The Weekly Wrap — May 11, 2012 (Part II)

The geopolitics of bananas, China and over-heated rhetoric: Are oil rigs a strategic weapon? The answer is apparently yes if you are China, which has joined Russia in the league of large nations carrying big petro-spears. The South and East China seas have long been a source of friction between China and its neighbors for ...

Nichoas Kamm  AFP/Getty Images
Nichoas Kamm AFP/Getty Images
Nichoas Kamm AFP/Getty Images

The geopolitics of bananas, China and over-heated rhetoric: Are oil rigs a strategic weapon? The answer is apparently yes if you are China, which has joined Russia in the league of large nations carrying big petro-spears. The South and East China seas have long been a source of friction between China and its neighbors for reasons of Beijing's naval aspirations, the promise of oil and gas riches underlying the waters, plus the occasional kerfuffle over fish. For a month, China and the Philippines have been in a standoff over a fishing ground called Scarborough Shoal. But now the gloves are off. China has begun to block imports of Philippine bananas, and to suspend tourism in the Philippines. On Monday, an anchor on China's state-run CCTV went so far as to say -- twice -- that the Philippines is in fact a Chinese territorial possession, reports Time's Hannah Beech. Two days later, we heard from Wang Yilin, chairman of the state-owned oil company Cnooc, speaking on the usually staid occasion of the launch of new oil drilling, in this case in the South China Sea off the coast of Hong Kong. "Large deep-water drilling rigs are our mobile national territory and strategic weapon for promoting the development of the country's offshore oil industry," Wang said, according to the state news agency Xinhua. Erica Downs, the China oil watcher at the Brookings Institution, told the Wall Street Journal's China Real Time blog that she suspects that Wang is addressing either domestic political or financial audiences -- seeking favor or more financial support. Look for more such tantrums given the numerous political flaps going on simultaneously in China, along with the scheduled turnover of national leaders.

 

Abundant oil, and the hope of serendipity: Is the problem with the oil abundance narrative -- the talk that the U.S. is on the cusp of energy independence -- that it relies too heavily on everything going right? Perhaps. Frank Verrastro -- who runs the energy program at the Center for Security and International Studies, and was formerly with Pennzoil, and before that in numerous federal government positions -- thinks that a multitude (and probably too many) stars need to line up for the abundance folks to have their way. There is much oil below ground to be sure, specifically in the shale oil of North Dakota and Texas. The hangups come in extracting it -- little matters such as the cost of production, the impact on water, and the price at which the oil can be sold. "If you are just doing energy resource development balls to the wall, then can you do this because the resource is there? Absolutely," says Verrastro -- as long as you ignore project economics, financing, government regulation, environmental concerns, required infrastructure and rates of return. John Hofmeister, the former president of Shell USA and author of Why We Hate the Oil Companies, also thinks the U.S. oil abundance narrative is optimistic. As field development proceeds, oil production will level off at some point, and not grow as far as the eye can see, Hofmeister told me. Shale oil and gas development will have to slow as it gets closer to population centers, he said. Says Verrastro: "[The forecasts are] way premature. We are in chapter 1, page 10, and some people have us at 18 million barrels by 2020."

The geopolitics of bananas, China and over-heated rhetoric: Are oil rigs a strategic weapon? The answer is apparently yes if you are China, which has joined Russia in the league of large nations carrying big petro-spears. The South and East China seas have long been a source of friction between China and its neighbors for reasons of Beijing’s naval aspirations, the promise of oil and gas riches underlying the waters, plus the occasional kerfuffle over fish. For a month, China and the Philippines have been in a standoff over a fishing ground called Scarborough Shoal. But now the gloves are off. China has begun to block imports of Philippine bananas, and to suspend tourism in the Philippines. On Monday, an anchor on China’s state-run CCTV went so far as to say — twice — that the Philippines is in fact a Chinese territorial possession, reports Time’s Hannah Beech. Two days later, we heard from Wang Yilin, chairman of the state-owned oil company Cnooc, speaking on the usually staid occasion of the launch of new oil drilling, in this case in the South China Sea off the coast of Hong Kong. "Large deep-water drilling rigs are our mobile national territory and strategic weapon for promoting the development of the country’s offshore oil industry," Wang said, according to the state news agency Xinhua. Erica Downs, the China oil watcher at the Brookings Institution, told the Wall Street Journal’s China Real Time blog that she suspects that Wang is addressing either domestic political or financial audiences — seeking favor or more financial support. Look for more such tantrums given the numerous political flaps going on simultaneously in China, along with the scheduled turnover of national leaders.

 

Abundant oil, and the hope of serendipity: Is the problem with the oil abundance narrative — the talk that the U.S. is on the cusp of energy independence — that it relies too heavily on everything going right? Perhaps. Frank Verrastro — who runs the energy program at the Center for Security and International Studies, and was formerly with Pennzoil, and before that in numerous federal government positions — thinks that a multitude (and probably too many) stars need to line up for the abundance folks to have their way. There is much oil below ground to be sure, specifically in the shale oil of North Dakota and Texas. The hangups come in extracting it — little matters such as the cost of production, the impact on water, and the price at which the oil can be sold. "If you are just doing energy resource development balls to the wall, then can you do this because the resource is there? Absolutely," says Verrastro — as long as you ignore project economics, financing, government regulation, environmental concerns, required infrastructure and rates of return. John Hofmeister, the former president of Shell USA and author of Why We Hate the Oil Companies, also thinks the U.S. oil abundance narrative is optimistic. As field development proceeds, oil production will level off at some point, and not grow as far as the eye can see, Hofmeister told me. Shale oil and gas development will have to slow as it gets closer to population centers, he said. Says Verrastro: "[The forecasts are] way premature. We are in chapter 1, page 10, and some people have us at 18 million barrels by 2020."

 

For the Sudanese, first it was oil and now it is survival: Sudan broke into two nations last July, and since then has spent much time in virtual war with itself. Apart from the usual ethnic and religious rationale, there are economic reasons: Both states — Sudan and South Sudan — are in deep trouble.  Before the breakup, Sudan got about 90 percent of its revenue from oil exports. In the first quarter of 2011, the country had a trade surplus of $1.7 billion, Reuters reports; but in the same quarter this year, it has a trade deficit of $540 million. Against these data, opposition leader Hassan al-Turabi is forecasting doom for the regime of his former protégé, Sudan President Omar Hassan al-Bashir. "The economic crisis has intensified and this is very dangerous. If the hungry go out in a revolution, they will break and destroy," Turabi said in the Reuters report. " … I expect it won’t take us long now." South Sudan, which received most of the oilfields in last year’s national divorce, cut off oil production in January after accusing the north of stealing shipments. So, in order to stave off collapse, it has been borrowing abroad, reports Bloomberg. South Sudan secured a $100 million line of credit from Qatar National Bank, $500 million from an unidentified benefactor, and expects money from China as well. Will reason prevail? Last year, we thought it already had.

<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>

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