The Weekly Wrap — June 8, 2012

Australia’s lop-sided economy: Given the jobless, growthless doldrums affecting most of the world’s economies, does it pay to rev up your economy and employment rolls with the engine of natural resources, as long as you are careful to avoid the dreaded resource curse? As it happens, this experiment — being pushed by loud voices in the United States — has been under incubation for several years in Australia, the leading producer of coal, iron ore and (in coming years) liquefied natural gas for booming Asia. As I write this week at EnergyWire, this raw materials juggernaut has resulted in a 51 percent Australian economic expansion over the last two years alone. And the plans are to go even bigger. The country plans a 20 percent, $23 billion expansion in coal production, adding some 75 million tons a year to the current production of some 350 million tons. On top of that, mining companies have proposed $46 billion in added coal projects that would more than triple current production to some 1,100 million tons.

As one might suspect, there are some problems with these numbers. First, the raw materials boom has not led to economic nirvana for Australia. According to the country’s Bureau of Statistics, mining has added 103,000 jobs to the Australian economy over the last four years, but almost an identical number — 97,200 jobs — has been lost in manufacturing. Almost all the mining jobs have come in just two provinces — Queensland and Western Australia. The rest of the country has largely stagnated. Meanwhile, Australians have turned profligate. As the boom has built, Australians have gone into debt — last year, they owed an average of 156 percent of their disposable household income, more than triple their 49 percent debt load in 1991. "The amount of jobs being generated in the mining sector is really not that many compared with the lost tourism service jobs, the manufacturing jobs," Neil Bristow, managing director of H&W Worldwide Consulting," told me. "The commodities are bringing in significant money to the economy, but it’s only very much in part of the economy."

And what about the coal projections themselves? Are they reasonable? Perhaps not, suggests Nikki Williams, CEO of the Australian Coal Association. "Australia has little or no chance of actually delivering growth of this magnitude," Williams told me in an email exchange. "Limitations to our access to capital, human resources and the capacity of our project approvals systems are just some constraining factors." And the projections of Australia’s surge as an LNG exporter — plans to become the world’s largest LNG producer, and build from there? Joshua Meltzer, a former Australian diplomat and now a senior fellow at the Brookings Institution, says the scale of LNG production will be "fairly ground-breaking." Yet experts tell me that there simply is insufficient capital, equipment and manpower to manage everything on the drawing boards.

This is part of the point in evaluating the robust projections of oil and gas abundance we are hearing around the world. Paraphrasing Williams, will there be the capital, the people and the pure capacity to actually carry out the projects, presuming that all or most pass muster with the public and government agencies? The answer is most probably no.

Go to the Jump for the rest of the Wrap.

The good and bad news of Iraq’s oil bonanza: In Iraq’s oil industry, as in the country as a whole, we find both dangers and silver linings. Starting with the latter, oil production is up 7 percent from just a month ago, to 3 million barrels a day, and exports to 2.5 million barrels a day — the highest since the eve of the First Gulf War two decades ago. The upside is both local — the boom is propping up Iraq’s struggling central government – and global, helping to cushion the loss of Iranian oil to Western-led sanctions. Yet the bonanza is also a threat: It is imperiling Iraq’s integrity, and seems to be succoring neighboring Iran just as the West tries to bring it to its knees.

It appears that Iran has piggy-backed onto Iraq’s petro-successes. Large volumes of oil produced in Shiite-majority Basra — about 250,000 barrels a day, according to Stratfor — are being siphoned off and shipped out the back door for private profit. The main client is Iran, which might seem strange at first blush but actually isn’t. Iran, while flush with crude that it cannot sell because of the sanctions, is also chronically short of gasoline because of years of inability to acquire parts to maintain its refineries. Basra’s gasoline-smuggling gangs — possibly Shiite militias with Iranian sympathies and ties to Iran’s Revolutionary Guards — help to soften the sting, according to a regionally based expert with whom we spoke. That the shenanigans also help to soften the bite of the sanctions simply underscores a truism of oil physics — hydrocarbons will always find an exit route. This expert estimates the smuggled volume at a lower but still substantial 200,000 barrels a day that he says come not just from Basra but Kurdistan, which brings us to another subject — the problem of Iraq’s central authority.

The Kurds and Baghdad, both jealous of their authority, have been in a long standoff over the proceeds of Kurdish-produced petroleum. Now, the Kurds say they will proceed with a plan to defy the central government and export their oil independently through Turkey to the north. This new escalation in the tension follows a Kurdish decision in April to entirely halt the shipment of 100,000 barrels a day of oil south, claiming that the central government hasn’t been paying for it (as for the smuggling part, the Kurds say they are doing nothing of the kind but simply shipping their oil that direction because of the problems with Baghdad). The idea is to build a 1-million-barrel-a-day pipeline route terminating at the Mediterranean port of Ceyhan. The builder would be Calik Enerji, the energy arm of an Istanbul-based holding company whose CEO, Berat Albayrak, is the son-in-law of Turkish Prime Minister Recep Tayyip Erdogan. Kurdish leaders say they are merely seeking their due — they will shave off 17 percent of the proceeds, as they are permitted under current agreements, and pass on the remainder to Baghdad. But as recently as April, Kurdish leaders threatened secession, and Baghdad is prone to see perfidy in Kurdish oil ambitions. By getting in the economic middle, Turkey appears to be taking sides. In a report last week, the Middle East Economic Survey said flatly that "Ankara has clearly crossed a red line."

Foreign oil companies have found themselves in the crossfire. As this blog reported last November, ExxonMobil signed an exploration contract in Kurdistan without Baghdad’s approval, and as punishment, it was excluded last month from a Baghdad-led auction for contracts in the south. So far, both Exxon and Baghdad have carefully averted any public breach. But at some point, if there is no resolution between the Kurds and Baghdad, foreign companies on the hunt for big fields may have to choose sides, which might further damage Baghdad’s aspirations.

Is all of this simply the normal detritus of the road from war to stability, and nothing for the U.S. and the rest of NATO to worry about? Last month, the U.S. agreed to sell surveillance drones to Iraq in order to patrol offshore oil installations. The drones are not intended to aid the control of smuggling and unauthorized exports, and perhaps that is the way Prime Minister Nouri al-Maliki prefers it. Iraqi power is a balancing act among militias, Iran, the Kurds and others. To the degree Maliki can use Iraq’s oil boom to maintain contentment among them, he may manage to retain enough support to keep his regime and country together.

Risk? What risk? Since March 2011, worry-warts have ruled the oil markets. Oil prices soared above $120 a barrel, and remained high, roiled by the Arab Spring and the potential for war between Iran and Israel. The price has gyrated wildly, up one day and down the next — precisely the environment in which traders earn (and lose) the most money. The last six weeks, however, have been one, long decline, which according to Reuters is the longest losing streak for oil since 1998. What is next? A new forecast by Citigroup’s Ed Morse suggests that we are currently witnessing the future: Over the next decade, oil prices look likely to stay right about where they are — in the $80-a-barrel to the $90-a-barrel range. At times, they could even temporarily dip below $50 a barrel, Morse writes. Why? Principal reasons include much new oil supply pouring onto the market, along with a lower, $70-per-barrel break-even cost point for producing most of that oil. What are some of the implications should Morse be right? He himself flags trouble for petro-nations whose economies rely on higher prices — Russia, Iran and Venezuela among them. Meanwhile, the bar goes higher for the economics of clean-technologies that must compete with the gallon of gasoline and the lump of coal — wind, solar and electrified vehicles.

End of the Fukushima moratorium? In the wake of the Fukushima nuclear disaster last year, nuclear power suffered a dip in popularity. Quite apart from Japan’s withdrawal from the nuclear industry, Germany elected to phase out nuclear power plants by 2022, China postponed the approval of new plants, and around the world, talk of a "nuclear renaissance" subsided. Fifteen months later, business is starting to pick up again for nuclear, at least in Asia. China has approved a new nuclear safety framework, the absence of which had been a major hurdle to clearing new plants. Four new Chinese projects may proceed this year, including the inland Pengze plant along the Yangtze River that has been the subject of protests. But the main news comes from Japan itself. In an announcement today, Japanese Prime Minister Yoshihiko Noda got behind the reopening of two nuclear reactors in coastal Fukui. Noda said the facilities are safe, and that Japan needs nuclear power to fuel its economy heading into summer. Turning the rhetoric of safety on its head, Noda declared that "I cannot put people’s safety and livelihood at stake by not restarting the reactors."