Thursday, February 23, 2012

Persian Pain with No Western Gain

“The two most common elements in the universe are hydrogen and stupidity.”
Harlan Ellison

February 22, 2012, crude oil futures for April gained 3 cents to reach $106.28 per barrel on the New York Mercantile Exchange, thereby marking the highest gain since May 2011.  While some attribute the price hike to the growing demand in Asia, the bigger blame is placed on Iran.  Tehran appears to be posturing with threats to block the Strait of Hormuz or cut oil supplies to U.K. and France, which have not imported as much oil as other European countries (e.g. Greece, Italy and Spain), but the growing tension over Iran’s reported nuclear enrichment program is largely behind the nearly 5-percent fresh spike in crude prices in the U.S. and Europe.  With a sense of inevitability of war, as the recent visit to Iran by the International Atomic Energy Agency proved unsuccessful, could anyone not expect that the crisis would trigger high oil prices?  While some naturally blame speculators for capitalizing on the anxiety over Iran’s saber-rattling with the West and potential supply disruptions, there seems to be little focus on how the West could be shooting itself on its foot by waging an unnecessary war at the wrong time. 
My January 5 blog piece examined the West’s misplaced euphoria about the pain its sanctions it believed to be creating for Iran and inevitable certainty of harm on fragile economies of the West from looming warmongering.  If it is not already obvious, the danger lies in stratospheric oil prices that would go beyond the Persian Gulf and derail the West’s economic recovery before the pain of any bloodshed.  Fearing a backlash at the presidential polls this November, the administration of Barack Obama is worried about the effect of crude prices on the economy, as it should be.  At $4 per gallon, with expected further rise, oil prices are starting to seriously bite U.S. consumers, even though the demand is low.
The problem is that even though the U.S. has reduced its dependence on foreign oil, specially from the Middle East, and it boasts highest domestic oil production in eight years as well as increased efficiency of the average U.S. passenger vehicle, changes in global oil prices inexorably reverberate through inter-connected markets laden with intricate speculative mechanisms.  With current high risk premiums attached primarily to the crisis in the Persian Gulf, the oil market is unlikely to bring prices down.  That would be damaging to recession-ridden economies whether high oil prices are short or long-term possibilities.

Thursday, February 16, 2012

Kazakhstan on Crude Expansion Trajectory

With a 50-percent stake in a Tengizchevroil joint venture to produce crude in Kazakhstan’s Tengiz oil field, Chevron announced this week that it planned to enter a front-end engineering design (FEED) phase to increase production in the country from 250,000 to 300,000 barrels per day (bpd).  However, Chevron’s numbers were higher than those provided by Tengiz, Kazakhstan’s major crude producer, which estimated the expansion to reach 260,000 bpd by 2017.  The Tengiz oil field, situated along the shore of the northern Caspian Sea, is the deepest producing major oil field in the world.  Under a new $25 billion investment plan, Chevron and other stakeholders in Tengiz will also “build a new crude-processing plant, a separate pressurizing unit that will make the new and existing plants work more efficiently, and drilling about 20 new wells.”  The plan, which is contingent upon the Kazakh government’s approval, will be a boost to the country’s annual oil output.
Despite the unprecedented political unrest in Kazakhstan’s oil town of Zhanaozen in December 2011, which resulted in the deaths of 15 oil workers from clashes with security forces over poor living conditions, the threat to oil production in the country was minimal, if any.  Allaying the concerns of some energy analysts that a halt to crude output in this Central Asian country would have an analogous effect on global oil prices as the violence in Libya, Kazakhstan’s central bank issued a statement on February 7, 2012, that “commodity exports grew by 46.1 percent [in 2011] compared to 2010.” 
The country’s leadership appears to be confident that the production level would not only be maintained, but it will increase.  According to the Kazakh State Statistical Agency, the country’s oil production increased by 2.6 mm in January.  The U.S. Energy Information Agency estimates that crude output is set to rise in Kazakhstan as its vast Kashagan oil field comes online in 2013 and add an average of 125,000 bpd each year.  With parliamentary elections behind, which re-asserted the victory of the current government in January 2012, Kazakhstan expects to reach a deal with international companies on expanding the production in the Kashagan oil field. 
Meanwhile Nursultan Nazarbaev’s long-standing regime has squashed the unrest in Zhanaozen, it is unclear whether this is an end to it.  Imprisoned then freed opposition leaders of a recent rally in Almaty planned to hold another peaceful protest on February 25.  The Kazakh leadership sees a solution to dissent in providing economic and social stability, which may not be enough for a politically suppressed society.  While implications of the tragedy in Zhanaozen on the near to long term stability of Nazarbaev’s regime are uncertain, it appears that the current leadership of twenty years has tightened its control on the country and will predictably rely on increasing exports of hydrocarbons to maintain economic strength.

Friday, February 10, 2012

U.S. Ushering in an Era of Nuclear Renaissance… or Maybe Not

On February 9, 2012, the U.S. Nuclear Regulatory Commission (NRC) approved a license for the Atlanta-based Southern Company, in a vote of 4 to 1, to build two new nuclear reactors at the Plant Vogtle nuclear power station near Augusta, Georgia.  This $14 billion project (with $8.3 billion in federal loan guarantees) is the country’s first nuclear reactor approved since the 1979 partial meltdown of the Three Mile Island plant’s reactor core.  This accident bumped up construction costs of nuclear plants and halted many planned reactors. 

Built by Westinghouse Electric, the two new reactors would be designed “to withstand earthquakes and plane crashes and to be less vulnerable to a cutoff of electricity, which set off the triple meltdown at Fukushima in 2011.”  The only vote against the approval of the project came from NRC’s chairman, Gregory Jaczko, who was not convinced that the project would ensure all safety improvements before reactors start operating in 2017. 

Mr. Jaczko’s concern with nuclear safety may have some grounds in the post-Fukushima era.  In fact, NRC faces a challenge not only to apply lessons from last year’s disaster in Japan, but also to decide what do with America’s all 104 old nuclear reactors, which will need to be phased out and replaced in the next 20 years.  Meeting 20 percent of the U.S. electricity needs, the future of nuclear power maybe at a crossroads where a decision must be made to build new reactors and to find viable alternatives.  Some predict that nuclear power production would shrink in the U.S. before growing.  According to Marvin Fertel, president of Nuclear Energy Institute that lobbies for the nuclear industry, not many new nuclear plants were to be built in the near term.  The reasons are depressed electricity demand, cheap natural gas that can be burned to produce electricity, lack of funding and ambiguity in the wake of the Fukushima Daiichi meltdown. 

While the future of nuclear power in the U.S. is largely undecided, the preparedness of the existing fleet of 104 reactors for potential earthquakes, floods, hurricanes, tornadoes, fires, and potential terrorist attacks is questionable, according to the January 17, 2012, PBS investigative film “Nuclear Aftershocks.”  Nearly 29 nuclear reactors across the country “were identified in the 1990s as seismically under-designed, but the NRC required no corrective action,” and 47 reactors failed to meet new fire protection standards.  Some nuclear plants avoided accidents caused by natural disasters, such as the recent flooding in Nebraska and earthquake in Virginia, only because they managed to boost their defenses and upgraded seismic protection in a timely manner.  Given its mixed track record, NRC is up against its own known weaknesses as much as against unforeseen disasters.