot on the Oil Companies

Decent polemic from Georges today. Usual Monbiot environmentalism etc but it does at least make internal sense. However:

The denial and aggression which characterised Shell's approach at the time of the Brent Spar campaign

Worth remembering that Shell were actually correct about the Brent Spar, don’t you think? That it was Greenpeace who were wrong?

The Ceyhan Pipeline

Finally this pipeline from Baku to Ceyhan, avoiding both Iran and Russia, is going to be properly used:

Washington scored a significant victory in its contest with Moscow for influence in Central Asia yesterday when Kazakhstan agreed to start pumping oil to the West through a British Petroleum pipeline that bypasses Russia and Iran.

I’m pretty sure this is the one that was originally bankrolled by the Government of Oman. Still, just to give you an idea of the timescales of the oil industry: back in ’92/93 we knew the guys in Moscow doing the original negotiating to get this route under way. It’s taken this damn long!

Viktor Khristenko

Russia has served a double warning over the price of oil and intervention to block attempts by its energy firms to move into EU markets.

Viktor Khristenko, Russian's energy minister and guardian of 5pc of the world's oil reserves, declared that motorists and business would have to learn to live with expensive fuel because "the era of cheap hydrocarbons is over".

One of the things about having lived in Russia for some years and working with Russian companies for some more is learning quite how few of the grandees actually understand how markets work.

Mr Khristenko said: "Forecasting is a thankless task in hydrocarbons, but one can say with certainty that the era of cheap hydrocarbons is over."

A brave and almost certainly wrong statement. A recession in the US and or China would bring those prices down pretty swiftly.

Oil Doom and Gloom

Something for the peak oil crowd:

THE world lacks the means to produce enough oil to meet rising projections of demand for fuel over the next decade, according to Christophe de Margerie, head of exploration for Total and heir presumptive to the leadership of the French energy multinational.

The world is mistakenly focusing on oil reserves when the problem is capacity to produce oil, M de Margerie said in an interview with The Times. Forecasters, such as the International Energy Agency (IEA), have failed to consider the speed at which new resources can be brought into production, he believes.

His basic point is that the reserves really are there, we’re not actually hitting the supposed disaster of peak oil.

However, we do have something which, in economic terms, would be the same as peak oil (not that the proponents of the peak oil hypothesis seem to understand the economics). That is that we cannot build the wells, pipelines and refineries fast enough to drag the oil up out of the ground.

For the doomsters predictions this should be the same thing. It doesn’t matter whether the oil doesn’t exist or whether it is still stuck underground for western civilization, as we are told it will, to fail.

However, two things that make me worry a great deal less than some others.

1) He states that the world will never be producing 120 mbd, even if the demand is there. Great, but what price? We might have a demand of 120 mbd at $10 a barrel and much less at $80. Or $120. What ever the number is prices will (as long as some damn fool doesn’t decide to try rationing or something) adjust so that supply balances demand.

2) From The Economist:

FOR China's disgruntled taxi drivers, these are worrying times. The government, long reluctant to raise fuel prices for fear of a backlash, has recently shown signs of yielding to the complaints of loss-making refiners beset by the high price of crude oil. In late March it announced the first retail-price increases in eight months. But is there a serious risk of protest?

Since March 26th the retail price of diesel has risen by more than 3% and gasoline by 5%. Increases were twice as high in Beijing, because of better fuel quality there. But the government is still being cautious. Prices remain well below international levels.

Now this big surge in global oil prices, isn’t it being said that it is driven by a rise in demand in China? As you can see, retail prices for oil products in China are not set by the market but by the government. Actually, refiners over there have been making huge losses as they have to buy at world prices and sell at the lower fixed ones. So, the rise in global prices is not actually feeding through into the reduction in demand we would expect in China.

So what happens if China stops price fixing?  Or fixes prices at world levels?  That extra demand that is driving the global market falls doesn’t it?  So even our current prices are, in part at least, driven by price fixing.