The Power and the Money

Speculation in world oil markets?

  I report; you decide.

Now, these figures don't include stocks of refined oil products.  Perhaps speculation is easier in final products linked to the price of crude, rather than crude?

These figures don't include Chinese stocks, which are available but are also a bear to download and input.  They do include stocks held overseas, or on tankers.

Of course, Chinese stocks aren't the only missing figure.  Oil producers can speculate by leaving oil stocks in the ground:  e.g., cutting production.  That said, I'm not sure that's interesting; we already know that production declines will drive prices up.  

So can we see evidence for or against speculation in these graphs alone, or do we need more data?  I'm sure I was sending a signal to the Saudi photographer who took this picture; I'm just not sure what.

How can financial speculation affect oil prices?

  The Obama Administration just announced that they may limit the ability of financial companies to engage in speculative trading in oil futures.  The reason is the recent run-up in oil prices.  I don’thave a problem with the idea.  After all, I am a conservative of a sort, in the sense that I like to limit the animal spirits of those crazy market types on principle. 

But still, I don’t understand the point.  The reason why I don’t understand the point is that I don't understand how futures trading can drive up the spot price.  That doesn't mean that it can’t; that just means I don’t understand how it might in the absence of a rise in actual oil inventories. 

What’s a futures contract?  Simply put, it’s an agreement to sell a given quantity of oil at a given price at a given date in the future.  So let’s say you and I strike up a contract that says that I will sell a barrel of oil to you at $100 in a year.  How do I make good on that contract?  One way is to run out into the market, buy a barrel of oil, and sit on it.  That will drive up the price of oil, got it, very clear.  When a year rolls around, I sell you that barrel for $100. 

A second way is to wait around until the contract is due, buy oil at whatever the market price happens to be, and then sell it to you for $100.  I do not understand how doing so could possibly drive up the price of oil.  I can vaguely sort of see how it might increase volatility:  trading on the futures market presumably reveals information (if only information about the neuroses of futures traders) and that information will be used by traders on the spot market.  When they use that new information, prices will move.  More information revelation, more price volatility. 

But seriously, people aren't worried about short-term volatility.  They'’e worried about big run ups and sudden falls.  I don't see how you can blame the speculators for those, absent big swings in inventories. 

In fact, inventory changes in the oil market tend to run against price swings.  During the recent price plunge, unsold oil piled up in stockpiles and supertankers all over the planet.  Those stockpilers were going long on oil, but in the context of falling prices.  Now that the price has risen, those stockpiles are shrinking ... and some analysts (not entirely coherently) blame the price rise on the inventory fall.

Am I missing something, or is this whole speculation story nonsensical?

Why costs rise

  Why do so many big projects regularly come in above budget?  Corruption?  Stupidity?  Or something else?  Well, I vote for “something else.”  Let's consider the French nuclear reactor project at Flamanville, which I had the honor to visit.

EDF initially costed the reactor in 2005 at €3.3 billion.  It is now estimated to cost €4.0 billion.  What happened?  Well, according to EDF, costs rose by €250 million due to inflation.  Special escalator clauses tied to the price of particular commodities (like steel) caused another €150 million.  Finally, an additional €300 million came from “évolutions techniques et réglementaires,” a fancy way of saying, “We learned on the job that some things are a little more complicated than we thought, but mostly the regulator kept changing the goal posts.” 

Considering that the head of L’Autorité de sûreté nucléaire, André-Claude Lacoste, actually said, “We wanted to show an example,” in regards to the construction of the first new reactor in 20 years, I find that last quite believable. 

Natural gas, energy security, and silly reporting

  Earlier this week, I learned about this report from a Chilean energy executive, which was officially released yesterday.  It seems as though the USA has much much more natural gas than anyone thought.  The increase is due to shale gas. 

Shale gas is found very deep, and it is rather expensive to extract.  Deep wells need to be drilled, the rock fractured, and horizontal wells dug to extract the gas.  A 2007 study found that even the cheapest shale gas deposits aren't viable at a price below $5.40 per million BTU (MMBTU).*

Which makes the market's reaction a little odd.  More accurately, it makes the reporting about the market reaction seem very silly.  Gas prices have been below the level that would make shale gas viable since the beginning of 2009.  So why attribute a tiny little drop to the report's release, especially since (a) the findings have been known to market insiders for some time, and (b) the price is currently below the level that would make shale gas viable. 

That said, the news is important.  U.S. reserves have risen from 79 years of consumption, up from 57.  More importantly, it means that annual production can (in theory) be upped.  That means that none of the LNG terminals approved by various U.S. agencies will be built anytime soon.  American natural gas prices will rise, but not as much as they might, and the U.S. will be one step closer to strong energy security.

Unless it won't be.  Because, well, why did prices spike in the first place?  Gas and oil must be better substitutes at the margin than people think, and that means that gas prices will be subject to pressure from oil shocks for some time to come. 

* Michael Godec, Tyler Van Leeuwen, and Vello A. Kuuskraa, “Rising drilling, stimulation costs pressure economics,” Oil & Gas Journal, 15 Oct. 2007: pp.45-51.  

Energy security

  So I’m in Santiago to talk about energy security.  “What does that even mean, anyway?” asked my father.  It seemed wise, then, to define “energy security.”  We use the phrase all the time, but what are we in fact talking about?

Energy security, I think, comes in three flavors.

Weak energy security:  insuring liquidity in the energy market, e.g., insuring that your country’s consumers can buy as much energy as they need at whatever the prevailing price happens to be.

Strong energy security:  insuring not only liquidity in the energy market at whatever price, but insuring liquidity along with some level of price stability. 

Extreme energy security:  insuring that should the maintenance of liquidity in the energy market create rents (during times of high prices, whether deliberately promoted or not) firms from your country will enjoy those rents.  Alternatively, it means trying to create circumstances at which energy is priced at marginal cost, and there are no rents for anyone ... or, should that be impossible, disadvantaging foreign companies or knocking off foreign governments that your government doesn’t trust with such rents. 

Thoughts?

The financial meltdown goes nuclear

  I just learned that in 1992 the U.S. Congress decided to help the nuclear industry by making it easier for plant operators to save for the future cost of decommissioning their plants.  How did they do that?  First, they lowered the tax rate on such savings from 34% to 20%.  Second, they removed the requirement to invest decommissioning funds in low-yield government bonds. 

The first didn't go far enough.  Why tax the funds at all?  They're a provision for a future expense. 

The second ... uh oh.  I really hope somebody walked that back between 1992 and today.  I really doubt anybody did.

The great socialist scramble for Africa

  So, China is trying to get into the Nigerien uranium business, for reasons known only to the China National Uranium Corporation.  (Although I will guess later in this post.)  Here's the story to date.  On June 5, 2007, the Nigerien government formed the Société des Mines d'Azelik (Somina) a mining enterprise intended to exploit the Azelik uranium deposit way up in the north.  Niger got a 33% stake in the enterprise, with China getting 67%.   On July 6, Toureg rebels kidnapped a Chinese national for four days.  On November 9, Somina got an official license to work at Azelik.  On November 11, the Toureg rebels declared that China's contracts were "invalid."  At which point the Nigeriens accused Areva (the French state-owned nuclear company) once again of funding the rebels.  The same rebels, that is, who attacked Areva in April.

So the Chinese suspended work.  And the Nigerien government started to hem and haw and stall and delay.  So much for all those Chinese plants to build 50 MW of (conventional) power plants in the country and a €27.3 million bridge over the Niger river.  On the other hand, the Chinese didn't want to lose their options, so on April 30, 2009, they agreed to lend the Nigerien government $95.22 million at 2% over ten years, with the loan explicitly (but vaguely) tied to the stalled Azelik project.  China, meanwhile, sold 5 percentage points of its interest in the mine to a state-owned Korean company, which promised the Nigerien government that it would buy 400 tons per year once (if) the 700 tons-per-year mine gets up and running.  The president of Niger has just visited the site, in order to show his seriousness about getting the project back on track. 

The hitch is that as the Chinese project in Azelik stalled, France was on the move. In January 2009, Areva signed a deal to open the largest uranium mine on the continent, and President Sarkozy visited Niger in March to give it his full-throated support.  That's a problem for the Chinese.

Now, the Chinese still have a good project if they can get it running.  After all, they have gotten the Korean government to implicitly promise to buy the uranium at whatever price the Chinese charge, which will be quite a coup if the mine opens.  Not a terribly bad plan.  That said, the overall impression is that the Chinese really don't yet know how to play this game.  

So what exactly is the game?  Suggestion below the fold.

On the edge of the French energy empire

  In 1965, the French discovered uranium in Niger.  Here is what the New York Times had to say about it in 1969, right before production began.  It makes for fascinating reading.  

The paved road comes to an end in this isolated, dust-colored market town on the southern shore of the sand sea known as the Sahara.  About 300 miles farther north, along an ill-defined track, lies the town of Agadez.  About 150 miles beyond that, near the jumbled boulders of the Air Mountains, the village of Arlit is rising.  Where nothing more than tumbledown mud huts stood two years ago, French and African workmen are building cement-block houses, shops, an electrical generating plant big enough for a city of 40,000 — and two uranium processing plants. 

The uranium will be produced by a company in which the government of Niger holds 20 percent, German groups 10 percent, and the French Atomic Energy Commission and two French mining companies 70 percent ...

In a country where the per capita income runs about $75 a year ($351 in 2008 dollars), peanuts and bony steers constitute the only significant exports, where fuel is so scarce that technicians once tried and failed to make a power plant run on peanut husks, the discovery of uranium was an extraordinary event.

Niger will receive about 40 percent of the company’s profits ... Niger is counting on only $4 million a year in revenues by 1975 — about a tenth of the current national budget.  “Even with this strike,” said a local economist this week, “this is never going to be a rich country—unless they find a market for sand.” 

Imperialism can pay ... the imperialized

  The French empire in Africa never really ended.  In 1960, the autonomous territories of the “French Community” got seats in the United Nations, but for most the change was less than dramatic.  Only Mali dropped the use of the old colonial currency.  The new African governments increased trade restrictions, bit by bit, and the French market closed to their exports, bit by bit, but Paris fought hard to keep the European market open for a very long time.  The Yaoundé and Lomé conventions granted the “associated” states preferential access to what later became the E.U. 

Empire didn’t go away in another more visible manner:   French troops remained on the continent, French nationals staffed the governments and newly-created armies, French companies (often state-owned) dominated the export industries, and France knocked over more than a few recalcitrant governments while propping up others. 

Niger, where the French found uranium, made for a particularly egregious example.  In 1963, French troops rescued the government of President Hamani Diori from a coup.  In 1969, the French discovered uranium, and two French companies got exclusive rights.  In March 1974, French, Nigerien, and Gabonese representatives meant in Niger’s capital to discuss Diori’s insistance that the country’s uranium contracts be renegotiated.  Coincidentally, Diori fell to a coup the next month.  It seems that all of Diori’s French military advisors had gone on vacation and no one picked up the phone in Paris when news of the violence arrived.  The New York Times went so far as to accuse France of abetting the coup because Diori wanted to give uranium concessions to Exxon.  The next guy kicked French troops out of the country, but the French remained in control of the mines ... and their troops came back in 1981 anyway.

So what did the combination of continuing French intervention and French uranium mining mean for Niger?  An unexpected answer below the fold. 

There is no bloody resource curse already

  So there are these people out there, notably the Oracle of Flat, talking about how high oil prices lead countries to do all sorts of crazy things, like take stuff or invade their neighbors or build weird shit. Which is a problem, see, because except for the building of the weird shit the real world just doesn't fit the model. 

Above you’ve got an example of weird shit.  Ditto to the right.  But what about the neighbor-invading or stuff-taking?  Well, I don’t have a whole lot to say about neighbor-invading at the moment, but there is some stuff-taking in the news: the Bolivarian Republic just cancelled all its oil service contracts.  That’s a form of stuff-taking, yet, as the great and immortal Onyx once said, but wait it gets worse!   The government also intends to nationalize the contractors’ assets.  That is stuff-taking of the purest form, which the “resource curse” models predict isn’t supposed to happen when oil prices are low.  After all, the government is supposed to need the service companies to keep production up.  And yet, here we are.

“Oil service companies” are at-their-simplest basically oil companies that extract petroleum for a fixed price on behalf the owner ... in Venezuela’s case, the government.   With nationalization of the oil services, the government gets a threefer:  the assets, the value of future payments, and the value of all unpaid bills.  But it loses the companies’ ability to run and maintain the assets and opens itself up to arbitration and lawsuits.  It also loses future investment.  Oil companies will tolerate expropriations-that-weren’t, like the Bolivarian Republics’s so-called “nationalizations” up until now.  They have less patience over the real thing.  It’s a particular problem for Venezuela because its wells tend to have a half-life around three years.  Without continual new investment, production will decline.

I’m not sure what Chávez’s motivation is, although I can speculate.  I am sure, though, that this is another sign that the whole petropolitics idea is worth a lot less than a gallon of crude, even at current prices.  Sure, it might be possible to take the political resource curse theories and mash them to fit recent events in Venezuela, but then you would wind up with a theory that predicted that governments nationalize when prices go up and they nationalize when prices go down; or that they nationalize when they don't need foreign technology and they nationalize when they do.  In other words, you would get a theory that predicted that the governments of oil producing states should always nationalize at all times. 

The proper word for such a theory?  Worthless. 

Churchill, paraphrased, sort of

  American electricity transmission is regulated in an odd way.  You’ve got 50 state regulators.  Then you’ve got three interconnected grids (the Eastern, the Western, and the Texan) and a separate grid in Puerto Rico.  (Alaska and Hawaii don’t have statewide grids.  Hawaii is an archipelago, and Alaska is too thinly populated.)  On top of the three Conus grids you’ve also got ten North American Electric Reliability Council (NERC) regions.  Only Texas, under the Electric Reliability Council Of Texas (ERCOT) coincides with an integrated grid.  Then on top of it all sits the Federal Energy Regulatory Commission (FERC).  The Energy Policy Act of 2005 — as best as I can tell, a not-bad piece of Bush-era legislation — gave it real powers for the first time.

A lot of that act was due to the work of Pat Wood, who ran FERC between 2001 and 2005.  Unlike a lot of political appointees from that era, Wood was supremely competent and very non-dogmatic.  You can get a taste of his approach in this 2001 interview.  He left FERC to go work for Airtricity, and thus in that capacity I’ve had the opportunity to hear him speak on several occasions.

Like a lot of people, he isn’t happy with America’s lack of an intelligent energy policy.  Where’s the carbon tax?  The centralized grid?  The feed-in tariffs?  And, of course, working in the Bush Administration didn’t help.  Admittedly, I last heard him back when “Drill baby drill” still echoed across the land, but as I watch the ugly sausage of cap-and-trade inching its way through the Congressional meat-grinder, with the threat of EPA regulation as a stick in the background, I can understand the disillusionment. 

Even if I wouldn’t take it quite so far as to say, in public, at an HBS conference, “Maybe in a country of 300 million people, democracy, even a republican form of democracy, doesn’t work that well.  But that’s a debate for the law school.”

The expropriation that wasn't

  Kevin Drum and Dan Drezner wonder why the oil companies would get back into Venezuela after the way Hugo Chávez treated them the first time around.  The answer is simple:  Chávez didn’t treat them badly.  When oil prices head back up, they’ll do fine even if he plays the same movie all over again. 

“What???” you say?  How can that be?  Simple.  Between 2004 and 2006, the Bolivarian Republic of Venezuela expropriated the marginal surplus generated by the run-up in oil prices.  It did not, however, reduce the revenues of the oil companies.  They took home about $10 a barrel when the contracts were signed in the late 1990s, and they took home about $10 a barrel in 2008.  In fact, some of the companies that had signed service contracts under the old regime received more money under the Bolivarian regime than they would have under the original rules.

So why not get back in?  It isn’t like there are a whole lot of places around the world for the oil companies to invest in, especially not on-shore.  Most oil reserves are closed to the majors, and political risk is everywhere, including Alaska under its radical socialist governor.   The companies have little chance of enjoying the upside from a return to high prices, but with estimated costs of $6-$7 a barrel, Venezuela is still a good bet. 

Details and money graph below the fold.

Data I'd like to have

  Where can I find time series on:

1. Gazprom's revenue, by market;
2. Russia's transit fee revenue, by originating market;
3. The average wholesale price per standardized unit for Russian gas and other gas, by market.

Get me that data, and I might be able to make some sense out of Russian policy.  I will say that current events make me think that Russia doesn't want to snarfle off bits of Ukraine.  You can extract a lot more surplus out of a neighboring vassal than you can out of your own citizens.

The resource curse doesn't exist, and please stop talking about it

  My friend Will hopes that oil prices stay low, in order to insure that the Russian Federation remains behaved.

My response:  Please get the stupid, and I mean truly monumentally stupid, idea of the resource curse out of your heads?  It's a well-accepted idea, but it's just plain wrong.  No matter what Tom Friedman writes about it.

Stephen Haber and Victor Menaldo have a paper coming out that shows that there is no, squat, zero, ningún relationship between democracy and oil resources.  Haber and ... uh ... me ... will eventually have a paper showing the same thing for civil war. 

But hell, maybe Russia is different.  So my question for you all is simple.  Why would an authoritarian government, no, why would a dictatorship give up power because its export revenues went down?  That makes no bloody sense.  It could default on foreign debtors.  It could blame foreigners for any crisis.  It could shoot dissidents, you know, the way Panama did under Noriega. 

Is there any reason to believe that a fat Russia would be more democratic and less expansionist than a lean Russia?  No.  F@&k no.  There isn't any reason to believe the opposite either, of course ... but by God do I wish that people would stop fooling themselves.  Resource money has fueled democratic transitions and dictatorial takeovers, foreign expansion and foreign engagement.  Those who know Russia better will be able to predict that country's idiosyncratic political reaction to declining export revenues ... but why any of the information in this story, about governments trying to crack down on the bearers of bad news, would make an observer hope for sustained bad news is beyond me. 

Ah, here comes my first AFOE cross-post.  But your reactions first.  At least until I can find the damned keys to that blog.

L’énergie atomique

  The Economist has an interesting article on French nuclear energy.  You read about it here first.  Be sure to check out the comments if you click the link. 

I have a terrible feeling that the emerging potential depression has changed the economics of nuclear power, such as they were.  First, the cost of traditional energy sources has plunged along with the overall demand for energy.  (I don't think today's low prices will outlast the downturn, but the fact remains.)  Second, the credit markets are pretty messed up at the moment.  How would you finance a project based on the idea that energy prices will rise in the long term?  In the long term, everyone is bankrupt.  Third, nuclear power plants as they are currently designed seem to be pretty bad as a Keynesian fiscal demand boost.  The lead times are far too long; it'd be years before a project leads to a dime of actual purchases.  That means that governments will be ill-advised to include subsidies to nuclear power in the capital projects that they are going to undertake over the next few years. 

Still the energy of the future.  Perhaps the article's relative optimism will prove justified.  I hope so, but it isn't how I'd bet. 

Half moon at bay

The consequences of persistent inequality are with us today.  They appear to be pushing Bolivia towards civil war in slow motion.  Today there was a brief flutter of news about the situation because Evo expelled the American ambassador, and the U.S. followed suit, but in general you've got media silence in America.  The split is between the central government and “autonomists” in the “Media Luna,” which is marked off in dark green in this map taken from Mark Weisbrot: 

Things are bad.  How bad?  American Airlines just stopped flying to the country.  Autonomists in Santa Cruz have seized control of most federal offices in the province.  Tarija — which produces 60% of Bolivia's natural gas — experienced bloody riots yesterday, where autonomists seized the customshouses and airport and federalistas (my term, not a Bolivian one) blew up the governor's parking garage.  Meanwhile, the nightmare that my Brazilian and Bolivian colleagues discussed in Venezuela?  Well, it came true for about 12 hours. 

Brasilia is reacting in a manner that could best be described as confused, but understandably so.  On Tuesday, the Brazilian foreign minister committed a Kinsley, when he stated that if Morales can't secure the pipeline, then his government will be forced to open relations with the Media Luna.  Today, however, the Brazilian national security advisor reiterated Brazil's position that Bolivia has but one government and intimated that his government might send troops to support Evo. 

So what's it all about?  I'm sure you all can guess, but a rough overview is below the fold. 

El Hugo del extremo norte

In a previous post, I wrote that total taxes as percentage of revenues on hydrocarbon extraction in Alaska were 25 percent.  Well, I've just had a chance to play with the data, and it turns out that my estimate was flawed.  (It failed to take into account that profit margins in Alaska are substantially higher than the overall profit margins in hydrocarbon extraction across the United States.)  Direct taxes on Alaskan oil & gas actually turn out to be 32 percent of gross revenues ... 33 after Governor Palin's tax hikes. 

One-third of revenues is a nice round number that you can use to put hydrocarbon tax burdens in other countries into perspective.  Bolivian taxes, for example, had fallen impressively low by the time Evo Morales assumed office, and some revision was almost certainly in order.  Time will tell whether he found the right level, and the means by which he raised taxes caused unnecessary uncertainty, but a substantial tax hike on the industry was the right thing to do by the people of Bolivia.  Regardless of whether you're a Bolivarian.

Reason to fear

I worry about Venezuelan government spending.  I just don't believe that oil prices are going to stay this high for long.

I could be wrong, but one of the things I learned in Venezuela was that Belize started producing oil in 2006.  They quite literally found oil on some dude's farm.  Production is now up to 3,000 barrels per day.  That's about 15 trips per day for a typical tanker truck.

Even more strangely, Venezuela gives Belize money through Petrocaribe.  Chávez, I would think, gets even less out of his spending there than in the rest of the Caribbean. He is, in essence, giving away money to up global oil production with only a very small claim on the corresponding returns. 

So, nothing in the global scheme.  But when prices are so high that Belize gets into the oil industry, you've got a tidal wave of other producers waiting in the wings.  They'll be high-cost, of course, so given the increase in global demand the days of $20-per-barrel oil are over.  In fact, I'd bet that the days of $40 oil are over.  But I wouldn't bet on triple-digit prices being with us for much longer.

Strangely enough, I'd like to be wrong.  For the planet.   

There really was a revolution

My previous post on the Bolivian hydrocarbon nationalization of 2006 made it seem like nothing changed.  And in terms of the security of supply (in price or quantity), not much did.  Ditto, the industry wasn't really nationalized.  Rather, the decree gave Bolivia's state hydrocarbon company, YPFB, a mandated 32% share of the output of the San Alberto and San Antonio fields, on top of a 2005 law that cancelled the preferential tax treatment the previous law had granted new gasfields.  Thus, Brazil's equanimity in the face of “nationalization.”

In other words, the nationalization was in fact a tax hike, and a rather large one.  According to work by Luis Carlos Jemio, the state's take of gross revenues jumped from 28% in 2004 to 41% in 2005 and 65% in 2006. 

How high is that?  Well, I just spent more time than I should have estimating the total value of taxes (including corporate income taxes) paid to the federal and state governments by oil and gas companies operating in Alaska.  The result?  In 2006, they paid 25% of their gross revenues (or 50% of their declared profits) in taxes and royalties.  Now, these estimates do not include gasoline taxes, or any other taxes on refined products ... because the Bolivian figures don't either.  They also do not include the tax hikes that the Palin administration just pushed through, but those hikes will only up the figure on gross revenues to 26%.

In other words, Bolivian tax revenues went from around the level found in Alaska to almost 2½ times that level.  There really was a revolution.  (And now you understand why the gas-producing provinces in the east are so damn upset.)

Was it a good idea?  I'm undecided.  Investment in exploration boomed in 1996, with the passage of the law favoring new fields, but started declining in 1999 and was down two-thirds by the time 2005 rolled around.  If one makes the assumption that geology drove that decline, then Morales hiked taxes at just about the right time.  If no more investment is coming anyway, why worry about discouraging it?

To be fair, foreign direct investment in exploitation (not exploration) did collapse in 2006.  That said, Bolivia could potentially make up for that via service contracts and the like.

The reason that I'm undecided is that I don't know how much of the exploration decline was due to geology, and how much was due to the increasing political instability in Bolivia.

But I'm not that undecided.  In this case, I think a massive tax hike on the industry was fully justified, and probably the best thing for the people of Bolivia.  Now if only they can figure out how to divvy up the new revenues without blockading roads or shooting at each other ...   

Bolivia versus Brazil

  On May Day, 2006, Bolivian troops occupied the country's natural gas facilities.   

Petrobras, Brazil's national oil company, owned the largest stake in the fields and Brazilian industries depended on Bolivian gas.  Yet Brasilia reacted quite calmly.  Why?

Simply because Bolivia had no leverage.  The “nationalization” raised taxes on the gas companies (Petrobras, Repsol, British Gas, and Total), but changed nothing else.  Brazil wasn't happy about losing the profits, of course (the Federal Republic of Brazil owns a 55.7% stake in Petrobras), but all Brasilia really cared about was retaining access to the gas at a reasonable price.  And that's what they got:  the red line shows the date of the nationalization:  the big run-up in price preceeded it.

Petrobras and Bolivia had a “take-or-pay” contract, in which Petrobras promised to purchase no less than 65% of Bolivia's daily capacity, even if they couldn't use it, at rates based on this (get ready for it):

The price per million BTUs, PGt = 0.475 × [0.5 × (FO1t-1/FO10) + 0.25 × (FO2t-1/FO20) + 0.25 × (FO3t-1/FO30)] + 0.5 × PGt-1, where FO1 is the price in $/ton of fuel oil with a 3.5% sulphur content (aka, “Cargoes FOB Med Basin Italy”), and FO2 and FO3 are the price of fuel oil with a 1.0% sulphur context (aka, “U.S. Gulf Coast Waterborne” and “Cargoes FOB NEW.”

Another way of putting it is that the contract stipulated that if oil prices doubled, it would take two years for Bolivian gas prices to increase 97 percent.  Which doesn't quite seem to have been what happened, since crude oil prices don't quite track fuel oil and Brazil sometimes needed to overpay when it couldn't use all the gas on offer, but close enough.

In other words, the revolution turned out to be something of a dud.  Petrobras kept its assets and its contract.  Bolivia did get more revenues but a tax hike didn't require troops.  Political theater, it was.

Of course, whether it was good theater depends on your seat.  Investment in the gas industry has collapsed, and Petrobras now prefers to access higher-cost gas deposits at home ... not because of the taxes, but because of the uncertainty.  Similarly, the dramatic way in which the tax hikes were guised as a nationalization meant tossing out the old revenue-sharing agreements with the provinces, and thus the current autonomy crisis.

It's not clear where the country goes from here.  I had lunch with a Bolivian and a Brazilian who joked about civil war.  The Brazilian was sanguine until the Bolivian suggested that eastern rebels might cut off the taps.

“No, you can't have a war,” joked the Brazilian, “until we get the other gas projects going. Then we will happily sell you weapons.”      

Blowing hot or blowing cold?

A few weeks ago I was at a conference where I heard a former Bush Administration official publicly wonder whether democracy was a good form of government for a nation of 300 million.  Now that's disillusionment! 

His disillusion stemmed from many things — it must be a sad thing to be a conservative these days — but some of it stemmed from this map:

The fact that good wind power isn't where the people are (or in all that many states) makes federal support highly intermittent.  The federal tax credit for wind comes and goes, gets renewed, expires, gets renewed, expires ... and with its see-sawing so see-saws wind investment.  Similarly, it's practically impossible to get federal support for the necessary investments in long-distance HVDC lines, which is why PG&E has so much trouble coordinating across only the West Coast. 

Peek this chart of the gross increase in electrical power generation, in gigawatts:

Is it good or bad?  Too much coal and gas, but the nation is on track to double its windpower by the end of the year, even with erratic federal policies. 

The reason is state mandates, good old command-and-control systems that force utilities to get a certain percentage of their power from renewable sources by a certain deadline.  (Spiralling fossil fuel prices don't hurt, although coal prices remained pretty flat until 2008.)

And who started the trend?  Well, I don't like the answer ...

Gridlocked

As I mentioned earlier the U.S. grid isn't very good.  Doug asks why.  I say bears.

Other hypotheses from our readers, however, would be very welcome.

Some current attempts to fix the problem below the fold.

Serious big actual built-stuff problems

What is the big limit to wind power in the continental United States?

The grid.  Simply put, our grid sucks.

I mean really truly seriously sucks, as in will collapse if highly variable power sources (like wind farms) make up more than 2% of the power pumped into the grid.  Worse yet, wind in the United States tends not to be near where the people are.  (Not even in Texas.  Texas is big.)  In other words, to really capitalize on wind power, the U.S. will need to spend quite a bit of money to add reserve power stations, upgrade local transmission grids, and build long-range HVDC lines to bring power from where the wind is to where the air conditioners run. 

Betting (on) the (wind) farm

I get into the office this morning, ready to do some reading (on Chinese and Russian energy policy) and writing (on American intervention in the Dominican Republic) when I spot two new hits from India, both for "Blowin' in the wind."

And so, I think, it behooves me to write a bit about Indian wind energy.  Thankfully, Dick Vietor, right down the hall, has done a lot of work on the topic.  Much of what follows comes from him ... wind power in India makes a great story.

The Myth of French Nuclear Technology

  A lot of myths accrue to France and the French.  For example, that the French military isn't very very very good at defeating its enemies.  Or that the French don't get fat.  Or have bad taste in comedy, or can't make decent action movies (most untrue!), or are peculiarly racist towards immigrants.  (Although ... another post.) 

Me, I love France in that peculiar way that (I like to believe) only Americans can.  So much of the place reminds me of home!

But still, I gots to punch the myths.  The latest one I've run into is that France has discovered a way to make nuclear technology pay that doesn't involve huge dollops of taxpayer money.  As with so many things, the proof comes from Finland, a country I really have to visit soon.

Blowin' in the wind

Flying into Berlin, you can't help but notice the wind farms.

Germany has 22.2 gigawatts of installed windpower, just a percentage point shy of a quarter of the world total, and a third more than the United States.  It gets more than 6 percent of its electricity from windpower, a number matched only by Denmark and the great state of Texas.  Inside Germany, the mouthful provinces of Sachsen-Anhalt, Mecklenburg-Vorpommern, and Schleswig-Holstein get almost 30% of their electricity from wind. 

How did Germany do it?  How far can they go?  Will others follow?  Some analysis below the fold. 

The Earth Award goes to ... AMLO!

Pemex, Mexico's national oil company, is in trouble. Production is declining.  More than three-quarters of all petroleum comes from fields on their last legs.  Cantarell, the largest, is almost tapped out.  On current projections, the country will become a net oil importer by 2016.  (Joining Indonesia, whose government just recognized reality and quit OPEC.) 

President Calderón has proposed a sensible (if insufficient) reform that would alter Pemex's relation with the government from that of a state agency to that of a state-owned company, with the ability to control its own investment budget and hire foreign companies to provide exploration and production-related services.  It's sensible, small-c conservative, preserves national control of the oil, and rather badly needed if Mexico is to remain an oil exporter.

So, of course, the center-left PRD, under the influence of your hero and mine, Andrés Manuel López Obrador (AMLO), is fighting it tooth and nail.  They forced the PAN to agree to 71 days of Congressional debate on the bill ... which will then almost certainly face a Supreme Court challenge. 

And I say ... good for AMLO!  Falling Mexican production means higher oil prices, and higher oil prices mean more conservation.  It's better for the environment, it's better for alternative energy companies, it's better for small cars, it's better for America.  Heck, it's probably even better for Mexico --- the place has done a great job of avoiding the Dutch Disease, but the federal government is gonna hafta wean itself from oil revenues someday, so why not today?

Go mismanagement of state-owned oil companies!  Up with nationalization!  Viva MEND!  At some point those big Brazilian fields will come on line, and Iraq will get its oil act together, and who knows how much oil is in the rest of West Africa?  So if you believe that $200 a barrel oil is a good thing for the world, then let's cheer on Hugo and AMLO and all the rest! 

It's a dirty job, saving the Earth, but somebody has to do it.

The Loss of El Dorado

This post is dedicated to Bernard Guerrero.  And Carlos's aunt.

Trinidad is the sort of place when you ask somebody to show you the sights, they go out of their way to show you the industrial park.  "Point Lisas, mon.  Gotta see Point Lisas."  So we saw Point Lisas. 

It is quite impressive.  The place employs more than 11,000 people (about one out of every 50 working Trinidadians, not including ancilliary operations in the surrounding area) in a urea manufacturer, a chlorine producer, a lube-oil blending installation, a natural gas fractionation facility, 4 methanol factories, 10 ammonia plants, and one giant honking steel mill. 

The Point Lisas Industrial Estate (related to, but not quite the same as the eponymous port) started under the administration of Eric Williams, Trinidad’s first prime minister.  It could have been a poster child for the failure of 20th-century socialism.  The place took two decades to get running, and once it did its heavy industries managed to lose money at such a prodigious rate that the industrial park managed to play a large role in Trinidad’s debt-led economic collapse in the 1980s.

Past failure is not what makes Point Lisas interesting; certainly less interesting than its equivalents in (to pick two countries completely at random) Romania or Armenia.  What makes Point Lisas interesting is the place's present success, and what that says about Trinidad's economic and political future.

More below the fold.