International Energy: What Is Going On?

Lynne Kiesling

Hmmm … another Western-looking former Soviet satellite experiences disruptions to their natural gas supplies. This time it’s Georgia, not Ukraine, but one has to wonder if this is a coincidence. Certainly Georgia President Saakashvili sees dastardly intentions behind the incident:

Accusations by Georgian President Mikheil Saakashvili that Russia is to blame for the blasts are “hysterics” and “a bacchanalia,” Russia’s Foreign Ministry said on its Web site today. Georgia’s attitude is a “mixture of dependence, hypocrisy and licentiousness, amplified by a feeling of impunity in hopes it will find a patron for its anti-Russian line in the West.”

Saakashvili called the bombings “sabotage” by Russia, an “unstable, capricious and politically motivated blackmailer.” Russia is using price and supply threats to force Georgia to give up ownership of its pipelines, he said on his official Web site.

Is it just me, or is the rhetoric that Russia uses just very strange? Bacchanalia? Licentiousness? This type of melodrama sounds bizarre to my ear. Too emotional, not sufficiently analytical. I’m sure my IR friends will tell me that emotion is crucial to geopolitical strategy, and that I should adjust my economist radar to it.

Anyway. Gazprom officials say they found debris from an explosive device at the scene; sabotage, but who planted it? Hmmmm.

Meanwhile, in Nigeria, Nigerian rebels keep their kidnapped captives and say they’ll repeat attacks like the one perpetrated on a Shell platform.

The group attacked a Royal Dutch Shell pumping station near the port of Warri last weekend, prompting the oil giant to withdraw 330 workers.

Oil workers’ unions in Nigeria have threatened to withdraw members from the main oil-producing region unless the government moves to improve security.

The instability has led to a 10% fall in Nigeria’s oil production. The country is Africa’s leading oil exporter and the fifth-biggest source of US oil imports.

Iran continues to be a mess, with nuclear threats and, for some reason, markets actually caring about whether or not they sell their oil in dollars or euros. Speaking of which, James Hamilton has a good post debunking this particular conspiracy theory.

Is it any wonder that oil prices are high and volatile? Today they are moving back slightly from last week’s $69, but that price still reflects a substantial risk premium increase due to Iran and Nigeria instability.

Not surprisingly, gasoline prices are seeing these effects too, as well as the effects of the fuel formulation changes induced by the Energy Policy Act of 2005, which are starting to hit the refiners production processes right about now.

This too shall pass.

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5 thoughts on “International Energy: What Is Going On?

  1. Re: Oil Prices
    A solution to high oil prices would be price supports. Yes, supports, albeit at lower than current levels. At say $30 or so.
    The last time we had a run up in prices, there was a lot of work on oil shale development. When OPEC got wind of the possibilities they dropped the price to below the economic price of continuing to develop shale. That economic price included a risk premium.
    Today we have developments in other energy sources. OPEC will drive the current price down to below the economic price of continuing to develop these projects.
    By enacting price supports the risk premium on future prices would be reduced greatly.
    A example of price supports and surpluses can be found in ag programs. Cotton, corn, and wheat can be produced at surplus levels by just increasing slightly the level of prise support. I contend that the same would happen to energy. So called, alternative, energy sources would be unleashed and the market would determine those that are best. With tax credits and direct subsidy, politics determines who wins. The long term, best solutions will be found in the market.

  2. Mark,

    You’re pulling my leg, right? Ag programs as a model we should follow? I have difficulty imagining a worse idea. The extensive lobbying in the ag industries should suggest to you how much of that price support is deadweight-loss-creating rent seeking, and how little of it does anything to contribute to dynamic economic efficiency.

    Plus, imagine the hue and cry when some folks find out that oil producers are being paid not to produce. Yes, at the margin, I can see how such a plan would enable otherwise struggling new technologies to gain a toehold, but I have trouble seeing how it actually contributes to efficiency, as opposed to well-organized special interests.

  3. What is going on? Simple. Fossil fuel is becoming more valuable.

    Disruptions in supplies will rise as the fuels become scarce (or valuable or vital if you prefer).

    Strikers, rebels, governments, and terrorists don’t gain much by disrupting supplies which are not needed. But look at how badly needed fossil fuels are today.

    Terrorists can damage opponents much more by blowing up pipelines when the pipeline is vital – it is winter and fuel costs are high.

    This situation will worsen until the world can move toward distributed power sources. Solar and wind can help in most inhabitable lands. Hydro, fossil fuels, and biomass potential are not even close to being distributed around the world.

    I omit mention of nuclear power, it can be built anywhere. Which is good. But oh my, the quarrels about it…

  4. What is going on? Simple. Fossil fuel is becoming more valuable.

    Disruptions in supplies will rise as the fuels become scarce (or valuable or vital if you prefer).

    Strikers, rebels, governments, and terrorists don’t gain much by disrupting supplies which are not needed. But look at how badly needed fossil fuels are today.

    Terrorists can damage opponents much more by blowing up pipelines when the pipeline is vital – it is winter and fuel costs are high.

    This situation will worsen until the world can move toward distributed power sources. Solar and wind can help in most inhabitable lands. Hydro, fossil fuels, and biomass potential are not even close to being distributed around the world.

    I omit mention of nuclear power, it can be built anywhere. Which is good. But oh my, the quarrels about it…

  5. ENERGY MARKETS AND POLICIES: 2006-02-06

    As we noted in last Thursday's technology and innovation-focused New Energy Currents post, US energy policy has been a slightly hotter topic than usual after President Bush claimed that the US is 'addicted' to oil…

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