Friday, March 18, 2011

Putting a New Signature on Libya's "Oil Checkbook"

Tossed around in the drama unfolding in unfortunate Libya is the matter of the country's domestic oil reserves.  Just because insurgents have managed to take a good part of the Eastern oil producing side of the country doesn't mean that the fat checks are now arriving in Benghazi.

A Quick Overview of the Current Situation

Libyan Oil Field at Sarah (image source )
Libyan Oil Field at Sirt Basin (image source)

For a very informative, interactive map of military action (current Thursday, Mar 17, 2011) in Mediterranean Libya, visit The Guardian UK at this link:

Because the writing of this posting is continuing (to Friday, Mar 18, 2011), we can add the latest "breaking news" from the Libyan conflict.  The UN Security Council has finally been able to unanimously decide that strong action can be taken by participating member states to suppress military violence against Libyan civilian populations.

This most recent development rather than dating the topic of this posting, makes it even more relevant.  Gaddafi hopes to sell the idea that "difficulties" in communicating the cease fire order to front line troops advancing on Benghazi will take longer than it will take to capture the city -- and the insurgent "government."

With regard to the "covering media" stories explaining the latest jump in gasoline prices being the result of an oil supply shortfall when Libyan crude left the market, don't be misled.  These tales are the product of some expensive "persuasion" originating with the speculators at the oil futures desk in the commodities market.  

Libya, on a good day, produces less than 2% of the global crude supply.  Saudi Arabia maintains, at a significant cost which is shared by the world's oil consumers, a 5% buffer capacity, that is, in times of need, the Saudis can "open up the spigot" to fill the gap.  This month's hike in crude prices was a repeat of the nasty little game played during the autocracy which led to our brief experience with $4/gallon gasoline at just the right moment.  

With a better White House in charge this time, the scheme didn't go on for as long as last time, but the speculators were still choking in truckloads of dough while it lasted.  The mere mention of opening up the National Petroleum Reserves coaxed these sociopathic "fat cats" back into their litter boxes more quickly this time -- not before, of course, they had pocketed another $100 Mn from our faltering economy.

BTW, the tea bags in the House of Representatives have, naturally, put the total deregulation of these heavy campaign contributors -- both the commodity speculators and their cronies in the oil corporations --  high up on their "Take Our Country Back" priority list.

So, given this over view of the main corporate players in the debacle, let's take a look at Libyan oil and the history of its recent "ownership."  The oil corporatists are not simply "side line sitters" in the events of the day.  In fact, oil corporatists have a long memory cycle -- they play the world crude markets over a period of decades, not weeks.

How Gaddafi Wound Up With All of Libya's Oil

From Wiki
(Many other sources pop up when we Google this topic.)

What's Not To Love?  (image source)

Nationalization of oil supplies

From Wikipedia, the free encyclopedia

The nationalization of oil supplies refers to the process of deprivatization of oil production operations , generally in the purpose of obtaining more revenue from oil for oil producing countries. This process, which should not be confused with restrictions on crude oil exports, represents a significant turning point in the development of oil policy. Nationalization eliminates the concession system—in which private international companies control oil resources within oil-producing countries—and allows oil-producing countries to regain control. Once these countries become the sole owners of their resources, they have to decide how to maximize the net present value of their known stock of oil in the ground. 

Several key implications can be observed as a result of oil nationalization. On the home front, national oil companies are often torn between national expectations that they should carry the flag and their own ambitions for commercial success, which might mean a degree of emancipation from the confines of a national agenda.

According to consulting firm PFC Energy, only 7% of the world's estimated oil and gas reserves are in countries that allow private international companies free rein. Fully 65% are in the hands of state-owned companies such as Saudi Aramco, with the rest in countries such as Russia and Venezuela, where access by Western companies is difficult. The PFC study implies political factors are limiting capacity increases in Mexico, Venezuela, Iran, Iraq, Kuwait and Russia. Saudi Arabia is also limiting capacity expansion, but because of a self-imposed cap, unlike the other countries. As a result of not having access to countries amenable to oil exploration, ExxonMobil is not making nearly the investment in finding new oil that it did in 1981.

Libya, in particular, sought out independent oil firms to develop its oilfields; in 1970, the Libyan government used its leverage to restructure radically the terms of its agreements with these independent companies, precipitating a rash of contract renegotiations throughout the oil-exporting world.

The "Cash Ball" Is In Play
An Interesting Interregnum of Ownership

Insurgent Fighter and Libyan Oil Field Fire (image source)

Since the revolution began the flow of wealth entering Tripoli from the sale of Libyan oil to mainly European customers has continued, although most likely at a reduced level.  Estimates made during the heat of the initial fighting were that oil production had been maintained at roughly 2/3 of the pre

This happy continuation of the flow of Euros into Gaddafi's money bin was, however, complicated by the first UN resolution of a week ago.  That article prohibited the import of weapons to the country, but, more importantly, it froze the assets of the Libyan government, around $30 Bn, in the foreign banks of participating members.  Although our first thought might have been that such an action would further the prohibition on weapons purchases, it also had a major impact on the cash payments being made for Libyan crude.

We now see a particularly unusual development for the petroleum industry.  Nervous European Union consuming nations remain too nervous about the final outcome of the insurrection -- and the profit picture of its final structure -- to actually start sending the money to the barely legitimate insurgent government in
Benghazi, but, at the same time, they are not very interested in funneling their payments to a failing autocracy in Tripoli -- especially not with the first UN sanction in place.

This might seem to be a distant, foreign affair, but to US oil commodity speculators, this is very, very much an immediately domestic issue.  They have been "on the phone" to Washington and probably to New York -- both Wall Street and the UN -- as well.

Further, the content of those "phone calls" has not been a heartfelt discussion of the prospects of Libya's burgeoning democracy.  Although oil corporations are unable to turn any faster than the proverbial giant oil tanker, their high speed response team cronies among the speculators can literally "turn on a dime."  And, where even the slightest aroma of a quick profit wafts through the trading desks, these speculators -- along with their corporate "daddies" -- are frothing at their little mouths.

What To Watch 

Although the Benghazi "government" would benefit greatly from an opportunity to convert some of these in-flowing Euros to military supplies, the UN sanction covers them just as much as it covers Tripoli.  It probably doesn't specifically prohibit the possibility of direct arms transfers from sympathetic member states, however.

The oil corporations would love to make a quick deal with the desperate, cash strapped revolutionaries in Benghazi, trading a sudden influx of cash for a reversal of some or all of the nationalization negotiated by Gaddafi while he was still able to apply the advantage of his violent autocracy.  

In this particular case, the Obama strategy is only now being revealed.  It seems that the US President was not volunteering to be a party to such a step backwards for the Libyan people.  This reluctance, based on American ideals, complicates the already formidable task of interfering "just enough" to sustain the revolution while not leaving the Libyans at a disadvantage in the hands the brokers' avarice.

Further complexity is emerging from the, to the West, incomprehensible tribal structure looming in the future complexion of the new Libyan government, not to mention the already "sticky" resolution of the fate of both thousands of foreign workers and Gaddafi's widely hated "last minute," imported mercenaries, each of whom has a country out there somewhere worrying about him.

Stay tuned.  This story isn't nearly over yet.

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