The Coming Oil Crash–When Drilling for Oil Becomes Unprofitable

Russia's President Vladimir Putin (R) and CEO of state-controlled Russian oil company Rosneft Igor Sechin (L) push the button launching a new oil terminal at the Black Sea port of Tuapse on June 15. An expected fall in crude prices this autumn could have serious impacts on the economies of Russia and other nations reliant on oil exports.
Mikhail Klimentyev/AFP/Getty Images

Russia’s President Vladimir Putin (R) and CEO of state-controlled Russian oil company Rosneft Igor Sechin (L) push the button launching a new oil terminal at the Black Sea port of Tuapse on June 15. An expected fall in crude prices this autumn could have serious impacts on the economies of Russia and other nations reliant on oil exports.

My mom out in California is elated — gasoline prices in her neighborhood are below $4 a gallon for the first time in four months. Less so are the world’s petro-rulers, who are watching the price of oil — their life blood — plunge at a rate they have not experienced since the dreaded year 2008. Industry analysts are using phrases such as “devastation” and “severe strain” to describe what is next for the petro-states should prices plummet as low as some fear. No one is as yet forecasting a fresh round of Arab Spring-like regime implosions. But that’s the nightmare scenario if you happen to run a petrocracy.

To understand why your average oil king is right to be worried at the moment, grab your calculator. The price of U.S.-traded oil fell to $83.27 a barrel on Monday, and global benchmark Brent crude to $96.05 a barrel; now juxtapose that against the state budgets of Iran, Russia, and Venezuela, which require more than $110-a-barrel Brent prices to break even, according to generally accepted estimates, and you’ll see the problem.

Given this already-existing revenue gap, one might fairly wonder what would happen if, as Citigroup’s Edward Morse says is possible, prices drop another $20 a barrel for an extended length of time. Oil economist Philip Verleger’s forecast is even gloomier — a plunge to $40 a barrel by November. Or finally, what Venezuelan Oil Minister Rafael Ramirez fears — $35-a-barrel prices, near the lows last seen in 2008. In Russia, for instance, “$35 or $40, or even $60 a barrel, would be devastating fiscally,” says Andrew Kuchins of the Center for Strategic and International Studies. That could damage the standing of President Vladimir Putin, since his “popularity and authority are closely correlated with economic growth,” Kuchins told me in an email exchange.

With few exceptions, the same goes for the rest of the world’s petro-rulers, whose oil revenue supports vast social spending aimed at least in part at subduing possible dissatisfaction by their populace. Saudi Arabia can balance its budget as long as prices stay above $80 a barrel, according to the International Monetary Fund, although projected future social spending obligations will drive its break-even price to $98 a barrel in 2016.

Of the major petro-states, only Qatar — with a requirement of about $58-per-barrel to balance its budget — appears to have sufficiently disciplined state spending to weather all but the most dire forecasts.

The biggest uncertainty in the global oil market isn’t whether oil prices will drop further — they seem likely to — but how long they will stay down. In short, how long, and at what scale, are the petrocracies likely to suffer? This state of affairs is a woeful blow to petro-rulers after nine years of mostly nirvana. The year 2003 started with oil at about $33 a barrel, after which prices went mainly up, peaking in July 2008 at $147 a barrel. They bounced back nicely even after the global financial crisis sent prices plummeting below their 2003 level, to about $31 a barrel in December 2008. When the Arab Spring unfolded, first Libya and then Iran triggered worried looks on trading desks in London and New York, and the price spiked to about $128 a barrel. My mom saw the average price of gas in California rise to $4.36 a gallon. But then the concern of war between Iran and Israel all-but vanished, and prices since have been on a seemingly relentless decline.

Now, a convergence of forces is weighing on petro-rulers’ nerves: Europe’s economic crisis; a slowdown in Chinese growth including the demand for oil; a steep decline in U.S. oil consumption with a simultaneous rise in domestic oil production; and a determined effort by petroleum colossus Saudi Arabia to build up global inventories.

It is perhaps the last data point — Saudi Arabia’s aggressive actions to lower prices by pumping some 10 million barrels a day — that might seem baffling given Riyadh’s economic stake in the oil game. But Verleger, the Colorado-based oil economist, says the Saudi rationale is clear, and linked to the kingdom’s traditional long game.

In an email exchange, Verleger pointed me to an interview he did a few days ago with Kate Mackenzie at the Financial Times. First, he explains, the Saudis are out for blood when it comes to fellow petro-states Russia and Iran, the former for failing to help calm the fury in Syria, and the latter for refusing to go to heel and give up its nuclear ambitions; in both cases, the Saudis think lower prices will produce a more reasonable attitude. In addition, Saudi Arabia is terrified of a current U.S. boom in shale oil; it is hoping that lower prices will render much of the drilling in North Dakota’s Bakken Shale and Canada’s oil sands uneconomical. Finally, the Saudis are well aware that low oil prices helped to turn around the global economic downturn in 1998 and 1999, and they hope to help accomplish the same now, and perhaps win new affection from the world’s leading economies.

Meanwhile, though, Verleger thinks that oil prices will crash. Markets overshoot when one is trying only to fine-tune them, as the Saudis are, he argues — which is the basis for his forecasts of $40-a-barrel oil and $2-a-gallon gasoline by November.

To the degree that such fire-sale prices are long-lived, they could cause mayhem among petro-rulers. While Verleger thinks that the Saudis can maneuver prices back up when they want, the very nature of a crash demonstrates that markets can be uncontrollable. But the Saudis are willing to suffer the consequences, knowing that their own financial reserves (some $380 billion) give them staying power. “The Saudis are able to look at the long term,” Phil Flynn, an analyst with Pricing Futures Group, told me.

Citigroup’s Morse thinks that prices can fall further from where they are now, but not as low as Verleger forecasts because, he told me, today’s market conditions are different from 2008 — the decline in demand is not as steep, and inventories are not as large. Morse calculates that Brent can fall into the $70s-per-barrel range and U.S.-traded oil into the $60s-a-barrel range. “There is a good chance Saudi Arabia continues to produce enough to force [a rise in oil inventories]. And there’s a good chance, between Europe and China, that demand growth could come to a halt,” Morse said. OPEC might respond by reducing production, but its actions would be late. “Add to the scenario no more supply disruptions (or only modest ones) and no military conflict involving Iran,” Morse said, “and prices could fall another $20 a barrel fairly easily.”

Low oil prices can have serious social impacts simply because, with less free cash, people tend to start more closely scrutinizing their surroundings — and when they become unhappy with what they see, they start looking for a scapegoat. The conditions that led to the string of Arab Spring ousters were not so much the lack of democracy as widespread public dissatisfaction with personal economic prospects. Analysts see similar vulnerabilities for the rulers of Iran, Russia, and Venezuela; when Venezuelan President Hugo Chávez can no longer milk the state oil company for public payouts, for instance, his political support could be in jeopardy.

Not everyone thinks the times will be so brutal for petro-rulers. Neil Beveridge of Bernstein Research told me that conditions may push down prices as low as around $90 a barrel, but no more than that. And the Energy Information Administration (EIA) on Monday estimated oil prices in the second half of 2012 at $95 a barrel.

The latter would be a heart-in-your throat, 10 percent plunge from the EIA’s previous forecast. But it would be nowhere near the cliff that brings cold chills to the world’s petro-rulers. As for my mom, either of these outcomes will make her merrier cruising the 405.


The Inevitable, Ugly American Pakistani Divorce

Divorcing Pakistan: Simply put, the interests of Washington and Islamabad do not align

By ANDREW J. BACEVICH | Los Angeles Times

The history of U.S.-Pakistani relations is one of wild swings between feigned friendship and ill-disguised mistrust. When the United States needs Pakistan, Washington showers Islamabad with money, weapons and expressions of high esteem. Once the need wanes, the gratuities cease, often with brutal abruptness. Instead of largesse, Pakistan gets lectures, with the instruction seldom well received.

The events of 9/11inaugurated the relationship’s most recent period of contrived warmth. Proximity to Afghanistan transformed Pakistan overnight from a pariah – the planet’s leading proliferator of nuclear weapons technology – into a key partner in the global war on terrorism. Prior to 9/11, U.S. officials disdained President Pervez Musharraf as the latest in a long line of Pakistani generals to seize power through a coup. After 9/11, President George W. Bush declared Musharraf a “visionary” leading his country toward the bright uplands of freedom.

But seldom has a marriage of convenience produced greater inconvenience and consternation for the parties involved. Simply put, U.S. and Pakistani interests do not align. Worse, neither do our preferred forms of paranoia. Pakistanis don’t worry about Islamists taking over the world. Americans are untroubled by the prospect of India emerging as a power of the first rank.

The United States stayed in this unhappy marriage for the last decade in large part because Pakistan provided the transit route for supplies sustaining NATO’s ongoing war in landlocked Afghanistan. In addition to exacting exorbitant charges for this use of its territory, Pakistan has closed that route whenever it wishes to make a point. No more: A recently negotiated agreement with several former-Soviet Central Asian republics creates alternatives, removing Pakistan’s grip on NATO’s logistical windpipe.

The Obama administration now seems ready to declare this troubled union (once again) defunct. With Pakistan no longer quite so crucial in an Afghan context, and still unable to explain how Osama bin Laden found sanctuary on Pakistani soil, evidence that this erstwhile U.S. ally remains in cahoots with various and sundry terrorist organizations has become intolerable. During a recent visit to India, Defense Secretary Leon Panetta publicly stated that U.S. leaders were “reaching the limits of our patience” with Pakistan.

As with most divorces, the proceedings promise to be ugly. Already, the U.S. is escalating its campaign of missile attacks against “militants” on Pakistani soil. U.S. officials dismiss complaints that this infringes on Pakistan’s national sovereignty. “This is about our sovereignty as well,” Panetta has explained, thereby redefining the term to grant the United States the prerogative of doing whatever it wants and can get away with.

Yet there is a back story to the crumbling relationship that goes beyond U.S. frustration with Pakistani double-dealing (and Pakistani anger over American highhandedness). A larger reorientation of U.S. policy is underway. Occurring in two spheres – the Greater Middle East and East Asia – that reorientation reduces Pakistan in Washington’s eyes to the status of strategic afterthought.

In the Greater Middle East – the geographic expanse in which the global war on terrorism has been largely waged – the Obama administration has now abandoned any pretense of liberating or pacifying or dominating the Islamic world. Through a campaign of targeted assassination (supplemented in the case of Iran with cyber attacks) the aim is now merely to keep adversaries off-balance in a never-ending game of whack-a-mole. In that context, Pakistan serves chiefly as a target-rich environment.

In East Asia, the Obama administration touts its proposed strategic “pivot” as the emerging centerpiece of U.S. national security policy. In Washington, however, “pivot” is a code word, translated by those in the know as “containing China.” The imperative of thwarting China’s perceived (but as yet indecipherable and perhaps undetermined) ambitions elevates the importance of India. In the eyes of aspiring Kissingers, an India aligned with the United States will check Chinese power just as aligning China with the United States once served to check Soviet power. Here too the effect is necessarily to render Pakistan, which views India as its mortal enemy, redundant.

Yet while a certain logic informs the coming U.S. abandonment of Pakistan, there are massive risks as well.

Pakistan is the most dangerous country in the world. (Go ahead: Plug that sentence into your search engine.) Mired in poverty, burdened with a dysfunctional government and weak institutions, dominated by deeply fearful military and intelligence establishments that have little regard for civilian control or democratic practice, it possesses one trump card: a formidable nuclear arsenal. A potential willingness to use that arsenal is what ultimately makes Pakistan so dangerous – and should give U.S. policymakers pause before they give that country the back of their hand, as the United States has done so many times before.

To the extent that foreign policy ends up figuring in the upcoming presidential election, Iran’s putative nuclear weapons program will probably attract some attention. OK, but that’s a potential bomb, not a real one. The bomb that will keep the next president up late is not the one that Iran may be building but the one that Pakistan already holds in readiness to use.


Andrew J. Bacevich is professor of history and international relations at Boston University. He wrote this for the Los Angeles Times.

©2012 Los Angeles Times

Saudi/Future-Linked Agitators Stirring Trouble In Palestinian Camps, Seeking Anti-Syria, Anti-Lebanon Recruits

[SEE:  Al-CIA-da Infiltrating Lebanon’s Palestinian Camps]

Berri Warns of Foreign Plot -Local Assistance in Targeting Army at Palestinian Camps

إقرأ هذا الخبر بالعربية

by Naharnet

Speaker Nabih Berri warned on Wednesday of a foreign plot coupled with a local participation to drag the Palestinian camps throughout Lebanon to strife.

“The incidents at the Palestinian camps and the targets against the Lebanese army are not innocent and call for concern,” Berri told several newspapers.

“The foreign plot is present but there is an internal participation in it,” he warned, reiterating that the security incidents from the North to the South are not a coincidence.

He claimed the facts on the ground match the information that he received several weeks ago about preparations for a clash between the shantytowns and their surrounding areas.

Berri was referring to a warning from an Arab leader to a Lebanese official that Palestinian refugees could be pushed to ignite strife in Lebanon similar to the upheaval in Syria.

Al-Akhbar newspaper said Tuesday that the official, who is likely to be Berri, contacted Palestinian President Mahmoud Abbas, who sent Azzam al-Ahmed as an envoy to Lebanon to cooperate with the Lebanese authorities in the attempt to thwart the plot.

Angry Palestinians have clashed in the past five days with the Lebanese army at the entrances of the Nahr al-Bared and Ain el-Hilweh refugee camps, leaving three people dead.

Berri rejected “tampering with the morale of the army and the role that the national institutional plays in protecting Lebanese and Palestinians against the Israeli enemy.”

According to An Nahar newspaper, Progressive Socialist Party leader Walid Jumblat held a telephone conversation with the speaker, backing him in his warnings.

Berri also contacted Palestinian and Lebanese officials to contain the incidents at the camps.