The Oil and the Glory

The Weekly Wrap: March 4, 2011

The Weekly Wrap: March 4, 2011

How to moderate oil prices: Vladimir Putin, Hugo Chávez and Mahmoud Ahmadinejad, plus the leaders of a bunch of other oil-producing states, are benefitting from high oil prices. But not motorists, and so we are being treated to the latest round of American politicians insisting that the White House open up the brimming, 727-million-barrel U.S. Strategic Petroleum Reserve. Sen. Jay Rockefeller (pictured above), the great-grandson of John D. Rockefeller, is the latest voice advocating the liberation of this sea of oil in order to bring down gasoline prices. His colleague, Sen. Jeff Bingaman, who chairs the Senate Energy Committee, says the following: "Between the lost production in Libya, the crude oil dislocation associated with additional Saudi production and the prospect of further turmoil in the region, we are now unquestionably facing a physical oil supply disruption that is at risk of getting worse before it gets better."

No, we are not facing what these two senators suggest, which is a supply shortage. Even if we were, the huge reserve would not influence gasoline prices. The single factor that would calm the markets would be more surplus production capacity, in other words not more oil, but the capacity to produce more oil. When traders are bidding up and down the price as they earn paper profits, then cash them in, they are not leveraging the perception of a supply shortage. They are trading on the perception of a lack of surplus capacity to produce more oil — they are betting that the chaos in Libya could spread to one or more additional OPEC states, remove more oil from the global market, and reduce spare production capacity to a sliver, or even erase it completely. When there is no spare capacity, it portends a battle for resources.

So simply putting more oil on the market, as these senators suggest, would have almost zero impact. In fact, Michael Levi argues that invoking the petroleum reserve could have the perverse impact of spooking the market, much as Saudi King Abdullah did a week ago by promising $36 billion to the country’s suffering masses. Levi asserts that releasing the reserves could "validate fears in the market –after all, it would signal that the United States government was worried."

Traders watch videos such as the one below, and rub their hands with glee. The politics and the panic are part of this volatile casino.

The Chinese are not suicidal: The Chinese have given us the latest evidence that some of the major presumptions regarding their fixations aren’t as valid as some think. Zhou Shengxian, China’s environment minister, said pollution could hinder Chinese economic growth and social stability. That was after Prime Minister Wen Jiabao said the country would aim for slower, cleaner GDP growth over the next five years — not the double-digit rates of the last quarter-century, but more like 7 percent.

We have suggested that China may continue using a lot more coal — it currently accounts for half the world’s demand for the fuel — but that, for the very reason cited by Zhou, its demand will not rise at the breakneck rate that is conventionally suggested. Simply put, the Chinese Communist Party is not suicidal; it wants to continue in power, and if pollution gets out of control, there could be serious public unrest. Less-than-projected coal consumption in China carries a lot of implications, such as lower-than-presumed CO2 emissions and generally a cleaner country going forward than the received wisdom suggests.

… but they are still pretty territorial: China has demonstrated yet again that territory is a red line. Two Chinese patrol boats appear to have ordered a Filipino oil exploration vessel to leave an area of the disputed Spratly Islands in the South China Sea. The confrontation was ended when a Philippines military aircraft swooped over. The Spratlys are a long-time source of antagonism among several nations that claim them — Taiwan, Brunei, Malaysia,  and Vietnam, in addition to China and the Philippines. The Chinese call them the Nansha islands, and appear likely to continue pressing their case that they have "indisputable sovereignty" over them, as a spokesman for the Chinese Embassy in Manila said.