The Weekly Wrap — Jan. 13, 2012

Role-playing in the Persian Gulf: Iran continues to insist that it is building an innocent nuclear power industry but, as it discovered again this week, a successful serial assassin does not believe it. Mostafa Ahmadi Roshan is the fifth Iranian nuclear scientist to be slain in four years, writes the New York Times’ Scott Shane, who reports on a general spate of mayhem rained on Tehran’s purported foray into nuclear energy. At New York magazine, Dan Amira regards the predicament of Iranian nuclear scientists as an opportunity for amusement. Certainly there is something darkly satirical about Iran’s self-parody. If you really are only developing nuclear power, open the whole thing up like a public swimming pool so any mystery vanishes. If you, conversely, are carrying out as everyone assumes — that is, developing nuclear arms — why stir the pot with provocative outbursts all-but certain to lead to attempts to confound your program? Why not wait until your work is complete before throwing sand into others’ eyes?

Whatever the case, the U.S., Europe and an important majority of their allies have agreed collectively to stop buying Iran’s 2.3 million barrels a day of oil exports. Of Iran’s major customers, only China and perhaps Turkey so far refuse to go along. The client for some 540,000 barrels of Iranian crude a day, China will probably continue this trade and store the crude in its strategic petroleum reserve, reports the Financial Times’ Javier Blas. As for the rest of Iran’s output, those familiar with oil smuggling have assumed that Iran will simply turn to deep discounts in order to unload its crude on the black market, but Blas writes that Tehran may have a difficult time doing so because of a global embrace of the sanctions.

Iran has threatened to block the Strait of Hormuz, but probably won’t do so since it would be one of the primary victims of such a blockade, assert Frank Verrastro, David Pumphrey and Guy Caruso at the Center for Strategic and International Studies in Washington. Yet one cannot feel entirely certain about that, they add. "Desperate nations driven to the brink sometimes do desperate and unpredictable things, and even if short lived, disruption to shipping in the Gulf would undoubtedly wreak havoc in oil markets," the trio says.

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In shale, it’s the oil not the gas: The world is awash in natural gas, and one result is fire-sale prices in the United States. Gas is at a two-year low in the U.S. — below $2.75 per 1,000 cubic feet; as a comparison, the price was $13 per 1,000 cubic feet in 2008. But do not shed a tear for natural gas companies, write the Wall Street Journal’s Russell Gold, Daniel Gilbert and Ryan Dezember. It turns out that many of the wells drilling for shale gas (pictured above) contain not just gas but much oil and other liquids, which are priced according to an oil benchmark, currently just under $100 a barrel. The WSJ trio quotes Amy Myers Jaffe of the Baker Institute at Rice University: "Companies are making so much money on the oil and natural-gas liquids that gas is basically free. They are saying to themselves: ‘I am going to produce the gas regardless of what the price is, because I’m making money on the oil and liquids.’"

This does not mean that gas companies are content giving away their product. What they would like to do is export gas abroad. Quite apart from gas company profits, a geopolitical upside to such exports would be more balance to Europe’s energy market, which currently relies heavily on Russia, writes Judy Dempsey at the New York Times. Russian gas is undercut to the degree that U.S. shale gas is shipped to Europe in the form of liquefied natural gas.

Here is where we have a serious industrial squabble. A company called Cheniere Energy has obtained federal approval for a liquefied natural gas terminal at Sabine Pass, Louisiana, on the Gulf of Mexico, and other companies have applied for seven more LNG export permits. If all are granted, they would ship 18 percent of current U.S. gas production, writes the Financial Times’ Ed Crooks. But U.S. industrial companies such as chemical and metals giants are urging Washington to block the export of gas; they like low gas prices because that makes their products cheaper to make. Crooks quotes Alcoa CEO Klaus Kleinfield, who sees political advantage in talking not about his own profits, but jobs. "If you use very competitive energy, you open up opportunities for a lot of industries to expand here," Kleinfield says.

The gas revolution is slow off the mark in China as well: Beijing has made ambitious growth targets for gas consumption, but is sluggish getting there. One reason, writes the WSJ’s Wayne Ma, is internal price controls on importers like PetroChina. "The state oil major pays about $9 per million British thermal units for its [gas] imports from Turkmenistan," Ma writes. "But it receives only about half that when it sells the gas on because the government sets the price paid by retail distributors. That knocked $433 million off PetroChina’s profit in the first nine months of 2011." As with U.S. companies, one should not worry about PetroChina’s bottom line. But look for the company to find a way to reduce the degree to which it carries the weight of China’s natural gas consumption goals.

All things being equal, a cheaper car is better: Day after day, week after week comes the drumbeat: Plug-in hybrid and electric cars cost too much. And there is no getting around it — they do, and that is why consumers don’t buy more of them, including in China, whose leaders, we had previously been told, could simply order their people to buy what they were told. So electrified vehicles are a failure and should be buried and forgotten, correct? No. Hybrids and electrics are in a typical developmental incubation period in which carmakers from Germany, Japan, and the U.S. are starting out with costly and sometimes not-quite-ready-for-prime-time vehicles in order to be first movers, suggests the New York Times’ Nick Bunkley. (Their offerings were on display this week at the Detroit Auto Show.) They know the price must come down, and that their cars need to travel further on a charge. The surprising thing is not that BMW, Audi, Mercedes, Ford, Toyota and General Motors are launching electrified vehicles before they can honestly expect large sales. It is that so many people steeped in this high-tech era are ready to march the scalawags out of town so early in the product cycle.

More on oil prices and petro-rulers: Goldman Sachs cannot decide why oil prices will surge by 25 percent this year (Geopolitics? An improved economy?), but simply forecasts that they will. Others think that prices are headed lower. So which is it, and how will it affect petro-rulers whose reign relies on those oil dollars? Let’s consider Russia’s Vladimir Putin, whose ups and downs are followed avidly as a parlor game of the world’s geopolitics and energy analysts (yes we play it, too). As of now, Putin appears to be up but a bit wobbly, given the discovery that tens of thousands of the folks who prospered on his watch do not love him. In addition, we are starting to see descriptions of the suffering Russian state: Since last month’s Russian parliamentary elections, the value of the ruble has fallen by 3 percent against the dollar. In the last quarter of 2011, wealthy Russians pulled $38 billion out of the country, writes the Wall Street Journal’s Ira Iosebashvili; in all, $84.2 billion fled Russia last year. Clearly, oil and gas dollars are insulating neither Putin nor Russia from the winds of global politics, economics and social change. Studying these numbers, it is clear why investment houses, along with other hallowed analysts, may at times be puzzled and issue conflicting reports just days apart. Putin himself is experiencing confusion. When oil prices are low, they can play havoc with a country (i.e., troubled Putin predecessor Boris Yeltsin, under whom oil prices plummeted to $10 a barrel). But even when oil prices are high, they alone will not save you.