The Weekly Wrap — Dec. 3, 2011

A tail risk called Iran: Back in September, New York oil analyst Edward Morse wrote a paper called "Tail Risks and the Oil Market: Expecting the Unexpected." The paper (if anyone finds an open-sourced on-line link for all to avail, please let me know) describes the outsized impact of big surprises on oil prices — "hurricanes, floods, refinery fires, tanker spills, accidents, terrorism, unpredictable geopolitical strife within OPEC," Morse writes, could drive oil prices through the roof, or just as easily cause them to collapse. That quality, he suggests, makes oil a great investment vehicle — for those prepared to accept the risks, of course. I write about the role of tail risks this month in Alberta Oil magazine. Others have noted this general law of physics — Nassim Taleb named it the "black swan" affect; coming from another angle, Stephen Greenblatt calls it "the swerve." For the rest of us, there is a focus on the pure impact on our lives, which at the moment includes what will happen with Iran. Will it develop nuclear weapons? If stymied by sanctions, imposed this week by the U.S. and Europe, will it send Hezbullah against Israel? Will it block the Strait of Hormuz?  Will it elect to withdraw its 2.2 million barrels a day of oil exports off the market, as the Financial Times’ Javier Blas asks? The FT published a column by two British writers who suggest that we might be "sleepwalking into a war with Iran."

The Obama administration is attempting to navigate the shoals by shaking the stick of death-strike sanctions, but not actually imposing them. As this blog has suggested, tough sanctions can bite, but companies and countries eventually figure out how to bypass them through the good offices of smugglers and assorted other wily middlemen. Yet the tail risks remain. This is especially so with a nation like Iran, whose essence of power lies in its menacing hint of roguish mischief.

In Russia, Putin always wins: If you believe the polls, Russians are going to convey unambiguous dissatisfaction with their rulers in tomorrow’s elections. Revenue from $110-a-barrel oil is pouring in to Russian coffers, yet many of the country’s citizens think that is not enough, these polls say. The pro-Vladimir Putin United Russia party can no longer rely even on the support of ultra-right groups, reports Reuters’ Thomas Grove. One problem with these analyses is the suggestion that Putin stands to be the big loser. The bigger victim by far would be President Dmitry Medvedev, who in a gentleman’s agreement with Putin is stepping down to run for prime minister; should the election result in the foreseen lukewarm support for United Russia, it is Medvedev who might be sidelined from political power. As for Putin, he will go on to fight another day in March presidential elections.

Regardless of the election outcome, another fatality of the campaign is the warm-and-fuzzy aspect of the U.S.-Russia "reset" of relations. In Putin’s mind, it does not seem possible that scrutiny of his political plans can be home-grown; it instead is a western-funded conspiracy.  As part of the new brinksmanship, Washington and Moscow have unveiled dueling missile-defense plans. In Moscow, Medvedev says the U.S. proposal is a threat to Russia’s nuclear strategy. In the U.S., a senator accuses the Obama Administration of falling for a Russian intelligence trap, and is blocking confirmation of Obama’s nominee for ambassador to Russia — Michael McFaul, the coiner of the term reset — until he has written assurance that no classified missile defense data will go to Moscow. What is going unstated in the back-and-forth is that there is no proven U.S. anti-missile technology a quarter-century after then-President Ronald Reagan set the country on a course of creating a missile shield.

Recommended reading: an investigative dive into the accumulation of wealth by Putin’s close circle, by the Financial Times’ Catherine Belton.

U.S. energy independence, bananas and hucksterism: The world appreciates enthusiasm, which has been in short supply the last three or so years, and so it is not surprising that purveyors of the latest fervor — an apparition of energy independence in the world’s most gluttonous oil-consuming nation — are getting real mileage. Is the U.S. truly on the brink of accounting for its entire energy requirements, as experts keep telling reporters? A month ago, this blog attempted to drown this infatuation in cold water — no, the U.S. is nowhere close to meeting its own oil demand — but to no avail; it reappeared this week on page one of Wall Street Journal. The newspaper reports that, for the first time since 1949, the U.S. is exporting more diesel, gasoline and other fuels than it imports. That is a neat conflation of definitions — when most people think fuel, they think oil. So if you say exports are suddenly exceeding imports, you can turn a lot of heads; people might start running down the street shouting hallelujah and other exhortations (this in fact happened in terms of matching stories by Reuters, Bloomberg and the Financial Times).

But should we be excited? Imagine the humble banana. Suppose that the United States imports 9 million of this elongated fruit a day, and consumes 7 million of them. What would you say if enterprising Americans turned around and exported 2 million banana splits? Would you say that Americans are on the brink of banana independence? Of course not. As the WSJ writes further down in the piece, the development reflects a weak U.S. economy as compared with Argentina, Brazil, Mexico, Peru and Singapore, which are the main booming economies snapping up the oil products turned out by U.S. refineries.

Renewable trouble in China: Is China inexorably swallowing up the nascent global renewable energy industry? In a long take, the Financial Times’ Leslie Hook and Ed Crooks examine why Chinas’s solar and wind industries are looking decidedly mortal of late. Starting with the decade-long history, Chinese Communist Party leaders noticed and determined to respond to their colliding calculus — booming energy demand and catastrophic pollution. The answer was a colossal bet on renewable energy technologies — $54.4 billion in public and private spending last year alone, plus $47 billion in credit lines from state-controlled banks.  As a result, two Chinese companies — Sinovel and Xinjiang Goldwind — are in the world’s top three wind-turbine makers, and "seven of the world’s 10 top manufacturers [of solar voltaic panels] are Chinese." Yet these makers are buffeted by the same pressures facing all: The world’s biggest solar and wind markets — Spain, Italy, Germany and the U.K. — are scaling back. In China, too, a quarter of standing wind turbines are idle. It does not help that these industries have been built not on mere state ambition to dominate, but on political connections. The two wind-makers cited above — Sinovel and Goldwind — are recipients of large investments by a fund co-founded by Wen Yunsong, the only son of Premier Wen Jiabao. One suggestion is that such investments are not necessarily in quality companies. Another is that these companies may be less formidable than they might seem.