But Things Like This Are Driving the Oil Price
Pay No Attention to This Headline!
“Geopolitics and headlines have been controlling oil prices for easily the past seven years,” noted Michael J. Economides.
One of the most recognized -- and recognizable -- figures in the oil and gas industry, Economides will discuss “Energy Geopolitics” as the All-Convention Luncheon speaker on Monday, April 2, at AAPG’s Annual Convention in Long Beach, Calif.
He will present his views and opinions on headline topics affecting the industry. That’s promising for two reasons.
First, the world today has no shortage of scary headlines about geopolitics and energy.
Second, Economides never has a shortage of opinions.
He is a professor in the Cullen College of Engineering at the University of Houston and managing partner of a petroleum consulting firm.
The author or co-author of 11 books -- with two more on the way -- and editor-in-chief of the Energy Tribune, Economides also will receive AAPG’s Geosciences in the Media Award at the annual meeting, for his recent best-seller, The Color of Oil.
Latin America Lunges Left
Economides called Venezuelan President Hugo Chavez “an anachronistic version of Eva Peron” and noted the close ties Chavez has to other Latin leaders, particularly Bolivian President Evo Morales.
“They are not alone -- they are very popular, without a doubt. They’ve been a disaster for their countries,” he said.
The tightness and price of world oil supplies will determine the clout Chavez wields in the future, according to Economides.
“At $75 oil, Chavez is a 1,000-pound gorilla,” he said. “At $50 oil, he’s reduced to a monkey.”
Energy Militants on March
Economides sees the emergence of an “axis of energy militants” -- national leaders who want ever-higher oil prices regardless of the consequences to the world economy.
In that group he included Chavez, Russian President Vladimir Putin and Iranian President Mahmoud Ahmadinejad.
“There is a common thread between all of these guys,” he said. “Basically, they are socialists of different types.”
OPEC tried to cushion oil price spikes to avert serious recession in oil-consuming countries, but the energy militants would welcome economic suffering in the West, especially in the United States, Economides said.
“They would love $100 a barrel oil,” he noted.
“Geopolitical militants have certainly held sway in recent years. To complicate matters you have China, which has an insatiable appetite for oil,” he added.
China to Pass U.S.
Economides has traveled to China. He said “Beijing has 200 hotels and the worst is as good as the best hotel in Houston. Beijing and Shanghai have 1,000 restaurants and the worst is as good as any restaurant in Houston.”
Far short of the domestic resources it needs in order to develop economically, China currently derives 70 percent of its power from coal, “something the U.S. hasn’t seen since the 19th century,” Economides observed.
“China is the greatest emerging superpower in the history of the world. People in the United States need to recognize this. China will surpass the United States in many ways, very soon,” he predicted.
As an irony, Venezuela’s Chavez is “the leader most joined at the hip to the United States,” Economides said.
The United States has the refining capability and markets Venezuela needs for its heavy oil. Now there’s talk of China retrofitting refineries and diverting that heavy oil for its own consumption, according to Economides.
He said that would be a disaster for the United States.
“You have China out there lurking to take Venezuela’s heavy oil. It will be very interesting how that will play out over the next few years,” he observed.
Geopolitics Pads Oil Price
Right now, the equilibrium price of oil is $40, Economides said. On top of that price, the market has added a headlines-and-geopolitics cushion, he stated.
“I would say the fear factor in the Middle East added $10, not counting Iran. Iran added another $10. And Chavez and Putin were maybe another $5,” he said.
He expects the geopolitics price addition to remain in place for the foreseeable future, with a break-out possible at any time.
“The headline that didn’t happen -- but it could have had a huge impact -- was the UN deadline on Iran came and went without a whimper from the United States,” he commented.
Deepwater Lifts U.S. Prospects
Economides believes the emergence of ultra-deepwater discoveries, like Chevron’s Jack field, will have huge consequences for the United States.
“The impact that ultra-deepwater production will have on the U.S. energy supply is so great that I believe it may reverse the long-term trend exactly the way Prudhoe Bay did when it came online,” he said.
Russia Retro under Putin
Economides said he is working on a book about what he calls the re-Sovietization of Russia under Putin.
“He’s not just taking Russia back to Brezhnev. He’s taking it back to Khrushchev. Putin is taking Russia back 50 years -- you have to go back 50 years to see what you see going on in Russia now,” he said.
He agreed that the takeover and forced sale of Yukos assets was “the theft of the century,” and noted the emergence of Russian giant Gazprom as a world-scale energy force.
“Gazprom is just such a gargantuan company -- six times the size of Shell, for comparison -- it’s a state within a state. The question is whether Russia owns Gazprom, or Gazprom owns Russia,” he observed.
Economides said there are even rumors that the current president of Gazprom will become the next president of Russia -- and after he leaves office, Putin will move up to become president of Gazprom.
OPEC Members Lose Clout
At one time, OPEC could move world oil prices by sharply increasing or decreasing production, Economides said.
“OPEC really has very little excess capacity left. It can’t manipulate the market the way it used to,” he noted.
The organization’s member countries once had a surplus production capacity of 10 million barrels a day, but that has dwindled to almost nothing, he said.
Today, the energy militants are more likely to move market prices.
“Russia -- which isn’t a member of OPEC, of course -- has been acting like the most militant of OPEC countries,” Economides said.
U.S. Needs Sensible Policies
In reacting to the 2007 State of the Union address by President Bush, Economides said, “I thought I was listening to (former presidential candidate Sen. John) Kerry.
“The United States is a huge consumer of energy, and on top of that we have some of the dumbest energy policies in the history of the world,” he said.
In regard to a push for more ethanol in the U.S. fuel supply, Economides commented “ethanol is a scam, you realize. Ethanol has a net negative energy quotient.”
About the United States relying more heavily on wind and solar energy, he said, “What nonsense is this? Wind and solar are much more expensive than the most expensive natural gas.”
Iran on Power Trip
“The fact of the matter is, Iran has been hurting badly,” Economides said. “During the time of the Shah, Iran was producing six million barrels a day. Now they are barely meeting their OPEC quota.”
Iran’s population has increased 75 percent in the past 25 years, he noted, and that growth has diverted energy resources to fueling power for the country’s development.
Even worse, Iran has become a net importer of natural gas, and uses about half its oil production to generate electricity.
“As their population goes up, they are using more and more oil for power generation, which is preposterous in these days,” Economides said.
“Nuclear power generation is very rational for them. That would free oil for external sale,” he added.
Middle East Top Concern
While Iraq and Iran now dominate U.S. attention, geopolitics in other parts of the world continue to affect the global energy picture, according to Economides.
“Basically, you have the events in the Middle East, the fear factor in the Middle East. But there are many other events that have taken place,” he said.
Given the Iraq War and the sensitive nature of events in the Middle East, that region probably will remain a focus of concern, Economides noted.
“You want to know the headline that would move oil over $100 a barrel? Israel Attacks Iran,” he said.
Headlines Paint Grim Picture
“There’s not much good news for the oil industry in geopolitics,” Economides observed.
“It would take very little for the price of oil to go up. Even $50 a barrel, or $55 a barrel, can be ill-afforded by Venezuela and Russia,” he said.
But he also advises, don’t pay too much attention to what’s in the headlines. They may have no more real meaning than the headline for this story.
“As usual,” Economides said, “geopolitical issues have a headline component, and a reality component.”