The Weekly Wrap: July 30, 2011

Crisis, what crisis? One of our era’s most prevalent themes is that of ostensible crisis, the short list of which includes financial trouble, terror and energy. As regards the last item, the truth depends where you live. Qataris are experiencing no crisis; Pakistanis are.  What about gas-guzzling Americans — are they in the woeful fix ...

Paul J. Richards  AFP/Getty Images
Paul J. Richards AFP/Getty Images
Paul J. Richards AFP/Getty Images

Crisis, what crisis? One of our era's most prevalent themes is that of ostensible crisis, the short list of which includes financial trouble, terror and energy. As regards the last item, the truth depends where you live. Qataris are experiencing no crisis; Pakistanis are.  What about gas-guzzling Americans -- are they in the woeful fix that seemingly every U.S. resident regardless of profession says they are? By an important metric -- supply -- the answer may be no, at least for the moment.  That is because, contrary to prevailing thought, the U.S. is awash in both oil natural gas. True, the country continues to import 9 million barrels of oil a day, but storage at the supply hub of Cushing, Oklahoma is brimming. This is the situation going forward as well -- Americans are not necessarily at the mercy of dastardly forces outside the country, as the narrative goes.

As we have discussed, there is an almost embarrassing excess of oil next door to the United States -- to the south in Venezuela and to the north in Canada. ExxonMobil reported this week that, having been spurned in large parts of the rest of the world, it is returning in a big way to its roots in the United States. In just the three months of April to June this year, Exxon said it spent $4 billion exploring and producing oil and natural gas in the U.S., Ben Casselman and Isabel Ordonez write in the Wall Street Journal. Production is on the rise in the long-declining U.S.

This does not mean that Americans are out of the woods -- a supply crisis yet awaits toward the end of next year, most industry analysts say. But are these analysts right? One wild card is Libya. In the same way that market psychology shifted to pessimism earlier this year when an outbreak of the Arab Spring shut in Libya's sweet oil, look for prices to moderate when the country's crude comes back. This is not wild thinking. Edward Morse, head of commodities research at Citi Global Markets, thinks it is "reasonable to assume" that a year from now, Libya will again be selling a third to a half of its previous 1.2 million barrels a day of exports. That is a considerable volume of oil. In Morse's low-key argot, the result will be a "tangible impact on global markets." In layman's language, look for fireworks, dancing and cheerleaders.

Crisis, what crisis? One of our era’s most prevalent themes is that of ostensible crisis, the short list of which includes financial trouble, terror and energy. As regards the last item, the truth depends where you live. Qataris are experiencing no crisis; Pakistanis are.  What about gas-guzzling Americans — are they in the woeful fix that seemingly every U.S. resident regardless of profession says they are? By an important metric — supply — the answer may be no, at least for the moment.  That is because, contrary to prevailing thought, the U.S. is awash in both oil natural gas. True, the country continues to import 9 million barrels of oil a day, but storage at the supply hub of Cushing, Oklahoma is brimming. This is the situation going forward as well — Americans are not necessarily at the mercy of dastardly forces outside the country, as the narrative goes.

As we have discussed, there is an almost embarrassing excess of oil next door to the United States — to the south in Venezuela and to the north in Canada. ExxonMobil reported this week that, having been spurned in large parts of the rest of the world, it is returning in a big way to its roots in the United States. In just the three months of April to June this year, Exxon said it spent $4 billion exploring and producing oil and natural gas in the U.S., Ben Casselman and Isabel Ordonez write in the Wall Street Journal. Production is on the rise in the long-declining U.S.

This does not mean that Americans are out of the woods — a supply crisis yet awaits toward the end of next year, most industry analysts say. But are these analysts right? One wild card is Libya. In the same way that market psychology shifted to pessimism earlier this year when an outbreak of the Arab Spring shut in Libya’s sweet oil, look for prices to moderate when the country’s crude comes back. This is not wild thinking. Edward Morse, head of commodities research at Citi Global Markets, thinks it is "reasonable to assume" that a year from now, Libya will again be selling a third to a half of its previous 1.2 million barrels a day of exports. That is a considerable volume of oil. In Morse’s low-key argot, the result will be a "tangible impact on global markets." In layman’s language, look for fireworks, dancing and cheerleaders.

Read on to the jump for more of the Wrap

 

The little shakeup … For many months, I have argued that the shale gas industry is damaging itself: While prodigious shale gas has the potential to disturb the geopolitical status-quo in numerous places around the world, plus enrich many people, industry players are potentially jeopardizing all by refusing to seriously act on credible local concerns in drilling regions. Now we have new evidence that the industry is seriously over-playing its hand in ground zero of the industry boom, which is the United States. At the New York Times, Ian Urbina reports that the Securities and Exchange Commission has subpoenaed companies demanding documents — the agency wants to know if there is a material difference between what the companies say in SEC filings, and the cost and volume of gas they have been reporting to investors and shareholders.  As I’ve written, the companies almost certainly have exaggerated, since that is a hallmark of booms of all types, and legal precedence allows a buffer for embroidery, otherwise known as salesmanship. But there is a boundary, and the SEC wants to know if the companies crossed it. So the companies are fighting on two fronts: Environmentalists want to stop the practice of hydraulic fracturing, which they say imperils water supplies (this week, the U.S. Environmental Protection Agency imposed air-quality rules on the industry since it refused to police itself). And the SEC is poking at the heart of the industry, which is its claims of new gas supplies as far as the eye can see. Perhaps now the industry will get serious?

Update: O&G reader Frank Maisano helpfully provides this good briefer from Baird Equity Research.

 

… and Russia’s ups and downs: A key example of shale gas’s geopolitical impact has been Russia’s Gazprom: Once fearsome in Europe, Gazprom was reduced to a lesser force as shale gas undercut its market share on the European continent. But, as we’ve discussed, the Fukushima nuclear disaster has restored Gazprom’s fortunes: Japan, Germany and other big nuclear-power consumers are turning away from nuclear and hard to natural gas. At once, Russia and Gazprom are again players to contend with. I raise this subject in light of a lunch I shared yesterday at the Hay Adams Hotel with a small group of Russia watchers and the host, Philipp Missfelder, an influential voice on foreign policy matters in the German Bundestag, who was visiting Washington. The biggest surprise for me was Missfelder’s impression that German lawmakers are wholly on board with the country’s much greater reliance on Russian gas. That is, if Missfelder reads his colleagues correctly, German parliamentarians have set aside any misgivings regarding how Russia has tended to behave in the past when it has felt powerful, and embraced a reinvigorated Gazprom. Missfelder said he himself is not content with that state of affairs and retains hopes for the success of Nabucco, a star-crossed proposed pipeline to carry non-Russian gas into Europe.

Yet in the commentary of other lunch guests, one grasps the scale of Missfelder’s battle not just in Europe but in the United States. Two of the guests — who run the Russia and Eurasia groups at leading Washington think tanks — made robust arguments that Russia is an eclipsed gas power, and wholly at the mercy of the market. Its attempt to build an Asian market has failed, and in Europe "it is a price taker, not a price maker," one of these American specialists said. But is such happy confidence premature? There is evidence that it is.

Let’s look at the landscape. China is projected to require some 335 billion cubic meters of natural gas a year by around 2030, up from the current 130 billion cubic meters of gas. What will be the source of this additional 200 billion cubic meters a year of long-term supply? Let’s exclude China’s own potential shale gas for the time being since no one knows whether it can be extracted, and even if it can, at what scale. Turkmenistan has promised an additional 40 billion cubic meters. Australia will provide 60 bcm, perhaps more. Though it is not on the drawing board at the moment, perhaps Alaska will ship 30 bcm from the North Slope. So, back of the envelope, you reach approximately 150 bcm. What about the remaining need? The answer is that China will require most of the 68 bcm annual supply that it has been discussing with Russia in logjammed five-year-long negotiations. Russia’s Asia strategy is not failed; it is merely behind schedule.

Back at the Hay Adams, the discussion turned to an assertion that Russia needs Europe more than visa-versa. This is a misreading of how economic death-grips really work.

 

Engineering Pakistan: This blog has had fun at the expense of American geo-strategists who persist in promoting a rehabilitated Silk Road — the visage of a grand energy linkage of Central and South Asia. But the region seems to attract folks who read Kipling and Gibbon, then turn to policy-making. I refer now to a string of events that have followed the May killing of Osama bin Laden, and what one has to imagine is the handiwork of a feverishly creative soul deep in the bowels of Washington officialdom.

For decades, the CIA has had intimate relations with the Inter-services Intelligence directorate, the Pakistan Army’s spy agency known as the ISI. It has been one frequently marked by alleged ISI perfidy since the Pakistanis have always run a parallel game that sometimes aligns with U.S. policy, but usually has not. Yet, since all intelligence services on the planet are distinguished by weird pathologies, the ISI’s have been disregarded — until, as I say, the bin Ladin assassination. Just this month, we find the Obama Administration blaming the murder of Pakistani reporter Saleem Shahzad on the ISI, with Admiral Mike Mullen himself directly accusing Pakistan of sanctioning the killing; the FBI charging two U.S. citizens with illegal lobbying on behalf of the ISI; and the New York Times reporting that the ISI has been spying on and threatening Pakistanis living in the U.S. All of this occurred after the U.S. more or less accused the Army of harboring bin Ladin for years.

Major Gen. Athar Abbas, chief spokesman for the Pakistani Army, has sensed an orchestrated campaign against the ISI, Reuters reports. Ordinarily I would dismiss such an accusation coming out of notoriously conspiratorial Pakistan, but as the revelations have emerged one after the other, I have wondered why the U.S. is suddenly risking its vital relationship. Then I read the news yesterday out of Turkey — Turkey’s senior military brass has resigned en masse as the civilian government tries 195 military personnel in an alleged coup plot.  As in Pakistan, Turkey’s military has dominated public affairs for decades. Now Turkey’s civilians have carried out a coup, and they are in charge.

Is such a turning of the tables possible in Pakistan, with the defanging of the ISI? The U.S. has long tried to shore up Pakistan’s civilian leadership, with little luck, partly because Pakistan’s civilian leaders are by and large corrupt and inept, partly because the Army is exceedingly well-organized, and partly because such complex maneuvers almost always fail. But — speaking purely hypothetically — what if the ISI could be gravely discredited? Would that provide an opening for even inept civilians to assert themselves?

These repeated black eyes against the ISI could be purely coincidental. But if the U.S. is systematically seeking to undermine the ISI, it is an interesting but dangerous game. Pakistan is not Turkey, which has one of the most vibrant economies and pluralistic cultures in the Muslim world. Asif Zardari is not of the caliber of Recep Tayyip Erdogan. A teetering Army in Pakistan would not necessarily leave the country more stable. Kipling is best savored over a snifter of cognac, and then relegated to the bookshelf.

 

The Kremlin Contest: Contestants thus far are more or less balanced between forecasts for Dmitry Medvedev to continue as Russia’s president, and Vladimir Putin to return to the Kremlin in elections next March. This week, one contrarian contestant in the Kremlin Contest wagered that the two will make a game of it and both run for president. Check out the totally easy rules here and send your entry. Tell us who will be Russia’s next president. Use the email link above my postage-stamp size photo on the right of the blog. Or tweet to me at @stevelevine. The deadline is Sept. 1.

<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>

More from Foreign Policy

An illustration shows George Kennan, the father of Cold War containment strategy.
An illustration shows George Kennan, the father of Cold War containment strategy.

Is Cold War Inevitable?

A new biography of George Kennan, the father of containment, raises questions about whether the old Cold War—and the emerging one with China—could have been avoided.

U.S. President Joe Biden speaks on the DISCLOSE Act.
U.S. President Joe Biden speaks on the DISCLOSE Act.

So You Want to Buy an Ambassadorship

The United States is the only Western government that routinely rewards mega-donors with top diplomatic posts.

Chinese President Xi jinping  toasts the guests during a banquet marking the 70th anniversary of the founding of the People's Republic of China on September 30, 2019 in Beijing, China.
Chinese President Xi jinping toasts the guests during a banquet marking the 70th anniversary of the founding of the People's Republic of China on September 30, 2019 in Beijing, China.

Can China Pull Off Its Charm Offensive?

Why Beijing’s foreign-policy reset will—or won’t—work out.

Turkish Defense Minister Hulusi Akar chairs a meeting in Ankara, Turkey on Nov. 21, 2022.
Turkish Defense Minister Hulusi Akar chairs a meeting in Ankara, Turkey on Nov. 21, 2022.

Turkey’s Problem Isn’t Sweden. It’s the United States.

Erdogan has focused on Stockholm’s stance toward Kurdish exile groups, but Ankara’s real demand is the end of U.S. support for Kurds in Syria.