As we have said before, the Wall Street Journal’s news reporting isn’t all its cracked up to be. One pattern we’ve noticed is a tendency to put a positive spin on economic news.
Now we’ve detected a second: failing to report when powerful foreign interests jerk America’s chain. When the US said that it would file a case with the World Trade Organization over intellectual property rights and access to the Chinese publication market, Wang Xinpei, a commerce ministry spokesman responded harshly, and as the Financial Times reported, said it would “seriously damage” bilateral relations. Yet the Journal article on the very same speech, “China Adjusts Policies to Narrow Trade Surplus” made the Chinese sound conciliatory! The proof of the pudding was the recent US-Chinese trade summit, in which the Chinese made only token concessions.
The latest instance is of greater importance, and in this case, the reporting disparity was so large as to make one wonder how two news organizations covered the same event, in this case, an announcement by OPEC secretary-general Abdalla El-Badri.
As the Financial Times called it, OPEC issued a direct threat against the West. The story, the lead article on page one, titled “Drive on biofuels risks oil price surge,” said that if advanced countries make greater use of biofuels (and therefore reduce their oil dependence), OPEC will punish them by cutting production and producing a price surge:
Opec on Tuesday warned western countries that their efforts to develop biofuels as an alternative energy source to combat climate change risked driving the price of oil “through the roof”.
Abdalla El-Badri, secretary-general of the Organisation of the Petroleum Exporting Countries, said the powerful cartel was considering cutting its investment in new oil production in response to moves by the developed world to use more biofuels.
In case you think this might be a wee bit of overstatement on the FT’s part, keep in mind that OPEC has a proud history of disciplining the US through price moves or threat of production cuts. For example, the International Herald Tribune reported in 2003:
OPEC members, joined for the first time by a delegation from post-Saddam Hussein Iraq, unexpectedly agreed Wednesday to cut oil production by 3.5 percent, driving oil prices sharply higher….
“This was a message to Washington,” said Mehdi Varzi, a private energy consultant in London. “You can send a delegation to OPEC, but we control the oil price.”
In fairness, it’s not clear that OPEC could deliver on its threat, since protracted production cuts in the past have lead to cheating by members. Moreover, a sharply higher oil price would make biofuels and alternative energy more attractive. If OPEC really wanted to discourage the development of new fuel sources, it should engineer volatile oil prices. But it is obviously hoping that its threat will be sufficient (and while it may not affect private sector measures, it could deter government support for alternative energy).
By contrast, the Wall Street Journal appears not to have reported on the speech and instead, in “OPEC Official Looks West for Investment,” quotes from an interview with El-Badri:
In an unusual admission, OPEC’s new secretary-general said oil-producing countries may have to attract more foreign investment to meet world oil needs. But his call is at odds with the rising barriers faced by Western oil companies hoping to tap the cartel’s vast reserves.
Abdalla el-Badri said in an interview that members of the Organization of Petroleum Exporting Countries, which supplies about 40% of global petroleum output, need to invest as much as $500 billion by 2020 to satisfy rising global demand for crude. He acknowledged some of that must come from foreign sources, like Western oil majors, and not just from state-run national oil producers.
Now the Journal had a leg up in getting an interview, yet it was irresponsible in failing to report on the speech. And there was no evaluation of the content.
First, the idea that the Gulf States need to come to the West, hat in hand, for capital is ridiculous. OPEC is clearly NOT investing its petrodollar surpluses in oil infrastructure (at least to the degree required); instead, Dubai is in the midst of an insane construction boom. In fact, part of its explicit strategy is to become a pleasant place for the wealthy to live as a way of diversifying away from oil. Because the Saudis et al haven’t made enough investments, the oil surpluses are going into consumption, producing inflation in the region.
In addition, the FT said:
Opec plans to invest about $130bn until 2012 to raise its oil output. Excluding production from Iraq, the cartel forecasts a capacity of 39.7m barrels of crude oil per day in 2010, up from today’s 35.7m b/d. From 2013 to 2020 Opec plans to invest another $500bn in production infrastructure but that could change depending on the biofuels outlook, Mr El-Badri said.
So publicly, OPEC says it intends to spend $630 billion on its own in productive capacity; the only thing tha might stand in the way is biofuels. Yet the Journal reports that they only need to spend $500 billion and they need help from the West.
So the concept is West as bagholder: we invest in liquidating Saudi assets because they don’t want to (and with good reason). And as we’ve said before, there is evidence that Ghawar, the biggest Saudi oilfield, is already in decline. So the speech may also be posturing. If production falls in a few years because oil fields in the Gulf are starting to become tapped out, they can blame the West for failing to provide the most advanced extraction technology.
And if one is really paranoid, perhaps the seeming contrast between the speech and the interview disguise a unified strategy. The threat of a price hike, if it worked at all, would create only a short delay at most in the move to increase reliance on alternative energy sources. But if Saudi production is about to start declining visibly, anyone investing to extract what was left would know that they were looking at a declining annuity. Any slowing of the development of new energy sources makes the investment in declining oil fields more viable.
For reader benefit, below are both articles in their entirety. The first is the Financial Times’ “Drive on biofuels risks oil price surge“:
Opec on Tuesday warned western countries that their efforts to develop biofuels as an alternative energy source to combat climate change risked driving the price of oil “through the roof”.
Abdalla El-Badri, secretary-general of the Organisation of the Petroleum Exporting Countries, said the powerful cartel was considering cutting its investment in new oil production in response to moves by the developed world to use more biofuels.
The warning from Opec, which controls about 40 per cent of global oil production, comes as the group of eight leading industrialised nations meets on Wednesday with climate change at the top of its agenda. The US and Europe want to use biofuels to combat global warming and to strengthen energy security.
Opec has previously expressed scepticism about alternative energy but Mr El-Badri’s comments mark the first clear threat that the cartel might act to safeguard its interests in the face of a shift towards biofuels.
“They are really concerned,” said Julian Lee of the Centre for Global Energy Studies in London. “Opec will continue investing, but with biofuels on the horizon, they may not invest enough.”
“It is a difficult situation for Opec. On one hand they are asked to produce more, on the other one, Washington and Brussels are telling the cartel ‘we are betting on biofuels and we don’t want to rely on you [Opec]’.”
George W. Bush, the US president, has pledged to cut US petrol use by 20 per cent over the next 10 years through more efficient vehicles and a big increase in biofuel consumption. World production of biofuels, which are derived from agricultural commodities such as corn and sugar, was equal to 1 per cent of all road transport fuel in 2005.
Mr El-Badri warned that biofuel production could prove unsustainable in the medium term as it competed with food supplies. Biofuels are one reason retail food prices are now heading for their biggest annual increase in about 30 years.
Mr El-Badri said this meant the biofuel strategy championed by Mr Bush and European leaders would backfire because “you don’t get the incremental oil and you don’t get the ethanol”. In this case, he warned, oil prices would go “through the roof”.
He said Opec members had so far maintained their investment plans but he warned: “If we are unable to see a security of demand…we may revisit investment in the long-term.”
Opec plans to invest about $130bn until 2012 to raise its oil output. Excluding production from Iraq, the cartel forecasts a capacity of 39.7m barrels of crude oil per day in 2010, up from today’s 35.7m b/d. From 2013 to 2020 Opec plans to invest another $500bn in production infrastructure but that could change depending on the biofuels outlook, Mr El-Badri said.
Global oil benchmark Brent rose on Tuesday to $70.60 a barrel, close to a nine-month high.
This is “OPEC Official Looks West for Investment,” from the Wall Street Journal:
In an unusual admission, OPEC’s new secretary-general said oil-producing countries may have to attract more foreign investment to meet world oil needs. But his call is at odds with the rising barriers faced by Western oil companies hoping to tap the cartel’s vast reserves.
Abdalla el-Badri said in an interview that members of the Organization of Petroleum Exporting Countries, which supplies about 40% of global petroleum output, need to invest as much as $500 billion by 2020 to satisfy rising global demand for crude. He acknowledged some of that must come from foreign sources, like Western oil majors, and not just from state-run national oil producers.
“I’d like to see further cooperation between national oil companies and international oil companies, particularly in exploration and enhanced oil recovery,” said Mr. Badri, a former Libyan oil minister who took over the senior position at OPEC in January.
Read a roundup and analysis of the day’s news in everything from oil to gas, from ethanol to wind power, at blogs.wsj.com/energy.
Such cooperation could run into toughened barriers between many cartel members and the West’s oil giants, despite the latter group’s keen interest in developing new reserves.Many barriers are longstanding. Oil-production assets within the borders of many OPEC members, especially big Persian Gulf producers such as Saudi Arabia, have been off-limits to foreign companies for years. OPEC nations that actively encourage foreign investment, such as Angola and Nigeria, are in the minority.
But even those that have traditionally put out the welcome mat for Western oil majors have toughened terms recently as high world prices for crude triggered a rise in resource nationalism. In February, Western companies were forced to hand over operating control of major projects in Venezuela to state oil monopoly Petróleos de Venezuela SA, known as PDVSA. Algeria, meanwhile, imposed a tax on what it considers excess profits and restricted the role of foreign oil companies in production projects.
As an example of cooperation, Mr. Badri cited a $900 million natural-gas exploration deal struck last month between the Libyan government of Col. Moammar Gadhafi and British energy giant BP PLC. Libya has seen a sharp uptick in interest from Western oil companies since 2003, when it abandoned its weapons of mass destruction programs, prompting the U.S. and Europe to ease sanctions.
But in some of its licensing rounds, Libya has imposed terms that are so tough that some private companies have wondered how they could ever make a profit.
Mr. Badri heads the OPEC secretariat, an administrative and research body. Supply decisions are made by oil ministers of member nations who periodically meet at the OPEC conference, which coordinates the group’s policies.
For decades, oil-rich nations were incapable of fully exploiting their resources without Western help. But with oil prices so high, state oil companies no longer have to rely on foreign capital and are making massive investments to boost production.
However, not all of them have the technology to find and develop new reserves, and many lack the expertise of Western oil majors in unconventional techniques, such as enhanced oil recovery and deep drilling.
Meanwhile, some national oil companies have been criticized for low levels of exploration and investment. Iran has seen its production capacity fall in recent years — a result, analysts say, of underinvestment in new upstream projects.
Mr. Badri said OPEC would need investment of between $230 billion and $500 billion by 2020 to achieve a target of nine million barrels per day of additional production. OPEC currently produces a little more than 30 million barrels a day, the equivalent of 40% of global output.
He said international oil companies have the “technology, the know-how, [and] the financial back-up to expedite any discovery they find, to bring that discovery to market as fast as possible.
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