The Oil Shell Game

by Reverse Engineer, Doomstead Diner

Discuss this article at the Geopolitics Table inside the Diner

No, not the Shell Oil Game. Although the difference is sometimes hard to make out.

Two very interesting pieces of Geopolitical Newz last weekend, on another of those frustration filled occassions with the Diner Down, this time apparently due to a DDoS Attack. NSA? Disgruntled Diner Hacker? Ruskie Spammers? Who knows? Techies are changing the IP addy, and I am twiddling my thumbs waiting/hoping to get back up. So with nothing better to do, time to start another article!

First piece of interesting Newz is that finally after much Posturing on both sides, the Iranians have apparently capitulated and agreed to some type of halt to their Nuclear development program. In return for this, NATO supposedly will begin lifting the Sanctions that have been strangling the Iranian economy. Or have they?

In theory here according to the Experts in the Biz, Iran coming back online will bring a lot of Oil back on the market, and will depress the prices back down below the $100/bbl mark, which would make Oil Importing countries very happy. However, was this Oil ever really OFF the market? Far as I know, the Chinese were still buying it regardless of NATO sanctions. They’ll likely still be buying it. The production wasn’t stockpiling up in Iranian Tanks, it was getting burned SOMEWHERE. So removing sanctions in and of itself doesn’t bring any NEW Oil to market.

The corollary idea that would bring new Oil online is that with the new Nuke Agreement, the Multinational Oil Companies will now feel SAFE enough to go back in and start dropping down more investment money to Ramp Up production. Well, maybe they will but anything they do start tomorrow will take quite some time to bring into production, even assuming you buy the idea they have a whole lot more wells they can drill and exploit.

Thing is here, neither of the possibilities does a whole lot to bolster the Iranian Economy. If prices drop because of additional production from their end, actual revenue won’t increase, and may decrease. If prices stay high or go up, there will be more Demand Destruction in the Oil consumptive states and additional Oil will just glut the market, eventually causing it to crash again. Rinse and Repeat.

Similarly over in Ukraine where they have been playing both sides against the middle for a while now, in a semi-surprise move the Ukranians have climbed back into bed with Mother Russia, after splitting off from them when the Soviet Union Titanic sank. Like many othe Eastern European nations, they have been flirting with joining the EU for years, but apparently this inexorable March of Capitalism eastward has come to a halt. The EU is a Clusterfuck, Ukraine is just about outta money, so running back into the arms of Mother Russia seems like the wise course of action there. Who do they get the NG from to heat their homes after all? Not Brussels. Gazprom.

However, for similar reasons to Iran, Mother Russia herself is pretty Fooked here, because between Demand Destruction and the possibility of more Iranian Oil making it to market AND the Saudis maybe trying to put North American Shale plays outta biz, there seems to be a high likelihood of an Oil price DROP in the near future.

From Ambrose:

Goldman Sachs and Bank of America have both warned over recent days that crude prices will slide in 2014, much to the alarm of states that depend on oil to make ends meet. The “fiscal break-even point” needed to balance budgets is near $120 for Bahrain, Nigeria and Algeria, and $110 for Venezuela, and Iraq.

Oil duties furnish half the budget in Russia where the break-even price reached $117 last year. Moscow is tightening its belt but Fitch warns that it may downgrade the country if there is a prolonged fall in crude prices.

Even Saudi Arabia is feeling the pinch. It boosted spending by $130bn in 2011 to avert social protest, and its break-even cost has jumped to $98, though it still has $700bn of foreign reserves to be used in extremis. The implicit threat to dump US dollars is unusable at a time when monetary tightening by Washington is likely to drive up the dollar.

Mr Skrebowski said Riyadh may try to “rap America’s knuckles” by flooding markets with enough oil to puncture the US shale oil revolution. Production costs at the US Bakken shale field are around $80.

It is unclear whether the Saudis still have the spare capacity to pull off such a feat, or whether other Gulf OPEC producers would join forces in a replay of the Arab oil embargo of 1973. The Saudis have played a responsible role over recent decades as the swing force in global markets ensuring stability.

What should be apparent here is that a massive Shell Game is being played, with two of the shells empty and one ball of Oil/Money being shifted around from one shell to the other, but you can never have all 3 shells filled up with Oil OR Money at the same time. Price goes UP, the Industrial apparatus groans, companies and individuals go BK, Goobermint loses Tax Revenue. Price goes DOWN, Oil producing economies are starved for revenue and expensive Oil Production facilities get shut in as unprofitable. You cannot win in aggregate, in the simple Shell Game, 2 out of 3 Shells are SOL. For today, you can call the current Shells SOL “Greece” and “Spain” on the most obvious level in the West, but in reality this Shell Game encompasses hundreds if not thousands of shells, which include Nation-States, TBTF Banks and Hedge Funds too. There is only one little marble of energy/money here, at the moment being shifted around by Supercomputers through High Frequency Trading (HFT), but still only one truly EXISTS. Unlike Human Hands, super computers can move this around SOOO FAST it can fool any Human Eyeball, and that is what is occuring.

If on the HUMAN level you only Observe one “Crisis” at a time (call it “Cyprus” or “Ukraine” or “Iran”), but on the Computational Level you can shift around the focus far faster, you can make it SEEM like the Marble is under EVERY shell. Turn up the Ukraine shell, and it appears the Ruskie Shell can save them. The reality of course is that this marble that gets shifted around can’t really save ANYBODY, because during the whole game of shifting, said marble is constantly SHRINKING in size! In REALITY, if the Ruskies can keep producing enough Oil and Gas just to keep Lights On in Moscow for a few more years this will be a challenge.

On top of all THAT Geopolitical Nonsense being played out here this week, the Chinese have decided to Flex Some Muscle not just on the Monetary side of this game, but now also on the Military end! They have decided it is time to put the Thumbscrews to the Japanese, who are seriously on the Ropes anyhow from Fukushima and dying Exports and claim some more Hegemony over their territory.

From Zero Hedge:

Following the to-ing and fro-ing of the last 2 days with US and Japan “testing” China’s new Air Defense Zone (ADIZ), China has not only escalated (as we noted earlier) but as the day begins in Asia is stepping up the rhetoric significantly. Official media said that Japan is the “prime target” and it is an “urgent task for China to further train its air force to make full preparation for potential conflicts.” Japanese lawmakers, meanwhile, are pushing for a bill “demanding an immediate withdrawal of China’s ADIZ.” While the Western world goes on its merry way buying S&P futures, China’s concluding message rings its most defiantly so far, “We are willing to engage in a protracted confrontation with Japan. Our ultimate goal is to beat its willpower and ambition to instigate strategic confrontation against China.”

The Chinese just stepped up the rhetoric notably,

Via Yonhap,

China’s official media pointedly said Friday that Japan is the “prime target” of Beijing’s newly declared air control zone over the East China Sea, warning that China is willing to engage in “a protracted confrontation with Japan.”

China’s declaration of its Air Defense Identification Zone (ADIZ), announced last week, has sparked strong resistance from Japan, the United States, South Korea and other neighboring Asian nations. The new zone partly overlaps those of South Korea and Japan.

The U.S. flew two B-52 bombers through the Chinese zone without informing China this week. South Korea and Japan followed suit. In response, China sent several fighter jets and an early warning aircraft on patrol Thursday into the disputed air space.

In an editorial titled “Japan prime target of ADIZ tussle,” the official Global Times newspaper said, “We should carry out timely countermeasures without hesitation against Japan when it challenges China’s newly declared ADIZ.”

“If Tokyo flies its aircraft over the zone, we will be bound to send our planes to its ADIZ,” the editorial said.

“If the trend continues, there will likely be friction and confrontations and even tension in the air like in the Cold War era between the U.S. and the Soviet Union,” it said.

“It is therefore an urgent task for China to further train its air force to make full preparation for potential conflicts,” the editorial said.

“We are willing to engage in a protracted confrontation with Japan. Our ultimate goal is to beat its willpower and ambition to instigate strategic confrontation against China,” it said.

Analysts said the Chinese declaration of air control zone is mainly aimed at bolstering its claims to a group of islets in the East China Sea at the center of a bitter territorial dispute with Japan, which are known as Diaoyu in China and Senkaku in Japan.

The Japanese are not backing down…

Via Kyodo News,

An official of Japan’s ruling Liberal Democratic Party is considering asking lawmakers to adopt a bill demanding an immediate withdrawal of China’s air defense zone in East China Sea

Now, WTF do the Chinese give a damn about a few disputed Islands, and WTF do they feel it necessary here to Flex Muscle, overfly the area and send their brand new Aircraft Carrier steaming around the neighborhood? Far as I know, there is no OIL on or around these disputed Islands though there is a Gas Field in the nabe, and do the Chinese REALLY want to take over Japan and all the liabilities of their Nukes? Its an externalization of blame thing here, if they can make enough NOISE vis a vis the Japanese, maybe the locals won’t notice they can’t BREATHE the air and have no decently clean water left to drink?

Already it has been demonstrated that even with the very BEST and most Technologically Superior Weaponry, NATO is unable to keep client states like Syria, Libya et al running here. They can Bomb any of them back to the Stone Age, but they can’t get them producing more Oil no matter how many bombs they drop, in fact of course the more bombs they drop, the less Oil gets produced! This makes CFS? NOT!

So why all the Saber Rattling here? Basically because all of these societies, the Japanese, the Chinese, the North Koreans et al have their BACKS AGAINST THE WALL here. Moreso even than the FSoA. They are in the DEEP DOO DOO already here, and revving up the Military Option is all that is left here. The Chinese don’t HAVE further resources to exploit within their own borders. The Japanese don’t HAVE further resources to exploit within theirs either. If they cannot acquire resources through some type of trade, they HAVE to strike out. The only other option is to Peacefully Die Off, and generally speaking no society of Homo Sapiens will choose to do that. Frankly no other species capable of striking out (all Predators) would do it either.

All the rest of the Geopolitics going on here is just Kabuki Theater. None of the ongoing wars in MENA have anything to do with “Democracy”, which has always been a sham even inside the so-called “Democratic” countries of the 1st World. It is all about resources, specifically fossil fuel energy resource. Same Game in Ukraine, it has nothing to do with Ukrainians liking Ruskie rulers any more than they like Brussels Sprout Rulers. Just at the moment, the Ruskies appear able to provide the ENERGY the Ukrainians NEED to keep an industrial lifestyle going, whereas all Brussels Sprouts have to offer is more Debt Money.

Far as the Chinese and Japanese go, they have Old Axes to Grind, and neither one has much in the way of Resource to get from the other. In this battle, really Japan just serves as Proxy for the Power game being played between China and the FSoA, Creditor vs Debtor. The Chinese in their typical stupidity loaned money they never had to Amerikans who could never pay it back. Some people think this is Inscrutable Wisdom, IMHO it is Incredible Stupidity. Now they can BUY THE WORLD with the Debt Money! Except, too bad, nothing left worth buying here, and it will be damn difficult to hold onto anything you did buy on some other continent where other people are living. So unless you propose to load up Troop Transport ships and physically take control of any of these spots, you can kiss your “investment” goodbye.

Of course, nobody likes getting left holding the Debt Bag, as the Chinese do. As their society spins down, they will resort as Guido does to trying to use FORCE to squeeze Blood from a Stone. There is no way they will be repaid, the best they can do is Repo all the Toys they sold us. That is the PRODUCT of their years of Slave Labor. Said toys mostly not Repo-able now unless you wanna dig through the local Landfill.

On the upside, the Big War with all the Big Toys won’t last long. The carriers and frigates and troop ships will all go down to the bottom of Davey Jones Locker inside a few years, sunk mainly by much cheaper to build missiles. Then the REAL fun begins internally in each of these places, as the survivors fight amongst themselves for what little is left on their patch of the Earth.

Barring Climatic or Nuke disturbance of significant level, SOMEBODIES will walk away from this conflict in some places. Not many to be sure, but some. Negotiating this shitstorm is the Challenge for the coming Generation.