Oil and Gas Geopolitics: No Shelter From the Storm
Russia and Saudi Arabia are in deep debate on whether to raise OPEC and non-OPEC oil production by 1 million barrels a day to offset the drastic plunge in Venezuela’s production plus possible shortfalls when new US sanctions on Iran kick in in November.
The problem is that even a production raise would not be enough, according to Credit Suisse; only 500,000 barrels a day would be added to the global market.
Oil has spiked as high as $80 a barrel – unheard of since 2014. A production spike could certainly halt the trend. At the same time, key supply players would rather keep crude futures at $70-$80 a barrel. But the price could even hit $100 before the end of the year, depending on the impact that US sanctions have.
Persian Gulf traders told Asia Times the current oil price would be “much higher today if the Gulf States played their usual role at OPEC and cut back production” – to 10% or 15% or 20% of OPEC supply. According to an Abu Dhabi trader, “present OPEC cutbacks only target 1.8 million barrels a day, which is ridiculous, and indicates that the US is still pressuring to hold down the price.”
A Saudi-Russia deal could certainly turn the tables.
And then there’s the further issue of depleting OPEC supplies. There’s a consensus among traders that, “the depletion that has to be replaced is about 8% of total supply, which comes out to approximately 8 million barrels a day per year. Most of this has been made up by pre-2014 drilling but in the next four years will fall short very considerably as drilling has collapsed 50%.”
So, uncertainty seems to be the rule. To add to this, Societe Generale has forecast that US sanctions might remove as much as 500,000 barrels a day of Iranian crude from the global market.
And that leads us to the real big story for the foreseeable future, as Asia Times cross-referenced analyses from Persian Gulf traders with diplomats in the European Union; beyond technical issues, the point is how oil and energy markets are hostage to geopolitical pressure.
The US is in a relatively comfortable position. US oil production has reached 10.7 million barrels per day – enough for domestic needs. And shale oil production is expected to rise to a record 7.18 million barrels a day next month, according to the US Energy Information Administration.
The US imports only 3.7 million barrels a day – three million of them from Canada. As traders in the Persian Gulf confirmed, the US “imports heavy and exports light oil. In three years the country will be essentially totally independent.”
Sanctions or bust
Once again, the heart of the matter concerns the petrodollar. After the Trump administration’s unilateral pull-out from the Iran nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), European Union diplomats in Brussels, off the record, and still in shock, admit that they blundered by not “configuring the eurozone as distinct and separate to the dollar hegemony”. Now they may be made to pay the price of their impotence via their “outlawed” trade with Iran.
The EU – at least rhetorically – now wants to pay for Iranian oil in euros. Add to it the Trump administration’s ultimatum to Chancellor Merkel: give up the Nord Stream II gas pipeline from Russia or we will slap you with extra tariffs on steel and aluminum – to gauge the incandescence of current US-EU relations.
This Deutsche Bank Research report has the merit of highlighting the advantages of Nord Stream 2. It hits one of the nerves, when it stresses that, “Russian gas flows through the Ukraine look set to continue following the expiry of the old contracts in 2019”. That “may foster acceptance of Nord Stream 2.”
But that does not tell the whole story.
EU diplomats fear that “the US can strangle Iran by blocking them from SWIFT and CHIPS [payment systems] so that they cannot clear their transactions, and can possibly strangle them with sanctions.” Meanwhile, in the Persian Gulf, it’s no secret among traders that sooner or later it must be factored in that Iran, in the eventuality of a US attack, “has the power to bring down Western economies by destroying 20% of the oil production in the Middle East. And Russia has that power too. Russia is largely self-sufficient for its needs. It can win this as an economic battle rather than a military one”.
The US seems to be extending the proverbial “offer you can’t refuse” to the EU; an elusive, assured delivery of LNG in the (unlikely) event of a cutoff of Russian natural gas to the European Union.
First of all, Gazprom has no intention to ditch its extremely lucrative European market. Moreover, this supposed American LNG capacity “does not exist as yet in the United States. The US cannot replace Russian oil or gas for the EU”, traders said, even as “Russian oil deliveries to the EU have dropped 40% while exports of Russian oil to China have risen about 30%.”
Oblivious to facts, Capitol Hill, through the Countering America’s Adversaries Through Sanctions Act (CAATSA), is getting ready to slap Russian defense and energy sectors with devastating secondary sanctions applied to nations doing business with Moscow.
And this sanction double trouble, on both Iran and Russia, is bound to have immense repercussions not only in Europe but all across Central Asia.
Trouble in Kazakhstan
Take Kazakhstan’s massive top three energy projects: Tengiz, Kashagan and Karachaganak. The majority of Kazakhstan’s crude exports flow through the 1,500km-long Caspian Pipeline Consortium (CPC) – partially owned by Moscow (Transneft owns 24% compared to 15% by Chevron and 7.5% by Exxon Mobil).
The expansion of both Tengiz and Kashagan, which pump roughly 950,000 barrels a day to the Russian Black Sea coast, depends on Russian transit routes.
Karachaganak’s 250,000 barrels a day of condensate go into the CPC, and most of its 18 billion cubic meters of gas a year go to Russia and are marketed by Gazprom.
Chevron and Exxon Mobil have stakes in Tengiz, Exxon in Kashagan and Chevron in Karachaganak.
Russian oil and gas executives have been caught in the US sanctions web. Transneft has been under sanctions since 2014. Now imagine Washington deciding that Chevron and Exxon Mobil cannot continue to do business with Russian companies.
Compound it with the reaction from Russia. A recent law criminalizes Russian companies which abide by US sanctions – and further retaliation may include cutting off US companies from access to Russian infrastructure.
Persian Gulf traders argue that if Russia was finally convinced to “divert their oil and natural gas supplies to China, and the EU becomes totally exposed to the Middle East for their oil supplies based on the grave instability of the Gulf states, then Europe could find itself collapsing in an economic sense by a Gulf states oil cutoff.”
The nuclear option
And that plunges us into the heart of the geopolitical game, as admitted, never on the record, by experts in Brussels; the EU has got to reevaluate its strategic alliance with an essentially energy independent US, as “we are risking all our energy resources over their Halford Mackinder geopolitical analysis that they must break up Russia and China.”
That’s a direct reference to the late Mackinder epigone Zbigniew “Grand Chessboard” Brzezinski, who died dreaming of turning China against Russia.
In Brussels, there’s increased recognition that US pressure on Iran, Russia and China is out of geopolitical fear the entire Eurasian land mass, organized as a super-trading bloc via the Belt and Road Initiative (BRI), the Eurasia Economic Union (EAEU), the Shanghai Cooperation Organization (SCO), the Asia Infrastructure Investment Bank (AIIB), is slipping away from Washington’s influence.
This analysis gets closer to how the three key nodes of 21st century Eurasia integration – Russia, China and Iran – have identified the key issue; both the euro and the yuan must bypass the petrodollar, the ideal means, as the Chinese stress, to “end the oscillation between strong and weak dollar cycles, which has been so profitable for US financial institutions, but lethal to emerging markets.”
And that’s why the Shanghai oil futures experiment is such a game-changer, already deepening China’s sovereign bond market. Persian Gulf traders show a keen interest in how Asian traders are profiting from the fact the petro-yuan may be redeemed for gold. Iranian oil being sold in Shanghai will further expand the process.
It’s also no secret among Persian Gulf traders that in the – hopefully unlikely – event of a US-Saudi-Israeli war in Southwest Asia against Iran, a real scenario war-gamed by the Pentagon would be “the destruction of oil wells in the GCC [Gulf Cooperation Council]. The Strait of Hormuz does not have to be blocked as destroying the oil wells would be far more effective.”
And what the potential loss of over 20% of the world’s oil supply would mean is terrifying; the implosion, with unforeseen consequences, of the quadrillion derivatives pyramid, and consequentially of the entire Western financial casino superstructure.
Call it a nuclear financial weapon of mass destruction chain reaction. Compared to that, the 2008 financial crisis would be little more than a walk in an ecologically friendly park.