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Oil Nationalism: Russia Versus Saudi Arabia

Commodities / Crude Oil Oct 28, 2012 - 06:21 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleTOO MUCH
In a week where Malaysia's Petronas' buyout bid for Calgary-based Progress Energy was rejected by the Canadian government, and the rejection called "resource nationalism" by Fitch ratings, Rosneft's buyout of TMK-BP is seen as Vladimir Putin's vehicle to regain state ownership of Russia's oil fields. Rosneft was firstly handed control over Yukos Oil in 2003, by Putin's government hitting Yukos with a $26-billion tax bill which bankrupted it, followed by Putin's bundling of Yukos founder, the billionaire Mikhail Khodorkovsky, into a Siberian prison. The present buyout of TNK-BP has Rosneft acquiring BP's 50% stake of the joint venture in exchange for cash and stock, for $27 billion.


The numbers are important: the goal of raising Kremlin control of Russian oil to 100% runs alongside the goal of levering up Russia's control of global oil export supply as the world's biggest single exporter, always with Saudi Arabia either close behind or a little in front. Here, the numbers diverge. Using US EIA data, Russia produced a day average 9.8 million barrels (Mbd) in 2011, and consumed about 2.4 Mbd, leaving an export surplus of about 7.4 Mbd. The same year Saudi Arabia's net export surplus ran at a rate forming the basis of multiple analyses and studies, also affected by KSA's growing refined products exports. The probable crude oil equivalent was around 7.7 - 8.1 Mbd.

This combined net total for Russia and KSA, of about 15 - 15.5 Mbd, can seem huge but this only represents 28% - 30% of world total volumes of oil traded, transported and used outside the country of production, estimated at a widely disputed total of around 50.5 - 52.5 Mbd. Without being too flippant, we could compare this with world dependence on a few-only exporters of smartphones and cellphones. Graphs or charts of average price per cellphone/smartphone against production and exports shows interesting elasticities, comparable to Saudi or Russian average annual oil exports versus average Brent and WTI crude oil prices on a yearly basis, to be sure with export surges explainable as "export more to cover falling unit prices", from time to time. Unfortunately for this easy analysis there are major gaps to explain: any claimed price-driven export supply elasticity of either KSA or Russia is not evident in the data, with the exact opposite (output changes unrelated to price changes) able to be shown for their oil export performance over the last 25 years.

ORWELLIAN VISION OF PEAK OIL
More important to global oil and gas importers, oil export supplies and prices can be (and are) easily manipulated by KSA or Russia, or by both KSA and Russia. Their degree-of-freedom however ends at a shrinking horizon for oil prices, now set at $75 a barrel or less.

Both countries are massively dependent on oil revenues. Their oil-fattened economies are extremely dependent on these revenues, and for Russia, also on gas export revenues. While we can say that Russia only has import dependence of Mercedes Benz sedans, Saudi import dependence extends from being unable to produce the cars, to also being unable to produce the food needed to fill up the driver and the passengers.  Without oil-for-manufactured goods and oil-for-food neither Russia nor KSA have any future, without science fiction-type social revolution changes. Russia's long nightmare of Yeltsin-type "adjustment to a market economy", in the 1990s, is a reminder for Putin but a danger for OECD and Emerging country oil importers: both Russia and KSA can be oil price hawks.

Basically, if they act to drive oil and gas prices too high, importers will react one way or another, faster or slower, to reduce their dependence. Since the Oil Shocks of the 1970 starting in 1973, OECD energy dependence on oil has shrunk from 52.6% of total energy demand in 1973, to 33% in 2012. This is a warning for KSA and Russia that they hear loud and clear. The energy economy of the OECD countries can use less oil and does use a lot less per unit GDP, than 40 years ago. Even more rapid-acting for the Emerging economies as recent evidence shows, the BRICs and the Emerging economies can also cut, and are cutting their oil intensity of economic output on a sustained basis.

The Orwell version of Peak Oil is therefore 100% and exclusively political, nothing else. The Orwell theory is that either KSA or Russia, or both, could act to heavily reduce oil exports, for some reason or other, but the final reason would be political, only. Oil paranoia is therefore basically political. This is reinforced by the technical, technological, resource and industrial reasons which make the rapid depletion of so-called conventional or "first generation" oil unimportant and with no serious near-term implications - of falling global oil production or reduced global export supply. This is because unconventional oil and unconventional gas, as well as unconventional or alternate energy systems, sources and supply are rapidly growing. Just as important, global oil consumption has flat-lined and global energy demand growth has massively downtrended, even in the 3 years since 2009.

This readout of global energy trends can be called "political".  The OECD's IEA continues to forecast serious or even structural oil supply shortage by about 2017, but this doomster forecast firstly needs an almost miraculous recovery of global oil consumption growth and oil import demand growth, especially by the OECD countries. Also,the Emerging economies are supposed, by the IEA, to "snap out" of their current downtrend of growth rates for total energy demand, and energy demand.

The remaining key role of the OECD group is simple: OECD net oil imports of about 24 Mbd (and gross oil imports of 41 Mbd) are at most flat-lining relative to 2009 import levels, but still represent  well over 75% of world gross oil imports. The reality is however not "doomster friendly": both the total oil consumption of OECD countries, and their net oil imports after refined product exports, are declining. This can be attributed to "price elasticity of oil demand" but this is only one explanation, among several, of course including post-2008 OECD economic crisis becoming "a new lifestyle".

Until 2011-2012, the IEA-thesis with "Orwellian undertones" was easy to peddle. China and India would race to supplant and replace the OECD countries (which would however go on increasing their oil import demand) at the world's oil spigots. This would drive up world total import demand, and oil prices would explode "by about 2017". IEA forecasts in repeated official publications were of $150-oil being "New Normal" by about 2017. Today, things look a lot different on the energy demand side, and the energy-and-oil supply side is in the process of being totally transformed.

Energy revolutions happen - the problem is that most people thought they would not happen now, so soon, and so rapidly.

PUTIN AND KING ABDULLAH:  STRANGE BEDFELLOWS
Vladimir Putin and King Abdullah bin Abdulaziz al-Saud can rightfully be called strange bedfellows but oil unites them in their pseudo-conflict with the rest of the world. Both, for example, are "resource nationalists". Press comment on the Rosneft buyout of TNK-BP says that "Wth a snap of his fingers" Putin has further strengthened his national oil giant, moving it ever closer to the supposed "gas hegemony" of Gazprom - - with an implied or inferred "Kremlin plan" to reassert Russia's global influence by controlling all other countries' energy needs.

Saudi Aramco thinking, and the al-Saud Wahabite elite's thinking can be called similar or almost identical. For both bedfellows, this needs a very careful control of oil prices - for Putin's Gazprom "gas empire" this need is right now> It is causing an ever more careful, rapid change of previous Kremlin ideas, or notions on how much you can get from controlling other countries' gas-energy needs. Oil-indexed pricing of global natural gas is dying, right now, and Gazprom, albeit in "coded language" and with clumsy, inelegant hypocrisy and double talk admits this. Gazprom has been beaten by the double revolution of shale gas and stranded gas. The days of $15 - $17 per million BTU for gas supply, from a "single reliable supplier" called Gazprom (which supplies about 33% of Europe's gas imports) are finished. When the oil index or yardstick for gas prices is shattered and can only get more flexible, to say the least, big things will happen.

The wake-up call for the strange bedfellows however cuts both ways: KSA and Russia need to make sure that oil substitution (let alone discovery and development of shale oil and deep offshore oil reserves!) does not run ahead of their "energy plan", whatever this plan might be. While Putin is shy on details regarding Russia's energy transition, Saudi official sources proudly proclaim that KSA can or could become "all renewables" by around 2045. Non-Saudi energy users can set the same goals - if they, the Wahabites do not need oil by 2045 we can do without it, also. With a 2045 value of zero dollar per barrel for oil, we can start programming the price fall of oil. High oil prices are finished.

The only lever for the strange bedfellows, if they have a strange plan for controlling the energy needs of all other countries is simple: price.

Running back in time, and unlike Putin's Kremlin and its oil price strategy, Saudi Arabia's oil ministers can be almost permanently relied on to say that - at any moment, at any oil price - they thinks prices are too high, the Kingdom is concerned, and is working out how to reduce oil prices.

For example in the early 2000's, Aramco was highly concerned about oil prices of more than $25 a barrel. Recently, the Kingdom has been highly concerned about prices over $75 a barrel. Proving their energy "plan" must be an impressionist masterpiece, Putin and the Saudi elites rarely talk about anything else than increasing oil and gas production and exports. Normally speaking, if you increase supply you have to expect a lower unit price.

The bottom line is that KSA and Russia have to be "soft" on oil prices. They can so easily live with 75-dollar oil; whenever they care to check the real world, the real economy, and the real energy-economy they will find they have little alternative but to accept this price level.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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