David
Seaton's Energy Links® Editorial Will appear again next week
David
Seaton
David Seaton's
Energy Links®
As China, U.S. Vie for More Oil, Diplomatic Friction May Follow - Washington Post
Think of next week's meeting between President Bush and China's President Hu Jintao as a summit
of the planet's most voracious energy user and the planet's fastest-growing energy user. In a
world of limited oil resources, that could strain U.S.-China relations as much as any issue.
China's oil industry has wooed countries that the United States has tried to isolate for
political reasons -- such as Sudan, Iran and Burma -- potentially undermining the isolation
efforts. Three of China's major oil companies have been aggressively pursuing long-term supply
arrangements in such places as Venezuela, Nigeria, Gabon and Angola.
Even Saudi Arabia, despite its long-standing tight relationship with U.S. oil companies, is
turning toward China and is today its largest oil supplier. In 2004, China Petroleum & Chemical
Corp., also known as Sinopec, became one of just five companies to win the right to explore for
natural gas in the uninviting desert known as the Empty Quarter, edging out U.S. companies
interested in the area. The kingdom has invested in Chinese refinery projects, and in January,
Saudi King Abdullah bin Abdul Aziz visited Hu in Beijing.
"Saudi Arabia is taking a Chinese wife," said Charles W. Freeman Jr., a former U.S. ambassador to
Saudi Arabia who has extensive diplomatic experience in China. "The Saudis are not divorcing us.
In Islam you can have more than one wife and they can manage that."
But can the United States? Many U.S. policymakers are nervous about China's quest for energy
supplies around the world.
"I can tell you that nothing has really taken me aback more as secretary of state than the way
that the politics of energy is -- I will use the word 'warping' -- diplomacy around the world,"
said Secretary of State Condoleezza Rice in testimony before the Senate Foreign Relations
Committee on April 5. "It is sending some states that are growing very rapidly in an all-out
search for energy -- states like China, states like India -- that is, really sending them into
parts of the world where they've not been seen before, and challenging, I think, for our
diplomacy."
And China is nervous about the United States, too. The vociferous opposition in Congress last
summer to the China National Offshore Oil Co.'s bid to buy Unocal Corp. has left sore feelings in
China, according to Xiao Lian, director of the Center for American Economic Studies at the
Chinese Academy of Social Sciences. Xiao said Chinese military strategists also worry that the
United States might try to block oil supplies in a dust-up over Taiwan, the self-governing island
that Beijing claims is part of China.
According to Jiang Wenran, a professor at the University of Alberta, a popular Chinese online
book, "The Battle in Protecting Key Oil Routes," imagines a sea engagement near the Strait of
Malacca linking the Indian and Pacific oceans, in which the Chinese navy destroys an entire U.S.
Pacific carrier group.
"The risk is that energy issues become not a source of constructive cooperation but rather a
deepening source of competition, misperceptions and excuses for obstructing one another's
interests," says a paper by Mikkal Herberg, an energy security expert at the National Bureau of
Asian Research, and Kenneth Lieberthal, who served as the senior director for Asia on President
Bill Clinton's National Security Council.
Next week's talks between Bush and Hu should provide an opportunity to see whether it will be
cooperation or not when the two discuss Sudan and Iran. In conversations with the Chinese, Deputy
Secretary of State Robert B. Zoellick has tried to use China's interest in energy to win its
support for tougher action on Iran's nuclear program, according to a senior administration
official. Zoellick has made the case to the Chinese that if Iran obtains a nuclear weapon, it
would be destabilizing in the region that is the source of much of China's oil -- and thus it was
in their interest to prevent that from happening.
The dynamics are sobering. Over the next 15 years, the number of automobiles in China is expected
to increase fivefold, helping to double China's overall demand for oil, which has already passed
Japan's to become the second-largest in the world. By 2020, China is expected to import 70
percent of its oil needs, compared with 40 percent today.
Meanwhile, the growth in U.S. oil consumption, starting from a higher base, rivals China's growth
when measured in barrels a day instead of percentages. From 1995 to 2004, U.S. oil imports grew
by 3.9 million barrels a day while China's grew by 2.8 million barrels a day, thus "making the
United States much more of a rogue element than China in the world oil market over the past
decade," Herberg and Lieberthal wrote.
During 15 years, China's coal demand could also double. China, which has nine nuclear plants
running now, will build more plants (30 according to Freeman) than any other nation over that
time period. And it has drawn up plans for giant hydropower dams. "The trajectory they're on is
not sustainable," said Herberg, former director of strategic planning at the Atlantic Richfield
Co.
China has been taking several steps to bolster its energy security. It has imposed measures to
dampen demand, including higher gasoline prices and surcharges on cars with big engines (which
could hurt U.S. automakers with plants in China). It has established a state energy office, which
reports to a new energy "leading group" headed by Premier Wen Jiabao and has set a goal of
reducing the energy used per unit of GDP by 20 percent by 2010.
Leaders in Beijing also want to boost the country's strategic petroleum reserves, which would
last just seven days, compared with the 90-day minimum for members of the International Energy
Agency. If war, weather or terrorism disrupted supplies, China would soon be forced onto world
oil markets. Herberg said that China bought extra oil before the Iraq war in anticipation of a
supply disruption, thus contributing to the oil price spike at that time. Given current high
prices, though, China is unlikely to step up purchases for its reserve at this time.
Xiao said that Beijing wants to diversify its sources by increasing imports from Russia, Central
Asia and Latin America. China and Russia are in talks to build a $10 billion pipeline to deliver
natural gas from Siberia to northern China.
China's major oil companies -- CNOOC, China National Petroleum Corp. and Sinopec -- have sought
to lock in long-term supplies by buying stakes in operations abroad, which are still modest
compared with major Western oil firms. CNPC, the largest state company that operates like a
ministry, has a stake in Sudan's oil fields, giving it around 150,000 barrels a day in equity
oil. It also has a 60 percent stake in a Kazakh oil firm that will deliver about 200,000 barrels
a day to western China via a new pipeline. Sinopec landed a contract for the development of
Iran's Yadavaran oil field, which may eventually produce 300,000 barrels per day. Sinopec has
also acquired a 40 percent stake in Canada's Northern Lights oil sands project, which is expected
to produce about 100,000 barrels a day by 2010.
China has also opened its doors to Middle East investment, broadening its relationship with that
oil-rich region. A $3.5 billion refinery expansion underway in Fujian province, financed by
Sinopec, Exxon Mobil Corp. and Saudi Arabian Oil Co. (Saudi Aramco), is seen as part of the
effort to cement relations with Saudi Arabia. "What are the chances of cutting off oil to your
own refinery?" Herberg said. "That's the nature of international oil security, not by going out
and turning a country into your own private filling station."
While these moves make sense for China and help put more oil on world markets, they worry many
diplomats and policymakers in Washington. Will China's oil relationship with Iran prevent it from
joining other major powers at the United Nations in pressuring Iran to open up its nuclear plants
to international inspection? Is China's willingness to buy oil from Sudan contributing to
Khartoum's determination to resist U.S. and European pressure to stop raids on people living in
the Darfur region? Will the dispute between China and Japan over rights to a large natural gas
field in the East China Sea lead to wider conflict? (Lieberthal said both sides have been flying
military planes over each other's claims -- perfectly legal, but worrisome.) And will China's
growing presence in world oil markets drive up the price of crude oil?
Policy analysts have been recommending a variety of steps to ease U.S.-China tensions over
energy: making it a partner, if not a member, of the IEA; creating a northeast Asia energy
cooperation group to work out disputes and deals on natural gas reserves in Russia and the seas
between China, South Korea and Japan; and inviting China to a Group of Eight meeting to discuss
energy.
Freeman warns against blaming China for rising oil prices. He notes that U.S. imports have
increased more than China's in recent years. "It's a wonderful issue," he said. "We get to blame
the Chinese, the enemy of choice at the Pentagon. And then we get to blame the Arabs, perfect
villains upon whom to heap blame."
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Rising oil prices `a threat to world economies' - Sunday Times - Australia
High oil prices are storing up trouble for the world economy by creating serious imbalances in
national finances, particularly in the US, the International Monetary Fund has warned.
The IMF said much of the cash bonanza enjoyed by oil-exporting countries was being recycled into
the US market, driving up its current-account deficit and creating financial risks for the world.
"The recycling of petrodollars through international capital markets is helping to keep interest
rates low in the US, thereby further fuelling the current-account deficit by supporting
consumption," the IMF said.
But the higher the US deficit, the greater the risk of the dollar crashing, "which would push US
interest rates up sharply and possibly lead to a recession," the IMF warned.
The IMF's comments came in an early statement from its World Economic Outlook report, due out on
Wednesday. The IMF said that higher oil prices accounted directly for about half the
deterioration in the US current account over the past two years.
In 2005, the US current-account deficit widened to a new high of $US804.9 billion, caused by high
energy prices and a consumer binge on cheap imported goods.
In the fourth quarter of 2005, the deficit surged by 21.3 per cent compared with the previous
three months, to a record $US224.9 billion – an unprecedented 7 per cent of the gross domestic
product.
And oil prices are still soaring, with Brent crude breaching $US70 a barrel on Thursday, caused
by a shortage of supplies and the crisis over Iran's nuclear ambitions. Iran is a major oil
exporter.
In the past, world imbalances from high oil prices have adjusted quickly. Such imbalances have
fuelled inflation and caused economic growth to falter, particularly in the US.
But this time, interest rates have stayed low, caused by globalisation and greater vigilance
about inflation. In addition, oil exporters have not been spending their cash as freely as in the
past.
"As a result, the oil price-induced imbalances are likely to be with us for some time," IMF chief
economist Raghuram Rajan said.The longer the imbalances persisted, the IMF report warned, the
greater "the risk of a sudden, disorderly adjustment".
The IMF believes that a 10 per cent rise in crude prices reduces global growth by 0.1 to 0.5
percentage points.
David Robinson, the IMF's deputy head of research, said that predicting oil prices was fraught
with problems, but all the signs pointed to fuel staying expensive in the medium term.
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Oil price breaks $70 mark as Iran nuke tension simmers - Xinhua
Brent North Sea crude oil was traded at 70.20 dollars a barrel for the first time on Thursday
evening due to simmering tensions of Iran nuke issue.
However Bloomberg News survey shows that crude oil may fall on speculation that surging
inventories will reduce the impact of a possible disruption to Iranian exports.
The price of Brent crude for June delivery jumped 34 cents to reach 70.20 dollars before
later falling back slightly to 70.15, an increase of 28 cents from Wednesday's close.
"We're just in this terrific Bull Run right now, and the worries just steepen," said John
Kilduff, analyst at Fimat USA.
He added that as long as political tensions continue in Iran, crude futures next week are
apt to break their previous trading record of 70.85 dollars, reached Aug. 30, 2005, after
Hurricane Katrina struck the Gulf coast.
While Bloomberg News survey shows that 26 of 52 analysts, traders and brokers, or 50
percent, said prices will decline next week, 17, or 33 percent, forecast an increase and nine
expected little change.
"Prices are reflecting geopolitics while inventories remain at historical highs," said
Andrew Harrington, an industry analyst at Australia & New Zealand Banking Group Ltd. in Sydney.
"Barring any new developments in Iran, prices should drift downward."
Brent has been striking record high points since Monday also on market concerns that the
U.S. might launch military strikes at uranium facilities in Iran.
In Iran, the world's fourth-largest oil producer, no oil exports have been disrupted, but
some market participants are worried they might be, depending on the U.N. Security Council's
response to the Iran's defiance of council resolutions concerning its nuclear program.
The United Nations has given Iran until the end of April to shut down its nuclear program.
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Iran hopes to join Shanghai group this summer - People's Daily
Iran hopes to join the Shanghai Cooperation Organization (SCO) this summer, Iranian Deputy
Foreign Minister Manouchehr Mohammadi said in Moscow on Friday.
Iran and India are observers in this organization, but probably they will become its full-fledged
members as early as this summer, Mohammadi was quoted by the Itar-Tass news agency as saying.
According to Mohammadi, the joining of India and Iran would make SCO a strong international
organization that others could join too. The SCO "could make the world more fair."
He said that Iran planned reviewing with "colleagues from this organization" the nuclear problem
and counted on securing their support at the SCO summit in China due this summer.
Tehran hopes for a more active stance of Russia and China on assistance to Iran's economic
projects, and proposes building an Iran-Russia "gas and oil arc" in order to merge efforts of
these resource-rich countries.
The SCO comprises Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, with India,
Iran and Pakistan willing to join and granted formal observer status.
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Oil prices likely to surge to new record highs - Reuters
'Even without a possible Iranian oil disruption, we could go to $75 to $80 a barrel' - Olivier
Jakob of Petromatrix.
An influx of fresh fund buying and geopolitical worries will most likely push oil prices to new
record highs soon, analysts said, while the most bullish predicted prices to eventually climb to
$100 a barrel.
Supply concerns in Nigeria, Iran and other key oil-producing countries have ignited US crude
prices, up 13 per cent this year and within $2 of the all-time record high of $70.85, reached in
late August 2005 in the wake of hurricane damage in the United States.
Analysts predicted the market to rally even further as high oil prices have failed to reduce
global demand.
"It is pretty clear that we can break $70 without too much problem," said Deborah White, an
analyst at SG CIB Commodities in Paris.
"We have been getting a massive injection (of investment fund money) in the commodity markets. It
is very clear from the price action that they haven't stopped."
Analysts said prices could peak at around $80 a barrel, a level that matches inflation-adjusted
prices set after the 1979 Iranian revolution.
Twenty-seven years later, the market is again focused on the Middle East country as Tehran
battles with the West over its nuclear programme.
"Even without a possible Iranian oil disruption, we could go to $75 to $80 a barrel," said
Olivier Jakob of Swiss-based Petromatrix, an oil analysis group.
To stay at those levels, Iran or some other major oil-producing nation would have to cut oil
supplies, analysts said. This would then prompt the International Energy Agency to release
emergency government reserves to keep markets from spiking even further.
Ian Henderson, fund manager at JP Morgan Fleming in London, took an even more bullish stance,
saying prices would continue to climb as long as demand stayed strong.
"The ultimate deterrent for the market is when the price becomes too expensive for people to fill
their tanks," he said.
"I think they will continue to carry out their travel plans even with oil prices as high as $100
a barrel.
I personally wouldn't stop driving."
Analysts agreed that Opec, the source of more than a third of the world's oil, would be of little
help in a crisis.
The cartel, which is already pumping at near-maximum capacity, has repeatedly said it wants oil
between the upper $50 to lower $60 range.
"Opec can make all the statements that they want, but they really can't do anything," Mr Jakob
said.
But some analysts warned that the market could just as easily plummet.
"The current rally is crucially linked to whether the intensity of the current news flow can be
maintained, particularly given the health of fundamentals in (the second quarter)," said BNP
Paribas in a research note.
The IEA has repeatedly said world markets are well-supplied and that other OPEC producers have
filled the Nigerian shortfall, now at around 500,000 barrels per day.
In February, prices fell by more than $11 in about two weeks after a huge rise in US fuel stocks
and a slight easing of geopolitical tensions.
"The rapid fall in the oil price in the first half of February should remind the market how
compelling fundamentals can also prove at times," BNP Paribas said.
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Chad Threatens World Bank With Oil Cutoff - Forbes
Chad threatened Saturday to cut off its flow of oil unless the World Bank releases $125 million frozen in a dispute over how the central African country should spend its oil revenues.
The announcement followed a late-night meeting between President Idriss Deby and his Cabinet ministers to discuss their response to a rebel attack on the capital. The rebels were repulsed but are believed to be regrouping nearby, and the threat of a violent overthrow of Deby's government has not diminished.
The government presumably wants the frozen funds to finance its fight against the rebels.
Oil Minister Mahmat Hassan Nasser told the Associated Press that the World Bank in January froze an escrow account with $125 million in oil royalties in London, where the royalties are deposited on behalf of the government. Without payment, the government would have to shut down the pipeline that flows through Cameroon to an Atlantic Ocean oil terminal, he said.
"Chad has the right to do this," the oil minister told the AP. "The government has the right to act as its sees fit if obligations are not met."
Nasser said the World Bank had until midday Tuesday to release the funds or the pipeline would be shut down. He said such action would not hurt his government because the royalties already had been cut, but it would hurt other businesses and Cameroon, which have been collecting their revenues.
He spoke as thousands of people gathered in central N'djamena for a rally in support of Deby's government.
Chad had a deal with the World Bank for the financing of a pipeline on condition that most of the revenues would be used to alleviate poverty. Deby broke that deal earlier this year so he could use the money to finance his military, prompting the World Bank action.
Earlier, Prime Minister Pascal Yaodimnadji was defiant while explaining the government's decision about the pipeline to the diplomatic corps.
"The people of Chad have lived in the past without oil and will live tomorrow without oil," he said, adding that the elected government had the right to spend its money as it saw fit.
Chad exports about 160,000 barrels per day, a small amount by world standards.An Exxon Mobil-led consortium exported 133 million barrels of oil from Chad between October 2003 and December 2005, according to the World Bank. Chad earned $307 million from those exports, the bank said.
Earlier, Deby said he was severing relations with neighboring Sudan, and he threatened to expel 200,000 Sudanese refugees if the international community did not do more to stop what he claimed were Sudanese efforts to destabilize his government.
Deby repeatedly has accused Sudan of hiring mercenaries to overthrow his government. Sudan has denied the accusation, and in turn has accused Chad of supporting fighters in its volatile Darfur region, where Arab militias and African rebels have fought for nearly three years.
The Central African Republic said Friday it was closing its border with Sudan after the rebels passed through the northern part of the country while their way from Sudan to attack N'djamena.
The rebels released a statement on their Web site, again condemning Deby's refusal to negotiate with them. A key issue has been Deby's decision to change the constitution so he can run for a third term in elections set for May 3.
"The regime of Idriss Deby is the basis of the crisis in this part of the African continent," the rebel statement said.
Chad, an arid, landlocked country about three times the size of France, has been convulsed by violence for most of its history, including more than 30 years of civil war since gaining independence from France in 1960. There also have been various small-scale insurgencies since 1998.
Some 180,000 people have died in Darfur in western Sudan over the past three years, some at the hands of Arab militias, many from disease and hunger.
While observers believe Sudan has provided at least some support to the Chadian rebels, the insurgents are led by former senior military officers, who until recently served under Deby. There has been enormous dissent within Deby's clan over his decision to run for a third term and over how royalties from recently exploited oil reserves have disappeared.
Army officers first attempted to oust Deby on March 14 by trying to seize power while he was out of the country.
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