Some thoughts on Georgia and other Russian actions
Posted by Heading Out on August 19, 2008 - 9:30am
Topic: Supply/Production
Tags: georgia, kovykta, russia, tnk-bp, turkmenistan [list all tags]
When I first went to talk to someone about investing in stocks, it was carefully explained to me that I should not be concerned over daily fluctuations but rather should look at longer-term outcomes of events. So it has been with the recent price fluctuations with fuel, in that I haven’t really been that concerned with the causes of daily, or even weekly ups and downs, since those moves were often in reaction to transient events, but have rather tried to pick out more long-term changes that will have more of a permanent impact. Thus it was just over a month ago that I wrote about a quote from the CEO of Gazprom, which is perhaps (given recent events) worth repeating:
Gazprom forecasts that Russian gas prices will reach 500 U.S. dollars per 1,000 cubic meters by the end of 2008. "If oil prices exceed in the future 250 dollars a barrel, then gas prices will grow to 1,000 dollars per 1,000 cubic meters," Miller said.
I then went on to talk about the visit of the new Russian President to Turkmenistan, Azerbaijan and Kazahkstan to ensure that their supplies of natural gas and oil traveled to the west via Russian pipelines (with appropriate fees along the way) rather than being routed through alternate pipelines, where those fees and the concurrent flow-rate controls would not be available to Russia. If nothing else then, as Gail caught in Open Thread #4 the benefits of investing in alternate pipelines, such as Nabucco for which Turkmenistan gas must first cross the Caspian and then pass through Azerbaijan and Georgia in the Trans-Caspian Pipeline have suddenly become a whole lot less attractive.
It must be born in mind that one does not have to own the initial fuel source itself, if instead one controls the only method by which that fuel can be supplied to the eager customer. This is a lesson that Gazprom has been teaching BP for over a year now. BP discovered, after developing the Kovykta Project that they could not transport the resulting product.
TNK-BP has been locked in conflict with Gazprom over the development of its two major gas projects in Russia as the state seeks to tighten its grip over the energy sector. TNK-BP cannot sell gas from its vast east Siberian Kovykta field or its smaller Rospan unit in western Siberia without Gazprom because of the Russian gas giant's monopoly control over Russia's pipeline network.The two companies have failed to agree on terms despite numerous offers from TNK-BP for Gazprom to take a substantial stake in both projects. Gazprom has said it is not interested in Kovykta by itself. Russia raised the pressure over the issue last month by declaring TNK-BP to be in violation of its licence to develop Kovykta.
That was in March of last year, and by June 22 an agreement had been signed that brought Gazprom into the picture. However, if BP thought that this was the end of their troubles, they were sadly mistaken. Regulatory pressure and additional pressures from the government have continued
MOSCOW — In another sign of its deepening troubles in Russia, the British oil giant BP has reassigned engineers working at its TNK-BP joint venture to projects outside of Russia.Most had already left, after police raids, labor inspections and visa complications. But the formal announcement represented another low for BP.
The company is fending off a corporate raid by its Russian partners that is backed by Russian regulatory authorities; part of the strategy has been to expel expatriate staff members from the joint venture.
It is becoming increasingly clear that the joint venture is not wanted in its present format, and that BP will have to renegotiate its dealings in Russia.
The point is made more bluntly by the denial by the Russian authorities of permission for the CEO of the company to work in Russia.
PARIS — The British oil giant, BP, suffered another setback Thursday with its troubled Russian joint venture after a Moscow court disqualified the venture’s chief executive from holding corporate office in Russia for two years.The chief executive, Robert Dudley, was denied a Russian work visa last month and has been for some weeks in an undisclosed location outside of Russia from which he continues to operate as chief executive. On Thursday, a Russian labor court ruled that he could not work in Russia for two years.
The impact that this is likely to have on BP should not be disregarded.
The TNK-BP venture in the country’s western Siberian oil basin had accounted for nearly all of BP’s reserve growth in recent years, as supplies from Alaska and the North Sea dwindled. The loss of the joint venture would leave its long-term strategy, which had depended heavily on Russia, in tatters.. . . . . “BP’s long-term strategy was to focus on Russia,” Ms. Tiscareno said. “All of a sudden, it’s like ‘Time for Plan B.’ ”
There is thus, as Mark Twain said, more than one way to skin a cat. However, putting these two together I would first not hurry to dispute Alexei Miller’s projection that oil prices may reach $250 a barrel, and secondly I am going to dust off Michael Klare’s Blood and Oil , although skimming through the section on the Caspian suggests that all that thinking and the policies behind it have suddenly become history.
And on a short anecdotal note, I have been off for three weeks, and at one point in this vacation two cars left Augusta, ME. The first headed down to the airport in Portland, while the second, twenty minutes later left and meandered through Winthrop, up to Canaan in VT (over the covered bridge) for lunch, and then down into Montreal (300-odd miles away). There, after an hour through rush-hour traffic, we reached the airport and waited another hour and a half, before the passengers from the first car arrived. We carried them another 70 miles north, where we attended my niece’s wedding. And, as another anecdote, the bridegroom arrived at the ceremony in a hand-paddled canoe (they had met doing work on coral reefs for some movie that involved Pirates and the Caribbean).
I hope your summer was as much fun as ours, sadly I cannot see that the future will be as promising.
There can be no disputing that Russia is trying to control and monopolize oil transport. Oil and gas are what Russia have, plus nukes and the means to deliver them.
But nor can there be dispute that the US has steadily been taking maximum advantage of the breakup of the former SU to encircle and isolate Russia thru instigating the "color" revolutions, recruiting the pieces in NATO, proposing to place missile sites on their soil, and now instigating the Georgian attack on Ossettia. No matter what the Russians might be up to, the counter-attack was just that, the first instigation that the Russians have firmly rebuffed.
The US no longer has surplus oil (or gas), and is a net importer of oil. Nor is it the industrial powerhouse of yore. And it's financial structure is cracking up. It has only one thing left: a huge world-wide military and intelligence presence. It is the world's superpower, but in decline. I believe that the TPTB are well aware of this decline, and one faction at least believes that this military advantage (real or not, I dread finding out) should be exploited while (and if) it still exists.
The US ruling circles have over and over again employed the tactic of entrapment with various adversaries (and even presumptive allies): Pearl Harbor, Iraq, Afghanistan (Soviets), Panama (Noriega).
The WSJ and other venues are already writing about the mouth-watering taking place among "defense" contractors in the wake of Georgia. The event is being exploited full-scale in US domestic politics. The media, here and in Europe, have shifted very noticably and very rapidly from the first few days of the conflict, where there was some kind of minimum evenhandedness. Now it's a matter of everyone getting on board the "Russia the aggression" train.
It's an extremely dangerous path we are on: a resurgent power that has oil, gas, and nukes, and maybe not too much else, which wants to protect its franchise, v. a declining hyperpower that is deficient in but dependent on oil and gas with little but military brawn.
Think back to WW2. It was the oil and resource starved powers that were the aggressors (not that the "good guys" didn't commit their own retaliatory war crimes in spades, firebombing, nukes, etc.) Despite all pretense to the contrary, the US and Europe are now in a position somewhat analogous to Germany and Japan in WW2.
I dread that you may be right.
This would be short term thinking for TPTB. What would be the objective? Get hold of the resources so they can outlast rival powers by a decade? War is ruinous. This is a time where all efforts should go to peak mitigation and development of alternative energy sources, not war. But while we see signs that leadership understands there is not enough oil production (the Bush quote for instance), we see no sign of mitigation activity that would make sense in the long term.
The only conclusion is their sense of logic is warped.
Exactly right, we must free ourselves of oil dependency as much and as soon as possible:
http://www.energyinvestmentstrategies.com/2008/08/18/oil-is-a-national-s...
@ dave
A bit of nitpicking:
Germany was the up-and-coming power, having been put in its place in WWI. Whether it was resource arm or rich had little to do with its upandcomminence. Instead, it had more to do with its new economic power, its tech. prowess, and its demographic dynamics.
Sounds somewhat like China, although we're still waiting for them reaching the tech. cutting edge. Their demog. are also not real dynamic.
Germany had LOTS of coal, making LOTS of steel (cannons, etc..)
Russia might be preparing for "Cold War II", like you suggest, but sadly it has little other than oil. Now it's learning to play this card "right". Hyperpower USA might just have to give up their influence in the Caucasus, for cryin' out loud.
@PolR
Their logic is power logic, not PO logic. The strategy will be amazingly flexible, once PO is come and gone.
@ holic,
Nice article. However, have you ever tried to tell a child to stop egging on a sibbling / stop letting themselves get egged on, i.e. to get out of the game? The problem with the suggestion is that neither the power brokers in Washington nor in Russia have any plans of getting out of the game.
Power to those that BE is the only game in town...
Cheers, Dom
"Germany had LOTS of coal, making LOTS of steel (cannons, etc..)"
I've been reading William Shirer's Berlin Diary, 1934-1941 recently. He described the hardships the Germans faced in the winter of 1939, 1940 and 1941, with the authorities going so far as forbidding the use of cars and coal, large-scale scrapping of unused iron (including cars from conquered countries) and more.
But you're right, it had a lot to do with the upandcomminence of the people in power, which caught most democracies at the time by surprise (since they desired peace at any cost).
I'm more worried about simply having to collectively bite through hardships, rather than NATO declaring war on Russia.
Basides oil, Russia has a very diverse mineral resource base that makes it largely self-sufficient in all metals, natural gas, phosphates, potash, etc. Not to mention having more arable land and fresh water than any other country, both in absolute terms and on a per capita basis (20% of all of the world's fresh water is in just one Russian lake - Baikal). Shrinking population, vast forest resources and extensive electrified rail infrastructure also make it pretty well positioned to survive future resource crises.
Though I agree with your general point, keep in mind that with their generally severe climate constraints, Russia's (Siberia's) vast forest resources are pretty much a one-time windfall. Regrowth rates are generally very slow.
This is true, but less than 20% of Russia's population lives east of the Urals. The regrowth rates in the European part of the country are much faster due to warmer climate and more precipitation compared to Siberia. While on a visit to Russia a few years ago, I had a pleasure to pick wild chanterelles in a forest that only 15 years ago was a Soviet-style collective farm field, now fully overgrown with pine trees. BTW, in Russia forests are largely considered an important food source (mushrooms, berries, hazelnuts, etc. - see Dmitry Orlov), not necessarily a source of wood to be cut and burned. It will be a while before most Russians have to heat their houses with firewood again.
Hey Pete,
I guess I really need to qualify on my appraisal of Russia.
You are most certainly right that Russia has plenty of mineral resources. I won't argue that the trains are a definite advantage.
Now let's look at Japan: Little to no resources (Back then coal and some steel) but success out the kazoo.
Russia's on top of the world and will never be able to change that. It will spend its oil wealth and wonder why it's poor again. It will mine its Uranium under the Siberian dessert and wonder why the US or Japan (ok, probably Europe) is the beneficiary. It will sell its phosphates and potash to those in better climates and buy back the expensive. It will be strong, it will be weak, depending on the long, long business cycle. It will certainly survive.
But will it be a vibrant, dynamic nation like most in Europe, the US and the Far East? For some reason I have my doubts.
I would also warn, that the shrinking population is hardly an advantage, whether world resources are failing or not.
Forests for foraging are different than socio-economic health. My actual statement should be: "Where would Russia be without it's oil and gas wealth?"
Cheers, Dom
What you describe is the economic regime of the 1990s and not today. Russia's GDP is driven mostly by domestic consumption and not raw materials exports. Residential construction in Russia is experiencing explosive growth as is retail. Fossil fuels, Uranium and other minerals are going to be increasingly consumed domestically.
Russia's richness in resources is probably why the communist system survived so long. The land was so rich it could afford the inefficiency of the system. Without the revolution it could have been the World's preeminent economy.
"The only conclusion is their sense of logic is warped."
Not quite. Think it through for a second. It's widely agreed that the US government is bought and paid for by oil-men, right? Heck, they all ARE oil-men... Pretty much the same for all the other world powers. Now, with peak oil, they have a choice: They can throw all their money into alternative technologies decades in advance of peak oil in order to help mitigate the disaster (very few companies survive new technological implementations - look at the airline industry, not one of them has ever made money - ever), in which case they all go bankrupt slowly and lose all their power as the oil companies start to fold one by one OR they can keep the world addicted to oil, so that when the crash inevitably comes, they become far, far richer than they already are as the remaining oil reserves become exponentially more valuable. If you were an oil-man, and had de facto control of the world, what would you do? Bankrupt yourself - or make yourself into a modern-day emperor?
Putin has been reported as suggesting to GW they will start selling US treasury Bonds if the US gets too involved....what a threat with awful consequences.
"Putin has been reported as suggesting to GW they will start selling US treasury Bonds if the US gets too involved....what a threat with awful consequences."
Does that make sense? How many dollars worth of U.S. Treasuries does Russia actually have? How did they get them? Most Russian gas goes to Europe, that is the gas that is not burned inside the borders of Russia or sold to their former sattelites. Russia sells no cars, electronics or aircraft to the U.S., and a small handful of farm tractors. From did all these U.S. Treasuries come?
One would assume that Russia would have a far greater surplus of Euros, and this is indeed interesting. In the U.S. the Euro has often been trumpeted as some sort of "super-currency". There is absolutely NO reason to view the Euro as superior to the dollar, and the Georgian debacle has demonstrated that once more, but I will return to that in a seperate post. But again if anyone will please help, and I will look for it, for the amount of money Russia supposedly has invested in American bonds...thanks,
RC
According to the US Treasury, it's about US$60.2 billion, which on its own is not much, since the total is US$2,646.5 billion. Japan, China and the UK are the big ones, but Japan and the UK are unlikely to turn around and shaft the US tomorrow.
Russia got the US money from their oil exports to the US, and also Russian investment; the US has been asking for more Russia investment lately. Yep, the country which "won" the Cold War is asking for a bailout from the one which "lost".
But in currency terms, you'd want to be more worried about China, or the OPEC countries generally; the OPEC countries generally price oil is US$, which makes the US$ an implicitly commodity-backed currency, it used to be gold, now it's oil.
If OPEC were to follow Iran and Venezuela's suggestions and price oil in Euros or else develop their own petrodollar, not only would they have no reason to hold US$170.4 billion in funds, but it'd drop the value of the US$ hugely, since it'd now be backed by... um... debt.
Of course all those countries have substantial investments in the US, the OPEC countries being particularly fond of real estate, so they don't want to tank the US economy, since it'd hurt their own wealth.
Russia could probably do more harm to the US by shutting off their 414,000bbl/day exports to them, this has effectively doubled over five years, making up for drops from the Persian Gulf.
But Russia's real power is over gas and now oil to Europe generally, especially Eastern Europe (about three-quarters Eastern Europe's natural gas comes from Russia). Hurting Europe by turning off or down the tap would hurt Europe directly, and also the US indirectly. If the EU has to pay higher prices for energy, this pushes up the prices of all other goods and services, and leaves the EU with less money to buy US products and lend the US money to bail out its people and credit institutions.
There's every reason. The US currency is implicitly backed by its use as the oil pricing currency, and by US military might, and a big pile of debts which will never be repaid. And nothing else.
The EU currency is backed by the strength of the economies of a couple of dozen economies. Its diversity gives resiliency - if one country has some idiotic economic policy (say, subprime mortgages and CDOs, or a losing foreign war), it can't fall too far before being saved by the others.
Kiashu -
RE: "The US currency is implicitly backed by its use as the oil pricing currency, and by US military might, and a big pile of debts which will never be repaid. And nothing else."
Do you not have any faith in my great-grandchildren? Once the US has crashed and burned, the resulting currency devaluation will enable the repayment of that debt with pocket change, if anyone has any. It just seems to me that the main tenet in long range planning of the neocons is the destruction of value of the dollar, since I am sure that they know that the fiscal mess they have embraced through their spend-but-don't-tax policies has brought the US economy to a point of collapse.
Oh yeah, and the "full faith and credit" of the US government is behind the US Dollar, just like in the case of the Euro. No wonder it is gaining strength.
You see this, I see this, every other potential investor in US also sees this possibilty. Therefore the risk premium associated with USD holdings increases. In order to attract funds the US must then increase interest rates. Increasing interest rates to placate foreign investors drives up the cost of credit to US householders and firms. This exacerbates the existing credit crunch putting more people out of work, putting more houses into foreclosure, weakening the economy and making it less attractive to foreign investment. This in turn results in a further increase in rates and the downward spiral deepens.
It will not be pretty and your children will not thank you for the world of hurt you have left as your legacy.
People in the past had ancestor worship as their religion.
People in the future will have ancestor cursing as their religion.
I'd say the dollar is currently gaining in value as deflation gets a grip on the economy:
Sharp US money supply contraction points to Wall Street crunch ahead
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/19/cnusec...
Demand for US dollars is rising as fast as the black-hole of deflation is destroying them. The rise in the dollar's international value is probably due in part to the repatriation by the US of foreign investments as everyone scrabbles for cash.
As the money supply contracts the availability of credit declines and the price of credit (interest rates) increase.
The reason for the sudden jump in the value of the dollar is not clear. A partial explanation may be funds liquidating other holdings ( stocks, long commodity trades) and "parking" those funds in Treasuries. There has also been a big investor exit from the GSCs (Fanny, Freddy).
Reuters has an interesting story today:
http://www.reuters.com/article/newsOne/idINSP21695020080819?pageNumber=1...
The article describes foreign funds buying US financial stocks as they were thought to be at the bottom of the cycle. If the bottom continues to fall then further investment will be delayed and / or other safe havens sought.
My hunch is we will see oil repriced in a basket of currencies. This will benefit China, Russia and the Gulf states and be negative for the US.
Burgundy: Jeez. Those Bernanke helicopters better hurry up.
I would like to see a post on peak oil vs deflation.
Peak oil implies high oil prices and a yoy decline in oil available to consume. Financial implosion and deflation imply a yoy decline in demand and low energy prices. The question is which one is the stronger force.
Either way we will have economic hardship and energy consumption will decline, but there are differences. If the financial mess is big enough it could hide peak oil for years. If capacity to export oil declines by 4% a year but consumption contracts by 6% a year then we could end up with another glut of cheap oil from over capacity. This perceived glut would quickly evaporate as soon as the economy recovers and we would be deep into depletion with no awareness, infrastructure, or plan.
I'm an amateur in both finance and oil, I know enough to realize that both are going to be big problems but not enough to know which is going to be more powerful in the near term.
Thanks,
Tim
Helicopters need fuel and when TSHTF the only helicopters getting the remaining oil will be gunships.
That was yesterday.
Today the dollar is sinking like a stone.
Tomorrow?
Expect erratic moves in the dollar, against a general sinking to falling trend, from here on out.
Russia could probably do more harm to the US by canceling the so called Megatons to Megawatts program. Because
... One-tenth of America’s electricity comes from fuel made from Russian nuclear warheads!
http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=17626
Perhaps Russia and China have an "agreement" concerning US Treasuries. Together, they could do some very real damage to the US economy. China has been very quiet during the whole Georgia conflict. It will be interesting to see their behavior once the Olympics is finished. I'm already noticing that the table is turning again somewhat with the US$, price of WTI crude, and the DOW just as the Olympics are on their last leg.
Russia holds $65 billion in U.S. securities - really a minor amount compared to Japan ($584B) or China ($503B), and significantly less than the U.K., the oil exporters, Brazil, the Caribbean banking centers or even Luxembourg.
http://www.treas.gov/tic/mfh.txt
Not that $65B wouldn't be enough to create some havoc in the currency markets. But for now, the Russian incursion into Georgia is probably boosting the dollar via reflexive flight-to-safety investment in treasuries.
fat_tail_rider
Russian government also holds about $100 billion in Fannie Mae and Freddie Mac bonds, although they are apparently trying to limit their exposure in light of recent developments.
Sigh,We all know the answer .I am coming to the conclusion that the wealthy have their hideouts where they ,and their decedents will live as autocrats,with as much of a vestige of modern tech as is left in the world,preserved for their private use.They[those in power]see no way to keep power thru a desperate attempt to prepare for peak...
And then there is this population bottleneck that will start to bite around the time I was supposed to retire...
I have a small permaculture type homestead that will keep me and mine eating,I hope.
I do not think out .gov has the ability ,[after the monkeywrench gang that has been busy smashing all the controls]to deal with the crisis that will be in full force at the first of the year.The world financial system is in the process of melting down to a slag heap,with every one in this administration ,cutting themselves a BIG piece of pie on the way out the door.
We are busy losing 2 wars.
We just got punked by the Russians bigtime.
I honestly though a certain sense of shame might motivate bush to try and make some sort of attempt to start to undo the utter catastrophe that has unleashed on our poor country.Most folks have no idea the true magnitude of the problems headed in their direction
These are the good old days.Enjoy.They will be gone soon.
"Get hold of the resources so they can outlast rival powers by a decade? "
That is EXACTLY their strategy. It's called Last Man Standing. In LMS mitigating the problems that drive the strategy is COMPLETELY irrelevant, and isn't done.
Gotta read the August 18th entry at www.kunstler.com :
Reality Bites Again
Not many know it but Georgia has quite a few billion barrels of oil. It is mostly deep down in the cretaceous. The Russians got all the low hanging fruit. Two companies doing their best to bring on discoveries are Frontera - frr.l and Canargo - cnr. Canargo has a very significant find at Manavi and at Norio has p50 1.5 billion barrels awaiting a farm-out. Potentially there is more then enough enough oil to fund the reconstruction of the country but as events are unfolding when that will be is anybody's guess.
The US and NATO antagonize Russia by meddling in there back yard then act all indignant when Russia responds in kind.Imagine if it were Russia and the US back yard. . oh yea that happened already and was called the Cuban missile crisis and almost started thermonuclear wwIII.It seems to me the lines are being drawn,the pushing and shoving before a fight breaks out.The US is not a rising power and may want a fight before it falls to far.the US, Europe,Australia's. . .Russia china Iran and others.On the bright side WWIII could solve are energy,environmental and many other issues.Like cutting my own head off would solve all of my problems.
hi Ex-Ad.,
Wow! suicidal thinking right out in front.
Well Kunstler obliquely alludes to suicidal-addictive thinking in his quip "*Russia got its house in order under the non-senile, non-alcoholic Vladimir Putin*".
At first I thought he must be comparing to OUR supposed ex-addict, shrub .... the dry drunk. But I guess JHK must have been alluding to Comrade Yeltsin.Urpp.
Israel did massive damage to Lebanon after a few rockets and a few of their soldier were captured. Imagine if a Hezbollah armored column had taken Haifa and killed as many as 2,000 people. That is analogous to the provocation the Russian faced.
If faced with the situation, it is unlikely that the US would have shown the restraint that Russia has.
US lost 2,900 lives and invaded two countries, initiated ongoing conflict in both, and continues to threaten a 3rd.
"US lost 2,900 lives and invaded two countries, initiated ongoing conflict in both, and continues to threaten a 3rd."
To be a little more accurate: "Cheney and others conspired to murder 2,900 fellow-Americans, blamed it on Islamic suicide-jihadist patsies, and used that as an excuse to......."