European Tribune - Community, Politics & Progress.

Gas, Oil and the Central Oil Bank of Saudi Arabia

by ChrisCook
Sat Mar 20th, 2010 at 09:48:36 AM EST

This Diary is a response to a post on one of the Claverton Group lists and in particular, this statement in the context of Danish energy.

Nearly all Denmark's village scale plants, based on gas engines, can start and stop in minutes. They are very flexible, having stand-alone boilers, sometimes wood chip-fueled, that can operate if the CHP mode is not economic. It is true that like the wind turbines, these receive "top-up" income support when annual Nordic spot price are very low.
The weakness is reliance on gas. This week (surprise surprise) Algeria called on Qatar and Russia to curb exports of gas so as to raise the price! Watch this space. As OPEC is successfully demonstrating, the economic gain from "production discipline" is a runaway commercial success. Even threatening to withdraw a small amount of fuel from the market will raise prices.

Now, it seems to me that the OPEC membership is in fact at today's prices as undisciplined as it is possible to get, and that in fact the current level of oil pricing now has far more to do with financialisation of the market - and interest rates at the zero bound - than anything else.

So this was my response......

Gas suppliers like Russia, Qatar, Iran, Algeria are not exactly in a position of strength, and although there is a lot of hype around shale gas, it is one of the reasons why the whip hand is currently with the buy side, as it used to be in the oil market and no longer is. Hence the breaking down of the gas/oil pricing relationship.

IMHO that means there is a window of opportunity to create the sort of new global market clearing infrastructure for the gas market which I set out in Rotterdam at the 'Spark and Flame' conference in December.

Unitisation and a Global Market in Gas

For those who think that 'monetisation' of energy generally and gas in particular is a pipe dream, it is in fact exactly what is going on now in the oil market, where Saudi Arabia is in all probability acting as a de facto Central Oil Bank,

Central Oil Bank of Saudi Arabia

and IMHO successfully keeping the global oil price pegged in a range of roughly $75.00 to $85.00.

The reality is that oil is no longer priced in dollars: dollars are priced in oil.

This 'Oil Bank' role is achieved not so much through their position as a swing producer - where their actual capability is pretty murky - but through the relatively new ability of producers to 'lease' oil to energy investors.

Introducing Financial Oil Leasing

ie investors lend $ to the producers who in return lend (through forward sales) oil in tank or even in the ground. This financial oil leasing was pioneered by Shell in 2005 and appears to have become fairly widely (albeit opaquely) adopted by investment banks as intermediaries.

This article of mine Saudi Arabia and the Oil Bank

and this interview set it out.

The outcome is that producers are able to support the price at a 'perfect' (as it has been said) level, undoubtedly one tacitly agreed with the US government, who are also able to bring to bear their Strategic Oil Reserve as a management tool, and to buy in oil when the price falls below the lower level of the peg, and selling it when it rises above.

This is global market manipulation on a massive scale, but there is nothing new about that. It's just that it's the wrong people being blamed for it.

The speculators got the blame for high oil prices, but for them it's pretty much a zero sum game (in fact worse, because they have to pay the casino). If you ask Cui Bono from high oil prices, it is of course the producers, and for the last few years they have been using cheap - and these days, zero cost - money to support the price via the opaque Brent/BFOE oil market which actually sets the market price despite continuing US fantasies that their market is anything other than the tail on the dog.

US no longer controls the price of oil

So the Saudis and US are between them able to keep the oil price in unstable equilibrium, but it is vulnerable to shocks: I am reminded of a Ro Ro ferry in calm waters with water swilling about the decks: one decent wave, and over it goes.

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Gas, Oil and the Central Oil Bank of Saudi Arabia | 4 comments (4 topical, 0 editorial, 0 hidden)

Will China take over the USA's current role (none / 1)

in the oil industry, as suggested yesterday in Friday's New York Times?

Last year, Saudi exports to the United States fell to 989,000 barrels a day, the lowest level in 22 years, from 1.5 million barrels a day the previous year, according to the Energy Information Administration.
Meanwhile, Saudi sales to China surged above a million barrels a day last year, nearly doubling from the previous year. The kingdom now accounts for a quarter of Chinese oil imports.
<...>
"Oil flows are shifting from West to East, and Saudi supplies that used to go to Europe and the United States are now headed for Asia," said Jean-Jacques Mosconi, the senior vice president for strategy at Total of France.
Brad Bourland, a former State Department official who heads research at Jadwa Investment in Riyadh, said: "Saudi Arabia used to be very much an American story, but those days are gone forever. That's just a reflection of a globalized world and the rise of Asia. They now see their relationship with China as very strategic, and very long term."

The implications for Middle East politics would be interesting:

"We know the Saudis and others have delivered the message to the Chinese that instability in the gulf is not in their interest," Douglas C. Hengel, the deputy assistant secretary for energy, sanctions and commodities at the State Department, said last week during a conference in Houston.
But Jon B. Alterman, a Middle East expert at the Center for Strategic and International Studies in Washington, said that the falling dependence of the United States on Saudi oil could turn into a problem for the Saudis, because the United States guarantees their security in the Persian Gulf.

The march of civilizations is a series of defenses that man has put up against the dread of pure existence.

by marco (cowannar at gmail punkt com) on Sun Mar 21st, 2010 at 02:12:18 AM EST

Re: Will China take over the USA's current role (4.00 / 3)

The US has since 9/11 been weaning itself off Saudi oil - for obvious reasons - and alongside their disastrous Iraqi adventurism they have been concentrating closer to home, like the Gulf of Mexico, and across the Atlantic in and off the coasts of Africa

Gabon's green ambition for Africa | Ali Bongo Ondimba | Comment is free | guardian.co.uk

Hardly a month goes by when new deposits of oil and gas are not uncovered somewhere in Africa. Uganda and Ghana are set to join the club of major oil producers in the next couple of years. The US plans to source almost 25% of its annual crude oil imports from Africa over the coming years.

I think that China has always been inward-looking and that their military posture is essentially defensive - cf Great Wall of China - and also aimed at internal security against threats to the regime.

I do not believe that China will ever take an expansionist military approach to secure resources, although it suits the US military-industrial complex to suggest that they would. China is quite happy to achieve their purposes through economic power, and let the US waste $ gazillions, and thousands of young lives, on keeping the world secure for Chinese mercantilism.

marco:

"We know the Saudis and others have delivered the message to the Chinese that instability in the gulf is not in their interest,"

I think that the Chinese are well aware that Gulf instability is not in their interests which is IMHO why China will continue to veto not only an attack, but also any energy sanctions on Iran.

But note here that (based on my personal contact with some of the key players, who genuinely believe that US sanction policy is either mad or dumb) the Iranian leadership would actually welcome gasoline sanctions, since it would enable them to cut their unsustainable and increasing energy subsidies and blame the Great Satan in the process.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Sun Mar 21st, 2010 at 09:59:00 AM EST
[ Parent ]

Re: The Central Oil Bank of Saudi Arabia (4.00 / 2)

The reality is that oil is no longer priced in dollars: dollars are priced in oil.

When on the Gold Standard the ability to defend the value of one's currency against SHORT TERM fluctuations was provided by gold reserves. And gold is not destroyed by its use as a monetary standard. The contrast between gold and oil as de facto currency reserves then becomes instructive.

In a world after peak oil the net production/consumption ratio for oil, for any country with its own currency, becomes a major factor in that nation's trade balance and strategic petroleum reserves along with domestic oil reserves, to the extent that there is swing capacity, come to have a role comparable to gold and foreign currency reserves in the maintenance of the value of that nation's currency.

To the extent that energy is "fungible" wind and solar capacity move a nation towards a positive trade balance and serve as energy "gold standards" in that, like gold, the source of the energy is not consumed. Were the US to move to 30% renewable energy generation it would have a comparable decline in oil imports.

Rather than being a deep insight, this might be an observation simple enough to be readily comprehensible by a large number of people and it could appeal directly to the "gold bugs". It also makes more obvious that the world is already partly on an "energy standard", just as it is very partly on a gold standard. Money is ultimately valued in terms of what it will buy and how well it stores that value. What money can buy, for purposes of relative currency values, is the sum total of international trade.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer at eurotrib.com) on Sun Mar 21st, 2010 at 03:45:49 PM EST

Re: The Central Oil Bank of Saudi Arabia (none / 1)

ARGeezer:

The contrast between gold and oil as de facto currency reserves then becomes instructive.

In fact I am proposing an energy standard, not an oil standard. That oil versus dollar phrase is just a useful metaphor, I guess.

The key point at issue here is the difference between a Unit of currency (or money's worth) and an abstract Unit of measure or Value Standard.

Units of currency would be based upon energy use value, and could take one of many forms, such as a Unit redeemable in payment for electricity use; a Unit redeemable in payment for natural gas, one for diesel, or any other fuel, and even a Unit redeemable in payment for an hour of standardised/specified manpower (Keynes' unqualified labour).

A Unit redeemable in payment for crude oil would not be particularly useful as a currency because of the plethora of types and origins of crude oil.

All of these energy-based currency Units would be exchangable for other forms of value and conveniently priced by reference to a Value Standard consisting of an absolute unit of energy of a suitably relevant amount.

This 'Value Standard' would be a standard unit of measure for Value, in the same way that a Kilogram is a standard unit of measure for Mass, or a Metre a standard unit of measure for Length.

The reason gold is IMHO pretty useless as a Value Standard (as opposed to being the basis of a currency with some credibility) is that it has little or no value in use, and therefore (say) one gramme of 24 carat gold would not be particularly helpful or relevant to anyone as a pricing reference.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Sun Mar 21st, 2010 at 04:22:13 PM EST
[ Parent ]

Gas, Oil and the Central Oil Bank of Saudi Arabia | 4 comments (4 topical, 0 editorial, 0 hidden)

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