Geopolitics and oil – July 26

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Falling dollar puts pressure on Opec
Javier Blas, Financial Times
The falling US dollar is lowering the Organisation of the Petroleum Exporting Countries’ purchasing power by up to a third, making the powerful oil cartel more reluctant to increase production and cut prices.

Although oil is trading near last August’s record $78.65 a barrel, Opec calculations show that, when adjusted for the weaker dollar and inflation, an average of the 12 Opec members’ crude oil prices has fallen in the past year.

The adjusted “Opec basket price” averaged only $43.60 a barrel in June compared with $44.30 a barrel in the same month last year, according to the organisation’s latest monthly report.
(23 July 2007)
Related:
How the Weak Dollar Affects OPEC (The Trumpet)
The Dollar Collapse’s Oil Ramifications (Resource Investor)

Is There a Viable Solution to Our OPEC Dilemma?
Ed Koch, Family Security Matters
Gasoline prices are still over $3 per gallon. Whenever OPEC (Organization of the Petroleum Exporting Countries) decides to increase the price of oil — which now ranges in the upper $60s to $70 a barrel — OPEC’s price becomes the world’s price and non-OPEC nations adopt the OPEC price as theirs.

A major factor in determining the profits of oil producers is the cost of drilling wells and pumping oil. Petroleum that is closest to the surface — such as Mideast oil, particularly Saudi Arabian oil — is cheapest to extract. Among the highest cost per barrel is the offshore oil extracted from the North Sea by Great Britain and Norway. Yet, all oil-producing nations use the OPEC price.

Surely, if ever there was a case that demonstrates the power of a cartel, it’s OPEC. If ever there was a violation of the Sherman Anti-Trust Act, this is it.

But what are we doing about it?

…Whether or not a suit will be brought by the Department of Justice, the only party permitted under the legislation to initiate a lawsuit, is already clear. It won’t in the Bush administration. The President has made clear he is opposed to such litigation.

Every presidential candidate, Republican or Democrat, should now be asked — “If you become President, will you direct the Department of Justice to sue OPEC?”
(25 July 2007)
Pick your scapegoat: OPEC, oil companies, environmentalists… -BA

The European Champions of Energy
Russia and France Play the Game
Sam Hopkins, Energy & Capital
Last week I told you the French are beating the Brits in the pan-European battle for Russia’s gas-fueled energy affection. But what exactly are they winning?

Across Europe, a new nationalism is in the air. France can take some of the blame for eroding the sense of inevitability that was once attached to European political unity. After all, it was the French voting public who, along with the Dutch, rejected the proposed EU constitution in mid 2005.

Though not necessarily as a direct result of the French and Dutch “no” votes, the past two years have seen a succession of cross-border curmudgeons protesting international corporate deals, many of them involving energy utilities.

For its part, France decided last year to create a “national champion” worth nearly 90 billion euros by joining its state-run energy firm Gaz de France with privately run Suez. That move came after the Italian utility company Enel bid for Suez. The Suez-GDF deal still has not been completed.

…To the east, a specter is haunting Europe–the specter of Russian gas! While the EU gets wishy-washy about what its member states can jealously guard and what they can’t, the Kremlin has final say. Snapping up companies like oil major Yukos (which was privatized during the mob-heavy and under-the-table post-Soviet nineties), Russia has wrested control of its national energy endowment away from stillborn private enterprise.

Now, the government and its state-run companies Gazprom and Rosneft respectively control all of the country’s natural gas and oil exports. Russia holds the world’s largest national gas reserves, is #2 in coal, #8 in oil (though it is the second-biggest exporter), and most importantly it is the world’s #3 consumer of energy.
(25 July 2007)
Peak oil (aka “the end of cheap oil”) seems to be giving a boost to nationalism. -BA

If Iran Provokes an Energy Crisis: Modeling the Problem in a War Game
Various, Heritage Foundation
From December 2006 to March 2007, Heritage Foundation scholars conducted a computer simula­tion and gaming exercise that examined the likely economic and policy consequences of a major oil disruption in the Persian Gulf. The exercise utilized a realistic scenario, state-of-the-art macroeconomic modeling, and a knowledgeable team of subject-matter experts from government, business, aca­demia, and research institutes from around Wash­ington, D.C.

This project was a proof-of-principle investiga­tion that combined computer modeling and gaming to capture how U.S. decisions during a crisis might affect how global energy markets and the U.S. econ­omy adjust to sudden and significant disruptions of oil supplies. In this scenario, the United States responded to a crisis precipitated by an attempted Iranian blockade of the Strait of Hormuz.

The game began with a series of economic results based on a scenario in which Iran began blockading the Strait of Hormuz in January 2007. The assump­tion was that Iran may succeed in fully blockading the strait for up to one week, but after that, some oil shipping would slowly resume.

…The results of the game also suggest that an offi­cial response to an actual crisis based on an Iran blockade of the strait might be effective. The experts who played the roles of the U.S. government offi­cials opted for a focused but restrained use of mili­tary power oriented toward objectives that directly addressed vital national interests and that were clear, relevant, and obtainable. This use of force demonstrated the U.S. determination to uphold freedom of navigation in the Strait of Hormuz. The American response did much to calm global markets and reassure American consumers.

In addition, the experts chose to take a minimalist approach to interfering in U.S. domestic markets. They focused primarily on liberalizing domestic energy policies and rolling back regulatory restric­tions. They also strove to propose policy changes that would minimize fears over shortages beyond the immediate crisis. In this exercise, the combina­tion of a determined but limited military response and minimal government intervention ameliorated the economic consequences of the crisis.

Why Worry?

As global energy demand grows-especially among China, India, and other developing coun­tries-competition for access to oil is escalating. The Persian Gulf is becoming the most important bottleneck, making freedom of navigation through the strait a vital American and global interest.
(25 July 2007)
According to SourceWatch:

Founded in 1973, The Heritage Foundation is a New Right think tank. Its stated mission is to formulate and promote conservative public policies based on the principles of “free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.” It is widely considered one of the world’s most influential public policy research institutes.