The Weekly Wrap — Jan 6, 2012

Oil, and the geopolitics of China and Iran: President Barack Obama’s new military policy — the U.S. focus will shift to two geographic areas, China and Iran — steps up the geopolitics of oil. In the case of China, what keeps American policymakers up at night? It is the prospect of a challenge to the U.S. control of movement on the world’s seas. As of now, Beijing’s navy isn’t impressive, but it has proven a nuisance in one place — the South China Sea. It is there that Washington — along with Chinese neighbors such as Vietnam and the Philippines — has thrown down a red line. What has the South China Sea friction been about? As suggested, for the U.S. it is the geopolitical influence that accompanies dominance of the world’s seaways. But, locally speaking, it is mostly a belief that the South China Sea lies above massive volumes of oil and gas. So the U.S. will maintain a naval presence in the area.

No one at the moment is going to go to war over the South China Sea, but in the case of Iran, we enter a different universe. Europe appears likely Jan. 30 to approve a near-cutoff of oil purchases from Iran. Obama signed a U.S. version of the sanctions this week. Iran’s response has been military — it calls the sanctions an act of war, and has threatened to close the Strait of Hormuz, the channel for 17 percent of the world’s daily oil supply. As a demonstration that it can do so, Iran has announced more naval maneuvers, to be held next month, reports Reuters’ Robin Pomeroy. So are we at the cusp of World War III, as some have suggested, especially if Iran unleashes Hezbollah on Israel? In Tehran, the Washington Post’s Thomas Erdbrink and Joby Warrick describe a populace stocking up in the event of fighting. At Foreign Affairs, Suzanne Maloney suggests that Iran correctly defines the sanctions as a war footing: By attacking Iran’s Central Bank, and thus its ability to pay its bills, and be paid, the West has "backed itself into a policy of regime change." Even if one regards negotiations as ineffectual, Maloney writes, a shift to promoting the ouster of Iran’s rulers is worse, placing a reliance on dynamics that "Washington has little ability to influence." Commentator Fareed Zakaria disagrees. He says that Iran is no threat, but instead is becoming "weak and getting weaker."

Read on for more on Iran, and the rest of the Wrap.

Oil prices meanwhile have risen considerably because of Iran’s Hormuz threat. Initially, traders forecast that prices would double in case Iran made good on the threat, but now no one is sure. For one thing, Western diplomats have been working overtime to make sure that, while they can punish Iran, the West does not suffer as a consequence. Members of the International Energy Agency, such as the U.S. and Europe, have plans to put an unprecedented 14 million barrels a day of crude onto the market from their strategic reserves, reports Reuters. In Europe, the sanctions are being formulated so as not to disadvantage countries like Italy, which has made loans to Iran that are repaid in the form of oil; the sanctions will not bar such loans-for-oil arrangements, reports Bloomberg’s Thomas Penny. The U.S. version, signed into law this week, also allows for wiggle room. Obama can determine that a given country has made a good-faith effort to cut back its purchases of Iranian oil, or that there are compelling national security reasons for an outright exemption. So for Iran’s oil customers — that is, those that prefer not to contract their oil from the black market — a big question is how to qualify for such exemptions, writes the Wall Street Journal’s Min-Jeong Lee. Japan and South Korea, for example, import all of their oil (15 percent and 9 percent from Iran, respectively), and now must try to figure out how much of a cutback will satisfy Obama.

At the Wall Street Journal, Liam Denning urges traders not to be too sure of anything: The sanctions could tighten global supplies, but they also could result in a glut. In addition to the IEA volumes, smugglers will create a black market for Iran’s oil. Denning argues that war is unlikely, but that is the most unpredictable dimension of the brinksmanship.

Fracking, earthquakes and the PR strategy of yawning: Is there a difference between your house catching fire by itself and a fellow down the street setting it ablaze? At O&G, the balance of opinion is that there is, but that is just us. But we are hearing the opposite frame of reference from others observing the recent outbreak of earthquakes during the underground injection of wastewater from "fracking," which is slang for the drilling of shale gas. The event at issue is a spate of 11 earthquakes in a space of 10 months at a fracking site in Youngstown, Ohio. Against a resulting renewed round of critical scrutiny, the drillers themselves, along with investors who buy shares in fracking companies, argue that the quakes have been hyped. Earthquakes are a fact of life, the frackers say, and soon enough the hoopla will die down.

A few days ago, I noted that billions of dollars in investment continues to pour into shale gas fields despite environmental reservations. In the same vein, Bernstein Research analyst Bob Brackett forecasts that, while the public may continue to worry, significant new regulation is unlikely. In a note to clients, Brackett likens the situation to coastal shark attacks. A minuscule number of maulings have terrorized the public; but sharks are not (yet at least) outlawed. "There are hundreds of millions of sharks in the ocean, but [only] a handful of human fatalities a year (which preferentially seize the attention of the public and create a biased image of what a shark does)," he writes. America’s National Gas Alliance, the leading fracking industry association, is similarly playing down the temblors. "It is important to put seismic activity in general and seismic activity in natural gas development areas into context," ANGA says in a new post on its website. "Minor and imperceptible seismic activity is extremely common."

Back to housefires. We clearly have a gap in the perception of earthly events and public relations. In this particular case, the folks in Youngstown are highly unlikely to raise a fuss against any local business in the event of a natural earthquake, or any act of the weather for that matter; however, they might do so if the company caused it. In other words, the fracking industry yet again demonstrates PR skill rivaling BP’s: You will not persuade the public by and large to go along with provoked earthquakes.  

Some readers have asked me to point out the following, which I am happy to do: The Youngstown temblors have occurred not in the process of the gas drilling itself, but in the disposal of the water used in the drilling procedure. To get rid of this wastewater, workers drill a separate well, and inject the water back into the Earth. Scientists say such injections correlate with earthquakes.

Speaking of fires, what about the Volt? Numerous companies in a number of countries are launching electric and plug-in hybrid vehicles as the spearpoint to what they hope will be a vibrant new industry in the decade or two ahead. The rollout will be a slow ascent as history shows that new technology is usually only gradually perfected before wide adaptation. Short of a miracle breakthrough, the hybrids will come first, because their costs will fall and, since they contain a gasoline engine along with the battery, they address what is known as range anxiety, which refers to the inclination of people to get nervous when the battery gets low, for instance in a blizzard while in traffic. Before all that, however, carmakers need to address an immediate concern, which is fire. As with earthquakes (see previous item), people do not ordinarily accept fires in association with the products they embrace. In November, General Motors and federal regulators disclosed that the company’s plug-in hybrid passenger car had caught fire three times during severe crash testing. The fire in the GM Volt was battery-related, which triggered nightmarish memories of the PR and consumer black eye suffered in 2006 and 2008 by Sony because of laptop fires. GM’s immediate response was to offer a loaner car to any Volt owner, or to buy back any Volt. A couple of hundred owners of the vehicle took GM up on one or the other offer, the company says. Now the company says it has confirmed why the fires happened — the culprit was coolant that surrounds the battery, which caught fire because of a short circuit in unrelated electric equipment. Federal authorities have not yet announced their own conclusion, but GM is sufficiently certain that it has advanced a fix, reports Kevin Bullis at MIT Technology Review — starting next month, Volt owners can bring their vehicles to dealers, where mechanics will add braces to an encasement around the battery; install a sensor on the coolant; and put in a device to keep the coolant from overflowing. As suggested, we are not looking at a rapid process — we will be watching for the success or failure of electric-driven vehicles for some years.

Judgment in Ecuador: One of the nastiest courtfights of the modern age involves Chevron and plaintiffs for an Ecuadoran town called Lago Agrio. For 18 years, these folks have fought hammer, tong and axe over wastewater pollution left behind in Lago Agrio when Texaco, a company that Chevron bought in 2001, stopped drilling in Ecuador in 1992. Last year, an Ecuadoran judge handed the plaintiffs an $18 billion award against Chevron, and this week the judgment was upheld. The plaintiffs lawyers say they will pursue fulfillment of the award against Chevron around the world, the Financial Times reports. Chevron meanwhile is pursuing a fraud and racketeering case, claiming that the plaintiffs fabricated the evidence. The record is so fraught with innuendo that it is hard to be clear what happened. For those interested, two illuminating items have emerged this week, both of which are recommended. At the New Yorker, Patrick Radden Keefe produces a long, exceedingly well-written account of the case with some very strong and visual material. For its part, Chevron emailed me the following video, which lays out its case that the plaintiffs themselves drafted the judge’s sentence against the company.

Said Kent Robertson, Chevron’s director for issues management and litigation communications:

We believe there is overwhelming evidence that the initial judgment was not written by the judge who issued it.  The fact the appeals panel didn’t seem to care about this matter is, in itself, and indictment of Ecuadr’s judiciary as well as the process we’ve endured.  For what it’s worth, the U.S. State Department has also reported on Ecuadorian "judges parceling out cases to outside lawyers, who wrote the judicial sentences and sent them back to the presiding judge for signature."