Winners and losers of oil war

In less than one year time crude oil prices have come down by more than 30 percent and it is expected that the downward trend will continue for a while. The United States having emerged as the largest producer of oil does not seem in a mode to curtail its oil production. Smaller oil producing member countries of OPEC are proposing reduction in daily production. All eyes are set at forthcoming OPEC meeting. While non-oil producing countries are more than happy with the reduction in price, it seems both the United States and Saudi Arabia want to show the world that one of them controls oil prices, who is that?

I have stated in my last blog that many wondered why Saudi Arabia has been supporting the United States in keeping oil prices high. My perception is that since United Stated was working on shale oil and also wanted to keep Iran from oil market it lured Saudi Arabia to produce extra oil and mobilize more petro dollars. During this period Arabs were brain washed and made to believe that Iran was a bigger enemy as compared to Israel. This allowed the United States to sell over US$36 billion arms to Saudi Arabia in one year. Since United States refused to fight proxy Saudi war against Syria and Iran the King and his allies were upset. Signing of an interim agreement between the superpowers and Iran further annoyed the Arabs.

Historically, Saudi Arabia has been extending its support to the United States in keeping oil prices high, but this time it is reduction in production which the monarchs of Arabian Peninsula don’t like at all. Instead of carving any mutually acceptable strategy OPEC led by Saudi Arabia is trying to enhance production to maintain its revenue levels. This policy has led to the decline in oil prices which was certainly not liked by United States. The reason is obvious Shale oil production in not economically viable below US$80/barrel. Saudi Arabia still believes that shale oil production will not remain economically viable if prices decline below US$70.

After attaining the position of largest oil producing country after more than three decades the United States seems to suffer from the illusion that it has also attained control to fix price. To avoid any adverse price movement United States has not officially removed ban on oil export and its stockpiles are at record high. Instead of capping its own production the super power wants OPEC members to cut production of oil. There is high probability that OPEC may agree to this proposal to boost its petro dollar income. If this happens it will become too evident that oil producers other than United States and particularly Arabs have lost pricing control.

Oil is the most geopolitically important commodity. It drives economies around the world and is located in some usually very volatile places. Now U.S. crude production exceeds 9 million barrels a day, the most since at least January 1983. Over the last 10 years, the defining factor in the oil market was the growth of China and Chinese oil demand but at present the defining factor is the growth of U.S. oil production.

While making attempts to achieve this position, the United States has also been able to prove to the world that it remains the sole super power. Some experts say a new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Surging U.S. oil production enabled United States and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Now Russia faces a catastrophic slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine.

The first prey of this policy is Russia, which is the second largest producer of energy products outside OPEC. One can still recall that plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela.

The second prey is Saudi Arabia that is trying to prove it still enjoys pricing power. If it succeeds in plunging the price down to $60 or $70 a barrel, there could be a slowdown in the U.S. shale oil production but the world is not going to see it stop. The factors that can possible reverse the trend are: 1) terrorist attacks on a few oil fields in the volatile Middle East, 2) production cut by OPEC and 3) revival of global demand but neither is likely in the near term.

The third prey is Iran, like Russia its economy has been weakened by economic sanctions due to its nuclear program. The steps by the United States and its allies have almost closed Iran’s oil and gas fields to investment over the last decade, limiting the country’s access to technology to boost output. The nation needs to achieve enhance its oil revenue to keep its budget in balance. The decline in crude prices and a Nov 24 deadline for a nuclear accord are raising pressure on Iranian president elected last year on the promise to end Iran’s isolation and revive growth. If he succeeds in striking a deal and sanctions are lifted and the country is allowed to increase its oil exports, price may come under further pressure.

Oil producers, other than United States have to agree on the bottom prices if their governments want to survive. Social turmoil could paradoxically help prop up prices in the short term if output is disrupted, but that may not be the real solution.

The biggest winner in oil war will be the United States with Increasing energy independence, it will become less vulnerable to supply disruptions that will also provides added leverage in international negotiations, whether with Iran over its nuclear program or with Russia over its intentions in Ukraine.

China is also likely to emerge as a big winner, as it imports almost 60 percent of its crude. The world’s second-biggest economy probably will take advantage of the savings to build up its strategic reserves rather than dedicating the funds to increased spending on defense or any other program. The plunging oil prices will also gives the nation leverage in its dealings with Russia. The two countries signed a US$400 billion, 30-year gas-supply accord in May during a summit in China and then deepened their energy ties earlier this month by signing a preliminary agreement for a second Russia-China pipeline. China will always have an upper hand in dealing with Russia as long as crude prices stay low as Russia needs the energy income dearly.

Pakistan to produce extra 600,000 tons motor gasoline annually

According to a report published in Pakistan’s leading English newspaper Dawn dawn.com, motor gasoline production by local refineries will increase by 600,000 tons next year that will help the country save US$60 million per annum. Three of the local refineries would produce motor gasoline from naphtha, at present around 800,000 tons naphtha is being exported every year. This has become possible due to these refineries investing around US$200 to upgrade their facilities.

These three refineries namely, Attock Refinery, National Refinery and Pakistan Refinery are installing isomerisation units which are expected to be completed by the end of next year. Attock Refinery is installing isomerisation unit of 7,000 barrels per day to produce environmental-friendly gasoline that will enhance its production by 20,000 tons per month. Monthly motor gasoline production of Pakistan Refinery will be doubled to 24,000 tons from 12,000 tons. Monthly production of National Refinery will also increase to 16,000 tons.

Every year in winter motor gasoline consumption increases due to closure of CNG stations, which erodes paltry foreign exchange reserves of the country. During 2013-14, around 58 per cent of petrol demand was met through import. Total sales of motor gasoline in 2013-14 was 3.8 million tons in which local refinery produced 1.6 million tons while remaining quantity of 2.19 million tons has to be imported. During 2012-13 country has imported 1.89 million tons while refineries produced about 1.4 million tons and total sale was 3.3 million tons.

According to the report record 267,763 tons of motor gasoline was imported in April and this record was broken with import of 273,681 tons during September. Earlier, the highest monthly import record of was 233,348 tons registered in Nov 2013. The import of  was just 127,000 tons in 2007-08, rising to 249,177 tons in 2008-09; taking a quantum jump to 625,019 tons in 2009-10, rising to 1.06 m tons in 2010-11 and 1.55 million tons in 2011-12.

Pakistan: Is LNG the right solution?

The PML-N government is very actively perusing LNG import and also terming it the right solution to overcome Pakistan’s looming energy crisis. However, some of the quarters attribute this to be nothing more than ‘rental power scam’. They insist that it is ‘selecting a lesser evil’ and question the prudence of policy planners. They even go to the extent of saying that the power energy policies of ruling junta have always been dictated by those having vested interest. If rental power scam was a display of PPP’s corruption the same may be said about distribution of half a trillion rupees among the favorite IPPs by PML-N soon coming into power.

On the request of the Ministry of Petroleum and Natural Resources, the Economic Coordination Committee (ECC) has exempted the import of LNG from Gas Infrastructure Development Cess (GIDC). The decision looks like a joke because the purpose behind imposition of GIDC was to mobilize funds for the construction of Iran-Pakistan gas pipeline and LNG terminal. Therefore, collection of GIDC in imported LNG was irrational and to be blunt unconstitutional. Ideally, imposition of GIDC is unconstitutional because it is the sole responsibility of the government to mobilize funds for infrastructure development fund and it should refrain from penalizing the customers. The ECC, however, decided to levy five per cent GST on LNG import in any case, instead of prevailing general sales tax rate of 16 per cent.

Over the years experts have been saying that Pakistan’ energy crisis can be overcome by following a prioritized agenda that should include immediate actions like; 1) curbing theft of electricity and gas and 2) improving recovery of electricity and gas distribution companies. Let this point be kept in mind that the PML-N distributed half a trillion rupees to overcome circular debt issue. However, the government completely failed in taking the above stated two steps. The result is that the size of circular has bulged to around the same quantum in slightly more than one year.

The recommended medium term measure is changing the energy mix by minimizing dependence on imported fossil oil by switching over thermal power plants to coal, initially to imported one and then to indigenous. They also suggest construction of smaller ‘run of the river’ type hydel power plants, close to the places of power consumption

They also demand granting status of IPPs to sugar mills, which are capable of supplying 3000MW to the national grid to begin with and the output can be doubled by operating sugar mills at 100% capacity utilization. At present the mills are produced around 5 million tons sugar against an installed capacity of 9 million tons.

The added advantage will be double the production of molasses that is the basic raw material for the production of ethanol, being used to produce bio-fuel E-10 (motor gasoline containing 10% ethanol). This percentage can be enhanced to 35% by taking advantage of Brazilian experience. The move will: 1) improve capacity utilization of sugar mills and help in producing exportable sugar, 2) enhance production of molasses and ethanol, 3) contain motor gasoline import and above all save natural gas (CNG) currently being used in vehicles.

In the medium term work on coal fired and nuclear power plants should be completed on war footings but the core objective should remain increasing hydel power generation. The country is capable of producing 40,000MW hydel power and the added advantage of construction of mega dams are 1) generation of electricity around Rs2.50 per unit as against cost of Rs15 per unit produces at furnace oil based thermal power plants. The exact cost can be determined by examining cost of generation of HUBCO and KAPCO, Pakistan two largest IPPs.

While the fate of first LNG project is in doldrums the GoP has taken decision to construct another LNG terminal at Gwadar. Early October the ECC approved ‘fast track’ construction of 710km Gwadar to Nawabshah gas pipeline and LNG terminal at Gwadar port as an alternate plan to facilitate Iran-Pakistan pipeline and transport liquefied natural gas (LNG). The Gwadar to Nawabshah pipeline, with 42-inch diameter shall be laid along with two compressor stations. The terminal will have the capacity to handle up to 500 mmcfd of gas. Interstate Gas Systems (Pvt) Limited (ISGS) will be authorized to execute the implementation of the project. The committee also directed the Ministry of Petroleum and Natural Resources to finalize the funding plan preferably on government-to-government basis or build, operate and transfer or build, own, operate basis.

It is an incorrect perception that the country suffers from shortage of gas. To be precise if use of gas in power generation is stopped, thefts are contained the shortfall can be reduced substantially. If cement plants can switch over to burning coal why power plants can’t be run on coal? One has the reasons to suspect that ‘oil lobby’ is deadly against promoting use of coal in power generation. This point gets credence if one looks at the failure of the GoP to exploit Thar coal potential.

The time has come to put the things in right perspective and take the right steps to overcome the energy crisis. Keeping in view the high cost of LNG using it as a prime source of energy is highly imprudent. At the best it could be used as a make shift arrangement during winter and during the days supply from gas fields remain suspected due to annual turnaround. This consumers should not be forced to pay for high cost imported case as the country has ample supply if use prudently. Containing the leakages and theft of Sui twins would can add nearly 1,000 mmbtu or more than what the GoP intends to import as LNG.

Is ISIS making inroads in Pakistan?

On Sunday Dawn Pakistan’s leading English newspaper published from Karachi ran a story on signs of emergence of ISIS in the country.  According to details ISIS is attracting the attention of radicals in Pakistan and Afghanistan, unnerving authorities who fear a potential violent contagion. The successes of ISIS play a very dangerous, inspirational role in Pakistan, where more than 200 organizations are operational. A banned outfit the TTP says it broadly support both ISIS militants and Al-Qaeda.

The report also quoted US officials saying the group is generating tens of millions of dollars a month from black market oil sales, ransoms and extortion. This financial heft is proving a big draw — including for the five Pakistani Taliban commanders who announced their support for the ISIS. The splinter groups are facing financial crisis, so they are contacting Daesh, another name for IS. They also say they have sent 1,000 fighters in recent years to help the militant struggle in Syria and plan to send 700 more.

By late evening there was a horrendous blast in which more than 60 people died and over 100 critically injured near Wagah border, the responsibility of which was claimed separately two outfits Jundullah and TTP affiliated Jamaat-ul-Ahrar. Jundullah and TTP are among loosely aligned militant groups that frequently share personnel, tactics and agendas but claims for specific incidents are often hard to verify.

One is completely taken aback by the statement of Rehman Malik, Interior Minister of previous PPP government. He has urged the government to immediately convene a joint session of parliament and share information about Jundullah with the lawmakers. If a person like Malik is not aware of the details, what else can one expect from PML-N government, which is often alleged for having contacts with extremists groups operating in Pakistan? This statement is based on the fact that PPP and ANP came under severe attack but PML-N didn’t during the election campaign.

As Dawn has rightly alarmed ISIS could be serious threat for Pakistan. Although ISIS is a product of the Western super powers, it also draws support from many Muslim countries. It could not have emerged without support from western powers and their regional allies. These facilitated the travel of jihadis from 80 countries into Syria, funded them, and then trained and armed them.

Terrorism is a product of relations of domination. As long as such relations are not addressed, we can see no end to it. ISIS is not an internal phenomenon of Syria and Iraq but an international one. The US, Europe, Turkey, Saudi Arabia, Qatar and other Persian Gulf Arab regimes are often alleged for creating a monster that is now threatening their interests. All the countries involved in the disaster in Syria through which ISIS has emerged and who are responsible for the present catastrophe need to get together and agree to stop funding and arming the parties involved.

Shiites and Sunnis must know that any action or remark, including insulting one another, leads to increased sensitivities and ignite flames. This will certainly benefit the common enemy of all Muslims. The supposed grand plan hits two birds with one stone: to pit Arab against Arab until they are too weak to face Israel, and to gather the Sunnis against Shiite Iran, foment a sectarian cross-border conflict and encircle Iran.

Can Saudi Arabia survive the US oil assault?

Many had wondered why Saudi Arabia was supporting United States in keeping oil prices high. Now it has become evident that the US wanted to keep crude oil prices high as it was working on shale oil extraction. In this exercise first Iraq was encouraged to attack on Iran and war continued for almost a decade. Then sanctions were imposed on Iran to curb its oil export.

Turmoil was created in Iraq in the name of regime change to disrupt its oil export. Libya was also a victim of oil vultures. And the latest drama is being staged with the connivance of ISIS. Many of the countries are facing US bombardment in the name of demolishing ISIS hideouts. Have the Muslims ever bothered to find out the rise of ISIS, its funding and colossal military might. The reply is simple ISIS has not emerged overnight but part of the Zionist agenda to destroy Muslim countries, particularly those producing oil and Saudi Arabia is the prime target

Ironically Saudi Arabia still suffers from a dilemma that United States is its best friend. Saudis have been completely brain washed as they say ‘Iran is a bigger enemy as compared to Israel’.  This perception has also enabled the US to sell billions of dollars arms to Saudi Arabia. Oil prices were kept high to facilitate Saudi Arabia to earn more of petrodollars that were taken back as price of arms. Saudis were annoyed when the US refused to attack Syria, mainly due to the opposition of Russia. The breach between Saudi Arabia and the US further widened after the super powers arrived at an agreement to ease sanctions on Iran.

While Arabs remained engrossed in their petty matters, the work on shale oil continued at full swing and the result is that today United States has emerged as world’s largest oil producers. This means that not only the biggest oil market will be lost but United States will also emerge as the biggest competitor of Saudi Arabia in the global oil market. The signs of oil glut have already started appearing,  oil prices have plunged substantially and the fall is likely to continue because the US does not seem in a mood to curtail shale oil production.

The US cronies have already started putting pressure on OPEC to curtail production to resist further fall in oil prices. As opposed to this Saudi Arabia, the biggest oil supplier among OPEC members seems adamant to retain its share in the global market by selling oil to Asian buyers at a discount. This is killing two birds with one stone, retain its petro dollar income and snatch share of Iranian market, Iran supplies oil to Asian buyers that include China, India, Korea and Japan.

In the prevailing scenario it seems that Saudi Arabia has no solution, except drift with the tide. If it considers that it has got the muscles and can also afford to flow against the tides, it has to let oil prices slip to a level where production of shale oil becomes uneconomical.

It is true that in the short-term Saudi Arabia may emerge as the biggest looser and other OPEC members may not subscribe to the strategy. However, it is the question of collective survival of OPEC members who control 40 percent of global oil production.

Muslim countries, particularly Arab monarchs have to come out of ‘Iran phobia’ and identity their real enemies. They have wasted trillions of dollars in fighting US proxy war and the time has come to protect the interest of Muslim collectively irrespective of which language they speak or sect they belong to. The enemies have prevailed over by deepening the sectarian divide and spreading animosity in the name of Islam. The enemies are trying to portray killing as prime mission of Islam, which is totally incorrect. Islam is religion of love and peace for all irrespective of faith, cast and creed.