Chinese and US oil thirst, economics, and global warming

Trust me, these threads all tie together.

How?

Yesterday, the International Energy Agency reported that American oil demand grew at a higher rate in 2013 than Chinese oil demand.

It seems to be in part an American economic speed-up, primarily in the production of petrochemicals. It was the first time since 1999 that a US rate increase outstripped China. And, China's growth rate was the weakest in six years.

So, is the Chinese bubble starting to deflate? What's up there? Economists have speculated about that possibility for a full year or more, but, interestingly, I didn't see it mentioned in any news reports about the IEA story.

And, apparently some sort of slowdown is happening. A Chinese factory index has contracted for the first time in six months (which means there was a contraction in the middle of last year).

The US? This is due to increased production, not more car driving. The production is primarily in refined gasoline and diesel, more and more of it being exported, followed by petrochemicals.

It will be interesting to see how "energy security" hawks fight it out with oil producers wanting to now have the green light to export unrefined crude, even though the IEA says any surge in US production will be short lived.

Probably because, especially with naturla gas, and somewhat with oil, fracking tends to increase rate of production even more than it tends to increase overall production.

So, the world's new love affair with fracking, based on gas production increases and jobs alike, as detailed here, could have long-term climate implications.

On the natural gas side, it's guaranteed to further crowd out renewable energy as well as coal. (Even in the US, a fair chunk of the increase in renewable energy has been from hydroelectric, not solar or wind.)

And, thus, at the point when natural gas prices go back up, unless fracking delivers major, major amounts of gas, coal will become tempting again, and renewables won't have had that much more development. In short, fracking might deliver little more than 20 years of running in place on greenhouse gases.

Plus, even in the US, it's not clear if casing on wells is sealed tight enough, if valves and pipelines are built well enough, to keep gas leakage below a rate where natural gas for electricity actually becomes worse than coal-fired power plants. Since China's already demonstrated its capacity for shoddy energy, it's growing interest in fracking to replace coal should thus be little reason for huzzahs and handsprings.

That's not even to mention a fracking-based gas boom fueling a new explosion of demand for cheap plastic products.

More on the maybe not-so-dumb Obama-IEA oil dump

That joint agreement by the United States and the International Energy Agency to release crude oil from strategic petroleum reserves? The one that had everybody scratching their head over its timing?

Well, there's more to it. As in, this may have been the equivalent of a pool bank shot, primarily involving Washington, the EU, speaking through the International Energy Agency, ... and the Saudis.

As early as May 11, Mr Obama telephoned King Abdullah of Saudi Arabia to “discuss bilateral issues”, according to the Saudi press agency.

Boom ...

And, this wasn't a spur-of-the-moment thing:

For three months, dozens of senior oil officials from the US, South Korea, Germany and Japan worked secretly to execute what was one of the most daring moves by the International Energy Agency since its creation in 1974.

And, that's about the time we first started bombing Libya, on the usual delusional American belief that we'd topple Gaddhafi in a week or two.

There's one "interesting" part. In a story about how the Commodity Futures Trading Commission is investigating "suspicious" trades in oil just before the decision was announced, it notes the Saudis had already agreed to a production increase.

Maybe the White House thought it would take too long. Or that it would be of too low a quality compared to Libya's vaunted low-sulfur crude.

Or maybe all involved wanted to send a double-slapdown message to ... ohhh ... Iran and Venezuela?

Per the FT article linked at top:

In early May, Mr Obama dispatched a team of senior advisers to the region, including Michael Froman, White House deputy national security adviser, Daniel Poneman, deputy energy secretary, and Neal Wolin, deputy treasury secretary, for talks with Riyadh, Kuwait and Abu Dhabi.

Washington found the Saudis willing to ensure adequate supply.

The IEA nonetheless decided to send a clear message to the market that it was ready to act. On 19 May, at the conclusion of a regular meeting of its board of governors in Paris, the agency said: “We are prepared to consider using all tools that are at the disposal of IEA member countries.”

Venezuela and Iran, along with Algeria, were the three hardliners in the most recent OPEC meeting against raising production.

At the same time, Western nations didn't want to look like this was being done for too narrowly economic reasons, but, after the Saudis couldn't "carry" OPEC with them, decided to act. Japan, Britain and South Korea were other major "movers" on getting the IEA to act.

The primary beneficiary? Most of Libya's oil, of a very high quality, goes to Europe. So, even though the White House started the ball rolling, Europe had good reason to jump in, via the IEA.

The U.S.? Well, analysts as far away as Hong Kong are saying this will be the gateway for more "quantitative easing," but by different name and means. In fact, Forbes calls it QE2.5. If that's the case, and if it actually gets Obama himself, not just Fed Chairman Ben Bernanke, to do something more in the way of stimulus-like action, then that's good.

Obama's dumb oil move

Tapping the Strategic Petroleum Reserve?

First, the amount it contains? 727 million barrels, per Wikipedia, is enough that it can't be tapped too often, too hard.

Wiki also says the current consumption per day is 21 million barrels so Obama's 30 million barrels actually lasts less than a day and a half (just over 1 day, 10 hours to specific), per fried Leo Lincourt.

So, add up A and B, and contra Salon's Andrew Leonard, it's possible this will NOT stop oil speculation. (I'm also assuming Saudi Arabia's talk about raising production is a lot of talk and not much else, given its recent unmothballing of a field that that had been in drydock for years.) The market remains relatively tight. It might take the sharpest edges off speculation, but that's about it. And, due to the realities of what the strategic reserve contains, commodities speculators know that.

Beyond that, Obama's never showed any real inclination to reign in speculators. If he had, he would have tighten commodity, commodity futures, and commodity derivatives legislation.

But, since many of those folks are the ones who were major bankrollers of the mythical Citizen Obama's 2008 presidential campaign, and whom he hopes will be the same in 2012, he's not going to regulate them in the future.

This was just about trying to give the economy enough of a nudge, without having to make any actually liberal political decisions, to boost his election chances.

But, this is about more than Obama. The International Energy Agency signed off on this too.

This is also in part about post-Fukushima Japan, worried about summer energy needs with some of its nuclear plants offline. Or so I'm guessing. It's about the EU, hoping this will take the mind off of bailout trauma in Greece and bailout payment trauma in Germany. And, it's about China hoping it can continue to keep its housing and other bubbles from bursting.

Well, I don't know what the answer is for Japan. For Greece, austerity won't address a culture of tax evasion and corruption that makes the legal-on-paper antics of folks like the Koch Bros. look like kindergarten, and cheap oil won't camouflage austerity. For China, as Paul Krugman wrote the other day, only an upward re-evaluation of the renmimbi (yuan) has a serious chance of deflating those bubbles without too much pain or destruction.

On Europe, as I learn more ... it's supposed to replace the missing Libyan oil, most of which went to Europe. So, I wasn't totally wrong there.

China? At least one market analyst in that area, as well as some in the U.S., suspect "coordination" with Fed chief Ben Bernanke's speech about a slowing economy, and that this will be the gateway for more "quantitative easing," but by different name and means. In fact, Forbes calls it QE2.5

Meanwhile, the Commodity Futures Trading Commission is investigating "suspicious" trades in oil just before the decision was announced. Getting back to lack of regulation - such insider trading isn't illegal in the commodities markets.

And, back to the "timing" issue, too. The story notes the Saudis had already announced a production increase.

So, many this was a bank shot against the non-Saudi members of OPEC, played in conjunction with Riyadh?