Secretary John Kerry and friends have managed what can only be called a brilliant double suicide. The September 2014 deal with Saudi Arabia to crash oil prices, then at $103 a barrel for US WTI grade crude oil, not only has managed to bring the US shale oil industry—Washington’s new strategic card allowing the US to essentially abandon her Saudi and Gulf Arab allies–to the brink of bankruptcy and collapse. The oil price collapse, ironically, also gave Russian oil beautiful profits and forced the companies to turn east for far larger and more lucrative new markets. Team Russia-Saudi Arabia: 2 to 0 for Team USA-Canada.
At the present rate of developments, with oil prices frantically being pushed up by derivative trades only to crash back the next day, today hovering at $47 a barrel for the benchmark US West Texas Intermediate or WTI, I would estimate that a major share of USA shale companies will be forced to declare Chapter 11 bankruptcy before year-end or into the first quarter of 2016.
By now the story is well-reported. In September 2014 US Secretary of State John Kerry made a trip to Saudi Arabia to meet the dying King Abdullah, his Oil Minister Ali al-Naimi and others. Kerry was armed with a proposal believed to have generated from one of the many Washington policy think-tanks. He proposed to the King that the world’s largest oil producer crash the world oil price. For Kerry it was a seemingly brilliant way to deal a devastating blow to Russia’s oil-reliant economy and the state budget revenues, heavily dependent on oil and gas.
For neo-cons such as Victoria Nuland, Assistant Secretary responsible for waging war on Russia, it was orgasmic. Only one problem. It’s backfired colossally.
There is a reason they call it “Foggy Bottom” around the State Department headquarters on the Potomac River in northwest Washington. Now, though, they might have to rename the area “Foggy Brains” for all the recent foolish and poorly thought-through acts of war, financial as well as military, recently being generated there from war on Libya to Egypt to Syria to Ukraine and now Russia and soon China.
By the early days of January 2015, people in Washington as well as those in the know in Wall Street banks which had lent billions to US shale oil companies, slowly realized they were facing a self-inflicted catastrophe with the Saudi strategy. They risked economic suicide in their own energy industry.
For al-Naimi and the Saudis, their prime goal was not to bankrupt Russia, but rather to eliminate the growing and destabilizing competition emerging from the rapidly growing US oil production from shale rock. Repeatedly, though they managed to get prices into the $40-50 range, the Saudis have refused to cut back production to bring prices up, even though their budget is feeling the cuts.
There seem to be two reasons for their tenacity.
First, they have ample dollar reserves to last it out until their shale goal is reached. At year-end 2014, SAMA, the Saudi Arabian Monetary Agency, its central bank, had net foreign assets worth $733 billion. As leading Saudis have made clear, they aim to wipe out their main “disturbing” new shale competitor in North Dakota and Texas and perhaps also in the Athabasca Canada tar oil region which is now pumping some 2 million barrels a day of oil.
Second, the Saudis have made crystal clear to Obama and Washington that they feel profoundly betrayed by their long-standing ally, the United States, through the Obama Administration’s nuclear deal with Iran. When a Bedouin feels betrayed, he doesn’t forget easily.
Now, for Kerry, Nuland and friends, the US faces the worst outcome from their attempt to repeat their 1986 Saudi oil price collapse. Shale companies are bleeding, desperately pumping shale oil production to the maximum, to raise enough cash to meet debt service, making the oversupply worse. At the same time there is what can only be termed a strategic geopolitical shift by the Saudis away from Washington towards Putin’s Russia.
During the St. Petersburg International Economic Forum in June, Saudi Prince Salman, son of the new King, with a large delegation of Saudi businessmen, met with Russian President Putin to initially discuss Russian construction of nuclear power plants in the desert Kingdom as well as purchase of billions of dollars of advanced Russian high-tech military equipment. Until now the US, and, to an extent, British arms companies have been the ones arming the Kingdom. It is a huge market and the turn by the Saudis to talks with Moscow did not go unnoticed in Washington. “That wasn’t supposed to happen, was it Victoria?” we can imagine a befuddled John Kerry asking Nuland.
Fake recovery collapses
During April-July 15 this year, Wall Street hype about a price recovery combined with obvious derivative manipulations brought the price for WTI slowly upwards to above $60 a barrel from a low some months earlier of $38. All mainstream financial market pundits such as CNBC sighed relief that the crisis was over.
A report by oil market analysts at Morgan Stanley in July dashed the nascent recovery in oil prices. The report stated that, rather than keeping output of OPEC oil flat at a high level as the market had assumed, Saudi Arabia and other Arab OPEC suppliers had increased the flow of oil by 1.5 million barrels a day since January, and that into an already saturated global market creating a glut of unused oil of at least 800,000 barrels/day. In short, Saudi Arabia is going for the kill of the US shale revolution in every sense.
On that report, with no sign of Saudi let up, the market began a new plunge below $40 by mid-August. At that dangerous point a strange and unwarranted brief rally took place based again on Wall Street hype. Oil briefly went to $48 at end of August before dropping back to $44, trend down.
Unconventionally expensive oil
US shale oil and Canadian tar sands oil are termed “unconventional” because they require different, more costly technologies to extract than ordinary oil. They are also unconventionally expensive.
So long as Fed interest rates were at near zero % and oil prices above $100 a barrel for several years until mid-2014, costly shale oil was a profit bonanza, or at least seemed to be. When oil passed below $60 late last year, cold sweat broke out across the shale oil patches of America. Saudi oil by comparison can be produced in some fields at a cost of around $2 a barrel. According to calculations by Gerald Celente, head of Trends Research Institute, fully half of all US shale oil fields, “are not economically feasible [below] $45 a barrel.”
Celente added that Canada’s huge and very costly oil tar sands projects are in crisis as well: “Canada is in a recession. Their currency has fallen to 2004 levels. Prices are collapsing. … You’re seeing mergers and acquisitions.”
Tar sands are a viscous form of bitumen that has to be heated with considerable gas energy, a major added cost, to turn it into a useable liquid that in any way resembles oil. It is also an ecological catastrophe that is destroying huge parts of Alberta in Canada and the source of the oil for the highly controversial Keystone XL pipeline to the US.
Russia’s Sanctions Boon
But the ill-conceived Washington sanctions have yielded another unexpected consequence. The US Treasury’s aptly-named Office of Terrorism and Financial Intelligence, headed by Under-Secretary David S. Cohen, announced new sanctions against Russia’s energy giants Gazprom, Gazprom Neft, Lukoil, Surgutneftgas and Rosneft in September, 2014 the day after Kerry’s Saudi talks.
The new sanctions were intended to cripple the source for some 45% of the Russian state budget. As well, other sanctions created a free-fall in the ruble against the dollar going into late December 2014. The ruble went from 37 to the US dollar in September to 65 by January 2015. Good ‘ol Victoria Nuland even publicly hailed Cohen’s new financial warfare unit and was clearly salivating at the prospect of bankrupting her nemesis, “Evil Knievel” Vladimir Putin, and his oil company cronies.
But, woe is them, again. Washington shot itself in their royal foot or feet. Profits at the sanctioned Russian oil companies this year are booming. Not only are Rosneft, Gazprom Neft, Surgutneftegaz and Lukoil resistant to both low oil prices and Western sanctions. They also have shown astonishing revenue growth in the second quarter through end of June, the latest reporting period.
According to a study by the Swiss Neue Zürcher Zeitung newspaper, the answer is not so mysterious. Costs of extracting oil and gas in Russia for the Russian companies are based on the ruble, which devalues due to falling oil prices, making them less expensive. On the other hand, the Russian oil companies’ products are sold in the world market for dollars, not rubles, making their profit margins higher, much higher.
In recent years financial markets have traded derivative contracts in which Russia is considered an “oil economy.” Wall Street and other traders automatically devalue the ruble in futures markets every time oil prices worldwide fall. So as oil went into free-fall in dollars after the Kerry-Abdullah pow-wow in September, the ruble went south along with it.
Oil and gas production in Russia are inexpensive from a global perspective, not only because of the ruble’s low value but also because the country already has in place a longstanding energy infrastructure from Soviet times. Therefore, there is not much need to engage in the cost-consuming development of new infrastructure.
Russia’s ‘Asia Pivot’
And now, because of those foolish Washington sanctions aimed at Russian energy companies, Russia has furthermore made the strategic decision to turn east for its future economic survival in a way as never in its history. This is opening huge new energy markets for both Russian oil and gas giants.
In May and again in October 2014 amid the US economic sanctions, Russia’s Gazprom signed two mammoth deals with China’s CNPC to construct gas pipelines into China, an eastern route called Power of Siberia and a western called Power of Siberia-2. They would supply China with Russian gas for some 30 years.
Now, on September 3 in Beijing, on the occasion of celebrations of the 70th anniversary of China’s victory over Japan in 1945, Putin was present with the CEO of Gazprom Alexey Miller. They signed a third major gas deal with China. Russia’s Gazprom and CNPC of China have signed a memorandum on a third project as part of their strategic cooperation over the next five years. Gas from Russia’s Far East Sakhalin will be delivered to China. Construction on pipelines for the first two Power of Siberia lines is already well underway.
At the same occasion in Beijing, Russia’s state-owned Rosneft, the largest publicly-traded oil company, advanced its deal to acquire a 30 percent stake in China’s ChemChina Petrochemical (CCPC) and to increase oil supplies to Chinese petrochemical plants to four million tons a year, said Igor Sechin. Sechin, Rosneft’s CEO, is another target of Victoria Nuland and the US Treasury’s Office of Terrorism sanctions. Since sanctions began on the company, Rosneft has signed agreements with China worth a potential $30 billion. So much for that idea, Ms Nuland.
On September 4 in the Russian far-east city of Vladivistock, President Putin hosted the First Eastern Economic Forum the day after his talks in Beijing with China’s President Xi Jinping. There Russian Energy Minister Alexander Novak stated that Russia’s oil and gas export to the Asia-Pacific region is expected to increase 2.5-3 times by 2035, and the country’s oil export to the region will grow 3.5 times by 2020. Novak told the meeting, “Russian energy policy objectives in the eastern direction include the diversification of energy exports. The increase of energy export in the eastern direction 2.5-3 times by 2035 and the increase of the share of the Asia-Pacific region in the total export of fuel and energy from Russia to a level of 36-39 percent are major steps in that direction.” He added,”In the coming five years oil deliveries from Russia to the Asia-Pacific region could go up to account for 28-30 percent of the total export of Russian oil.”
This is Kerry’s foolish double assisted suicide. His sly deal with the Saudis to crash oil prices to weaken Russia is destroying the trump card that had briefly made the USA world’s leading oil producer with its booming production of oil from shale rocks. That in turn is creating major new economic crises in the one real economic growth part of the US economy since the crisis of 2007.
At the same time, the US financial warfare and currency attacks on the ruble are yielding record profits to sanctioned Russian energy giants who in turn have made a massive “Asia Pivot” of their own, one that will make a laughing stock of Obama and Hillary Clinton’s military anti-China Asia Pivot. The ’Russian Pivot to the East’ is a peaceful strategy for economic development, together with China, development of the vast Eurasian land mass and of Asia that will transform the economic map of the entire world. We might want to think, using the title of the great Russian novel of Leo Tolstoy, which is better: War or Peace? I know which I prefer.
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.