Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Oil Page 2 of 7

When Is the Next Oil Driven Inflation Spike In the US? December to March.

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On September 7, 2022

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Recently read a smart lad who noted a few simple things:

  1. Biden’s been releasing oil from the Strategic Petroleum Reserve (SPR).
  2. The SPR has basically two types of oil: sour and sweet.
  3. Biden has been releasing almost all sour since that’s what most US refineries need.
  4. At the current rate of release, the SPR runs out of sour crude to release around March.

A Bloomberg article from June noted the same issue (just prior to Joe’s begging visit to Saudi Arabia.)

OilX, a consultant, estimates that by the end of October, the SPR will hold only 179 million barrels of medium-sour crude. To put that into perspective, during the period June 2021 to October 2022, the US is likely to sell about 180-190 million barrels of medium-sour crude from the reserve. Clearly, Washington is running out of firepower to repeat that exercise.

Of course, when Biden stops releasing oil, either because he’s out or because he chooses to stop after the election or the holidays are over, then prices are going to spike if sanctions are still in place against Russia and/or Russia is unwilling to sell to the West. As a bonus, the government will need to buy oil itself to stock the reserve back up.

This means you have to ask yourself whether or not the Ukraine war will still be going on thru the winter. It’s hard to say, but unless the US tells the Ukrainians to give Russia enough of what it wants to get peace, the answer appears to be yes, especially as winter is the best time to wage war in Ukraine, as it is when the ground is most solid and many rivers are likely to iced over. Putin needs a decisive, obvious win and if he can’t get it diplomatically, he has to get it on the ground.

Putin’s happy with slowly grinding forward militarily in part because he’s also aware of what sanctions are doing to the West. The most rabid anti-Russia country outside of Eastern Europe has been Britain, and energy price increases which are often 500% or more are taking Britain apart. More of this later, and I want to see what new PM Truss’s plan is, but if Britain doesn’t get its act together soon, this could be the year its descent into 2nd world status becomes unstoppable.

Russia can get most of what it needs from sources other than Western nations, but energy and inflation issues are kneecapping much of the West. Why not drag things out and see how much damage is done?

Remember that the entire previous post-war order was essentially destroyed by stagflation caused by oil price shocks back in the 70s (that gave us neoliberalism.) This order can be destroyed the same way.

What this means for Americans is that there’s a very good chance of a big inflation spike after the election. It might hold off for as long as spring, it might start a few weeks after the election. It won’t just hit gas prices, oil is important for much more than driving cars, so it’ll rip thru the entire economy. Stock up on what you need before the election if you can.

And let this be a lesson that GDP means very little when the chips are down. Who cares if you have Hollywood and lots of fast food stores and Google and FaceBook? What matters is what you grow, dig up, refine and make.

Russia has enough energy and food and can buy the manufactured goods it needs from India and China.

The West, with a few exceptions, does not have enough energy and the primary manufacturing power is China. In certain ways we’re in a weaker position than we were during the last oil shocks.

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The Delusional Dishonesty of the G7 Russian Oil Price Cap

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On September 5, 2022

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So…

Members of the G7 have agreed to impose a price cap on Russian oil in a bid to hit Moscow’s ability to finance the war in Ukraine.

Finance ministers said the cap on crude oil and petroleum products would also help reduce global energy prices. The cap will be set at a level based on a range of technical inputs.

“We will continue to stand with Ukraine for as long as it takes,” the G7 said.

Russia said it would stop selling oil to countries that imposed price caps.

Well, so the price cap is effectively a “we won’t buy it because you won’t sell it” policy.

There’s long been a delusion that commodities like oil are global. They operated almost as if they were for a while, but oil is produces in certain places, refined in certain places and shipped in specific pipelines, ships, trucks and trains. It has different qualities and not all refineries can handle all types of crude.

To the extent, however, that oil or natural gas or coal or whatever is subject to boycotts, it becomes less of a global market and that won’t generally decrease prices, rather the reverse, at least in the early phases of a breakdown of a global market. (In the late phase prices will diverge significantly in different countries, with extensive measures or realities in place to prevent arbitrage.)

So (2)…

UK Chancellor Nadhim Zahawi said the G7 were “united against this barbaric aggression”, adding the price cap would “curtail Putin’s capacity to fund his war”.

US Treasury Secretary Janet Yellen said a cap would also help fight inflation, which is on the rise in many of the world’s economies.

The price cap helps achieve “our dual goals of putting downward pressure on global energy prices while denying Putin revenue to fund his brutal war in Ukraine”, she said.

Sanctions have not reduced Russia’s income, they have increased it. This won’t be an exception because most of the world isn’t onside with sanctions, including India, China, virtually all of Africa and most of South America, but by fragmenting the market it will increase prices, especially in specific areas like Europe which need to get their hydrocarbons (remember, this is not a virtual good, it has to be extracted, refined and shipped), through specific infrastructure links.

The “price cap” is thus largely a symbolic measure, which will if anything increase prices somewhat. That’s not to say it’s useless, if the plan is a new long Cold War with Russia (and almost certainly China), getting off supplies from those two countries needs to be done and done in stages.

But it sure isn’t going to decrease prices or empty Putin’s treasury. In fact, in the short to middle term it’s likely to hurt Europe, again, far more than Russia.

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Poland Refuses To Pay For Russian Gas In Rubles, Russia Cuts Them Off

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On April 27, 2022

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Well, well.

But, so far it looks like Germany will just buy extra (paying in rubles) and ship it to Poland. Me, if I were Putin, I’d refuse to sell Germany more than its usual amount (what is contracted for) and see how long it takes Poland to break. Granted it’s not winter, but so far as I can see Europe can’t switch off Russian natural gas in less than about two years, though perhaps a few countries could (and pay more, since the Russians sell for less than anyone else will.) Natural gas prices (as of this writing) are up about 10% on the news, though it doesn’t mean much.

I remain convinced that sanctions will do far more harm to Europe than to Russia.

Meanwhile, Malaysia has said they will sell Russia semiconductors. They aren’t as good as Taiwanese ones, but they’ll be good enough for now, and China is crashing semiconductor tech anyway, for its own reasons. In a decade, the West and its allies won’t have much of a gap in semis compared to the rest of the world, if any.

Update: seems the news Malaysia would sell semis is probably not correct.

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Russian Debt Default + Consequences, Simply Explained

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On March 16, 2022

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I don’t want to spend a lot of time on this, but the fundamentals are worth a quick review.

Russia had hundreds of billions of dollars on reserve at central banks. We have frozen them so they can’t spend them, and we’ve also forbidden banks, in general, to do almost any business with them in dollars.

So they have the money to avoid default, but are not allowed to use it to pay their debts.

This is like if you personally had an account at the bank for $10 million and they said, “We’ve frozen it so you can’t spend it, and we won’t accept money from anywhere else, but we still expect you to pay your mortgage.”

It’s obviously unfair, and everyone outside of the West knows it, as many countries have invaded other countries and none of them were hit this way. This punishment is so harsh because Russia is outside the club and didn’t have the nod or a similar punishment would have been doled out over Iraq, Libya, and Yemen, among many others.

It has made other countries scared for their money. Even countries that have license, like Saudi Arabia — who is currently bombing the hell out of Yemen with a sanction in sight.

Saudi Arabia is considering accepting the Yuan for oil payments.

Of course, the US is pushing back hard — that oil is priced in dollars, and it’s one of the main reasons the dollar is the global reserve currency.

But while the Sauds are in good for now, who is to say they always will be? What if one day the US decides to sanction them? Perhaps they see it as in their interest to diversify their reserves. Perhaps they also see Beijing as FAR less likely to sanction them? If they do, I agree. Just don’t piss China off about Taiwan, and the odds of China ever freezing your Yuan reserves or sanctioning you is essentially zero, not least because in order to grab reserve status from the US, they need to be more trustworthy.

I don’t know if the Sauds will do this yet; the pressure the US must be bringing is immense. But I do believe that when we look back on these massive sanctions, we will see that forcing Russia into default was the end of the dollar’s hegemony. This weapon has been used before, but only on marginal states. To do it to a Great Power is quite different.

The US can’t be trusted with your money. Before, people was perceived the US was the safest place.

For most countries, the dollar hegemony has been terrible; they sold American stuff and got numbers on a computer in return. (China on the other hand, played the game smart. They got the US industrial base in return and, even if the US freezes every dollar they have, they’ll still be ahead.)

Most countries will be better off in a de-dollarized world. But the US won’t, and if Europe stays a US satrapy (which most indications suggest it will) then it will be bad for them. Ironically, back in the early- to mid-2000s, the Europeans had the opportunity to make the Euro an independent reserve currency, but, as usual for Europe in the age of American dominance, they lacked the guts.

None of this will happen immediately. But I believe we’re either at, or within, a year of when we will be able to look back and see this as the tipping point.

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How The Metaphysics Of Capitalism Destroyed The World

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On July 22, 2021

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Back in 1968 the book “Limits to Growth” stormed the world. Computer models predicted that humans would run out of almost every resource, overshoot carying capacity, then crash.

It was well known and widely discussed and combined with the oil crashes, made the 70s a ferment of practical and theoretical work on alternative energy, different ways of farming and so on.

Almost all of that came to an end in the 80s, with Reagan. Carter had put solar panels on the White House, Reagan had them torn down. A decision was made to crush wages and thus the oil consumption of ordinary people, while bringing new sources online as fast as possible. Obama, with fracking, made the same decision, by the way, but even more successfully, turning the US back into a HUGE producer of oil.

But what’s important today isn’t all of that, which I’ve discussed at tedious length in the past.

Instead I want to discuss the basic argument against the “Limits To Growth”.

“We will substitute away.”

In other words, alternate energy will step up and we’ll move away from oil and coil. We’ll find substitutes for steel and nickel and rare earths and anything else in short supply.

BUT what matters is the metaphysics of the argument. When the people making this argument said it would happen, they assumed “the market” would do it.

Which, it sort of has, but too late. Much too late.

There was a strong assumption that prices were information which stored in them all known information about the past and the future, and that therefore prices would drive self-interested people to make the necessary substitutions or find new sources.

To market disciples, the market’s “free hand” was like God, all-knowing and all-powerful and weirdly benevolent. All we had to do was let the market run and it would solve all our problems.

So why didn’t that happen?

Well, to start, the market doesn’t price the future well at all. Never has, and never will. People making decisions in 1970 will mostly be dead before all this stuff matters, and the same is true of people making decisions in the 2010s. Even if they aren’t dead, is there anything in human history which makes us believe humans are good at making very long term plans, over decades to generations?

Why would you believe the market would do it based on a discipline which suggests humans are rational and know what is good for them and act rationally to get what is good for them? (If you believe all of that, you are more of a fantasist than some fanatic whipping himself while screaming for God to save him.)

Now I’m not concerned here with the hypocrites: the people who knew this was all bunk but expected to get rich off it (they were, in a real sense, very rational. A bad future they don’t see or don’t care about, “I get 50 good years and die rich when the bad times come, whatever” isn’t a reason not be rich now, if you don’t care about future people.)

But many many people really believed this bunk and the issue is that by believing that the “market” and “price signals” and *vague hand waving* would solve the problem: by saying “we have a system that solves these problems automatically by giving correct feedback” they made it impossible to solve to the extent that they were believed. (And remember, huge amounts of money were run on the markets for decades based on these ideas. People believed and put their cash on the line.)

In fact, of course, we could have taken the warning of “Limits To Growth”, “Peak Oil” and “Global Warming” and used them to make changes.

Ironically a lot of those changes would be exactly what the disciples of hand-wavy “market” crap suggested would happen automatically.

Use markets and public policy: massively subsidize alternative energy and research so that where we are with solar today is where we would have been in the 90s. Massively research alternatives to bottleneck resources. Stop over-fishing, by force if necessary. And, of course, put sharp limits on “planned obsolence” backed with death sentences for executives.

If you’d rather get more resources or if you want more than one strategy, massively fund space exploration with an eye to mining rather than defund NASA in waves (Obama, classically, did the worst cuts to NASA ever so that private industry/billionaires could make money, but NASA funding should have been increased in the 70s.)

Warnings only serve those who heed them and when you believe in metaphysical entities which don’t have the attributes they think they do (God, Markets), then you don’t act to save yourself. Markets were never, by themselves, going to miraculously do what needed being done in time. Oh sure, price feedback has eventually gotten us some decent solar, and so on, but decades later than we needed it.

Markets are human creations, like God, and to work correctly they have to be tuned for the problem at hand or, even (heresy) one has to consider that there are things that Markets or Gods can’t do, or are bad at, and find other solutions.

So here we are, and markets have not made everything good and the world’s forests are burning and we’re about to have another oil boom, as best I can tell.

Like God, mis-using markets or assigning them powers they don’t have, leads to terrible consequences, so get ready for the invisible hand to slap us silly.

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On the Causes and Consequences of the Oil Price Crash

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On April 23, 2020

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Image by Yuan2003

So, we had a crash of oil prices, where some futures contracts were actually negative, which means that sellers had to pay people to take oil off their hands.

Obviously, oil use has dropped during the Covid-19 crisis, and before that, prices had already decreased in an attempt by non-US producers to reduce prices low enough to crush US shale production.

Oil is a real thing: It takes up storage. Storage space is running out, and it’s not clear when demand will recover, so oil that is to be delivered now-ish is an expense–you have to pay to store it. Thus, the negative prices.

There was a bounce Wednesday, ostensibly due to Trump saying he had ordered the US Navy to blow up Iranian boats if they continued to hassle other ships. (If they do this in the Gulf, and it goes to shooting, Iran will win the initial confrontation. They have a lot of missiles.)

One could equally say this is a dead-dog bounce.

At any rate, even double digit prices are below most people’s production costs for oil, and they are above the price every major government that relies on oil needs to balance their books. This means Saudi Arabia, the four gulf oil states, Iraq, Iran, Russia, and so on. Ironically, Iran, having been under sanctions already, will be in better shape than most of the others.

It is also, obviously, low enough to make US (and Canadian) shale oil production completely uneconomical: generally that needs at least $60/barrel, and much of it needs more.

So we have countries and companies with bleeding treasuries. The US has the ability to print money, presumably it will do so to keep Shale oil around in Zombie form. Countries which cannot print money and have other countries accept it could be in trouble. This depends mostly on how long this goes on. A couple months, even three or four, uncomfortable, but no big deal.

If this crisis bubbles on for a year and a half of shutdowns, partial relaxations, then more shutdowns, we’re into some very dangerous territory. I’m not sure the House of Saud, for example, can survive that scenario (it couldn’t happen to a nicer country, etc.).

The world has been in a very long economic relationship, in which the most important commodity has been oil, and the producers sold it in dollars, so the US and the swing producers all benefited. Obama and Trump more or less broke the deal with the promotion of shale oil, and China has increasingly been insisting on buying oil in Yuan, but the relationship had stumbled on, even though it meant enabling countries that the US has been treating as enemies, like Russia.

Trump wanted to force Europeans to buy more American oil and less Russian oil: This was a major part of his economic plan, such as it was. Trump likes to find a place where he’s more powerful, and push that as hard as possible, and things like sanctions against Russia, Iran, and Venezuela were–and still are–situations in which he has unilateral power that no one else has been entirely able to get around (though China has somewhat). The EU has proven unwilling to stand up to the US in the case of sanctions.

Right now, there’s no particular reason to think this can’t continue. The US can still print infinite dollars, because foreigners will still accept them–even though the US is no longer the most important manufacturing state. So the US can bail out shale oil. Oil producers, who do not have hegemonic currencies, do not have infinite rope.

This changes only the major producers of things the US needs cease to be willing to trade in US dollars. China and the EU could (but I very much doubt will) cut the US’s throat if they ever chose to act together. Perhaps China could even do it alone. The problem, of course, is that there would be a lot of collateral damage to them. US oil is expensive, but the US can produce it. China and the EU need to import it. If they want to make such a change, they have to secure strong supply guarantee from other nations.

This is theoretically possible, but the problem is simple: Any nation that did this would then fall under (even more) US military threat. Bombs are very good at ending oil exports, and neither the US nor China is willing to go to war over this. Perhaps China could move troops and nukes into vulnerable countries, but that would trigger a new cold war, and the Chinese don’t want that–at least not yet. China is working on their own trade area, to compete with the US-led trade area (which the US is abandoning anyway, as it shits on the WTO it created), but it is not ready yet (the Belt and Road Initiative is China’s name for this trade restructuring).

The current collapse of oil prices is unexpected; while a pandemic has always been possible, knowing when it would happen was not. The pandemic has simply revealed the current production’s costs and dynamics. Saudi Arabia has been moving towards vast danger for ages because of its over-reliance on oil; this simply means the consequences may hit sooner. Oi-consuming nations have been maneuvering to reduce their dependence on imported oil in general, and unreliable oil in particular, but they were not yet ready to make any big moves. Almost everyone has been chafing under the petrodollar and under the current world payment system, which the US has abused with its constant sanctions. Despite this, no one has created a viable alternative and been willing to take the hits necessary to move off the dollar and the US/eu payment system (“EU” is in lower case deliberately).

Most oil producing nations, including the US and Canada, are generally bad actors on the international stage: with crimes ranging from moderately bad to invading oil producing nations regularly and sanctioning other ones constantly, or to being the world’s premier supporters of fundamentalist religion and terrorists.

So don’t cry too much for oil producing nations, nor even for their customers, who have enabled them greatly. But beware that the game is changing: Covid-19 has highlighted existing issues and if it continues long enough it could precipitate changes which have been desired by many, but remained unimplemented because people have been unwilling to bear the costs and risks.

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UK Seizes Iranian Tanker, So Iran Seizes UK Tanker

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On July 20, 2019

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That’s the news, basically.

Well, Iran also seized a Liberian-flagged tanker, not sure why (may be operating for a British company).

Also not sure why the UK seized an Iranian tanker in the first place. The UK has said it supports the Iranian nuclear deal, and the US sanctions on which it was operating are destroying that deal.

But I suppose lap-dog nations will be lap-dog nations and the UK wants a free trade deal with the US badly for Brexit, and all indications are that the US is demanding massive concessions in exchange for one.

So this may be a little something on the side from Britain.

But as far as I’m concerned, the US sanctions on Iran are completely illegitimate, and no other country should be helping enforce them. That includes Canada, especially after we arrested a Huawei executive for breaking Iran sanctions, and that also includes the UK.

I rather doubt Iran had a nuclear weapons program in the first place, though I don’t see why they shouldn’t have nukes when Israel does. But neither of those observations are the point, anyway.

Meanwhile this whole mess has just emphasized, again, that you can’t make a deal with the US and trust them to keep it. The second some new politician gets in who doesn’t like it, they won’t just break it, they’ll hurt you badly.

(Admin: Feel free to use the comments on this post as an open thread, as well.)

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Why Would Iran Attack Tankers?

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On June 19, 2019

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Well, if it did.

Let me tell a story, possibly apocryphal. Back in the 1970s, the Russian (USSR) ambassador supposedly had a talk with the Pakistani leader of the day. This is what he is reputed to have said.

” I do not know who will be in charge in Moscow in ten, twenty, or even 50 years. But what I do know is that whoever is there will want the same things then, that we do today. You can trust us, not because we pretend we are your friends, but because we are consistent.

Anyway, remember, that we’ll come back to it.

In the meantime, on June 13th there were reports that two tankers had been sunk in the Gulf. Claims were made they were sunk by Iran.

I shrugged. Important people want war between Iran and the United States, and in such a situation it’s hard to know what’s true and what’s not. I moved on with my day.

(I am fundraising to determine how much I’ll write this year. If you value my writing and want more of it, please consider donating.)

But yesterday I discovered an interesting fact. Before the two tankers were sunk, something else happened:

On June 5, 2019, a huge fire consumed a storage facility for oil products at the Shahid Rajaee port in the southern Hormozgan Province. Located west of Bandar Abbas, the Shahid Rajaee port is Iran’s largest container shipping port. Reportedly, a vehicle used for transporting shipping containers exploded and caught fire. Since there were oil products near the site of the explosion, the blaze spread quickly to several tanks and storage sites and caused heavy damage to the port. The spreading fire set off huge explosions which shot fireballs and heavy smoke high into the air.

On June 7, 2019, six Iranian merchant ships were set ablaze almost simultaneously in two Persian Gulf ports.

First, five ships “caught fire” in the port of Nakhl Taghi in the Asaluyeh region of the Bushehr Province. Three of these ships were completely burned and the two others suffered major damage. Several port workers and sailors were injured. As well, at least one cargo ship burst into flames and burned completely at the port of Bualhir, near Delvar. The fire was attributed to “incendiary devices” of “unknown origin.” The local authorities in the Bushehr Province called the fires a “suspicious event” and went no further.

Oh hey.

So, assuming the Iranians did attack the ships, they were retaliating.

Iran has long said that if they can’t get their oil to customers, no one will get oil to customers through the Gulf.

Yeah.

But this has bigger consequences. The real problem is simpler: The US made a deal with the Iranians, under Obama, then repudiated it when the President changed.

The US has arrogated to itself the right to impose sanctions on anyone it wants, for any reason, with no recourse by the victim. It is using this “right” in an attempt to remove Iran’s government.

The US cannot be trusted. Every few years, it changes. You can’t make a deal and be sure it will be honored for any length of time, let alone 10, 20, or 50 years.

Americans who squeal about Trump being an aberration both miss the point (your system allowed him) and are wrong: Bush attacked Iraq based on lies, and everyone knows it. Hilary Clinton promised the Russians that Qaddafi would not be removed, then removed him and gloated about him being killed after being raped by a knife.

The US can’t be trusted.

So the larger consequence is that a coalition of countries, including multiple oil producers, China and Russia are moving to sell and buy oil in a bundle of currencies which does not include the US dollar, and where no payments go through the payment system which the US can control (systems like SWIFT, to slightly oversimplify).

Dollar hegemony is one of the main supports of American hegemony. Misuse of dollar hegemony to attack other countries has brought us to this point.

I’ve been a bit of a broken record on this issue, but that’s because it’s been the obvious consequence of the US Treasury’s misuse of its powers.

Other great powers and their allies can put up with a cruel, even an evil, hegemon. What they will not put up with is a capricious one whom they cannot predict.

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