Month: January 2015

OPEC’s Petrokrieg

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For the last several months OPEC, led by Saudi Arabia,  has been waging a silent and yet very noticeable war. The contradiction is resolved by realizing that while almost everyone has noticed the precipitous drop in oil prices (and concomitant drop in consumer gasoline prices), many people have mistaken what is going on.

Crude oil prices have slumped from a high of about $110 at the start of July of last year to, as I write this, around $50 per barrel. Since the end of July of last year oil prices have dropped more then 50%, a trend that really became precipitious in August 2014. Now there are lots of possible explanations for this,but my explanation asks: what of consequence happened in July of last year?

Oh, yeah, that…

Obama indicates extension to Iran nuclear talks as deadline looms, July 16 2014, theGuardian.com,

Nations agree to 4-month extension of Iranian nuclear negotiations, July 21, 2014, CNN.com.

Since the initial extension to November there has been a further, 7 month extension into next year. Snap goes the dragon…

Source: Nasdaq.com

Let’s be clear, this is not an accident of factors, this is a deliberate course of action undertaken by OPEC. From Bloomberg (emphasis mine);

The United Arab Emirates has no plans to reduce output no matter how low prices drop, according to Yousef Al Otaiba, the nation’s ambassador to the U.S. Representatives from Saudi Arabia, Kuwait and the U.A.E. stressed a dozen times in the past six weeks that OPEC won’t curb output to halt the rout.

This is not a painless war on the side of OPEC: at $50 per barrel, every single OPEC state is below their breakeven point (breakeven is the price needed for these oil driven economies to fuel themselves).

Consider this table, from Citi Research’s data compiled and posted at MarketWatch;

Country 2014 fiscal breakeven oil price 2015 fiscal breakeven oil price
Libya* 317 184
Venezuela* 161 151
Yemen 160 145
Algeria* 132 131
Iran 131 131
Bahrain 125 127
Russia 105 107
Saudi Arabia* 98 103
Oman 99 103
Iraq* 111 101
UAE* 79 77
Quatar* 55 60
Kuwait* 54 54
*OPEC member
Source: MEES, IMF, Citi Research

At current prices, no one among the oil producing states can sustain their production.

If we consider the current oil production by OPEC as a weapon (as I do here), then it is a weapon masterfully deployed: flooding the market as OPEC is doing would normally be understood to be a classic market manipulation strategy; dumping. This practice of undercutting competitors (even if you have to absorb losses) was one of the anti-trust charges brought against Standard Oil when it was broken up. But today the deployment of the OPEC oil bomb is something that bolsters the poll numbers of the President of the United States! Quite clever that: even if we credit Obama’s understanding of the situation, he can do nothing without the risk of tanking his (cheap gas buoyed) domestic approval numbers.

Unfortunately for everyone, Iran is not so limited in their ability to respond to the Saudi backed attempt to bankrupt their nation;

The surge in Yemen this week by Shiite Muslim militants represents what some national security insiders are calling a “huge victory” for Iran, just as the Obama administration faces criticism for being too lenient in nuclear talks with the Islamic republic and appears — at least tacitly — to be coordinating with Tehran against Sunni terrorists in Iraq.

Amal Mudallali, Mideast analyst with the Woodrow Wilson International Center for Scholars writes in Foreign Affairs last October;

If the Houthis secured Bab Al Mandab and the sea in Al Hudaydah governorate, another strategic waterway, they would control the traffic from the Suez Canal and the Persian Gulf, a sobering prospect for those worried about increased Iranian influence in the region.

Iran and its proxy forces are coming close to controlling access to all sea traffic around the Arabian peninsula except for the Suez canal. This would force all sea traffic from the Isreali port of Elat, the Jordanian port of Aqabah (which is Jordan’s only sea access) as well as the entirety of Saudi Arabia’s western coast to use the Suez canal.

Bab el-Mandeb/Bab Al Mandab at the southern end of the Red Sea.

As Charles Krauthammer notes, Iran and it’s proxies are on the march all across the Arab middle east. Only a few days ago an Israeli air strike killed an Iranian general and his Hezbollah companions on the Golan Heights,  as Iran attempts to militarize the Syria-Israel border.

It’s important to remember that the conflict between Iran and Saudi Arabia isn’t simply an issue of regional rivals, but something far deeper and more explosive. Iran represents a powerful rival to the Saudi paramountcy in Islam itself, as Iran is the stronghold of the Shia branch of Islam. Sunni and Shia Islam have been in conflict since nearly the beginning of Islam itself, splitting as a result of the Battle of Karbala in 680 CE (and no, they apparently feel 14 centuries is not too long to hold a grudge). “Of the total Muslim population, 10-13% are Shia Muslims and 87-90% are Sunni Muslims” (source), so the threat of the Iranian bomb represents not only a triumph of one side over the other in this ancient war, but a triumph of the minority side. Add to that the racial and ethnic considerations that the Persian Iranians are seeking dominion over an Arab Middle East, and the ancient (but still fiercely remembered) domination of Arab Islam under the Turkish Ottoman empire… well, let’s just say that hatreds run deep in the Middle East.

To be sure, there are targets other then Iran in OPEC’s sights: the US domestic oil industry is being hammered (emphasis mine);

The financial debacle that has befallen Russia as the price of Brent crude dropped 50 percent in the last four months has overshadowed the one that potentially awaits the U.S. shale industry in 2015. It’s time to heed it, because Saudi Arabia and other major Middle Eastern oil producers are unlikely to blink and cut output, and the price is now approaching a level where U.S. production will begin shutting down.

From “America’s Going to Lose the Oil Price War“, January 12, 2015. “With crude prices sinking, oil industry layoffs are on the way“, January 20, 2015: the domestic US oil industry is shedding thousands, ultimately probably tens of thousands, of jobs.

Of course, all of this is aided by our political elites, who can reliably be counted on to be short-sighted: “Will cheap oil kill Keystone?” asks Politico, as politicians respond to OPEC’s price manipulations. “Keystone Foes Energized as Price Pinches Oil Sands Allure” (Oct 27, 2014), and in early January CBS news asks why the Senate is voting on KeystoneXL when “oil prices have tumbled down in the past three months.” I would ask if the media or our politicians have ever heard the adage “dig your well before you’re thirsty”, but… well, more successful writers than I have mused on the failings of our media-industrial complex. 

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American Sniper: Rough Men and the revulsion of the Pappataci

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In Rossini’s comic opera L’italiana in Algeri (The Italian Girl in Algiers) the heroine, Isabella, engineers the escape of the heroes from the harem of the Turkish Bey Mustafà by convincing the credulous Bey that he has been inducted into the Italian order of the Pappataci. The pappataci is described as the ultimate expression of Italian sophistication; an order of men devoted to chasing women, eating, drinking and making merry. In other words, a man that treats luxury as an end in and of itself.

A very worthy movie that has prompted some very unworthy criticism.

 

Now, why mention this? Because over the weekend the movie American Sniper going into wide release occasioned a little clash between our own class of pappataci and those Rough Men who, (as the sentiment attributed to Orwell), stand ready to do violence on our behalf. Reflections on the life of war hero Chris Kyle;

Which, in fairness, still beat the crass racial angle of this Huffington Post contributor;

And, just to make his feelings completely clear,

Now, to be fair, there is a lot going on, and the above were scarcely alone in their dislike for American Sniper. What they have is a certain similarity, a certain mode of thought that brings to mind the pappataci and his purposeful indolence. The pappataci seeks to cast off care, worry and responsibility and luxuriate, to become, in a sense, a child again. So much of the criticism of American Sniper hinges on this child-like approach:  it is the men who serve our country that are the real brutes, the real villains. At The New Republic they are so sure Chris Kyle isn’t a hero they publish a movie review by a man that hasn’t seen the movie (not kidding). The Penn State professor(!) who dismissed American Sniper after viewing the trailer alone chides the fans of Chief Petty Officer (CPO) Kyle saying,

For him, the enemy are savages and despicably evil. His only regret is that he didn’t kill more. He laments that there were rules of engagement, or ROE, which he describes as being drafted by lawyers to protect generals from politicians. He argues instead for letting warriors loose to fight wars without their hands tied behind their backs.

In other words, Chris Kyle articulated exactly the sort of truths that the pappataci cannot endure hearing: that we are at war with loathsome, vile men and that our fighting forces are ill served by the restrictive, political rules of engagement they are saddled with. This rankles the pappataci: they look at a news headline like “Boko Haram Appears to Be Using Abducted Girls as Suicide Bombers” and accuses men like CPO Kyle of being insufficiently sad for killing such men, for not having enough “moral anxiety”… as if a lack of moral certainty in the face of evil is a virtue, rather then a failing. That’s not quite true, they are quite sure that “[t]he real American Sniper was a hate-filled killer”, as an opinion piece is titled at the Guardian.

How is it possible that a man that spent his life in service to both his country and his countrymen, who so enthusiastically answered President Kennedy’s call “what can you do for your country”? Resentment, I think, explains a very great deal: the pappataci, after all, contributes nothing but consumes everything. There is a simple, and painful, truth at play here: these men that embrace luxury become like luxury: an addition rather then an essential.  As the phrase oft attributed to Orwell goes: “people sleep peacefully in their beds at night only because rough men stand ready to do violence on their behalf.” No one sleeps peacefully beneath the blanket of protection provided by the Micheal Moore’s or Seth Rogan’s of the world, nor are these protestations on behalf of “brown people” likely to engender much camaraderie.

Once upon a time this was different, for in ages past Hollywood and popular culture sold heroism, real heroism, without shame;

Sergent York, Hero of the Great War and devout Christian.

There can be no doubt in the world of the fact of the divine power being in that. No other power under heaven could bring a man out of a place like that. Men were killed on both sides of me; and I was the biggest and the most exposed of all. Over thirty machine guns were maintaining rapid fire at me, point-blank from a range of about twenty-five yards. When you have God behind you, you can come out on top every time.

Sergeant Alvin York

For a moment, let’s try an imagine what the pappataci of today would say had they lived in the time of Sergeant York.

Then again, maybe this fellow has the right of things…