Iran’s oil and the street battles

Strangely, world crude oil prices have been dropping since the contested elections in Iran.

Not even graphic pictures of bloodied demonstrators—who have been questioning the avowed re-election of Iran president Ahmadenijad—which have been streaming out of the Islamic Republic despite a clampdown on foreign reporting, could stem the decline.

While democratic proponents and civil liberties workers throughout the world have been watching the political and social developments lately, economists and business leaders have been scouring the market horizons for any signs of an oil price spike.

There ain’t any. It is unlikely that there will be, as a result of the tumultuous events on the streets of Tehran.

The concern is real since Iran is a major crude oil supplier to the world. Logic tells us that should the unrest spreads around the country, it could lead to shutting off the Iranian oil taps from its ports.

But the scenario is unlikely.

Revenues from its oil exports lubricate Iran’s economy, and its entrenched leaders would be ill-advised if the country leverages its oil production for concessions from the outside world. More so now that nagging questions about the veracity of election results, which have been violently expressed on the streets, could lead to more dollar shortage to the Iranian regime.

Whether by force or design, any stoppage of oil deliveries from Iranian ports would at best only cause a blip on world oil prices. Other OPEC countries which have been reining in its own oil production in hopes of improving prices, would gladly take the slack of Iranian oil.

Iran needs oil exports badly that it is finding ways to develop other sources of energy in lieu of oil.

Iran has been insisting that its nuclear program is basically for power production and for other peaceful purposes; and there are reasons for believing that it is so. As a scientist, I have visited the Iran’s atomic energy agency in the late ‘90s, and their world class scientists were more inclined to study non-weapons applications like isotopes production for agricultural and hydrological studies and nuclear power engineering.

They would rather have a large electrical generating plant powered by nuclear fuel than a plutonium enrichment plant. And the oil revenues saved could go a long way towards lining up the state coffers.

And why would the Iranians insist on developing its limited geothermal resources, like the one at Sabalan mountains northeast of Tehran, when it is far easier and cheaper to drill for oil on its vast untapped oil resources to obtain an equivalent amount of electrical power?

With the ugly turn of events on Tehran streets, one would have expected that the president of Iran’s nemesis, the United States, which regards itself as a bastion of democracy, would jump at the opportunity of bashing the Islamic republic. But no; U.S. President Barack Obama’s response to the unfolding events has been muted.

As if returning the complement, Iranian authorities have singled out the U.K.—not the “great Satan” the U.S.—as the prime “meddler” of the country’s internal affairs.

No, the turmoil in Iran wouldn’t cause a spike, or even a slow rise, of oil prices.

Oil prices, as well as stock markets around the globe, have been steadily rising since October of last year mainly due to hopes of recovery for the global economy. Now that signs of economic recovery are more like a mirage on the desert sun, the steady rise in oil prices is beginning to stall and major bourses have begun to take severe pounding lately.

May we have more energy this year!

At the end of each year, pundits are likely to crow about “successes” of their predictions whether they’re about stock market prices, oil prices or weather patterns. At the same time, when they are way off target—which happens more often than not-- they simply keep quiet and hope nobody keeps a scorecard. We are tempted to do the same, but there is really nothing much to gain from chest-beating, except enlarging one’s ego—which is actually dangerous since a burst ego can no longer be inflated.

We prefer to offer some encouraging words of hope for the coming year in the energy arena as this is the reason for our being (the blog, not the person).

Let’s start with the big picture.

When oil prices peaked at $147/bbl, we suggested that prices would slide fast. We were completely wrong—at the rate of decline. Now that it is about $38/bbl, will the price snap back once economies recover?

Theoretically, yes, but historically, periods of economic slowdown take years to complete, and we are just starting to feel the financial crisis which started in the middle of 2008. So don’t expect oil prices to go back to $90 soon. Despite the announced OPEC production cutback. Despite Hugo Chavez. Even despite political pressures on oil-producing Iran.

The Somali pirates may unnerve some owners of oil tankers. But navies of the world would come to the rescue. Oil shippers would gladly fork over pennies for an armed escort than lose a $100 million oil cargo. Besides, if these buccaneers have the misfortune of seizing a British ship, then Her Majesty’s submarines would probably torpedo the rogue galleon ship to oblivion. Come to think of it, might be a swell idea to teach these bastards some good manners.

So, oil prices are likely to be around $25 to $30 per barrel rather than $90. This is because the world is now awash in oil. In fact, in many parts of the world, potable water is more expensive than oil.

The figures also represent more or less the cost of producing oil on the average worldwide. In the U.S., onshore production is about $20/barrel, but offshore and so-called enhanced oil production could cost up to $70/barrel. The effect of this on U.S. upstream oil producers is consolidation. Many of the lesser oil players would groan under low oil costs and difficulty in getting credit and finance; they would end up feast food for the majors like BP or Chevron.

Middle Eastern countries continue to produce at an average of $14/barrel, with Saudi Arabia getting oil at less than $10/barrel. But these countries can only cut back on production so much. They need cash to finance their lifestyles and keep their economies above water. Saudi Arabia has cut its production from 9.7 million bopd in summer to 8.9 million bopd by December 2008. Still, this is way above the target set by the kingdom.

Meanwhile, European and offshore African production costs hover near $30/barrel which could spell trouble to companies operating in these regions.

As an insurance against a repeat of $120/barrel scenario, car makers will continue to develop energy efficient cars, hybrids and even electric vehicles. They are at the same time as Kodak and Fuji—leaders in silver film technology—decided to go heavy on digital cameras.

Renewable energy would take a back seat—for a while. But development would continue, and governments around the world would offer more incentives for renewable energies. Maybe, not directly competitive with fossil fuels, but political pressures and environmental activism would keep the renewable flame lighted. Forget about Obama taxing the windfall profits of oil companies. He will be more focused on keeping American jobs and American soldiers alive in Iraq and Afghanistan.

In the local scene, the passage of the renewable energy law will not cause a flood of new investments. But this will not deter some bold souls to dip into the icy water of alternative energy development. Some who have already started their project in biomass for example, would be more hopeful with the new law.

It might even be a better strategy to start with the feasibility of that wind or solar project. By the time your project is ready to take off, the ground rules on feed-in tariffs or the renewable portfolio standard might be in place. Cross your fingers.

The government policymakers have probably now realized that government control on oil and resources is merely an illusion, fed by political expediency. The government will completely exit from Petron and oil retailing in an abject admission that it cannot control prices. It has gotten out of geothermal business completely after it has disposed of all its holdings in Energy Development Corporation.

For 2009, it will continue disposing its generation assets. But it would be fire sales rather than getting premium from competitive bidding.

The economic slowdown would unexpectedly give us some breathing space in terms of electricity supply. But the tight electricity generation and antiquated distribution would rear their ugly heads in the mid term. The new operator of the transmission grid would soon learn that the business is not easy with rundown equipment and lines.

This year, we would have energy to go by--but for the wrong reasons.

Happy New Year!

More bad news:oil prices tumble back to $96

It was swift and brutal.

Overnight, oil prices lost 10% to settle back well below the psychological $100 a barrel benchmark. I was about to admonish not to open the champagne bottles when the prices clawed back above $100, but I was overtaken by events in the last few hours.

At Wall Street, it was a massacre worse than any ethnic cleansing or pogrom. The Dow Jones Industrial Index--the most widely followed financial index globally--tumbled a record-breaking 777 points.

The immediate cause was the rejection by the U.S. House of Representatives of the $700 billion bailout of the American financial sector. Stalwart Democrats and dissident Republicans combine to bury what ought to be the biggest bailout plan ever hatched since a similar crisis in the 1930s.

The legislators simply realized that their government cannot afford to foot the bill. And why should the government intervene on a massive scale at the expense of the taxpayers' money failing private financial institutions?

The specter of a financial meltdown is staring at every one's face. But the price to pay was simply too much, the legislators decided.

The financial tremors have already been felt in Europe. Fortis, the biggest European bank is being resuscitated by three countries to the tune of 11.2 billion euros. Mid-sized UK bank Bradford and Bingley is being nationalized by its government while pieces of it are offered to outside investors.

Back home our leaders are putting up a sham face, saying that our financial institutions are intact and robust, which of course rings hollow in the face of global connectivity. Our banks' capitalization is puny compared to even Singapore's or Malaysia's banks.

We are not Mali, Albania or Tuvalu which are almost isolated from the world.

An hour ago, a supposedly analyst from a brokerage house proclaimed in effect, that the local bourse won't be affected much since our local banks do not have significant exposures to AIG, Lehman Brothers, Merrill Lynch or Fortis. he must have forgotten that foreign funds still dominate the stock market, and any asset devaluation globally would hit us hard.

How naive can we get?

While Philamlife may have mostly local clients, still it is a unit of AIG. When the parents tremble, it is the minor siblings which are first to go. AIG is reported to be in negotiations for buyers of its local unit.

Remember the electricity generator Mirant Philippines? The local unit kept on harping that their operations won't be affected by the troubles of its parent. Weeks later, all of Mirant's assets were put up for sale.

We will be sucked into the eddies of a financial meltdown. Much more than our resilient neighbors.

When the 1997 financial crisis  unravelled starting with the deflation of the Thai baht, our leaders were then singing the same tune that we have better fundamentals. We ended up being one of the worst hit.

We don't want to appear a doomsayer. But it is better to realize that a storm is approaching.

At least we can start anchoring our houses and filling up the sandbags. It these are not enough we can start packing ready to move to high ground.

Bad news: Oil prices crash through the $100 floor

For the first time in six months, oil prices dropped below the psychological $100/barrel last Monday and as of this writing, settled at $92.55 a barrel.

The sudden reversal of the oil fortune effectively scratched completely all the gains for the year. From a peak of $147 a barrel just two months ago, oil prices have lost more than 35% of its peak value.

Normally, such news would have been greeted with fireworks, and indeed, locally there have been some muted jubilation with the accelerated pump price reductions effected by fuel retailers. Reduction in fare prices may not be far behind.

The early sign of oil price rollback emerged when initial reports suggested that Hurricane Ike, while devastating a large swath of Texas, virtually left the oil platforms at the Gulf and the refineries unscathed.

U.S. authorities reported Sunday that Ike destroyed at least 10 oil and gas platforms and damaged pipelines in the Gulf of Mexico. But that number is only a fraction of the more than 3,800 production platforms in the Gulf and insignificant compared to the havoc brought about by Hurricanes Katrina and Rita three years ago.

 Oil prices continued their downward trajectory even as militants increase their attacks on oil platforms in the Niger Delta.

 Not even the expulsion of the U.S. ambassador to Bolivia which draws a similar sympathetic expulsion of the U.S. ambassador to oil-rich Venezuela, by leftist President Hugo Chavez, could halt the slide of oil prices.

But what suddenly triggered the sell-off were dramatic events in Wall Street which signals a looming economic downturn not only in the U.S., but would likely plaster much of the globe.

That is the real bad news.

In Wall Street, the venerable 158-year-old investment bank Lehman Brothers Holdings Inc., an iconic symbol of American capitalism, filed for bankruptcy after failing to find a white knight for its failing business. This came on the heels of the sale of another capitalist icon Merrill Lynch & Co. to Bank of America Corp.

The two bellwethers of the finance world, together with big institutional investors, have been the main participants in pushing the prices of commodities—not only oil but precious and strategic metals and foods as well—to stratospheric levels until signs of economic slowdown abruptly stopped the price train on its tracks.

 The upheaval in the financial sector could trigger massive liquidation of commodities amidst the fear that a slowdown could drastically cut the demand for energy and other raw materials futures.

 With the mightiest economy in deep trouble, the lesser economies, ours included, would be sucked in the maelstrom of economic downturn.

 Therein lays the dreaded looming economic crisis as if we have not suffered enough.

Oil prices wither some more

So much for $200 oil?

Dan Fisher at Forbes News wondered aloud when oil prices fell below $120 a barrel a day earlier, touching levels unthinkable just a few weeks back when rising oil prices seemed unstoppable.

Less than a month ago, we suggested that we are entering bubble territory, when the price dropped by $9 a barrel from $145. But as soon as the piece was posted, prices snapped back to record levels. Since then, prices have eased gradually to current levels.

The price charts (see Oil Price Watch sidebar) show a double top, with the second peak barely reaching the first level, but couldn't sustain that level. Trends in moving averages have completely reversed, and technical analysts definitely view this as bear territory. Are we now into a real bear market after the "bubble" was pricked?

Veteran oil price watcher and academic Ferdinand Banks in his incisive article "Speculation and the price of oil" which appeared on the July 9 issue of EnergyPulse castigated the idea of pure speculation as the main driving force of oil prices. A bubble, he pointed out, has no underlying fundamentals at all, giving the Dutch tulip mania in the 1600s, the South Sea expeditions (there is gold in thar seas!) and the 1929 stock market crash as classic examples. One could add the dot com bubble early this century.

Banks asserted that the rising oil price that we have witnessed of late is basically explained by the relation between ‘flow’ supply and ‘flow’ demand, and with or without speculation the result would be almost the same. This is somewhat different from the normal supply and demand relationship taught in Economics 101. The difference is the "flow" concept, which is taken to mean the movement of oil volume per unit of time, say from the ground to the oil tankers, or from the production platforms to the government inventories. The actual supply and demand could dictate a steady price, but an actual or even perceived disruption in the "flow" supply could alter the price equation.

In that sense we tend to agree with Banks that excessive speculation is not due to market manipulators at the Texas bars or at the New York Mercantile Exchange (NYMEX) but rather on the perceived disruptions on flow supply due to, among others, political posturings of the major powers, propaganda of depleted supplies by OPEC countries, attempts to use oil as a bargaining chip in economic negotiations, etc. Some observers are in fact suggesting that major oil producers are deliberately understating supplies and production levels to keep prices artificially high.

Data from the ground suggests that dwindling oil supplies are highly overstated.

Fisher noted that the pullback is vindication for analysts who for months have been saying that oil prices had entered bubble territory on a mix of financial speculation, worries about a military attack on Iran and rapidly increasing Asian demand. With hefty new supplies hitting the global market from Saudi Arabia, Libya and even Iraq, those analysts say, oil is likely to fall below $100 soon. Iraq in particular has been hitting record production levels since the U.S. toppled Saddam Hussein.

"This fall is a reaction to overshooting over the past couple of months," said Daniel Ahn of Lehman Brothers, which has issued several reports suggesting oil prices were unjustifiably high. "The fundamentals of new supplies suggest prices will be in double digits."

Saudi Arabia apparently hit its target of 9.7 million barrels a day in July, effectively muzzling its detractors who are harping on its supposedly depleted oil fields.

At the other side of the globe, oil production at the Gulf of Mexico is steadily recovering from the havoc wrought by hurricane Katrina.

The turnabout in oil prices has been excruciating to investors who flocked to oil and energy stocks at near the peak price. The Standard & Poor's Global Energy Sector Index Fund (IXC) is down 22% from its high of $54 in early June, and the Rydex Energy Services fund (RYVAX) is down 14%.

There could be more declines ahead, Fisher warns. Implied price volatility spiked to a high of 52% at the height of Iran-Israel tensions over suspected nuclear weapons facilities, but has settled to about 45 %. This is considered to be pretty high, as any number above 30 % is unusual.

Which means there is still too much froth left on oil prices.

Gov't audit of oil firms sidetracks price issues

According to today's papers, the Department of Justice is currently looking into the books of the oil companies to ferret out hanky-pankies of unfair market practice.

Justice Undersecretary Jose Vicente Salazar, speaking on behalf of the Department of Energy (DOE) - DOJ Task Force told the press that they are still gathering data.

Meanwhile, House Deputy Minority Leader Roilo Golez filed a resolution calling on the Commission on Audit (COA) to audit the profits of the Big Three, which he claims apparently have formed a cartel.

What would this audit try to establish?

Nothing.

It will not lead to lower oil prices.

When will our policy makers and legislators learn that under the current deregulated environment the price of oil, or any commodity for that matter, couldn't be dictated by a scheming trio-the so-called Big Three?

We have supposed to have licked this problem when the oil deregulation law was implemented. New players have come in. Although these have not toppled any of the Big Three, they have made significant inroads into the market.

A congressman from Cebu would even like to have an inquiry into the "fabulous" profits of the Big Three which he reckoned to have "balloned" to P 70 B since 1998. Is that amount something to crow about?

If we are to assume that this amount is equally divided among the three, the yearly profit would
amount to something like P2.3 B for each of them. Now, compare this with PLDT's net income of P 33 B or so last year.

No sir, the big money in oil is not made in retailing or refining, the mainstay business of the Big Three. In the downstream segment of the oil industry, margins are razor-thin; one can make profit if you make yourself more efficient than the competition across the street.

Increases in crude prices cut the bottom line of refiners, not pad it.

On the other hand, the Saudi oil fields extract oil from the ground at a cost of less than $10 a barrel.

Government task forces and Senate inquiries supposedly in aid of legislation generate lots of air, but no substance. The latter in particular has been meticulously refined by our ambitious politicians to become a springboard of choice for loftier ambitions.

How many of our neophyte senators have been elected on the basis of media exposure in connection with endless legislative inquiries? Many of them do not have a legislative track record to speak of.

Rather than digging up dirt, if any, from private businesses, our policy makers and legislators should spend time looking at strategic plans towards energy security and independence.

Like for instance, making the business climate more hospitable to investors rather than dragging them infront of the kleiglights of the senate hall, and berating them , humiliating them publicly.

Initiating white papers and well-researched studies on how to make the renewable energy bill more effective even before this piece of legislation is passed by the House.

Policy making is too important for our future to be left alone to lawmakers.

Do not blind us, the hapless consumers, with squid tactics, on the real cause of our seeming helplessness against the onslaught of high energy prices, which is governance, or the lack of it.

Oil price: a collapsing bubble or a sharp correction?

By J R Ruaya

In the last 48 hours, oil prices have dropped by as much as $9 per barrel-- a steep decline never seen for a long time. The bearish trend is a welcome respite for many from months of unending upward spiral of oil prices. The decline in effect, erases the rally in late June which pushed prices past $145.

Oil touched a trading record of $145.85 last week before closing at a record $145.29 a barrel.

Analysts are quick to attribute much of the sell-off to simply profit taking after the previous weeks' gains--a correction. Others say that a recovery in the U.S dollar 's strength keeps prices low as traders back off from commodities.

At the same time, fears of global oil supply disruptions have abated, and there are concerns that the global economy is facing a slowdown which is ironically, being partly fueled by high oil prices.

So, is it now the time to rev up that gas guzzler in the garage, and take that much postponed vacation?

Not yet, caution the pessimists. Analysts warned that the pullback could be ephemeral.

“Sagging global equities, which are tipping a lack of confidence in economic growth in both developed and emerging economies, helped trigger the retreat in the energy markets,” Addison Armstrong, director of market research at Tradition Energy, suggested in a research note.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates waived off the decline as corrective--profit-taking that could still be followed by fresh highs down the road. He also surmised that computer models used by large investment funds automatically sold oil contracts when pre-set price threshold has been breached.

Correction or a bubble?

Or could this be a start of a collapsing bubble?

Along with some signs the dollar is recovering from a long slump, fears that fresh conflict in the Middle East could cut oil supplies eased over the weekend after Iran gave an undisclosed response to an international offer of incentives if it suspends a central part of its nuclear program. While in Malaysia attending a meeting with leaders of 8 developing nations, Iranian president Ahmadenijad downplayed any possibility of war with U.S. while his military has tested a few hours ago a new generation of missiles capable of hitting targets 2,000 km away.

It is Iran's subtle way of saying it doesn't want to be bullied by a bellicose U.S.

Elsewhere, there also signs that potential tinder boxes may have lost much of their gunpowder.

Iraq, seen by the outside world as a country in permanent chaos, has actually started to open its oil fields to international tender -- and there are takers waiting on the sidelines. The country is sitting on one of the world's largest oil reserves. By past standards, its internal security situation has vastly improved recently.

It hopes to add some 1.5 million barrels a day to the world market. That amount could be enough to chip off significantly the price of oil.

North and South Koreans, long aiming at each other's throats, are about to embrace each other on the streets of Pyongyang and Seoul. Earlier, the Pyongyang government effectively took the sting out of U.S. claims of nuclear design by publicly blowing up a cooling tower of a nuclear facility suspected to be a front of clandestine nuclear weapons program.

The nearby other powder keg, the Strait of Taiwan, is fast becoming a tourist route rather than a potential naval battleground after reciprocal air flights crossed it after 60 years of hiatus.

More supplies coming in

Aside from the well known reserves, there are enormous supplies sitting idly, waiting to be tapped.

In the vast eastern desert of Saudi Arabia, infrastructure work has started in what could be possibly one of the largest expansion of oil development. This patch of sand in the middle of nowhere is the Khurais oil field, one of the last of the largest undeveloped oil fields of the country.

An Aramco refinery (Image from BBC news)

State-owned oil giant Aramco is spending $10 B for the infrastructure to pump out some 1.2 million barrels a day from this and two other smaller finds of Abu Jifan and Mazalij June of next year. That volume dwarfs the production of OPEC members Qatar, Indonesia and Ecuador combined.

In November last year, state-owned giant oil producer Petroleo Brasileiro SA, more popularly known as Petrobras, announced that it has discovered an elephant oil field off the coast of Rio de Janiero. The Tupi field, as it is known, holds up to 8 billion barrels of oil.

That find could send Brazil into the big league of oil producers like Venezuela and the Arab states. It was only last year that the country became a net exporter or crude although it has to import light oil for its refineries.

That announcement immediately sent Petrobras' stock prices soaring by 26 % at the New York Stock Exchange in a single day.

To be sure, extracting the oil wouldn't come soon as the field lies under 2,140 meters (7,060 feet) of water, more than 3,000 meters (almost 10,000 feet) of sand and rocks, and then another 2,000-meter (6,600-foot) thick layer of salt. However, in the past decade Petrobras has honed its skill in deep-water oil extraction.

Meanwhile, slowly but surely, the feasibility of developing fully the vast oil sands of Alberta, Canada as well as the Alaskan oil reserves, is coming to fruition.

Shift in strategic thinking

The aforementioned events could cap the oil price rally in the short term, but what would derail the rise in oil prices in the long term is the pervasive shift in thinking among policy makers towards weaning away from dependence of fossil fuels for the world's energy needs.

From Berlin to Brasilia to Beijing, policies are taking root where definite timetables are laid down to increase the contribution of alternative and renewable energy significantly by as early as 2015. Some ambitious targets are up to 30% from insignificant lows. The policy usually goes by the name renewable portfolio standards (RPS), and it has even found its way into our very own renewable energy bill now pending in Congress. Unfortunately, not much local debate has arisen from this provision.

At the G8 meeting currently ongoing at Hokkaido, Japan, taming the wild gyrations of oil prices has occupied the center stage of the far-reaching discussions on where the world economy is heading.

Legendary oil investor and Texan billionaire T. Boone Pickens recently unveiled his ambitious blueprint to reduce America's dependency on oil by massive development of -- not the Gulf of Mexico or Alaskan oil, but wind power. At the same time, he wants to shift the use of natural gas from power production to fueling America's teeming vehicles.

According to Pickens, the U.S. currently generates 22% of its power from natural gas. That fraction, according to his plan, could be totally replaced by wind power in 10 years, and the natural gas for those generating plants can be diverted to transportation use.

For a well-known figure who has breathed and eaten oil all his life, such radical shift in thinking should allow us mere mortals to ponder what he is up to. Does he know something that we don't?

But what could finally prick the the price balloon is the forecast-ed generally slowing down of world economy which is partly attributed to--surprise, the oil price itself.

The signs are all around us. Stock prices, which normally presage major economic events, have been rapidly deflating from London to Shanghai. Wall Street has likely entered bear territory officially. Recession, rather than the spirit of Christmas, is on the air.

Where are the prices heading?

Is it going to $200, or back to $100 or below?

Again, let's turn to Pickens.

He is standing pat by his earlier forecast that oil prices will hover around $150 a barrel now. But when asked what about two years from now, he said "You could get it back down to 100".

He added that the price of oil is dictated by supply and demand, not by speculators. You can take it from that.

Let us just hope that out-of-the blue political events like Washington showering Tehran with Tomahawks on a whimsical pretext of detecting plutonium stockpiles deep inside the arid sands of western Iran.

Whether the recent price movement is a sharp correction or a beginning of a long term deflation, it doesn't really matter much what the future of oil prices brings.

What we are likely seeing is a start of a cataclysmic reordering of the world's energy heirarchy.

Let us not be caught flat-footed.