The Oil and the Glory

The Weekly Wrap — March 23, 2012

The Weekly Wrap — March 23, 2012

A coming U.S. renaissance — and an oil price crash: Citibank’s Ed Morse unloads a monster, 92-page report forecasting no less than a new American Industrial Revolution. This economic resurgence is carried on the back of low natural gas prices as far as the eye can see (pictured above, hydraulic fracturing in Pennsylvania), in addition to a shale-oil, oil-sands, deepwater-oil boom that makes the U.S. "the new Middle East." In line with other top analysts, notably Deutsche Bank, Morse forecasts a tight global market in the next few years, notwithstanding the U.S. abundance, with the suggestion that prices will be high as well. But nirvana will arrive by the end of the decade with the convergence of U.S. oil abundance and a burst of production from west and east Africa, the Gulf of Mexico, India and the Caspian Sea. By the 2020s, we will see maximum oil prices of $85 a barrel, Morse writes in a teaser at the Wall Street Journal. There are of course potential geopolitical consequences, Morse writes:

It is unclear what the political consequences of this might be in terms of American attitudes to continuing to play the various roles adopted since World War II — guarantor of supply lanes globally, protector of main producer countries in the Middle East and elsewhere. A U.S. economy that is less vulnerable to oil disruptions, less dependent on oil imports and supportive of a stronger currency will inevitably play a central role globally. But with such a turnaround in its energy dependence, it is questionable how arduously the U.S. government might want to play those traditional roles.

I have noted previously that some of us are suffering whiplash since just a few months ago the conventional wisdom was energy scarcity. One is inclined toward caution regarding the new narrative of abundance, such as we see in the lead story today in the New York Times, where Clifford Krauss and Eric Lipton depict a future of "independence from foreign energy sources." Morse, the dean of oil analysts, must be taken seriously. Yet the forecast oil bonanza is still largely on paper — the crude is not pumping through the country’s petro-arteries. What if oil prices drop? Will the economics still support the type of drilling described? I urge continued and watchful caution.

Go to the Jump for more on the energy boom and the rest of the Wrap.

Finally, on the subject of lower oil prices, we get a separate forecast for the current decade. It is from Chris Cook, a former U.K. energy regulator who writes the Naked Capitalism blog. The gist of Cook’s long analyses is that almost nothing is currently propping up prices except some Enron-type legerdemain and an Iran bubble. Cook argues that western oil demand is plummeting, and that Chinese consumption isn’t sufficient to compensate. The outcome? A coming price crash this decade. Much conspiratorialism is embedded in Cook’s writing, but it is worth taking a look.


Blocking Iran: The Western-led effort to choke off Iran’s access to oil profits is continuing to push up the price of oil. Today for instance, prices are surging on a belief that the U.S.- and European-led sanctions will trigger a 15 percent drop in Iranian oil exports this month, Bloomberg reports. Last Saturday, the international bank transfer system known as Swift activated a block on Iranian banks, much-reducing Tehran’s ability to be paid for its oil, and to move cash around. The United Arab Emirates, one of Iran’s main trading partners, is seeking ways to help Iran evade the Swift block in terms of buying legal items, such as medicine and food, reports the Wall Street Journal’s Leila Hatoum.

China, Japan and South Korea have made deep cuts in their purchases of Iranian oil, reports the Financial Times, cuts that helped to persuade the U.S. this week to exempt Japan and 10 European countries from the sanctions. India, initially among the most reluctant of Iran’s main oil customers to embrace the sanctions, seems to be quietly changing its mind, suggests Trevor Houser of New York-based Rhodium Group, a consultant firm. In January, Indian imports of Iranian crude spiked, Houser says, but since then the Indian government has "encouraged its refiners to start diversifying away from Iranian crude," Houser told me by email. Refiners haven’t resisted much, but rather have been "eager to do it anyway, given persistent payment problems and the risk of future supply disruptions," Houser says. Look for oil prices to continue rising.


Break in Sudan? Sudan and breakaway South Sudan for years have seemed to like nothing better than to fight. Now, much is being made of an agreement by the leaders of both countries to meet next month and try to settle their biggest rift — over the sharing of oil revenue, reports the Wall Street Journal. Sudan President Omar al-Bashir and South Sudan President Salva Kiir are to meet in the next two weeks and sign ceremonial documents, while — one hopes anyway — horse-trading over the revenue from 350,000 barrels of daily oil exports. That is the volume of oil produced by South Sudan and sent north by pipeline for export; South Sudan has stopped the flow since accusing Sudan of diverting millions of dollars worth of the crude from the pipeline. The resolution will be somewhere between the numbers 1 and 32. The former — $1 — is the transit fee per barrel offered to Sudan by Kiir; the latter — $32 — is the per-barrel fee south by Bashir. It seems like a wide difference. One remains skeptical of any deal they reach holding.