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Fuel Freedom Staff

Explaining all the nutty conspiracy theories about oil

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The Washington Post has a good explanation why so many leaders — including Vladimir Putin — might believe that other players are conspiring to set oil prices low, putting pressure on nations like Russia that rely so much on the high price of oil to balance their budgets.

To understand this particular conspiracy theory, one must look at the nature of conspiracy theorists, and here WaPo cites some knowledgeable experts on the subject:

… the psychological research suggests that conspiracists don’t just believe one conspiracy theory. They often believe lots of them. And many of the conspiracies have similar structures — suggesting there are deeply powerful but unseen players working behind the scenes to shape world events.

“A lot of conspiracy theories take as their premise that there’s a small group of people who are plotting to control something, to control the government, the banking system, or the main energy source, and they are doing this to the disadvantage of everybody else,” says University of California-Davis historian Kathy Olmsted, author of “Real Enemies: Conspiracy Theories and American Democracy, World War I to 9/11.”

It might be natural for some people to believe in oil conspiracies, because oil itself is so vital a commodity around the world, and oil producers — notably OPEC — do, in fact, collude to keep their prices at a certain level. That’s the reason they formed the cartel in the first place.

But another motivator is that “struggling leaders need somebody to blame.”

In Putin’s case, finally, we must recognize that a conspiracy theory like the one above is politically expedient — especially in newly perilous economic times. “Governments use conspiracy theories in order to convince their people to support them,” says [University of Utah history professor Robert Alan] Goldberg. There’s no better way to rally support than to suggest to your people that outside forces — not supply and demand, but malicious schemers — are out to get them.

Arctic Leaf

Winston, what would you do concerning natural gas?

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Where is Churchill when we need him? How many psychobabble articles and cable commentary about Putin and Russia could we have done without by just remembering good old Winnie’s marvelous, insightful quote in 1939? It’s as near perfection as we are going to get in trying to understand Mr. Putin and Russia. Both are “riddle[s] wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian [and Putin’s] national interest.” (The word Putin is my addition — I am sure Churchill would not have minded.) What does Putin want? Apparently not only full control of Crimea, but also instability in Eastern Ukraine.

Okay, now some of you readers are saying the same about the U.S. We seem to accept Russia’s takeover of Crimea…ah, Russia had it once anyway and it has a big naval base there. Sounds vaguely historically familiar. What about the other place, they say. What was its name? Guantanamo and Cuba! Oh, no?! Please let’s focus on Eastern Ukraine.

Forget consistency and remember Ralph Waldo Emerson. “Consistency [in foreign policy] is the hobgoblin of little minds” (Again, pardon the added-on term, foreign policy.)

Now how does oil come into all of this? None of us, not just President Obama, want to fight a war over the Ukraine, Eastern Ukraine or Crimea. If he were running again, Obama would probably borrow from Woodrow Wilson’s campaign slogan, “He kept us out of war,” at least big wars, particularly with corrupt nations some of which have a history of fascism..

Alright, let’s use tough energy sanctions — oil and natural gas. if the regulations concerning sanctions were tough, they might really hurt Russia’s economy and its ability to move out of the economic doldrums. Let’s hit them where it hurts! No, apparently, we will not, at least for now. Why? Well, Western Europe and our new ally, the Ukraine, depend on natural gas. Without it, both would be in for cold winters and probably a severe industrial recession. So what did our leaders do? They excluded natural gas from the list of recent sanctions. I suspect they, also, will allow Russia and the West to continue to trade in oil not involving new technology from the West.

Absence of natural gas in Europe and the Ukraine (and probably other Eastern Europe nations) is a plus for the U.S. We can make it up by selling natural gas. Isn’t what’s good for the U.S. bad for Russia and Mr. Putin?

Maybe, maybe not…or maybe the view that the U.S can be savior of Western Europe is a myth. Or maybe it’s just too complex for political leaders to grab hold of instantly.

Some verities to deal with:

1. Even with the current rush to permit the export of natural gas, before terminals get built and tankers are ready and environmental issues are disposed of, the first large volume of natural gas would not reach Ukraine or Western Europe until 2016 or later.

2. The U.S., despite the increase in shale development and natural gas production, still imports natural gas to meet domestic supplies — about 12.5% in total. Like big oil, exports of natural gas are to a large degree being sought to secure a higher prices overseas than in the U.S. Hurting Russia for U.S producers is a side show.

3. Russia, ostensibly, can produce natural gas and ship it by pipeline, rail or boat cheaper than we can. According to experts, the cost of U.S.-produced, transported and sold natural gas in Europe and the Ukraine is and will be much higher than Russian-produced and transported natural gas sold globally. Note in this context that Russia just cemented a $4 billion deal for Russia to sell oil to China. Will the Europeans and Ukrainians want higher-priced natural gas from the U.S.?

4. Oh, I almost forgot. Just last winter, U.S. residents in many states, particularly eastern states, nearly froze because of shortages of natural gas resulting from lack of adequate pipeline capacity and pipeline congestion. Consequently, the gas they secured came at very high prices. If ports can be built, pipeline amendments for the east coast cannot be far behind and probably should come first, if money is tight. Can we afford both, given uncertainties concerning price of natural gas and cost of drilling in tight areas? Sure. But the tradeoffs need to be carefully balanced by policymakers and the long term for investors must look bright.

It’s a puzzlement. Our policy seen by many nonpartisan observers as a “riddle wrapped in a mystery…” I will know sanctions are real when gas is included. What I won’t know is whether it will make a difference to Russia, given the fungibility of import-needy nations like China. Sanctions may bring both China and Russia something that communism has failed to do — build back a broken alliance. What I also don’t know is whether the growth of exports will significantly raise natural gas prices over time in the U.S. and lower the price differential with oil, and its derivative gasoline. If it does, producers and distributors may get rich, but opportunities for something I do care about — the development and widespread use of natural gas-based ethanol as a replacement fuel — may be impeded significantly. If this occurs, the environment, our economy and low- and moderate-income Americans may be worse off for it. Policymaking in today’s world is difficult and is something you often cannot fully learn in school.

Arctic Leaf

Khrushchev, Gorbachev, Putin , Ukraine and Oil

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How many of you have ever been to Russia? It is a fascinating place filled with fascinating people. While in Russia facilitating an Aspen Global Forum of U.S. and Russian leaders,  I visited Nikita Khrushchev’s grave. He lies under six feet of earth — probably  banging his shoe and confessing that he still wishes he could have incrementally changed Russia.  He was not Gorbachev, but neither was he Rasputin.

On top of his grave was a very attractive gravestone. One half was white, the other half black. I asked the workmen what it meant.They explained the contrast by indicating that Khrushchev was part evil doer of black deeds, but also in part a good man who wanted to change Russia.

The gravestone seems to fit the current situation in Russia. It is a place of great thinkers, great writers, great dancers, great scientists and decent people, but it is also the land of Putin whose modus operandi is often dark and destructive. Putin is no Gorbachev!

In the present Ukrainian situation, the dark and dangerous side of Russian leadership is visible. Currently proposed Western sanctions are not persuasive. Paraphrasing, we won’t come to the G8 meeting in Sochi  and we won’t have any more relationships with your military are not earth shattering.Trade limits or sanctions, if announced, may hurt, but Russia’s ability to cut off natural gas to Europe and the Ukraine as a counter measure will marginalize any effort to develop meaningful  responses. Obama and his colleagues do not want to engage in military sanctions in order to counter Putin’s new version of our own Monroe Doctrine.

Speaking of energy, oil, and natural gas, most energy related U.S and Russian executives have not been told to slow down or avoid searching for new businesses in Russia. As a recent CNBC report indicated, “ the U.S. produces more natural gas than any other nation and Russia is now the biggest oil producer.” U.S. firms are seeking an increased stake in  Russian oil, which is light and good for gasoline.  U.S. companies are even building the rigs for Russian drillers. While the U.S. imports relatively little oil from Russia, this could change depending on price. Russia is still among the top five importers of oil to the U.S.  In light of the Russian actions in Crimea, the price of gas at the pump is expected to head up again. The stakes are high, and at the present time, no government leader in either nation has seriously suggested interfering with the export and import trade network between U.S. and Russia.

I suspect that the U.S. and Russia will eventually agree to a deal on some sort of a pullback in Crimea and the possibility of a monitored arrangement concerning Russians living in both Crimea and the eastern part of Ukraine. I could be wrong. Russia could insist on remaining in or even annexing the Crimea and it could invade part of Eastern Ukraine.  I pray neither happens!

Would we react militarily in some form or manner, as we have at times in the Middle East in order to secure oil and gas supplies for the Ukraine and other needy western nations? I think not!  Such a provocation would lead to war and is  beyond the pale  for even ardent proponents of “getting tough” with Russia.  Indeed, because Russia’s military is strong, the U.S. and the West will most likely avoid any significant direct military response to possible Russian occupation/annexation of of the Crimea and even eastern Ukraine.

Possible high impact economic sanctions — different from the ‘I won’t come to your meetings and you cannot come to ours’ brand — would not be favored by most Western European countries or even the Ukraine, as they are dependent on Russia’s natural gas.  At the present time, the real options we have to counter Russia’s nefarious activities are not the best ones. While we could fulfill some of our allies’needs by exporting natural gas and oil, the decision to do so deserves (and I suspect is getting) hard analysis, especially in light of domestic U.S economic, political and security concerns about supply as well as demand and a fear of environmental problems, as well as increased consumer costs at the pump here at home. If shipping overseas passes muster, moving natural gas to our European allies and Ukraine could work both in providing needed gas and in possibly negatively affecting the price of Russian gas. Despite acknowledging the theoretical goal of oil independence, the world, including the U.S., is oil and gas dependent. We are lucky to have natural gas in ample supply, and if sane environmental regulations are applied, we can limit related methane and GHG emissions as well as other pollutants. Finally, we have an evolving and growing alternative fuel sector testing and developing renewable fuels.  Opening up U.S. fuel markets and fuel stations to increasingly available flex fuel vehicles and alternative fuels for consumers, including natural gas based ethanol and methanol, as well as electricity, can make us less dependent.

Arctic Leaf

Natural Gas Demand Causes the EU to Invite Russia to Join…

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Hold the presses, stop the cable and network news shows, break away from Twitter, and forget for a moment about Facebook… Why? Read the latest wire from The Associated Press! Many European nations, including Great Britain, have signed a multibillion dollar long term contract for Russian natural gas. The signing was accompanied by a decision by the European Community to integrate Russia into the community’s governance– NATO officials expressed anger and disappointment. Great Britain’s ambassador to America gently, but affirmatively, responded to the New York Time’s question concerning “what does this do to America and Great Britain’s special relationship? Well, it isn’t so special anymore.” She went on, “the world is evolving and Europe, as well as Great Britain, is evolving also. . . The alliance, and indeed NATO, is a relic of the past. I am sorry but that’s just how it is!”

Please don’t respond like many in America did to the late 1930s broadcast of H.G. Well’s War of the Worlds, narrated by Orson Wells. Don’t fear! don’t run out to the street! No deal with Russia for natural gas has yet been signed, NATO is still intact. The European Commission and European Union are still alive, if not well, given the economic problems plaguing many of its members and the continent as well as Great Britain.

While not factual, my flight into hyperbole and negative fantasy could become a reality sometime in the future. What got me thinking about the possibilities was an interesting article in the Oct. 31 Financial Times (coincidentally, on Halloween) by Paolo Scaroni, Chief Executive of Eni, Europe’s largest natural gas dealer.

Scaroni’s thoughts were not offered to trick or treat us. They were meant to make us think seriously about opportunity costing and risk analysis sure to be undertaken by European countries because of their increased need for natural gas and other energy sources.

Scaroni suggests that Europe’s present energy policies and related energy costs impede economic growth, and do not reduce Greenhouse Gas (GHG) emissions. Of note, he indicates that “the problem is that we have so far failed to grasp the implications of the U.S. shale revolution for Europe. Thanks to the rapid increase in efficient non-conventional gas production, U.S. companies pay about $3.50 per million British Thermal Units (BTUs) for their natural gas…That is about a third of what Europeans pay. “

Apart from high gas feedstock costs, Europeans also pay a hefty set of charges to sustain incentives to invest in renewables. As a result, Europe’s electricity is “twice as expensive as America’s” and gives the U.S. a clear competitive advantage with investors around the world, including investors from Europe. Why invest, build or expand in Europe if your company is energy intensive?  The U.S. has the Red Sox, Lady Gaga, Madonna and, most importantly, relatively cheap natural gas fuel.

Because natural gas in the U.S. now crowds out coal, Europe gets a lot of its surplus coal for power plants. So while natural gas use has declined, it is increasingly hostage to dirty U.S. coal- sort of a negative equilibrium for our friends on the other side of the Atlantic. Rising carbon emissions from coal have come close to netting out the carbon benefits from investment in renewables, natural gas and the economic downturn.

What are Europe’s generally intelligent public and private sector leaders to do?  Sounds obvious!  Increase imports of shale gas from the U.S.!  No, says Scaroni. By the time transport costs are added and subject to liquefaction in the U.S. for shipping and regasification for use in Europe, shale gas exported from the U.S. is twice as expensive as gas in the U.S. While likely a bit exaggerated, the author indicates that buying U.S. natural gas would be economically disastrous.

It is also not a good political move. Besides the costs for U.S. natural gas, many Europeans still view the U.S. as “that” upstart nation, once defined by old Europe as the “colonies.” Heck, it was only near 325 years ago; it’s too early to pay reparations.

Scaroni thinks the answer is to explore home grown shale oil assets and nuclear energy, as well as increasing the efficiency of conventional fuels. To secure the first two, however, will be tough given the opposition of environmentalists and people who would like to keep Europe just as it is. Further, high density wall to wall development throughout Europe and Great Britain creates even more fear concerning despoiling the remaining open space and breeds an intense “not in my neighborhood” attitude in many areas. Efficiency is praised by most, because it is often used devoid of real meaning in political rhetoric. Who can be against it, until specifics and likely mandates, costs, and its impact are put on the table?

Scaroni, realizing the obstacles to lowering the costs of gas to U.S. benchmark prices, suggests strengthening commercial and political ties with Russia and perhaps other traditional non U.S. energy partners.  Reading between the lines of the author’s words, he seems to be saying, “let’s milk Russia for all the comparably inexpensive gas we can get.”  WOW!  Communist! Reprobate!  Misanthrope!  No.  Probably just a good analyst and business person.

Without access to NSA data or James Bond, I still almost can hear the buzz at the Pentagon and State Department.  I can see the dour faces at NATO offices in Brussels. I can visualize the depression in the EC and EU. Sure, Russia may soon find a welcome mat in Europe. Its entrance price will be relatively cheap natural gas. New alliances, new travel patterns for diplomats, better food in Russia in the future, new political fun and games as well as new problems for the U.S.

Russia’s natural gas exports to Europe are likely to increase, but Russia’s natural gas dominance is probably not around the corner. The West can take a deep breath.  Use of fracking, governed by strong environmental regulations, likely will increase and result in expanded natural gas supplies in Europe and Great Britain.  While exports from Russia will increase, they will reflect a measured increase at least in the short term.

Russian exports to Europe and Great Britain will not have a major impact on the U.S. We can manage any uncertain political changes and the European price of natural gas will not have a major effect on the U.S. price of the same.

What’s the U.S. going to do with its natural gas? While LNG exports from the U.S. may increase to Great Britain and Europe (as well as Asia), the increase will be moderate, given the continued absence of sufficient port capacity, the cost and the slow pace of government approvals. Pressure, in light of predicted surpluses and the advocacy of alternative fuel supporters, may help open up the almost monopolistic U.S. vehicular fuel markets and increase natural gas demand.

Natural gas prices in the U.S. will remain subject by and large to U.S. production and related costs, as well as regional market behavior and investor speculation. Contrary to oil, natural gas produced in the U.S. likely will not play a major role for at least the next several years in global markets

Is this good for U.S. and U.S. consumers?  On balance, yes. The gap between demand and production as well as production potential will remain visible. ROI in natural gas wells and rigs will probably be sufficient to secure modest production increases. Natural gas prices will likely go up over time but remain well under the price of oil when both are converted to vehicular fuels. Assuming positive government rule-making and the increased use of natural gas derivatives, ethanol and methanol as alternative transitional vehicular fuels, consumers at the pump will benefit from the continued differential and the U.S. will benefit security-wise as well as environmentally and economically.