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Will Higher Oil Prices Save Kyoto?

Politics / Climate Change Dec 02, 2011 - 02:02 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleIf the goal of the Kyoto Treaty was to reduce global emissions of greenhouse gases, its near-15 year life span of shuffling diplomats, journalists and climate "experts" around the globe in CO2-spewing jetliners for talks, and talks about talks has been a total failure. As a 'Scientific American' blog of November 29 put it: "Japan (is) buying its way out of emissions reductions in 2011—and refusing to sign up for more. The European Union will trade its way into greenhouse gas cuts, whereas Canada—among the globe’s worst emitters on a per capita basis—has decided to break its pledge to reduce. The U.S., the world’s  largest (per capita) emitter, has never accepted legally binding targets under international climate treaties. Nor has China, which has gone from being a developing nation to the planet’s biggest source of human-made greenhouse gases in that same time span".

As we also know, the only thing which delivers real reductions in oil and energy demand, and real greenhouse gas emissions cuts is economic recession, like the current. This is already in its third year and producing major cuts of GHG emissions - especially in the European debt-wracked PIIGS, as unemployment spirals up, businesses collapse - and their political leaders mull the financing of multi-billion-euro offshore windfarms and solar power plants producing electricity at 25 euro cents a kWh.

Previous to recession, the 2005-2007 period from the start of Europe's mandatory trading of emissions permits to the start of recession was marked by ever rising European GHG emissions. Mandatory trading of emissions permits does nothing to cut emissions - but it does make money for a few greedy and rightly named "players". The public is invited to believe these players are "fighting' climate change.

Another proven method for real cuts of GHG emissions is industrial collapse, Russian and Eastern European style. Russian emissions are down 50% since the heyday of the Soviet Union. Emissions stay low in New Russia because it is wedded to delocalisation and outsourcing, like any other postindustrial democracy, or group of such countries such as the European Union. Being postindustrial, but importing consuming and throwing away a vast range of industrial goods, especially from China and India, only shifts the needed GHG emissions "over the horizon" - although this point would seem a little too subtle and much too complex for average media consumers, and energy consumers to know, or be told.

Unsurprisingly, Chinese and Indian energy demand is rising fast, and their GHG emissions also. On a per capita basis they however remain tiny compared with OECD countries, which is the basic sticking point for any "global renewal and extension" of the Kyoto Treaty.

European political and corporate elites, floating to the next climate conference be-in high above the tiresome reality of debt crisis, euro crisis, economic crisis, recession and mass unemployment can believe, and do congratulate themselves on "saving the climate" through "fighting" Global Warming.  Tireless effort continues in Europe for justifying the carbon finance trading circus, the scams and cash bonanzas which enrich a small and very easily identifiable group of profiteers who can be eliminated at a single sweep of legislators' pens - if they wanted to.

Instead, official media such as France's 5 state owned TV channels currently run intense propaganda shows - cheaply recycling climate crisis material from the glory days of 2009 before the Copenhagen climate "summit" delivered a sharp slap in the face to European leaders and Barack Obama, and the climate crisis shows suddenly went off screen. Even polar bears can be glimpsed again, between the advertising for takeout foods, throwaway consumer goods and new cars. Climate change business is already nostalgia business !

European players know they are the most exposed to major loss when the carbon trading bubble implodes. In turn this explains the frenetic attempt by European political and corporate deciders to find new allies - any allies. Indicating how strange causes bring together unlikely allies, European climate finance survival effort is now backed by Saudi Arabia.

The rationale is simple if psychedelic: Saudi Arabia has proposed that it should be compensated for loss of oil revenues if and when the world does phase out fossil fuels. The coming 2012 climate conference in Qatar, a country with exactly the same keen interest in maintaining huge revenues from doing nothing except pumping oil and gas, may be the scene for formal demands from oil and gas exporters, including Russia and Norway for "revenue protection".

To be sure this would be in the unlikely case of Kyoto being renewed, and the even more unlikely case of this leading to real cuts in oil and gas demand.

The European emissions trading circus therefore has to survive, for this happy new revenue window to open for the oil and gas exporters. A surprising-seeming alliance of the recession and unemployment wracked postindustrial democracies of Europe, and the absolute monarchies repressing democracy protests and pumping oil and gas in the Middle East, is therefore shaping up. Unfortunately for them however, this gameplan is opposed by the stark outlook that other, non-European postindustrial countries will refuse to extend their commitment to reducing carbon emissions, either by amounts or through another 10-year period of time, when the Kyoto Protocol expires in December 2012. In particular Japan and Canada have openly hostile stances on renewing Kyoto. Most high income countries have set a fatal condition - that emerging and developing countries, starting with China, India and Brazil must also accept legally binding GHG emissions restrictions. Otherwise, the "Kyoto process" will simply be allowed to lapse.

Times have moved on dramatically since US president elect Obama made an early hopeful pitch on climate crisis, including the now-standard claim of hyper urgency. CO2 science was beyond dispute he said. Sea levels are rising, like they have been doing for centuries. Coastlines are shrinking, in the same way. He said this is a global crisis and America must act. Drought, floods and deadly famine are commonplace - but Mr Barack Obama makes sure never to demean his image by showing up at any conference concerning the 900 - 950 million persons who face permanent food shortage, today and every day, not in "about 2075" - which is the favoured date for Global Warming Armageddon used by climate crisis shills like Obama. Famine continues, but possibly not Global Warming, nor Obama.

The sharp lesson learned by Obama and his European allies at the December 2009 Copenhagen climate meeting, called "summit", has penetrated leadership elite thinking in the old world postindustrial democracies. Neither European leaders, nor Obama, are due to show up at the Durban climate conference which opened November 28. When a loss of face threatens, do a No Show.

The scene sets to the basic and necessary conditions for floating GHG emissions trading higher and wider - or at least saving some of it. Without this, the already threatened flow of easy money to green energy and low carbon start-ups and hedge funds will also be threatened.

The answer is a one-liner: higher oil prices. While global warming hysteria and doom-mongering is necessary for gouging higher energy prices, dumping millions of persons in so-called advanced countries into fuel poverty, and letting famine rip in the neo-colonies it is not sufficient. Only higher oil prices can do the trick. Oil price hysteria can do almost anything - it can even persuade the mature electorates to move from the KFC drive-in to the voting booth, and vote for No Alternative on the cozy basis that only their neighbours will lose their jobs, and polar bears will be fine.

But things do not look good for cranking up oil prices. The most debt-wracked of Europe's failing national economies - the PIIGS countries - are cutting their GHG emissions in a big way: their oil consumption is on a double digit percentage annual decline track, or "trend rate". Oil inventories are high in nearly all OECD countries. Economic growth is slowing in both China and India. Only the threat of Middle East war and mayhem - perhaps the Big One of war against Iran to punish it for producing an atom bomb the same way that Israel, Pakistan and India produce atom bombs - holds any serious hope for a sharp levering-up of oil prices.

Anybody wanting to lever up oil prices has more than an ally - in fact a Dark Angel - in the shape of Goldman Sachs: its magic track record in talking, pushing and shoving oil prices higher is known to any oil trader.  While we dont have to believe it, because it is not true Goldman Sachs claims its interest in green goes beyond record profit gouging. The firm chauffeurs its execs in hybrid cars, and will soon move to all electric limousines. Its "Green Tower," or new $2 billion headquarters  in Manhattan, is so ecofriendly that posters in its canteens advise switching to a meatless diet as a healthy career move for employees. On the trading floors of the Nymex oil market Goldman operates pressure, pushing oil prices higher while it positions to scoop profit from any possible expansion or extension of government spending and subsidies triggered by "fighting" climate change.

With the now imminent threat of the Durban climate talks turning out bad for Low Carbon profiteers, the main hope centres to gouging up oil prices: even food crop based biofuels can be economic with oil prices above $125 a barrel ! As we know, political leaders terrified by the urgency of "fighting" apocalyptic climate change by about 2075, like Mr Barack Obama, have no time at all to waste on the so uninteresting fact that 900 - 950 million persons do not have enough to eat, today, now and every day. Using food crops to save on oil could pump up equity values in the biofuels patch: Goldman Sachs will advise for a fee. Lets look on the bright side !

Emissions permits traders are facing tough times. One major problem is they are trading something that is completely worthless - but Lady Gaga and Michael Jackson (RIP) icons sell, also. The "underlying security" or permits to emit hot air do not fetch too much, these days. The US voluntary-basis Chicago CCX permits trading floor closed down forever, 11 months ago, with final trades at around 5 US cents per ton for the not-so-valuable right to emit CO2. In Europe, long gone are the days of 30 euros-a-ton. Present prices hover around 5 euro with the big downside wipeout in clear view.

For some while now, the best arb(itrage) trade is with Clean Development Mechanism credits and permits, where pure corruption and total opacity of the market makes it relatively easy to print certificates and turn them into printed cash. Other, even more exotic "climate paper" can also be played on and with, but market volumes are tiny and risk is high.

Much better is switch into oil arb trading, where Goldman Sachs informs all loyal buyers of its services, and believers in its analyst reports that WTI grade oil is headed for $126.50 per barrel, and Brent is headed for $130.00. For starters, the WTI/Brent spread will be down to $3.50 in that happy future time, from spreads as high as $15 - $20 in recent months, and nearly $10 today. With a little or a lot of help from GS, this premium should go on shrinking, perhaps fast.

How the spread shrinks is important. Goldman Sachs wants higher oil prices. Highly stressed climate finance boomers, European politicians, Al Gore, Richard Branson, Qatari and Saudi princes want higher oil prices. So the basic gameplan should feature a sharp increase of barrel prices for both key benchmark oils, with the WTI price growing even faster than Brent.

Reality, as for the Global Warming gravy train ride, could be a downer: the outlook for world oil demand is nothing like the supposedly "very alarmist" official view of the IEA for spiralling Chinese and Indian oil demand to wipe out any hesitant and small oil savings made by the debt-wracked economies of Europe, Japan and the USA. The real outlook for world oil demand is down, down, down as inventories, stocks and reserves go up, up, up. Playing the Goldman game of goosing oil prices, like it did with fantastic success in 2008 - to the highest prices in all time - is frankly difficult with "fundamentals" playing so unfriendly.

Oil boomers really have only one serious hope: war in the Middle East.

While Goldman Sachs' expertise may not extend as far as triggering Designer Wars, several of its major clients do have that proven ability.

Even a small designer war - like the recent Libyan campaign and the thrilling "drive by shooting" of Col Gaddafi - can seriously lever up oil prices for some considerable time. What we need this time however, as Goldman says, is a $25 rise in the oil price from present levels.

Among the rational scenarios for achieving that hike, only civil war in Saudi Arabia and Iran bombing offer guaranteed results - in fact such good results prices could fly to $200 a barrel, which Goldman does not seem to have in its metrics, at present. Even more absent from its analyst reports, when oil prices are hiked to those levels the global economy has a one-only readout: collapse.

Syrian civil war could or might be a "median-hypothesis". This would need sufficient but circumscribed fallout from a short but thrilling war (for Fox News viewers munching their KFC) in Lebanon with heavy civilian casualties and awesome property damage, and would also feature determined Hezbollah attacks on Israel, to keep upward pressure on oil prices simmering long enough to hit $130 a barrel. Once the right price is achieved, the war could be shut down.

One other real option is on view: shred the unworkable Kyoto Treaty and let oil prices softly slump with the global economy, despite the negative impact on the already shrinking profits, called "earnings" of Goldman Sachs. Time will tell

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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