A historical perspective on oil and world power

Throughout his illustrious career, academic Peter Randon Odell enriched the available oil and gas market commentary and analysis of his time, writing close to 20 books and numerous research papers. In 1970, Odell wrote arguably one of his most authoritative works on the subject – Oil and World Power. He went on to update and revise it no less than eight times with the last imprint reaching bookshelves in 1986.

After over two decades, the old master’s insight is available once again via a Routledge reprint, under its Routledge Revivals Initiative which aims to re-print academic works that have long been unavailable. While the publisher’s hunt for scholarly reprints is rewinding the clock back to the last 120 years, the Oilholic is not the least bit surprised that Odell’s most popular work is among the first to roll off Routledge’s printing presses for 2013 under the Revivals Initiative.

It was Odell who was among the first to catalogue the oil industry’s commercial clout and pragmatically noted in this book that the oil and gas business was one which no country could do without given the inextricable link between industrialisation and fossil fuels.

Above anything else, this reprinted book offers Odell’s insight on the oil and gas business as it had evolved up and until the 1980s, pre-dating the corporate birth of ExxonMobil, the collapse of the Soviet Union, America’s shale bonanza and resource nationalism to the extent we see today. This in itself makes the reprint of Oil and World Power invaluable.

The reader gets a glimpse of energy hegemony as it was up and until the 1980s and Odell’s insight on issues of the day. From OPEC soundbites to the anxieties of consuming nations, from the decline of International Oil Companies (IOCs) to the rise of National Oil Companies (NOCs) – it’s all there, coupled with changing patterns of oil supply and the dramatic fall in oil prices in 1986.

Yet, Odell’s conclusions in this book, of just over 300 pages split by 11 chapters, sound eerily similar; a sort of a forerunner to what industry commentators are mulling over in this day and age. In fact, the deep links, which he refers to in this book, between oil and gas extraction, conflict, resource nationalism, global politics and economic prowess are as entrenched as ever.

After discussing the bigger picture, the author goes on to offer a fair bit of forward-thinking conjecture on the relationship between the oil and gas business and economic development. There are also subtle hints at the resource curse hypothesis – a discussion which was hardly mainstream in the 1980s but is hotly debated these days.

This reprint bears testimony to the brilliance of Odell in tacking such issues head on. It would be of immense value to students of energy economics, industrial studies, international development, geopolitics and political hegemony. But above all, those looking to probe the history of the oil and gas business must certainly reach out for this engaging volume. 

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To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: Front Cover – Oil and World Power © Routledge

Talking geopolitics & refineries at Platts event

Following on from earlier conversations with contacts in the trading community about the direction of the Brent crude price versus geopolitics, the Oilholic extended his queries to the Platts Energy Risk Forum, held in London earlier this week. At the event, Dave Ernsberger, global editorial director of oil coverage at Platts, summed-up the market mood as we near the final quarter of 2012 (see graphic above, click to enlarge). “This year has been one of two realities, namely the dire economic climate and upward geopolitical risk. H1 2012 saw anxiety about a war in the Middle East and H2 sees renewed fears of a demand slowdown,” he told delegates.

“The oil price is poised to break away from the mean – but which way? So far it has been chained and shackled in the US$15-20 range either way falling below US$90 and rising above US$115 over the course of this year. The threat of an Iran versus Israel conflict which might draw the US in by default has not gone away. On the other hand a European recession could bring a new oil price crash. Additionally, there is a perception that supply-demand and spare capacity scenarios are not what they are made out to be,” Ernsberger added.

Over a break in proceedings, the Oilholic quizzed the Platts man about the actual influence of the geopolitical or instability premium on the price of the crude stuff and market conjecture about it being broadly neutral for 2013.

“I think the current geopolitical dynamic is fairly well understood at this point. The big touching points which are at play for instance, but not limited to, the US-Iran-Israel issue and the China-Japan and Asia Pacific energy politics have been with us for a while. I feel it is hard to see how those geopolitical arenas will evolve significantly in 2013 because we are at a stalemate point. In a sense, if you look forward they should be neutral,” Ernsberger said.

However, both of us were in agreement that one always needs to be careful about a geopolitical trigger as a single tiny flashpoint could offset the placidness. But from where Ernsberger and the Oilholic sit at present – geopolitical influences are in a kind of suspended animation for next year. The Platts Energy Risk Forum also noted that demand forecasts for 2012 have stabilised and that Chinese demand, on a standalone basis, had slowed considerably. As such, the price outlook for 2013 is overwhelmingly bearish.

One unintended result of the European crisis brings us to another area of interest - refining. Platts noted that the EU-wide recession is speeding up refinery closures. It suggested that 3 to 5 million barrels per day (bpd) of oil refining capacity is under immediate threat of closure or actually did close recently. Additionally, an estimated 7 million bpd needs to close to adjust for more efficient refining in Asia and Middle East. But the closures are lifting refining margins over the short-term in a business that remains volatile (see graphic above right, click to enlarge). Ernsberger also brought forth a very valid observation for the readers of this humble blog – the striking similarity between the survival (or vice versa) statistics within the refining and civil aviation sectors.

“Refining and aviation are two industries where it’s a race to the bottom! There is so much competition in both these industries that basically whatever environment you are operating in – even if you are operating in India or China – it’s a race to the bottom…Typically, what you’ll find is that every company would try and stay in the business as long as it can and will only leave when it runs out of money. It’s also why refining and aviation have more bankruptcies than any other sector I can think of,” he said.

At the same forum, it was also a pleasure running into Dr. Vincent Kaminski, a former Enron executive who repeatedly raised strong objections to the financial practices at the company prior to its scandal-ridden collapse in 2002. In the aftermath of the scandal, Dr. Kaminski was praised for being among the voices of reason at a company riddled with malpractices. (For background read Bethany McLean and Peter Elkind’s brilliant book – The Smartest Guys in the Room)

Dr. Kaminski, who is an academic on the faculty of Houston’s Rice University at present, told the forum that by the time of its collapse Enron had mutated from an energy company to one which traded practically everything and one which was not alone in devising trading strategies based on exploiting geographical constraints.

“Energy markets have evolved over the last 20 years into an integrated global system. Markets for different physical commodities form what can be called a tightly coupled system. While market participants learn and adjust their behaviour in order to survive and prosper in a changing world, the system itself evolves and remains far removed from a stable equilibrium at any point in time,” he added.

Dr. Kaminski also dwelt on the Shale Gas revolution in the US which was decades in the making but transformed the country's energy landscape upon fruition leading to the availability of natural gas in abundance and a dip in gas price-contracts (see graphic on the left, click to enlarge). “As US production sky-rocketed, conventional wisdom about the possibility of LNG shortages barely five years ago was turned on its head. By April 2012 we even noted a sub-US$2/mBtu front-month settlement on the NYMEX,” he added.

Later in the afternoon, Dr. Kaminski told the Oilholic that US LNG import terminals currently being prepped to export gas in wake of the shale bonanza could one day be sending tanker-loads to Europe in direct competition with Qatar and Russia.

“On the flipside for the US consumer, the moment a viable gas export market is established for US gas, the impact on the country’s domestic gas market would be a bullish one. That is the nature of market forces,” he added.

When asked about the prospects of shale prospection in Europe – most notably in Poland, Ukraine, Sweden and the UK – Dr. Kaminski said he was a ‘realist’ rather than a ‘sceptic’. “What happened in the US, did not take place overnight. Technology, legislative facilitation and public will – all played a part and gradually fell into place. I do not see it being replicated in Europe over the short term and certainly not with the speed that some are hoping it would,” he concluded.

Just as the Oilholic was winding down from a discussion on shale with Dr. Kaminski, it seems the UK Institution of Mechanical Engineers (IMechE) was talking up the economic benefits of a British Shale Gale! In a policy statement circulated to parliamentarians, the IMechE said shale gas was ‘no silver bullet’ for UK energy security but will provide long-term economic benefits in the shape of thousands of jobs.

Dr. Tim Fox, Head of Energy and Environment at IMechE and lead author of the shale gas policy statement, said, “Shale gas has the potential to give some of the regions hit hardest by the economic downturn a much-needed economic boost. The engineering jobs created will also help the Government’s efforts to rebalance the UK’s skewed economy.”

However, Dr. Fox added that shale gas "is unlikely to have a major impact on energy prices and the possibility that the UK might ever achieve self-sufficiency in gas is remote." 

IMechE projects that 4,200 jobs would be created per year over a ten-year drill programme. The engineering skills developed could then be sold abroad, just as the oil and gas experience built up in North Sea oilfields is now being sold across the world. Well, we shall see but that’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Graphic 1: Platts dated Brent – January 2011 to August 2012 © Platts September 2012. Graphic 2: International cracking margins snapshot © Platts / Turner Mason & Co. September 2012. Graphic 3: US Natural Gas futures contract © Dr. Vincent Kaminski, Rice University, Texas, USA /Bloomberg.

Charting the love-hate relationship with big oil

If the oil companies had answers to the energy crisis, and in some cases maybe they do, would you believe them? Given that most of us grow up loathing big oil for a multitude of reasons ranging from environmental to monetary ones while filling up the gas tank, all thoughts put forward by energy companies become suspect.

Or as the author of the book – Why we hate the oil companies? Straight talk from an energy insider – asks, would you accept the fox’s plan for the hen coop? Written by none other than John Hofmeister, the former president of Shell, it examines what’s behind the energy companies' swagger or perceived swagger.

Having made the transition from being a mere consumer of gasoline to the president of a major oil company, Hofmeister attempts to feel the pulse of public sentiment which ranges from indifference to pure hatred of those who produce the crude stuff. Spread over 270 pages split by 14 chapters, this book does its best to offer a reasonably convincing insider’s account of the industry.

Along the way it dwells on how politicians and special interest groups use energy misinformation and disinformation to meet their own odds and ends in a high stakes game. Hofmeister founded the US Citizens for Affordable Energy; an American grassroots campaign aimed changing the way the US looks at energy and energy security.

So this book benefits from his thoughts on solving energy issues, offering targeted solutions on affordable and clean energy, environmental protection and sustained economic competitiveness. The tone is a surprisingly frank one and research is solid. It is also no corporate waffle from an oilman lest sceptics dismiss it as such without reading it.

The Oilholic believes it even throws up some pragmatic solutions which appear sound at least on paper. So while there is little not to like about the book, there is one glaring caveat. It is just way too American in its scope. Yours truly is happy to recommend this book to our friends across the pond in North America; but readers elsewhere while appreciating the narrative, may come to the same conclusion.

© Gaurav Sharma 2012. Photo: Front Cover – Why we hate the oil companies? Straight talk from an energy insider © Palgrave Macmillan

Crude Oil prices & some governments

I have spent the last two weeks quizzing key crude commentators in US and Canada about what price of crude oil they feel would be conducive to business investment, sit well within the profitable extraction dynamic and last but certainly not the least won't harm the global economy.

Beginning with Canada, since there’s no empirical evidence of the Canadian Dollar having suffered from the Dutch disease, for the oil sands to be profitable – most Canadians remarked that a price circa of US$75 per barrel and not exceeding US$105 in the long term would be ideal. On the other hand, in the event of a price dive, especially an unlikely one that takes the price below US$40 per barrel would be a disaster for petro-investment in Canada. A frozen Bow River (pictured above) is ok for Calgarians, but an investment freeze certainly wont be!

The Americans came up with a slightly lower US$70-90 range based on consumption patterns. They acknowledge that should the price spike over the US$150 per barrel mark and stay in the US$120-150 range over the medium term, a realignment of consumption patterns would occur.

This begs the question – what have Middle Eastern governments budgeted for? Research by commentators at National Commercial Bank of Saudi Arabia, the Oilholics’ feedback from regional commentators and local media suggests the cumulative average would be US$65 per barrel. Iran and Iraq are likely to have budgeted at least US$10 above that, more so in the case of the former while Saudi Arabia (and maybe Kuwait) would have budgeted for US$5 (to US$10) below that.

Problem for the Oilholic is getting access to regional governments’ data. Asking various ministries in the Middle East and expecting a straight forward answer, with the notable exception of the UAE, is as unlikely as getting a Venezuelan official to give accurate inflation figures.

Meanwhile, price is not the only thing holding or promoting investment. For instance, the recent political unrest has meant that the Egypt Petroleum Corp. has delayed the Mostorod refinery construction until at least May. The reason is simple – some 20-odd participating banks, who arranged a US$2.6 billion loan facility want the interim government to reaffirm its commitment to the project, according to a lawyer close to the deal. The government, with all due respect, has quite a few reaffirmations to make.

© Gaurav Sharma 2011. Photo: Bow River, Calgary, Alberta, Canada © Gaurav Sharma, April 2011

First thoughts from Houston…mine & others'

It is good to be back in the city that made the oil trade a business! With both ICE Brent and West Texas Intermediate forward month futures contract benchmarks above US$100 per barrel, Houston should be a happy place on this beautiful Thursday morning. Following a breakfast meeting with some ‘crude’ contacts, the viewpoints to emerge were more nuanced than I’d thought and some were in line with my chain of thoughts.

But first things first, last I checked WTI forward month futures contract was at US$106.35/b and ICE Brent at US$115.60/b. An energy partner at a law firm, a commodities trader, an industry veteran and an oil executive were all in agreement that geopolitical bias for crude prices – well – is almost always to the upside. Recent events in the Middle East and whats going on Libya in particular is having more of an impact on the Brent spread, as it is more reflective of global conditions. WTI is more reflective of conditions in the US mid-west and as such many here believe even US$100-plus does not reflect market demand vs. supply fundamentals.

Only medium term concern here, moving away from the geopolitical bias, is the perceived bottleneck associated with pipeline capacity (from Alberta, Canada) to Cushing and then southwards. This is unlikely to be relieved until 2013 (TCPL Keystone XL) or 2014 (Enbridge) and lets not forget the associated politics of it all.

The Libya situation, most experts here say, may create a short-term spike for both crude benchmarks, more so in Brent’s case – but it is not going to be 2008 all over again – in the words of four experienced Texans and the pragmatic SocGen analyst Mike Wittner.

Furthermore, market commentators here believe that over the next three quarters both speculative activity and investor capital flow in to the crude market (or shall we say the paper crude market) will be highly tactical as the current geopolitical risk premium (hopefully) eases gradually.

As expected, local feedback suggests utilisation rates of refineries and LNG terminals locally is still low. While I attach a caveat that four experts do not speak for the whole state, the belief here in Texas is that refining margins, which have been pathetic for the past six quarters may show some recovery towards the end of 2011.

© Gaurav Sharma 2011. Photo: Pump Jacks, Perryton, Texas © Joel Sartore/National Geographic