Tales of the South Atlantic II.

World oil supply has increased faster than has demand, so prices have fallen.[1] All sorts of changes have resulted. For example, most counties maintain some kind of petroleum reserve to be able to respond to emergencies. Many oil-consuming countries are seizing the opportunity presented by the fall in world oil prices to complete or expand those reserves. Asian countries, in particular, are buying oil where they can get it. Often, that means buying on the West Coast of Africa. “Years ago, you never saw the Chinese chartering [tankers] in West Africa,” said one shipping expert. “Now they are the largest charterer here.” The four chief oil export ports in West Africa are Luanda Oil Terminals in Angola; Warri Port , and Port Harcourt Terminals , in Nigeria; and Sogara Oil Terminal in Gabon.[2] All of them face out onto the South Atlantic.

The tankers themselves make an interesting story. Between the 1950s and the 1970s, tankers grew in size from about 500 feet in length and a capacity of 16,500 Dead Weight Tons to the “Very Large Crude Carriers” (VLCC) that run about 1,100 feet in length and can hold up to two million barrels of crude oil.[3] At Spring 2015 prices, that is a cargo worth $120 million. There are about 600 VLCC afloat at the moment.

Why did oil tankers grow in size? “Previously on LA Law,” Middle Eastern oil flowed to Europe and other Western ports through the Suez Canal. The Six Days War closed the Suez Canal for an extended period, forcing tankers to make the much longer voyage around the Cape of Good Hope.[4] To increase the efficiency and lower the transportation costs of oil, shipping companies started ordering bigger and bigger tankers. Then the oil port facilities had to be re-built because there was no way to bring these giants into any conventional port. (Indeed, the largest tanker built, the “Seawise Giant,” couldn’t use the English Channel.

The break-even charter rate for VLCC is about $25,000 a day. The global financial crisis caught tanker companies by surprise. The world economy—and demand for oil—slowed down, while they had to take delivery of a bunch of expensive ships that they had contracted for several years earlier. In 2013, average shipping rates for the VLCCs ran about $12,000 a day; in 2014 they averaged $22,000 a day. For the shipping companies, Asian entry into the West African oil market means more of their ships are making the longer runs to the Far East and back, rather than more and shorter runs across the Atlantic to ports in the Americas. This leaves fewer ships to handle that business, so the freight rates go up. In early 2105, the added Asian demand pushed rates up to $69,000 a day. More normal off-season rates run $40,000 a day.

Weird story: Speculators want to buy oil while it is cheap and sell it when the price rises. Where to store it in the meantime? Normally, in a tank farm ashore. However, there are a limited number of empty storage tanks, so the price charged by the owners tends to rise as more people want to use the tanks. Also, at some point, all the storage tanks are filled up, but the speculator still has to take delivery of the oil s/he bought low in order to sell high. Now what? Somebody chartered the VLCC “Alsace” and had it anchored off the Orkney Islands in February and March 2015. What did the crew do all day? Play cards, check on the anchors, watch the flat-screen TV? How would you like to be captain of an anchored ship? Garrr.

[1] Stanley Reed, “Oil Glut Benefits Those Who Ferry It,” NYT, date misplaced.

[2] http://globalenergyobservatory.org/list.php?db=Transmission&type=Oil_Ports

[3] By way of Ultra-Large Crude Carriers (ULCC) that were over 1,300 feet in length a capacity of 500,000 Dead Weight Tons.

[4] Avoiding that long, costly voyage had been why building the Suez Canal had been a good idea in the first place. Egypt’s loss of toll revenue from the re-routing of that traffic hasn’t helped the country’s always-struggling economy. “Thanks President Nasser!”

Recent American Public Opinion.

Iran. In March 2015, 68 percent of Americans approved of negotiating with Iran over its nuclear program. Broadly, we can see the effects of the Iraq war on the public mind. Most people favored negotiations over the risk of war. What is remarkable is the degree to which the words and actions of leaders have had a disruptive effect in spite of this broad consensus.

First, Americans seem to have arrived at an “a plague on both your houses” attitude to the Obama-Netanyahu conflict. In March 2015, only 38 percent had a favorable view of Netanyahu, while 27 had an unfavorable view of the Israeli prime minister. In April 2015, only 37 percent approved of the Prime Minister’s handling of relations with the United States. However, only 38 percent approved of President Obama’s handling of relations with Israel.[1] In many eyes, it has begun to look like a personal dispute, rather than an affair of state.

Second, a sharp partisan division had begun to manifest itself in attitudes toward Netanyahu. In the March 2015 poll, 53 percent of Republicans had a favorable view of Netanyahu, while only 28 percent of Democrats had a favorable view. Doubtless, this division of views reflected the invitation to Netanyahu to address Congress that had been schemed-up by the Republican leadership and the Israeli ambassador, the former-American and former- Republican activist Ron Dermer. That isn’t the same as saying that American attitudes toward Israel itself have shifted dramatically. Yet.

Third, in March 2015, the Republicans pushed their luck by meddling with the negotiations with Iran.[2] Forty-seven Republican Senators sent a letter to the Iranians warning that an agreement that was only an “executive agreement” could be undone by a subsequent administration. Almost half of Americans (49 percent) disapproved of this action. The hyperventilation on the left about “treason” (cue Ricky Perry) was silly. However, a lot of Americans seem to take the same view as did Napoleon: “It was worse than a crime. It was a mistake.”

Energy. In March 2015, Pew Research surveyed Americans on their attitude toward energy and climate issues.[3] At this point, 81 percent favored government-imposed higher fuel-efficiency standards for vehicles and 64 percent favored tighter emissions limits on power plants. However, 59 percent favored building the Keystone XL pipeline. On the other hand, 31 percent opposed building the pipeline and 31 percent opposed tighter controls on emissions from power plants. On the subject of ranking the means to develop America’s energy resources, 60 percent assigned priority to alternative energy sources (wind, solar, hydrogen) and 30 percent assigned priority to exploring for and developing carbon sources (coal, oil, natural gas). At the same time, 56 percent favored more off-shore drilling for gas and oil, while 40 percent opposed it.

There is a lot of incoherence here. How to sort it out?

First, the opponents of the Keystone XL pipeline and the opponents of controls on power plant emissions represent the very large numbers of crazy people in American politics. Together they total 62 percent. Either the middle ground learns how to make deals or we’ve got problems.

Second, more carbon energy means more oil and gas, not more coal. The “war on coal” has already been won. Mitch McConnell just doesn’t know it.

Third, the President is pandering to his base in vetoing the Keystone pipeline.

[1] “Poll Watch,” The Week, 13 March 2015, p. 17; “Poll Watch,” The Week, 10 April 2015, p. 15. In the March poll a lucky 23 percent had never heard of the Israeli leader.

[2] “Poll Watch,” The Week, 27 March 2015, p. 17.

[3] “Voice of the People,” WSJ, 31 March 2015.

Shock Waves.

The implications and possible effects of the drop in oil prices are complex and hard to predict.[1]

One effect of falling oil prices is to hammer oil producing countries at odds with the US (Russia, Venezuela, Iran). The fall in oil prices is putting far more pressure on Russia than are the international sanctions imposed over the unpleasantness in Ukraine. Both the Saudis and the Americans are quietly amused by the difficulties being encountered by the Iranians and the Russkies.

At least over the short-term (but likely over the longer-term) the fall in oil prices will reduce the revenues earned by the established oil producers. The effects could ripple through Middle Eastern politics. Saudi Arabia buys off domestic discontent with a high standard of living paid for by oil sales. Less revenue could translate into more discontent. When the United States scaled back aid to Egypt after the overthrow of the Morsi government, Saudi Arabia stepped in with generous assistance. Egypt plowed ahead with its suppression of the Muslim Brotherhood and other dissidents in open defiance of the United States. How long and how generously will Saudi Arabia be able to continue to support Egypt and other conservative regimes if the money stream starts to fall? Other Muslim states—like Algeria—are in something like the same boat in their dependence on oil revenues to fend-off unrest.

What does this suggest about climate politics in the United States? Will falling gasoline prices lead to more driving in bigger vehicles—with more emissions? Will the deflation of predictions about having passed “peak oil” reduce the pressure for the development of alternative energy sources?

What are the implications for the business-government relationship going forward? Eduardo Porter argues that government support for the development of the technology behind “fracking” endorses smart industrial policy. He suggests that this can offer a model for the development of new technologies to limit climate change. In particular, he endorses raising the gas tax during the period of low oil prices. The revenues “could be leveraged into a boon in tax revenues that the government could use to pick some of the winners that will help solve the [environmental] problems.”

The problem with “industrial policy” is that it’s just like other forms of politics. Established interest groups have a stronger position than do rising interest groups. The winners “picked” by the government are likely to be big campaign donors or the pet causes of political leaders. When government picks winners, we get farm subsidies and Solyndra. Porter’s own account of the development of fracking technology emphasizes the importance of research into new technologies paid for by the government, not that government picked winners. One thing that goes unmentioned by Porter is that government labs and subsidies were spread over a wide area. They didn’t focus on one technology or energy source. Continued investment in research certainly sounds like a good idea. So does an increase in the gas tax. Within that framework, however, would it be better to let the market pick the winners?

Why was this a surprise? Between 2008 and 2015 American domestic production of oil doubled. The European economy has been stagnant for a bunch of years. “Fracking” has been a loudly contested issue in American domestic politics for years. These are the key factors in the price decline. Yet markets, media, environmentalists, and politicians all seem equally surprised. Did no one see the rise in production/fall in prices coming? It’s a sort of Pearl Harbor in reverse.

[1] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

Seismic Shift.

It’s probably hard for most people to accept this, but economic growth raised incomes all around the world by 28 percent between 2005 and 2013. All that growth required a rise in oil production of 19 percent. That rise in oil production never happened. In large part, it never happened because Saudi Arabia and other major producers never increased their production.[1] They preferred a stable target price of $100 a barrel. Instead, oil prices held steady. By June 2014, West Texas crude was selling for $107 a barrel. Revenues flowed in to oil-producers. But, as the Germans said about the Greeks, “they’ve had their fun.” Nemesis was at hand.[2]

It has been a long time coming. In October 1973 the Organization of Petroleum Exporting Countries (OPEC) launched the first “oil shock” against the industrial democracies. The target countries responded in a variety of ways. Some of the responses were ludicrous, but some had important long-run consequences. In the United States, Congress approved construction of a pipeline from Alaska’s Prudhoe Bay, tried to foster nuclear power generation, first imposed fuel-economy standards on car manufacturers, and created the Energy Research and Development Administration. All these were efforts to prepare a long-term strategy.

Eduardo Porter has argued that federal support for research and development paid big dividends.   In particular, Porter touts the role of government “industrial policy” in the developments that led to the recent shale revolution. The government helped pay for the development of “directionally deviated drilling,” the antecedent to the horizontal drilling that is used in “fracking.” The government pioneered large-scale hydraulic fracturing. The government subsidized the “polycrystalline diamond compact bits” that do the drilling. Micro-seismic imaging, originally developed in government labs to trace coal mine collapses, found application in identifying fracturing sites. The Reagan administration ended obstructive price regulations that had hindered investment.

The shale revolution took decades to develop. Recovering natural gas from shale formed the initial target. When natural gas produced by “fracking” entered energy markets in large quantities a few years ago, natural gas prices started dropping. The drillers’ effort shifted to releasing oil. By 2013 it began to pay off. That year American producers generated 3.5 million barrels of oil derived from shale. From June 2014 to January 2015 the price of oil fell from over $100 a barrel to $45 a barrel.

Why didn’t OPEC cut its own production to push the price back up? Probably because they could not cut back enough to off-set the rise in American production. Cutting production would just cede market-share to the Americans. They are hoping that prices will bounce back up in the future. A revival of world economic growth will increase the demand for energy. This will off-set the expansion of American production to a degree. Shale oil is expensive to produce in comparison to “regular” oil. The current low price will cause many American producers to shut down their operations until prices rise to a profitable level. However, no one now expects oil prices to rebound to anywhere near $100 a barrel. A ceiling of $70 a barrel is more likely.

Falling oil prices have dragged down prices for gasoline, diesel, heating oil, and natural gas. Consumers all around the world are enjoying the equivalent of a tax cut, which in the US amounts to $1,000 a year. That is a valuable prop to growth when strong growth tarries.

[1] Excluding a brief fun-up to counter the 2008 economic collapse.

[2] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

 

The Blood of Victory.

Cotton may be the “fabric of our lives,” but oil makes everything run.

How much oil are we using? More and more each year: 60 million barrels a day in 1985, 84 million barrels a day in 2009; probably 114 million barrels a day in 2035. Oil use will probably accelerate as “developing nations” (Chinas, India), well, develop.

One problem is that there is a finite amount of oil in the earth. But how much is that? No one knows for sure. The current estimate is 1.2 trillion barrels. This is pretty hazy, actually. There may be lots more oil than people previously thought. Still, even “bullish” estimates suggest that we may have enough oil—produced at a rising cost—to provide oil for twenty or thirty or even forty years. So I’ll probably be dead before it runs out, but most people on the earth today will not. In the meantime, world demand for oil drives the exploration for new oil reserves into new areas.  As one oil company spokesman put it, “this is where nature put the oil.  You want to find oil, you have to go where it is.”

Some of the oil exploration sites are in extremely challenging environments.  There are undersea deposits in the Atlantic Ocean off the coast of Brazil, in the Arctic Ocean, and off the coasts of the United States. The American sites are problematic. People first started drilling for oil off-shore in the Gulf of Mexico in about 1950.  Success in the Gulf led to oil exploration elsewhere.  However, in 1969 there occurred a disastrous oil-rig blow-out in the Santa Barbara Channel in California.  The reaction put a stop to off-shore drilling wherever the oil industry was not already powerful.  Both the East Coast and the West Coast were soon out of bounds.  In contrast, Texas and Louisiana were already in the thrall of the oil industry.  Off-shore oil drilling became concentrated in the Gulf: there are about 4,000 oil rigs operating there now.

Since 2005 there has been a tremendous growth in the number of off-shore oil rigs world-wide.  There are about 2,500 off-shore oil and natural gas rigs around the world outside the Gulf of Mexico.  The number of the foreign off-shore rigs will expand.  Brazil claims a recently-discovered under-sea field 200 miles out in the Atlantic.  The oil deposits are estimated at 15 billion barrels.  Tapping into these fields would raise Brazil to the ranks of Canada and Nigeria among oil-producers.  For a rapidly developing economy with all sorts of needs and aspirations, this chance is too good for Brazil to pass up.  There are serious technical difficulties because the oil is four miles down.  The example of British Petroleum’s “Deepwater Horizon,” which blew up and blew out in Spring 2010, sends shivers down the spines of environmentalists.

Environmentalists go crazy over the risks. The “Deepwater Horizon” blow-out, and the resulting spill, gave them a lot of ammunition. How are you going to contain an oil spill four miles down if you couldn’t contain one a mile down? How are you going to contain a spill in the stormy Atlantic Ocean if you couldn’t control one in the comparatively tranquil Gulf of Mexico? Alternative oil sources don’t look much better. The Canadians have been extracting oil from “tar sands” in Alberta and the US is extracting oil from shale rock in the Western states. Getting oil out of tar sands requires six barrels of water for every barrel of oil produced. Water is nearly as scarce as is oil.

What to do? Well, if you’re running an oil company, you look in places that have weak environmental regulations and a corrupt government. “Nigeria is for drillers” bumper-stickers should start popping up all over the place. Ecuador, Peru, and Costa Guano should also start to figure in oil company reports.

See: “The search for oil,” The Week, 17 December 2010, p. 15; “Oil rigs: cities at sea,” The Week, 21 May 2010, p. 13.