Oil Price Volatility, the Oil Curse, and A More Abundant Energy Future

This article was first published on Al Fin Energy


In one sense, the price of oil has been very volatile -- boom & bust -- ever since the beginning of the oil age in the late 1800s. The price of oil in US dollars has been particularly volatile. But even when measured against the price of gold, the price of oil has seen some significant peaks and troughs over the years.

Severe oil price swings make it very difficult for countries that are overly dependent upon oil & gas revenues to balance their budgets. Countries such as the MENA oil states, Venezuela, Russia, etc. are finding themselves in a difficult pickle with regard to mounting obligations toward the future.

A new report suggests that Saudi Arabia will need an oil price of $320 a barrel by 2030 in order to balance its swelling government budget.

Russia's fiscal breakeven number varies between about $130 a barrel and $150 a barrel, depending upon who you are asking. Regardless of the exact figure, the number is likely to skyrocket in the future, and Russia is already having trouble making ends meet. What of the future?

Gustafson said that many in Russia's government realize that trouble lies ahead but that consensus is lacking on how to move forward. A reduction in oil revenues could devolve into a power struggle between interest groups over shrinking oil rents... A decline in oil revenues could usher in a major crisis, forcing cutbacks to major spending programs such as pensions and subsidies that underpin the stability of the Putin regime. In such a crisis the state would be forced to confront the difficult choice it has avoided for so long--whether or not to lessen the tax burden on the oil industry and enable it to invest in the next generation of fields and technology. _If Oil Declines, Russia Declines

Putin's agenda of bread and circuses will only suffice to cover up Russia's ruinous corruption and cronyocracy for so long, in the face of stable or falling oil prices.

The chart above reveals that the actual cost of production of oil for these countries is quite low -- in comparison with their fiscal breakeven oil price. The difficulty balancing their budgets in the light of their already huge production profits, points out the depth of oil dependency and corruption so prevalent in these countries.

In the meantime, US oil production continues to grow -- despite the Obama / Salazar / Jackson agenda of energy over-regulation. The vast deposits of Canadian oil sands are also waiting to be developed, and shipped to market. A rapidly accelerating oil production from the huge Iraqi deposits of oil await a suitable environment of stability. And large oil & gas deposits in Iran, Africa, Central Asia, the Arctic, and offshore deposits around the world, await the proper geopolitical and global economic milieu for development.

Vast amounts of global energy await the proper conditions for development and distribution. Advanced nuclear energy from unranium and thorium, clean coal technologies of IGCC and liquefaction, efficient and scalable GTL technologies, development of vast deposits of bitumens in Canada, Venezuela, and elsewhere, huge deposits of kerogens, and huge quantities of gas hydrates.

Advanced nuclear energy could supply abundant energy for tens of thousands of years. But until such technologies are developed, fossil fuels can bridge the gap in time.

As for carbon hysteria and climate change? Only a clear and dispassionate knowledge of the global carbon cycle of the land and sea can eradicate those phantom fears. For humans to acquire clear knowledge and wisdom on that and many other crucial issues -- a better leadership and a more honest information media will be needed.

Cyber War Envelops Middle East

Iran has already been hit by Flame, Duqu, and Stuxnet. Now we are learning of a more mysterious attack against Iran's oil infrastructure by malware called "Wiper:"

Wiper was an aggressive piece of malware that targeted machines belonging to the Iranian Oil Ministry and the National Iranian Oil Company in April.

...No one has ever found a sample of Wiper in order to study its code and determine exactly what it did to machines in Iran, but Kaspersky did obtain mirror images of “dozens” of hard drives that had been hit by the malware.

Although the disks were thoroughly wiped in most cases, leaving no malware behind – or much of anything else – the researchers did find evidence of its previous existence on some of the systems that weren’t completely wiped. The evidence came in the form of a registry key that pointed to files that had been on the machines before being erased.

According to Kaspersky, the wiping activity occurred between April 21 and April 30. Wiper’s erase operation focused initially on destroying data on the first half of a disk, then systematically erasing system files, causing the systems to crash and preventing them from rebooting... _Wired

Spread of Duqu

But Iran has not been entirely passive in this cyber-war. A recent cyber attack against Saudi Aramco -- Saudi Arabia's state energy company -- is thought to have originated with groups allied with Iran.

Saudi Aramco, Saudi Arabia's national energy company, said on Sunday it had repaired 30,000 workstations infected with a malicious virus earlier this month....

...A group calling itself the "Cutting Sword of Justice" claimed responsibility for the attacks. The group accused the Saudi Arabian government of supporting "crimes and atrocities" in countries such as Syria and Egypt, according to a post on Pastebin.

Saudi Aramco said it expected further intrusions. "Saudi Aramco is not the only company that became a target for such attempts, and this was not the first nor will it be the last illegal attempt to intrude into our systems, and we will ensure that we will further reinforce our systems with all available means to protect against a recurrence of this type of cyber-attack." _CW

Saudi Oil

Saudi Aramco is right to expect further attacks, just as the Iranian Oil Ministry should expect further attacks. In fact, all middle eastern oil production in and around the Persian Gulf is vulnerable to one type of malware or another. Whoever controls the flow of oil will be able to hold global oil markets hostage to potentially devastating price swings.

Earlier this year, a group of international experts at the Herzliya Conference imagined a very different scenario — a far more drastic one — in which a sophisticated attack on Abqaiq was directed by Iran and carried out from within. In the simulation, a series of explosions, along with a cyber-weapon, crippled the facility...

...The results of this simulated attack, detailed here in full for the first time, were profoundly disturbing. The price of oil skyrocketed to over $200 per barrel. The House of Saud, and the territorial integrity of the kingdom, were existentially threatened. Saudi Arabia’s neighbors — Jordan, Iraq, the UAE, Bahrain, Qatar, Kuwait and Oman — were destabilized. Developing countries that use oil for electricity were propelled into war, both civil and external.

And Iran, the world’s third-largest producer of oil, authoritatively recognized as the perpetrator of the attack, reaped the rewards, its influence growing throughout the Middle East as the demand for oil outpaced the supply, and the Shiite populations in the Gulf — increasingly unrestful throughout the Arab Spring revolutions — rose up in arms.

“The simulation showed that global over-reliance on Saudi oil and our over-reliance on Saudi stability, would give Iran, in the case of such an attack, carte blanche in the Middle East — and that’s without a nuclear weapon,” said Tommy Steiner, the author of the report... _How Iran Might Triumph Even Without Nukes

The evolution of increasingly sophisticated cyber attacks has just begun, and every industrial facility and information network is clearly at risk.

There is a limit to how well protected large networks can be and still function. In this situation, resilient backups will be increasingly important.

Canadian Oil Boom--A Difference in Values

It is possible to take oil wealth and do something good with it. Take Alberta's ongoing oil boom, which is beginning to rival China's business boom. Alberta is actually accomplishing long-lasting sustainable good from its temporary (probably decades-long) oil boom.

Brian Wang looks at a recent scientific creation from the University of Alberta:

Canadian scientists have succeeded in building the least expensive portable device for rapid genetic testing ever made. The cost of carrying out a single genetic test currently varies from hundreds to thousands of pounds, and the wait for results can take weeks. Now a group led by Christopher Backhouse, University of Alberta, Edmonton, have developed a reusable microchip-based system that costs just 500 (pounds) to build, is small enough to be portable, and can be used for point-of-care medical testing.

To keep costs down, 'instead of using the very expensive confocal optics systems currently used in these types of devices we used a consumer-grade digital camera', Backhouse explained.

The device can be adapted for used in many different genetic tests. 'By making small changes to the system you could test for a person's predisposition to cancer, carry out pharmacogenetic tests for adverse drug reactions or even test for pathogens in a water supply,' said Backhouse.(source)

The device is now much smaller than size of a shoe-box (USB stick size) with the optics and supporting electronics filling the space around the microchip.____NextBigFuture

One must ask oneself the question: which oil-rich countries are putting their newfound wealth into advancing knowledge for the future, and which are spending it on Las Vegas style glitz, and stashing it away in the Swiss bank accounts of royalty and dictators? It is a question of values.

Canada has different values than the oil-rich countries of the Persian Gulf. So far, Alberta has taken a different approach to the use of oil wealth than the royalty-saturated kingdoms and emirates of the middle east. Alberta's approach is even different from that of socialist leaning Norway, whose scientific output is only somewhat above that of the Arab world.

So far, Canada has managed to avoid most of the "oil curse" of windfall wealth. The oil curse is the natural laziness of a culture that does not have to work for a living. The decadence of unearned wealth.

For the Canadian provinces of Alberta--and now Saskatchewan--the oil boom is just beginning. For now, the main limiting factor is the significant manpower shortage, which is being felt in the oil and gas industry worldwide. Peak manpower, not peak oil.

Tale of Two Oil Lands:Tragic Venezuela, Kurdistan Triumphant

In Venezuela, the people are sinking into a hellish quagmire of socialist decline.

Those economists say the inflation is a result of a surge in public spending by Mr. Chávez and increasingly jittery efforts by the wealthy to circumvent tightening controls on prices and foreign exchange.

“We’re witnessing policy in the form of window dressing, all carried out at the whim of one man whose strong point is not economics,” said Hugo Faría, an economist at the Institute of Higher Management Studies, a private business school here. “Anyone who sees a 12 ½-cent coin as a remedy for this country’s problems isn’t thinking too clearly.”

Inflation has been climbing rapidly since January when a sharp decline in the black-market value of the bolívar pushed up prices of imported goods. Since Mr. Chávez moved to nationalize major telephone and electricity companies in January, Venezuelans have rushed to take money out of the country, currency traders say. That exodus has caused the bolívar to weaken by about 20 percent to a level of 4,000 to the dollar on the black market, placing it among the world’s worst performing currencies this year.

Source

Capital is fleeing Venezuela, and although the country's oil prevents the nation from going totally belly up, oil infrastructure in Venezuela is in rapid decline. Venezuela, Zimbabwe, Cuba, North Korea--what do these failing countries have in common?

Meanwhile in Iraqi Kurdistan, business is booming.

The cabin erupted with applause when the wheels touched down on the runway. The pilot announced the weather (sunny and 60) in three languages and cheerfully told us all to have a great day. Have a great day may seem an odd thing to say to people who just arrived in Iraq, but this is Kurdistan. I did, indeed, have a great day.

....Nation-building is a hard and violent slog in the center and south of Iraq, and it might not ever work out. But in Kurdistan, in the north, it already is a reality.

Massive new construction projects are literally everywhere. Most of those that had started when I arrived for the first time are finished, and ambitious new projects are well underway.

....Iraqi Kurdistan is still a Third World country in many ways – there is no sewer system, for instance, and the electricity fails every day. Unemployment is high. But it’s a Third World country with hope, and it is rapidly moving upscale. New houses cost more in and around Erbil than they do in some parts of the United States. An average sized 200 square meter lot can cost as much as 150,000 dollars – and that’s before a house is built on it. There are literally thousands of brand new houses here in this city, and the population is still just a little bit shy of one million.

Arabs are moving up here from the center and south – when they can, and as long as they are cleared by internal security – and they’re hired to do menial jobs the Kurds no longer want. Sunni Arabs were once the oppressors of Kurds. Now they are reduced to the same low status as migrant Mexican workers in the United States.

Source

You might say the problem with Iraq, is arabs. And while the middle and south of Iraq are flush with arab violence, the Kurds appear to be trying to enter the modern world of civil society.

There is only one country in the middle east that offers western standards of living, Israel. How nice it would be for a more peaceful vision of living to take hold in that part of the world, where death cults and blood-thirsty dictatorships such as Syria, Islamic Iran, and Saddam's Iraq traditionally hold sway.