June 21, 2008
Begging the Saudis
Gordon Brown was physically in Brussels yesterday. But it was clear that mentally he was already travelling to the emergency oil summit which is taking place in Saudi Arabia tomorrow.
At his closing Brussels press conference he kept repeating a single number - $3 trillion. This - Brown claims - is the amount that oil consuming countires have transferred to oil-producing countries as a result of the recent spike in oil prices. As the FT reports today, that is causing huge budgetary and political strains in many consuming countries.
But Brown has a plan. He thinks the oil-producers should take some of that $3 trillion and re-cycle it, by investing in alternative energy projects in oil-consuming countries. This idea sounds so flaky that I assumed I had mis-heard it, when he first outlined the scheme. But no - he repeated it several times. That is definitely what he going to be asking the Saudis to do.
A British official later explained to me that Brown would suggest to the oil producers that they could gain by investing in the industries of the future. Also they would be performing a service to the world economy by re-cycling some of their well-gotten gains in the rest of the world - spreading the oil wealth about a bit.
But - I pointed out - we were also asking the Saudis and the other oil-producers deliberately to make oil less important to the world economy. That would undermine the source of their current wealth. What is in it for them, I asked my official pal? “The ever-lasting gratitude of the British government”, he said smiling slightly.
The high current level of oil prices, if sustained, would in any case force a move towards alternative technologies: wind power, nuclear energy, geothermal, solar power and others. By investing in these technologies now, the Saudis could hedge their bets, so that they do not rely solely on future revenues from oil. This is something BP is already doing. It is similar to automotive manufacturers’ investment in electric motors. The idea is not at all flaky. Gordon Brown may have many flaws, but wooly thinking is not one of them.
Posted by: RCS | June 21st, 2008 at 11:34 am | Report this commentThe oil price would remain high, in any case, because their is currently no alternative to oil for transportation needs. The level of demand is such that prices will not budge; any slack, if formed, by the move to non-oil power generation will be picked up by the rising demand for motor transportation. The only difference is that supply constraints in manufacturing economies will be relaxed.
Brown is in essence telling the oil-producers: the move to alternative technologies is inevitable. You have a chance of joining the bandwagon now and securing your future for when the wells dry up. Your 3 trillion dollars could serve to hasten the inevitable. Even if that means foregoing current revenue streams (which according to my previous paragraph I thing it would not) it is well worth it as an investment for your own future.
Posted by: RCS | June 21st, 2008 at 12:01 pm | Report this commentBut Gideon that’s already how we get our money back, the Saudi’s routinely buy billions worth of armaments for which they have little to no use. The Saudi’s outraged reaction to the BAE inquiry showed as much; how can Britain presume to question what basically was a gift?
Posted by: Felix Drost | June 21st, 2008 at 2:43 pm | Report this commentInteresting idea to oblige oil-producing countries to invest their proceeds in alternative energy projects, in other countries. However the IEA might prefer the trillions to be invested in new oil and gas projects in the same countries.
Anyway, for consistency, would energy producers in the G8 be exempt? They include Russia, Canada, the United States and the United Kingdom.
One commentator elsewhere sounded an alert a week ago. He guessed $4 trillion a year - was being redistributed from “stable” to “potentially hostile” (unstable) societies. Anatole Kaletsky noted that a series of energy-related summits had recently been announced, starting with an emergency meeting of oil producers and consumers in Saudi Arabia and culminating in the G8 leaders’ summit in Japan in July.
Posted by: Slightly Optimistic | June 21st, 2008 at 4:53 pm | Report this commentGR”A British official later explained to me that Brown would suggest to the oil producers that they could gain by investing in the industries of the future”
It is not a goofy idea at all! I suspect he is taking some advice from Tony Blair. This is a very limited way of looking at the Persian Gulf and at the Arab nation. The current Gulf leaders are hardley “fossil fools”. They know the limitations of their gift. They are already advancing in research and expermentation in renewable energies. Abu Dhabi has launched the Masdar Initiative and formed a partnership with a Spanish firm (Sener) and they have formed Torresol Energy. Its focus is solar plants but that shows how forward thinking they are.. Masdar & Abu Dhabi have already invested billions into renewable energy. It is a shame the Persian Gulf is so sterotyped…a lot of good things are happening there at the moment.
If Brown is repeating it so much…I bet he has them on board already…it that is true …its a great PR move for the Saudis.
Posted by: Lisa-Helene Lawson | June 21st, 2008 at 4:54 pm | Report this commentLouis Lapham, former editor of Harper’s magazine and scion of a wealthy American oil family, was asked if it was true that there are only 20 years of oil supply left in the world. He replied, “Yes, it is true, and it has been true for the last hundred years.”
There are several things that will make a significant difference in the price of oil. How much the Saudis pump is not one of them.
Posted by: Paskalis | June 21st, 2008 at 5:25 pm | Report this commentimho Felix is on the right lines. What Brown is askin the Saudis is to recycle yet more oil money to the West, this time under the guise of R&D expenditure on renewables.
This is in addition to the huge arms expenditure for weapons that gently rust in the desert, numerous white elephant projects given to Western companies, direct transfers of cash by sovereign wealth funds to keep bankrupt American financial institutions afloat and the ruinously expensive cost of the upkeep of the Saudi and other royal families in the region (whose headcount rise exponentially given that they can marry several wives and do produce numerous offsping - about 10,000 Saudi princes and counting!).
What the British official meant by “eternal gratitude” is simply the way that the West supports these unspeakably corrupt rulers to keep up the recyclying of the oil proceeds.
Indeed democracy (and therefore true autonomy of acting in their own national interests) for the nations of the Persian Gulf would be economically disastrous for the West. Look at how they treat the one nation they cannot control, Iran.
Best,
P
Posted by: Pacifist | June 21st, 2008 at 6:43 pm | Report this commentIn 1960 you folks brought out a musical, “Oliver!” Take it on the road to Saudi Arabia. “Please sir, I want some more!”
Posted by: RK | June 21st, 2008 at 8:27 pm | Report this commentIn an interlinked world there is always ‘recycling’. To denounce that is to misunderstand the nature of free trade and globalisation.
Felix, in what way is the BAE deal a gift? What wouldn’t be a ‘gift’, building more palaces? The Saudi’s have a huge current account surplus which they are wise enough to invest in a diversified portfolio, through their SWFs. Their own economies cannot absorb such huge amounts. Buying shares in American banks, at the trough of the credit crisis, is not doing the Americans a ‘favour’. It is buying on the cheap assets which have great potential. An investment in alternative energy would be another such wise investment.
Posted by: RCS | June 21st, 2008 at 9:31 pm | Report this commentNo one seems to be giving Bush/Cheney credit for putting into place a sound alternative strategy which, clearly, was meant to reduce dependence on the Saudis. It was called stealing oil from the Iraqis. Who can blame these wise planners if things didn’t work out quite the way they were meant to?
Indeed, who can say that the strategy may not be successful in the end, let us say in another McCainian hundred years or so (assuming that both oil and humans are still around by then).
Posted by: algasema | June 22nd, 2008 at 1:01 am | Report this commentPaskalis:”There are several things that will make a significant difference in the price of oil. How much the Saudis pump is not one of them.”
Exactly…everyone have a great weekend!
Posted by: Lisa-Helene Lawson | June 22nd, 2008 at 1:04 am | Report this commentConsider this story from last january:
http://money.cnn.com/2007/11/27/markets/oil_speculat
ion/index.htm
If only 10% of the price of barrel of oil is speculative gain for Goldman and similar entities i would ask Brown to tax these people and invest the
funds in something useful. It would amont to 300Bn.
If 25% is the is the speculative froth then the numbers get to be about 750BN $. This number has also been mentioned here (Canada)
Why is the city refusing to discuss this issue?
It is remarkable that the FT has not published a single article quantifying these issues.
And what is one to say about food price explosion?
Posted by: Cassandra | June 22nd, 2008 at 4:41 am | Report this commentFrom Associated Press:
“JIDDAH, Saudi Arabia — The Bush administration’s energy secretary, Samuel Bodman, said Saturday that insufficient oil production, not financial speculation, was driving soaring crude prices.”
Finally, unassailable proof that financial speculation is driving up crude prices.
Posted by: Paskalis | June 22nd, 2008 at 8:47 am | Report this commentEvery morning when I get up, I have a cup of coffee and then I go out and personally inspect the total available world oil supply for that day, and then I compare that with my measurement of total world demand. I am happy to report that, so far, the price quoted in the stock market has honestly reflected those two conditions.
Posted by: CAM | June 22nd, 2008 at 9:18 am | Report this commentSolar energy is already mainstream in German politics and is becoming mainstream in the economy too, receiving generous state aid to encourage growth in the sector.
In Germany the solar electricity sector already employs 42 000 people, and the solar thermal energy sector employs 15 000. With political encouragement, many more jobs are expected to be created. Some large, well-known German companies are already taking over the smaller players. In addition, some companies not so far involved in solar energy are changing their business model and getting into this sector. The same trend is apparent in the Swiss economy. Turnover in the German solar energy sector (inc. export of same) increased ten-fold since 2000, and turnover is forecast to double again by 2010.
It’s reckoned that, even in Germany’s climate, 1/3 of the electricity and 1/3 of the thermal energy requirements can be met via solar energy. At present these figures are only 0,5% and under 1% respectively.
“Eco-energy” generated by homes, buildings etc via the installation of solar panels etc, will be fed into the national grid, and home owners etc will be credited with the electricity they feed into the grid, and debited acc. to the amount they take from the grid.
Posted by: J.J. | June 22nd, 2008 at 10:53 am | Report this commentThat reciprocal obligation “to buy from us if we buy from you” only works when there is reciprocal dependency and competition of oil and gas producers.
If the producer knows they will sell oil no matter if they buy anything from the consumer that reciprocal obligation doesn´t exist.
But, of course, there are two reasons to participate:
1. Because it is a profitable business.
2. Because the House of Saud´s traditional relationship with the British establishment, from the times of the colonial forces of Lawrence.
Saudi Arabia behaves as a kind of Western Protectorate that only Al Qaeda (Bin Laden) and the Neo-Cons (PNAC) tried to break for different reasons.
Posted by: Enrique | June 22nd, 2008 at 1:29 pm | Report this commentEnrique, please, please, please buy a history book. Lawerence - and the british establishment - backed the Hashimites who were the ENEMIES of the Saudi family. Also the Saudi family has been dominant in that area for centuries and long before the British arrived. Oh and Saudi, never a british colony.
When has anyone in the States tried to “break up” Saudi Arabia?
Posted by: Danny | June 22nd, 2008 at 4:08 pm | Report this commentCassandra, I see not only is “financial maths” beyond you but so is basic arithmetic. In constant dollar terms, oil at the time of your article was not at “record highs” it was cheaper than when Carter was in power.
There has also been a precipitous decline in the dollar contributing. In constant dollar terms the price has doubled not quintupled since around 2002. Very, very roughly the world consumes 85 million barrels a day so the “froth” at 10% would be 250 odd million constant value dollars and at 25% it would be roughly 600 million dollars.
You sure you don’t want to pit your ample financial acumen against some of my structured products colleagues. A mathematical genius like you could make some easy money….
Posted by: Danny | June 22nd, 2008 at 4:24 pm | Report this commentJ.J, from what very limited understanding i have of energy markets basically solar power stands as the only hope for simultaneously hitting greenhouse targets and energy targets over the next 30 odd years. So we can only hope others follow Germany’s lead…
Posted by: Danny | June 22nd, 2008 at 4:27 pm | Report this commentJ.J. that is fabulous news!…and another reason why Germany leads Europe no matter who the EU prez is at any given time…
This summit is starting out well…
King Abdullah has proposed a plan to help poor countries cope with fuel proces…$1 billion Opec fund would be set up along with $500 million in Saudi soft loans…He also called for the World Bank to arrange an international meeting to discuss his proposal.
And Brown stated there are plans afoot for a of a “new deal” opening energy markets to foreign investors and that GB will work with Saudi Arabia on technology “to capture carbon emissions from energy plants and with the United Arab Emirates on nuclear technology.”
See! He had wired!…Opec meets in Sept …another Summit in London in October…they are all in a very pro-active mood!…that’s how I like my movers and shakers!
Posted by: Lisa-Helene Lawson | June 22nd, 2008 at 4:51 pm | Report this commentDanny:
25% of 3 trillion is 600 million? (Even in constant dollar terms). ). I want to see the calculation here.)
Do it.
Posted by: Cassandra | June 22nd, 2008 at 4:59 pm | Report this commentJJ,
Good example Germany. As you state however this is a
complex problem. The solution will take a time greater than the current run up of prices.
There is solar heating, solar power (photo voltaic
and heating water for turbine purposes (done in spain).
A lot of transport will have to move onto mass transit. (very difficult for the yanks to accept). Fuel cells
The alternative fuels is not a solution even for Brazil. Even if you planted the whole earth.
If you had fusion power generatots (scheduled to go on steam around 2030-40) to charge your efficent batteries you could solve a part of the the problem. It is a race between tehcnology going to mass production which lags the vertical icrease
in hydrocarbon prices.
My main concern is that speculators are making the problem worse. They are simply behaving like black marketeers.
We have the problem that the speculators are managing to hide behind non publication of their activities in the financial press of record. This is a serious problem of transparency.
There was congressional testimony (at the beginning of this year, with oil hovering at around 100) to the effect that it was then adding about 10%). Here in Canada i was told that the pits of New York and Chigaco can add up to 25%.
Here is a report of the congressional hearing and links:
http://money.cnn.com/2007/11/27/markets/oil_speculation/htm
And here you find more extreme claims:
http://www.marketoracle.co.uk/Article4573.html
Posted by: Cassandra | June 22nd, 2008 at 5:45 pm | Report this commentCassandra.
You are right. In the article I quoted from (I don’t have a link, I just cut it out of a paper), it was mentioned that the t/o in the “Photovoltaik” sector went up by 10 times since 2003 to reach Fr9,1Mrd last year. The Germans and the Swiss always take the long view once they are convinced and then they invest heavily and depreciate over a long period. Then typically, as soon as they’ve proved their product in the home market, they look to expand abroad, using their well-honed export skills.
Critics say acc to that article, that the solar energy sector is being recompensed too highly (at 72 Rappen per Kilowatt hour) in comparison with the “true costs”. The article also mentioned Spain (as you did) and France where the bizz with solar cells from “the North” is flourishing.
Re Speculators. There is a lot going on in Germany & this part of the world regarding monitoring and introducing regulations unilaterally without waiting for any consensus with any other parties.
P.S. Germany’s new formation worked well against Portugal.
Posted by: J.J. | June 22nd, 2008 at 6:50 pm | Report this commentCassandra - Oil prices have risen by 3 trillion in real terms? Care to point out where that is claimed? It isn’t claimed in your article. Also the article says that it “will be discussed” which isn’t the same as Mr Gheit claims being “congressional testimony” or is reading another one of the skills you hope to add someday, someday soon to your repertoire?
Here it is nice and simple - dollar worth less means takes more dollars to buy same thing. Very roughly, half the price increase in dollars has been due to a decline in the dollar.
As for the costs to the consumer, the vast majority of the price at the pump is tax. OPEC’s leaders are clearly showing our famous arab hospitality by listening to Brown’s idiotic lectures when HE is why petrol prices are so high.
Posted by: Danny | June 23rd, 2008 at 2:48 am | Report this commentDanny,
I asked you to prove that 25% of 3 trillion $ is according to your claim 600 MILLION.
You obviously cannot.
Instead as is your habit you constructed another strawman. You are not a bona fide interlocutor.
Therefore i advise you to find similarly behaving individuals and play with them.
I am done with you on these threads.
Posted by: Cassandra | June 23rd, 2008 at 3:13 am | Report this commentSince the oil price was below $10 pb in 1998 it has risen c. 30% pa to date, doubling in the last 12 months. Much of this rise is due to the newish market in ETS based on commodities particularly oil. Perhaps the Saudis and other dabble in that market themselves.
As for Brown’s trip to persuade the Saudis to pump more that’s a tad difficult with all but full production and his call for the Saudis etc to invest in the UK’s energy production, I’m sure that they’ve looked at many projects already as solar power will deliver much more there than here.
Should the Iranians offer to invest in building nuclear power stations and supply them with (enriched) fuel would Brown accept such a generous offer?
Posted by: Damian | June 23rd, 2008 at 3:32 am | Report this commentShould our politicians not have set up an oil fund years ago to invest in alternative energy?
Posted by: DL | June 23rd, 2008 at 9:47 am | Report this commentIf other states invest in our alternative energies
we are going to be beholden to them in years to come and how are we going to be able to afford it?
Surely we need to be self sufficient in our energy
supplies going forward?
I am becoming increasingly concerned at the lack of long term thinking by our politicians who are only looking as far as the next election.
Perhaps we need to look at the American Indian model where any decision involved past,current and future generations.
According to the OPEC website, the G7 Governments made oil out of oil (through taxes) between 2002 and 2006 than the OPEC countries.
According to the same source, the UK government has the biggest share of revenue from current high fuel prices among all G7 nations.
Is this information correct?
Posted by: Kashyap Swamy | June 23rd, 2008 at 10:13 am | Report this commentCan someone please remind us of how much of the huge N Sea oil revenues was invested in research for renewables by the UK government?
Thanks.
P
Posted by: Pacifist | June 23rd, 2008 at 10:53 am | Report this commentAbout “By investing in these technologies now, the Saudis could hedge their bets”
Somehow I do not see the Saudis changing their business model from drilling & exporting to flying around a future world building renewable energy installations in remote countries.
Probably their best way of hedging bets is by creating sovereign funds which invest in solid enterprises.
Oh! I think they are doing that!
Marton
Posted by: marton | June 23rd, 2008 at 11:51 am | Report this commentI agree with Gideon the idea is indeed flaky - However, the PR campaign is spot on. The main holes in the idea in my opinion is that, what is on offer does not make economic sense. Brown was offering the Saudis the UK’s alternative energy market as a possible destination for investment - The Uk does not offer a great market for alternative investment today or tomorrow - if it was an EU wide inititiave I could understand and if you could throw the US in the bag and possibly China or India then the consumer market is over 2 billion energy consumers. The Saudis could make a decent return. Little old UK would not merit such a transfer of welth they may as well invest it in their own economy i.e R&D. Secondly, what Brown was fundementally requesting is that Opec countries transfer power as oil producers and become bit part silent partners in the “new deal”.Why would they do this? Furthermore, in his speech he did not mention once, the transfer of technology too these countries. The “new deal” seems like an old flaky deal to me.
Posted by: KWM | June 23rd, 2008 at 5:14 pm | Report this commentKWM:”The main holes in the idea in my opinion is that, what is on offer does not make economic sense. Brown was offering the Saudis the UK’s alternative energy market as a possible destination for investment - The Uk does not offer a great market for alternative investment today or tomorrow - if it was an EU wide inititiave I could understand and if you could throw the US in the bag and possibly China or India then the consumer market is over 2 billion energy consumers”
Correct. EU wide initive is needed …China nd India already proposing their own…
KWM:what Brown was fundementally requesting is that Opec countries transfer power as oil producers and become bit part silent partners in the “new deal”.Why would they do this?
The Saudis clearly understand they need a PR campaign…hence the reason to call a summit to begin with….Brown also needs a pR campaign!…the serious focus for research and technology will remain in their region, and in India and China…because this is where they will find partners and co investors and people more open to new ideas than the west is proving to be at the moment…
Posted by: Lisa-Helene Lawson | June 23rd, 2008 at 9:19 pm | Report this commentI today transferred a portion of my wealth to the local phone company in return for some form of service. Maybe they should be obliged to invest in the future of random technologies which could put them out of business. Idiots.
Posted by: Alistair | June 24th, 2008 at 7:52 am | Report this commentIsn’t he simply asking oil producing countries to do the same thing as oil production companies?
Diversify their investments before the goose runs out of golden eggs…
…since when is long-term strategy flaky?
Posted by: David | June 24th, 2008 at 8:53 am | Report this commentLisa;Thank you for shedding some light on this. We are truly witnessing a transfer of political and economic power to the east and PR stunts like the one conducted by Brown only highlights further how feably his proposal is.
Posted by: KWM | June 24th, 2008 at 12:07 pm | Report this commentpaskalis,
Posted by: Arslan | June 24th, 2008 at 1:55 pm | Report this commentyou have hit the nail on the head…the figure whethert it be 3,4,10 ,x trillion means nothing..it is just that..a figure..the real source and use of these funds is what’s at the heart of the matter..anyway, even if the Saudi’s don’t willingly invest (now) n the West, we can always invade using the ‘10 of the 9/11 hijackers were saudis’ blah blah..so sit tight and relax..yes it will be a bumpy ride but i have faith in western hypocrisy to do ‘the right’ (!) thing!
David:”Isn’t he simply asking oil producing countries to do the same thing as oil production companies?
Diversify their investments before the goose runs out of golden eggs…
…since when is long-term strategy flaky?”
Exactly…for energy innovation and energy power house realignment…. watch the India/China Saudi Arabia-Persian Gulf nexus…I assure you there is nothing flaky about it…
Posted by: Lisa-Helene Lawson | June 24th, 2008 at 3:48 pm | Report this commentHey America! Want to get rid of that awful $9 trillion debt? Simple!
Sell Iraq to China!
Posted by: Shevvers | June 24th, 2008 at 4:01 pm | Report this commentRCS, I rarely agree with P but in this case I do (up to a point). In Saudi Arabia a few thousand “royals” decide on how to spend all these oil billions while maintaining a very repressive, racist and radicalized society. Free market economics doesn’t really come into play when I analyze their modus operandi, it may be relevant for us it isn’t very relevant to them.
Posted by: Felix Drost | June 25th, 2008 at 10:25 am | Report this commentNot content with merely begging the Saudis, let’s go cap in hand to the Qataris too:
http://www.ft.com/cms/s/0/ccc2be62-4283-11dd-81d0-0000779fd2ac.html
Posted by: Pacifist | June 26th, 2008 at 12:49 pm | Report this comment“Oil reaches record near $142 a barrel”
All that begging has not worked!
Maybe, instead of trying to sanction Iran the West should try and help Iran develop her two giant undeveloped fields that have been left unused due to American sanctions (Joint recoverable oil 8.2 billion barrels).
P
Posted by: Pacifist | June 27th, 2008 at 10:47 am | Report this comment