The Strait of Hormuz is in the news again. The Iranian parliament is considering a bill that threatens to close this Strait to oil tankers from countries that support sanctions imposed on Iran. More than half of the members of parliament are said to have signed the bill.
Before that, what is Strait of Hormuz? The Strait of Hormuz is a strategic shipping route connecting Persian Gulf to the Arabian Sea and Gulf of Oman. The US Energy Information Administration characterizes the strait as "the world's most important oil chokepoint." In 2011, the strait witnessed a daily flow of 17 million barrels of oil per day. This is almost 20% of world's traded oil and roughly 35% of all seaborne traded oil, the agency reports. Further, the EIA estimates that on an average, 14 crude tankers pass through the waterway per day, with almost the same number of empty tankers entering it. The chokepoint? At the narrowest point, the Strait is just 21 miles wide. Blocking this neck, theoretically at least, is an easy possibility for Iran, cutting away nearly one fifth of the world's traded oil. Note also that this is a major shipping route for crude exported from Saudi Arabia (the world's second largest oil exporter), Kuwait, Iraq, Qatar and UAE. Almost 85% of the export is for Asian markets like Japan, India, South Korea and China.
The draft bill is said to be Iran's retaliation for the economic sanctions imposed on it by the US and European Union. The sanctions aim to curtail Iran's nuclear ambitions, especially using Uranium to develop weapons. Iran, meanwhile, insist that the reactors are for medical and electricity uses only.
Could Iran close the Strait?
The answer is an emphatic no. After all, the US' Fifth Fleet is stationed nearby. Iran would only be giving excuses for an invasion. In addition, leaked US diplomatic cables, from as early as 2010, show Saudi Arabia urging the US to attack Iran and destroy the nuclear programme (Thanks Wikileaks). Thus in the event of a war, the US may receive support even from the Arab world. Not a bad bargaining position for the world's superpower. On the other hand, if a blockade were to occur in the Strait even Iran's oil would stagnate. So, the new hostile resolution could be just empty noise.
Still, "just noise" from Iran could do a lot of damage to oil prices. Why does Iran create all these noises, empty or not? Mostly to increase oil prices to sustain oil revenues from China and India. Notwithstanding threats of US sanctions on institutions doing business with Iran and though China and India are actively looking for oil elsewhere, at present, a significant portion of their oil imports comes from Iran. Namely, 10% of India's total crude import and 12% of China's are Iranian (as of June). The higher the prices, the better it is for Iran. Remember the Arab Spring unrest and how Iran, together with Libya, managed to send oil prices to $128 a barrel? In the past, any threats from Iran, even if unfounded, have boosted the oil prices.
If Iran does choke the Strait, How?
Iran can block the narrow waterway by using mines, mini submarines, suicide squads or missile-ladden speedboats. Even one of these is enough to ignite a war in the region. Of course, a head-on confrontation with the US would be nothing short of suicide for Iran. Instead, it will certainly employ "guerrilla warfare", of the same kind it has supported for decades around the world with Hezbollah, Iraqi insurgents and Afghanistan. And the resulting uncertainty brought by the situation will disseminate panic sending oil prices higher.
Some guerrilla tactics Iran will likely employ:
harassing oil tankers in the Strait
using it as a leverage for nuclear talks with the world powers.
security search and checks of oil tankers. Other than delay, this could also create unrest in the region.
deploying Ghadir miniature submarines so they appear on tankers Sonars.
publicizing its intention to scatter mines in the strait. Even though Iran has an estimated 2,000 anti-ship mines, the mines don't have to be there. But a mere rumor will deter civilian tankers from cruising in the Strait.
No amount of US warship will prevent insurance companies to raise insurance premiums trough the roof on multi-billion tankers once it is known that Iran is acting with hostility in these waters and this will be enough to send the price of oil up. That's all Iran wants.
A similar situation, the "Tanker War", occurred 30 years ago. In 1984, Iraq attacked Iranian tankers and an oil terminal at Kharg Island. Iran retaliated by attacking Iraqi oil tankers. In what's known as the "Tanker war," the two countries attacked oil ports and oil tankers belonging to the other. The US and the then Soviet Navy entered the fray only in 1987, providing protection for Kuwait ships. US started acting against Iran and relations between the countries deteriorated from then on.
Unlike during the Tanker War, Iran is not in direct war with the US and western world. But it has indirectly been fighting US and western forces by supporting terrorism and Islamic insurgents on the theater of war and sees itself in a holy war against the West. Iran will likely employ the same deceitful tactics in harassing oil tankers and disrupting the distribution of oil. Forget Ideology - Iran needs the money.
Compared to western civilized societies, Iran remains in large an under-developed poverty-stricken nation ruled by ruthless theocrats. Since its non-competitive workforce is not a suitable tax base for its government's hegemonic aspiration, Iran has to rely almost exclusively of oil revenues to finance its government, police, army, hospitals and institutions. Most of its influence on the rest of the Arab worlds, its financial backing of Hezbollah is solely made possible by oil revenues. But cut these oil revenues and the proverbial goose that laid golden eggs is gone; without a market for its oil, Iran will likely face overwhelming domestic unrest leading soon to a civil war.
In fact, the US is all too familiar with the importance of the strait. Consequently plans are underway to develop alternative routes to bypass the strait. With US support UAE opened the new pipeline of Habshan-Fujairah in June 2012. This 220 mile long pipeline with a capacity of 1.5 million barrels a day is designed to bring oil from the UAE and Oman to the Fujairah export terminal, past the Strait of Hormuz. This port is well away from Iranian territorial waters and is guarded by the US fleet so that any possible threat can be addressed decidedly. The Saudi Arabian East-West pipeline from Abqaiq on the Red Sea, is another alternative, though the capacity is much less than the traffic in Strait of Hormuz. Considering that Iran's major clients are in Asia, one alternative is to transport oil through Suez canal. Expensive and dangerous, still a possibility. Iran too is building a new terminal at Bandar Jask in a bid to decrease the over reliance on the said strait. Oil can also be transported via the Iraq-Turkey pipeline. The UAE is also constructing the Abu Dhabi oil Pipeline ending at the port of Fujairah.
Back to the draft bill: According to a top Iranian Naval commander, the country would not close the Strait as it is vital for its economy too. Yet, Iran does have the capability to disturb oil supplies and prices by different threats. This bill could well be the beginning of a formal start to a series.
Saturday, August 25, 2012
Could Oil be a safer investment than Gold?
How many people around the world with money to invest are going to continue to fall for the advice of so called experts calling for them to invest in gold?
Everyday, newspaper and television advertisements are enticing people to invest their capital in gold. They are backing up their advice with claims that investing in gold will safeguard their capital from high inflation. They also go further by telling prospective investors that investing in gold will protect their money and savings from turbulence in the world economy.
Unfortunately, a number of people are falling for this advice and are investing their money in gold without actually calculating the risks, and it must be said that there is now more risk than previously in using gold as an investment strategy. One of the main risks is the mind boggling amount of fake gold bars circulating. As reported by our partner site Gold-Quote.net, number of governments worldwide have been secretly carrying out audits of their gold reserves due to the fact that trading in fake gold has become a major criminal activity. The Chinese government has actually recalled its gold reserves being held by the Bank of England. However, ironically it is also a Chinese company which has been advertising the fact that they manufacture and sell fake gold based on an alloy known as tungsten. Their website, Chinatungsten Online, actually quotes the following, 'We are well accustomed to exploit more innovative applications of tungsten products. Gold plated tungsten is one of our main products.'
It is no surprise that the Chinese may be at the forefront of criminal activity involving gold, as approximately sixty percent of the world's supply of tungsten ore is mined in China. Tungsten is a dream product for those who wish to make a profit from scams involving fake gold. While gold's density is 19.3 g/cm3, tungsten's density is 19.25 g/cm3, only 0.26% lower and given any practical measurements this difference is impossible to discern.
Counterfeiters manufacture fake $480,000 400oz gold bars as follows: a brick of tungsten is cast, and a thick layer of gold is deposited via electrolysis, sealing all the edges and covering the whole surface. Although these gold bars resemble gold and contain on the surface approximately $50,000 worth of gold, they are not gold, and those that have mistakenly invested in tungsten filled bars or coins, thinking that it is a safe and lucrative investment, have been in for a nasty surprise.
But the Chinese are not the only culprits, in October 2009, it transpired that there were tungsten-filled gold bars in the gold reserve held in Hong Kong... shipped from the USA. In the past number of years, some UK based investment banks have actually pulled out of trading in gold commodities due to their concerns regarding the amount of fake gold circulating.
Criminals that are manufacturing and selling fake gold have been using such sophisticated methods, that even seasoned experts have been fooled. A number of US citizens have actually been calling for an audit of the Federal Reserves. One of the problems with identifying fake tungsten filled gold, is that it can only be detected by drilling the bar.
When there are concerns about fake gold in such world renowned banking institutions as the Bank of England and the US Federal Reserves, there can be little doubt that the criminals, trading this gold, have been helped along the way by insiders working in these institutions. There is so much red tape involved with these banking institutions that it is impossible fake gold would have been able to infiltrate their vaults without help from insiders.
Whereas there is no doubt that real gold is valuable, it is no longer the safe investment that it once was. Rumours which are currently circulating that GLD EFT very likely holds tungsten counterfeit bars among its 1117 metric tons make frightening reading. This is more gold than the central banks of China, Switzerland, Japan and Europe put together. A large number of Investment strategists are now convinced of the fact that investing in oil is a safer and more lucrative investment strategy than investing in gold. Our studies show that this view is certainly correct. No one wants to make counterfeit oil, as there is no money in it.
There is simply no substance known to man that produces as much energy per liter for as cheap as oil. Any attempt to make "counterfeit" oil, to manufacture such potent combustible material is guaranteed to cost more, a losing business proposition. So oil is counterfeit-proof because it is... cheap. On the other side crooks will always attempt to counterfeit gold and may turn a profit because it is... expensive (gold costs close to $1,200/oz today)and there are cheaper materials out there such as tungsten (only $20/lb) and "proven" modern manufacturing technologies that make counterfeited gold impossible to detect.
As a result of the high amount of criminal activity now involved in the gold commodities market, anyone who invests in gold is taking the risk that some of the gold they purchase, whether they physically hold it or not, may include fake gold.
Friday, August 24, 2012
Coal Wins Minor Battle with EPA, but Still Loses to Natural Gas
The Environmental Protection Agency (EPA) has lost a major legal battle with major power companies over the timeframe and extent of coal-pollution regulations, but it will do little to stay the decline of coal in the face of the natural gas revolution.
On Tuesday, the US Court of Appeals overturned an EPA cross-state pollution rule, saying that it stepped on the legal toes of states, which are meant to set their own air-pollution regulations. The court also said the EPA’s caps on sulfur dioxide and nitrogen oxide emissions from power plants in 28 US states, mostly in the East and Texas, were too low.
Even by the EPA’s estimates, the pollution rulings would cost some $800 million annually to facilitate, beginning in 2014.
A victory it is—especially for the major players like Edison and the American Electric Power Co.—but it will do little to change the fact that coal-fired electricity generation is no longer a viable competitor in the face of cheap natural gas.
Coal stocks have experienced significant losses this year, though rallied somewhat on the Tuesday court ruling. At the same time, natural gas futures fell more than 3% with the court ruling, but rebounded right away, with no actual losses.
On Tuesday, the US Court of Appeals overturned an EPA cross-state pollution rule, saying that it stepped on the legal toes of states, which are meant to set their own air-pollution regulations. The court also said the EPA’s caps on sulfur dioxide and nitrogen oxide emissions from power plants in 28 US states, mostly in the East and Texas, were too low.
Even by the EPA’s estimates, the pollution rulings would cost some $800 million annually to facilitate, beginning in 2014.
A victory it is—especially for the major players like Edison and the American Electric Power Co.—but it will do little to change the fact that coal-fired electricity generation is no longer a viable competitor in the face of cheap natural gas.
Coal stocks have experienced significant losses this year, though rallied somewhat on the Tuesday court ruling. At the same time, natural gas futures fell more than 3% with the court ruling, but rebounded right away, with no actual losses.
International Oil Companies Illegally Exploiting Somali Hydrocarbons?
The East African Energy Forum has issued warnings to the Kenyan Government and four international oil companies today that are illegally exploiting offshore hydrocarbon concessions off the southern coast of Somalia. The lobby group has said in its directive to the oil giants that they have engaged in a gross infringement of Somalia's offshore resources, territorial integrity and sovereignty.
"These offshore oil blocks are solely owned by the Republic of Somalia as stipulated in the 1982 UN Common Law on the Sea (UNCLOS). Kenya's move to sell these oil blocks violates international law" says Abdillahi Mohamud, the lobby's managing director.
He states that the oil blocks sold by Kenya in Somali waters are L21, L23, L24 purchased by Italy's Eni, L22 by France's Total S.A., L5 by USA's Anadarko Petroleum Corporation and Block L26 by Norway's Statoil.
The lobby group warned these companies risk being shut out of future Somali energy concessions which are estimated to hold large untapped reserves along with what he described as 'legal action' the group’s lawyers would pursue.
"They should deal directly with Somalia, appropriating these blocks from the rightful owner is not in the interest of these otherwise innovative and successful oil companies."
The lobby group has stated it is planning legal action against Kenya and the oil companies.
"We are not asking for compliance on a matter of dispute, this isn’t a dispute, it’s a violation of Somalia's international boundaries established by an international law of which Kenya is a signatory. We will file court proceedings against those involved in the coming weeks at the International Tribunal for the Law of the Sea in Hamburg, Germany."
He continues on saying it is in Kenya and the oil company’s best interest to cease allocating offshore blocks that rightfully belong to Somalia.
"We will continue to take the matter to the highest courts, any attempt at illegally exploiting Somalia’s energy resources will be met with full opposition from us and our partners."
The lobby group has noted the total area of Somali offshore territory that is being illegally sold by Kenya and purchased by the four oil companies is approximately 116,000 square kilometers, an area about the size of Greece.
"These offshore oil blocks are solely owned by the Republic of Somalia as stipulated in the 1982 UN Common Law on the Sea (UNCLOS). Kenya's move to sell these oil blocks violates international law" says Abdillahi Mohamud, the lobby's managing director.
He states that the oil blocks sold by Kenya in Somali waters are L21, L23, L24 purchased by Italy's Eni, L22 by France's Total S.A., L5 by USA's Anadarko Petroleum Corporation and Block L26 by Norway's Statoil.
The lobby group warned these companies risk being shut out of future Somali energy concessions which are estimated to hold large untapped reserves along with what he described as 'legal action' the group’s lawyers would pursue.
"They should deal directly with Somalia, appropriating these blocks from the rightful owner is not in the interest of these otherwise innovative and successful oil companies."
The lobby group has stated it is planning legal action against Kenya and the oil companies.
"We are not asking for compliance on a matter of dispute, this isn’t a dispute, it’s a violation of Somalia's international boundaries established by an international law of which Kenya is a signatory. We will file court proceedings against those involved in the coming weeks at the International Tribunal for the Law of the Sea in Hamburg, Germany."
He continues on saying it is in Kenya and the oil company’s best interest to cease allocating offshore blocks that rightfully belong to Somalia.
"We will continue to take the matter to the highest courts, any attempt at illegally exploiting Somalia’s energy resources will be met with full opposition from us and our partners."
The lobby group has noted the total area of Somali offshore territory that is being illegally sold by Kenya and purchased by the four oil companies is approximately 116,000 square kilometers, an area about the size of Greece.
Energy Independence by 2020 with Romney?
Presidential candidate Mit Romney on Thursday promised voters a US entirely energy independent by 2020, the allegedly detailed plan for which he plans to unveil on his campaign tour stop in New Mexico later today.
The key to Romney’s ambitious promise is to aggressively increase local production of oil and natural gas on federal lands and on the country’s coasts.
Romney reportedly put the finishing touches on his plans during a $6-million luncheon in Houston yesterday with the help of oil industry majors. The plan would also necessarily seek to remove a number of federal regulations aimed at reducing pollution.
Key to the plan is a state-centric strategy that would allow each state to manage its own development of energy resources on federal land, effectively removing federal government control over these lands and allowing states to determine the issuance of exploration licenses.
The grand plan also promises to create 3 million energy jobs.
On a broader level, the plan would lift the Obama administration’s suspension of fossil fuel development off the coast of Virginia in response to the 2010 BP oil spill. In addition, the plan would boost development of the Keystone XL pipeline
The key to Romney’s ambitious promise is to aggressively increase local production of oil and natural gas on federal lands and on the country’s coasts.
Romney reportedly put the finishing touches on his plans during a $6-million luncheon in Houston yesterday with the help of oil industry majors. The plan would also necessarily seek to remove a number of federal regulations aimed at reducing pollution.
Key to the plan is a state-centric strategy that would allow each state to manage its own development of energy resources on federal land, effectively removing federal government control over these lands and allowing states to determine the issuance of exploration licenses.
The grand plan also promises to create 3 million energy jobs.
On a broader level, the plan would lift the Obama administration’s suspension of fossil fuel development off the coast of Virginia in response to the 2010 BP oil spill. In addition, the plan would boost development of the Keystone XL pipeline
The Truth About Gasoline Price Volatility
Nothing infuriates Americans more than volatile, spiking gasoline prices. Often the causes given for gasoline price hikes seem contrived. Iran and Israel trade harsh words in press reports and before the ink is even dry of the page oil prices tick up. Word of a fire at an oil refinery is enough to send prices shooting up as high as the flames on the cracker —and just as fast.
Those price spikes never seem to come down nearly as fast as they shoot up. Politicians are quick to blame oil companies for gouging customers, speculators for manipulating markets, traders for withholding supply.
The truth about gasoline price volatility is both a little more complicated and yet quite simple. The factors that seem to have the most impact on gasoline prices include:
- Global Oil Swing Productive Capacity. While the world has plenty of oil overall, prices are set by the amount of excess capacity at the daily margins. That is how much oil is left over when all the contracts for delivery are met. How much oil is available if something goes wrong? If some refinery shuts down? If some pipeline bursts? If some war breaks out? This marginal oil quantity has traditionally been controlled by Saudi Arabia’s ability to ratchet up or ratchet down the amount of oil pumped each day. This control over swing productive capacity is what gives OPEC its market power and drives the rest of us crazy.
- The Refinery Business Model. The oil refining business is a hard way to make a living. These plants are enormously complicated. They require skilled precision to keep them operating at optimal performance and many things can—and do go wrong. Yet it is almost impossible to build new refineries in the US today because of the environmental regulation, high capital costs and the NIMBY pressures in every potential location. We live close the edge of full refining capacity, yet refining margins are very thin because the costs of operation are so high.
- Boutique Fuels Mandates Create Monopoly Markets. A recent fire at the Chevron refinery near my home in the San Francisco Bay area adversely affected the supply of the blends of gasoline used in many of the Western States. A pipeline rupture in the Midwest reduced the supply of oil to refineries serving Chicago. While do these incidents have such a major impact on gasoline supply and price? Because the environment restrictions on fuels has created a system of boutique fuel blends that are virtual monopolies in many markets. The gasoline produced in the Richmond Chevron refinery is specifically designed for the Western market and no other gasoline products can be shipped in from other states to make up for a supply shortfall when a fire or other supply chain problem happens. So having reasonable gasoline prices requires that virtually EVERYTHING must work perfectly in the gasoline production supply chain—or else.
It does not have to be this way, but Congress passes laws without the slightest regard to how they will be implemented or enforced in practice. Congress takes credit for Clean Air but allows bureaucrats to impose regulations that have costs or impacts far beyond what the law intended. This happens because our environmental laws are written to ignore the cost while taking credit for the benefits. Our laws allow Federal agencies to set their own standards for measuring benefits. They are not subject to any burden of proof. The laws allow comment periods on rulemaking proposals but the bureaucrats do not have to accept the comments. The system is one-sided and so are the costs!
A more balanced and reasonable approach to environmental regulation would require Congress to approve major rulemakings by a Federal agency so it cannot avoid the accountability for imposing the costs. Existing regulations should be subject to sunset provisions and forced to be reconsidered regularly to reflect changes in technology and other factors. New laws requiring regulations should not go into effect until the final rules to implement the law are approved by Congress. Just as environmental advocates can sue in Federal Court to enforce environmental laws, those subjected to them should be able to sue over the reasonableness of the impacts of the law and rules to force the government to own its burden of proving that the benefits outweigh the costs and do not constitute an unreasonable taking of private property for which just compensation is required.
These changes in our regulatory regime won’t get more refineries built, but they would inject some common sense into the regulatory process and force the Federal agencies that dream up all these rules that the benefits are worth the cost and the practical application of proposed rules is reasonable and in the public interest.
Those price spikes never seem to come down nearly as fast as they shoot up. Politicians are quick to blame oil companies for gouging customers, speculators for manipulating markets, traders for withholding supply.
The truth about gasoline price volatility is both a little more complicated and yet quite simple. The factors that seem to have the most impact on gasoline prices include:
- Global Oil Swing Productive Capacity. While the world has plenty of oil overall, prices are set by the amount of excess capacity at the daily margins. That is how much oil is left over when all the contracts for delivery are met. How much oil is available if something goes wrong? If some refinery shuts down? If some pipeline bursts? If some war breaks out? This marginal oil quantity has traditionally been controlled by Saudi Arabia’s ability to ratchet up or ratchet down the amount of oil pumped each day. This control over swing productive capacity is what gives OPEC its market power and drives the rest of us crazy.
- The Refinery Business Model. The oil refining business is a hard way to make a living. These plants are enormously complicated. They require skilled precision to keep them operating at optimal performance and many things can—and do go wrong. Yet it is almost impossible to build new refineries in the US today because of the environmental regulation, high capital costs and the NIMBY pressures in every potential location. We live close the edge of full refining capacity, yet refining margins are very thin because the costs of operation are so high.
- Boutique Fuels Mandates Create Monopoly Markets. A recent fire at the Chevron refinery near my home in the San Francisco Bay area adversely affected the supply of the blends of gasoline used in many of the Western States. A pipeline rupture in the Midwest reduced the supply of oil to refineries serving Chicago. While do these incidents have such a major impact on gasoline supply and price? Because the environment restrictions on fuels has created a system of boutique fuel blends that are virtual monopolies in many markets. The gasoline produced in the Richmond Chevron refinery is specifically designed for the Western market and no other gasoline products can be shipped in from other states to make up for a supply shortfall when a fire or other supply chain problem happens. So having reasonable gasoline prices requires that virtually EVERYTHING must work perfectly in the gasoline production supply chain—or else.
It does not have to be this way, but Congress passes laws without the slightest regard to how they will be implemented or enforced in practice. Congress takes credit for Clean Air but allows bureaucrats to impose regulations that have costs or impacts far beyond what the law intended. This happens because our environmental laws are written to ignore the cost while taking credit for the benefits. Our laws allow Federal agencies to set their own standards for measuring benefits. They are not subject to any burden of proof. The laws allow comment periods on rulemaking proposals but the bureaucrats do not have to accept the comments. The system is one-sided and so are the costs!
A more balanced and reasonable approach to environmental regulation would require Congress to approve major rulemakings by a Federal agency so it cannot avoid the accountability for imposing the costs. Existing regulations should be subject to sunset provisions and forced to be reconsidered regularly to reflect changes in technology and other factors. New laws requiring regulations should not go into effect until the final rules to implement the law are approved by Congress. Just as environmental advocates can sue in Federal Court to enforce environmental laws, those subjected to them should be able to sue over the reasonableness of the impacts of the law and rules to force the government to own its burden of proving that the benefits outweigh the costs and do not constitute an unreasonable taking of private property for which just compensation is required.
These changes in our regulatory regime won’t get more refineries built, but they would inject some common sense into the regulatory process and force the Federal agencies that dream up all these rules that the benefits are worth the cost and the practical application of proposed rules is reasonable and in the public interest.
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