Upcoming Oil Mega Price Spike

The components of  the current low oil prices represent an insidious and toxic economic brew. The sustained long-term low oil prices, are a result of continued record high production domestically and internationally, excess inventory, tepid demand led by a slowing Chinese economy, and a strong US dollar in which oil is priced. Consequently energy firms have mothballed or outright cancelled mega energy projects worldwide totaling $380 billion which were undertaken years earlier during boom times to meet future global energy needs.

With respect to production, both OPEC and non-OPEC countries have been producing flat-out because of the need for revenue. The biggest producers are Saudi Arabia and Russia, the former because of unanticipated expenses supporting a war in Yemen and increasing domestic needs, and the latter because of Western-imposed sanctions. Iraq is continuing their record production, Iran will soon enter the world market with a bountiful of oil stored in supertankers and the US, despite some shale oil company financial difficulties, are still strong producers particularly with the new crude oil exports.

The restarting of mothballed projects is an operationally and financially complicated affair during a demand upswing for the following reasons:

1.       Operationally, getting these projects back on-line will not be accomplished before the excess inventory is reduced.

2.      Financially, oil companies may be reluctant to commit to continuing particular projects or will decide to have a limited restart because of the uncertainty whether new demand will continue to remain strong.

3.      Finally, the continued strength of the US dollar has limited the ability of many countries, particularly those emerging economies, from purchasing more oil to meet demand.

For this reason, these components represent a set-up for a brutal super-spike in oil prices for an inevitable market correction when demand rises which reduces excess inventory and the US dollar declines.  Even with a modest increase in demand, excess inventory will vanish and without any new oil operations coming on-line in the near future, oil prices will steadily increase. Accelerating this process will be the decline in the US dollar as more countries are able to afford to purchase more oil to meet demand.  At the same time energy companies will be scrambling to rehire oil workers and energy services, a highly specialized field, which could result in a bidding war for services raising operational dramatically.

It is important to note that these components will not necessarily move in synchronized lock-step, rather in a somewhat staggered fashion. Nonetheless, whichever component shifts first, the period from the initial change will be only a matter of months, not years before oil prices surge dramatically and remain elevated until new oil production operations are on-line.

The most likely scenario for the beginnings of an oil price increase would be the depreciation of the US dollar whose current lofty value is unsustainable and its decline precipitous. Because other commodities in addition to oil are valued at or near historic lows, the opportunity for countries to make large purchases immediately with a depreciated US dollar will be difficult to pass up. The result could be a sudden burst of intense purchasing activity for oil to transport these goods as well as to operate the industrial operations to process these raw materials.

The demand upticks may also come from China who is in the midst of diversifying their military, converting it from a largely land based military to a leaner, more muscular land, naval, air and cyber military force. For this reason they will take advantage of the lower US dollar to purchase oil to increase their strategic reserves.

Again, the timing of when this demand surge will occur is speculative however the components are in place for such a dramatic change in prices to occur. Certainly investments in oil, gas and energy related services should be strongly considered to take advantage of this upcoming energy price spike.

This article was published in SeekingAlpha.

Copyright Indo-Brazilian Associates LLC 2016.  All rights reserved.

Indo-Brazilian Associates LLC is a NYC-based global advisory service and think tank with connections at the highest levels specializing in international investment, political and security risk assessments. International business is increasingly complex featuring a highly mobile professional class in all corners of the globe. We provide you the tools to successfully negotiate cross-culturally in your global business endeavors. Tell us about your challenges.  We'll get you on the "Short List".

We provide executive coaching, speaking engagements, speechwriting and workshops. Contact us at www.indobrazilian.com

Petro-War: Iran Has Saudi Arabia Over An Oil Barrel

Iran will shortly receive about $100 billion unfrozen assets and would be able to sell an estimated 30-50 million bbls of crude stored in 25 super tankers (or VLCC Very Large Crude Carriers) each with a capacity of 2 million bbls. Although the quality of this stored oil has not been verified, there are still abundant markets worldwide for this grade. Additionally, the market has already priced in this soon to be available Iranian floating inventory as has probably assumed that the Iranians will not rush to sell this entire inventory in short order.

Because Iran is well armed financially to wreck havoc on a weakened Saudi Arabia, they will craftily use these assets to severely undermine the Kingdom.  Because the Saudis are still obsessed with maintain market share, the Iranians can undercut Saudi prices anywhere in the world while maintaining current production positioning the Saudis under the sword of Damocles.

Instead of the threat of nuclear weapons, in an ironic twist Iran is now using the nuclear agreement to unfreeze billions in assets and by de facto weaponize oil to gain market share and influence in the Middle East through trade instead of bombs. Unlike the pampered and entitled Saudi population, the Iranian population has learned to live with less under draconian sanctions for several generations so even a modest increase in the standard of living will placate the population.

As articulated in my recent article entitled Saudi Arabia on the Brink of Falling Into Economic Quick Sand which was published in the Oil & Gas Monitor magazine earlier this month, the Saudis face civil unrest with the reduction and/or elimination of subsidies such as health care, fuel, education, etc.

With respect to Iran, regardless of the type of government, any country that suddenly has a windfall of resources, hordes of cash and a plentiful fungible commodity, will wield this power in exacting revenge, real or perceived on its enemies and applying enormous influential pressure on its neighbors.

Iran can apply the same tactics as a local gangster who wants to gain market share quickly in a new territory by undercutting the established gang in pricing, even giving away the product, driving him out, and then establishing himself as the new powerhouse. Iran is doing this on an international scale. Unlike a neighborhood turf war, the Saudis will still remain however their power and influence will be greatly diminished and suffer an incalculable loss of face.  Their carefully crafted reputation will be badly tarnished and they may be forced to make politically and economically unpalatable compromises in upcoming OPEC meetings and on the international stage. Though the Saudis will continue to be a leading producer, Iran will have considerable leverage to call the shots and dictate terms. In other words Iran is hijacking the OPEC leadership from the shadows.

How will this upcoming abrupt change in dynamic impact energy prices?  In the interim you may witness a protracted economic war between these countries. Iran was engaged in a military one with Iraq during 1980-1988 resulting in untold human casualties. Iraq eventually sought peace because of diminishing manpower.

In this case Iran is better positioned to extract draconian peace terms with the Saudis because of superior economic leverage. Unlike the Saudis, the Iranian leadership is psychologically battle-hardened for a long-term slog and has experience and the will to absorb horrific losses to reach their objective.

For 2016 any coordinated efforts by OPEC to cut production are doomed because of the intense animosities between members particularly Iran and Saudi Arabia. Each are heavily involved in the economically-draining proxy wars based along sectarian lines. Iran is active in Baghdad, Damascus and Beirut while Saudi Arabia is deeply entrenched in the unwinnable and unending eight-sided Yemen conflict. Not only would OPEC members have to mutually agree to cut production, but they would also have to convince major non-OPEC countries to do the same. Russia will give a firm nyet because they are still under draconian sanctions and need all the revenue it can, including support of the Iranian-backed Assad regime, the newly (albeit forcibly) acquired Crimea.

My assessment is that Iran will utilize economic water torture in oil by selling at a steep discount just enough oil to keep prices slightly below the market rate even as demand may tick up, and keep Saudi Arabia subservient to Iran’s needs. For these reason, I believe that oil prices will remain within the $28-$35/bbl range through 2016.

This article was published in Seeking Alpha.

 Copyright Indo-Brazilian Associates LLC 2016.  All rights reserved.

Indo-Brazilian Associates LLC is a NYC-based global advisory service and think tank with connections at the highest levels specializing in international investment, political and security risk assessments. International business is increasingly complex featuring a highly mobile professional class in all corners of the globe. We provide you the tools to successfully negotiate cross-culturally in your global business endeavors. Tell us about your challenges.  We'll get you on the "Short List".

We provide executive coaching, speaking engagements, speechwriting and workshops. Contact us at www.indobrazilian.com

Paris Terror Spotlights Security at Public Events

Since the Paris terrorist attacks and other threats at European public venues security measures have been reviewed and tightened in the US. For this reason any disturbance will be perceived by the American attending public and security as a terrorist attack.

Frequently beefed up security is a public relations show for the purpose of assuring the public in the form higher visibility of security personnel, more intense scrutiny such as personal and electronic detection examinations, and stricter prohibition of items such as back-packs/handbags  and/or their contents.

Make no mistake that a determined troublemaker, amateur or professional, can cause havoc by bringing into a venue legal and individually harmless items when used in a particular way or combined are de facto weapons.

Nowadays, security enhancements must take place beyond the visible uniformed security team which are undertaken as the event is being planned. There must be a ‘tough love’ collaboration amongst the event planners, venue security, and law enforcement to discuss the potential threat level of an event including pre-determined communication and coordination responsibilities should things ‘go south’, either to prevent an incident from turning into a crisis or a rapid containment of a crisis.

The approach is to view attendees at an event as one living, breathing organism with its unique components, dynamics literally as having its own personality, in relation to a changing environment. Often security examines the components but fails to consider how each of them is linked and how they will interact. Take a basic example of an early season football game which elicits positive emotions and excitement while taking place in summer weather. Fast forward to winter with the same demographic of attendees at the same venue and now their team is in the playoffs against a bitter rival in brutally cold, wet weather. The same demographic who were so giddy months ago can slide into the dark side in an emotionally charged environment.

In other words security must play a ‘war games’ scenario. No one strategy applies to the same type of event at the same venue. There’s the insidious danger of complacency by security when an event takes place with few or no problems. They must plan the next event as if it’s taking place for the first time, even if nothing appears to have changed previously.

In an ideal world, private security personnel uniforms and body language should exude professionalism and who are well-trained.  Unfortunately the weakest link to security at venues is that often security personnel are not well-trained because of their part-time and low paid status. This can result in venue security either under-reacting or over-reacting to a high-level threat.

On the other hand, if the part-time security is frequently on duty at the same venue for many events, they have a superior ‘feel’ as to what does or doesn’t seem right and can notify their superiors far sooner.

Another critical security component is the event layout. Venue capacity signs are for the purposes of fire code compliance but it’s layout will determine the efficacy of an evacuation.  Even when attendance is far below maximum allowable capacity, the layout itself can turn into a deadly obstacle course to safety.  A venue may indicate a maximum capacity of 1,000 but may hold only 700 for the event because of the stage and seating layout.  However an orderly evacuation may be compromised because of narrow aisles formed by individual chairs that will shift when attendees try to leave quickly and block passageways heightening panic.

There’s also the potpourri of components of attendee demographics, type of food and beverages served before and during the event – paid or complimentary, night or day, outdoors or indoors, meteorological conditions, etc., all environmental components that will determine the attendee character because any deviation from the baseline norm of any one of these components has a surprisingly ripple effect.

The components that determine the character and psychological state of the attendees serve as a predictor of how they will probably react if a major incident occurs. Attendees may be orderly and compliant at the beginning of an event but as the event progresses, due to the above factors, may become unruly and belligerent.  For example a simple operational glitch like a blown A/C can turn a comfortable environment into a steam bath; when only minutes before you had a boisterous yet controlled crowd, now you have a highly agitated mob on the brink of rioting.

What may seem trivial is actually one of the most important aspects during an emergency – the tonality of the public address announcer. Superbly articulated instructions to a crowd on the brink of hysteria are meaningless if the voice does not convey a calming and convincing level of assurance.  Public announcers must have a reassuring yet authoritative voice to provide information and instructions.  The voice preferably should be regional and familiar because people gravitate to leadership for trust and credibility from their community to guide them to safety.

The announcer must provide statements in short sentences using everyday words, never compound sentences. The delivery should be smooth but not monotone.  Because everyone is under stress, the ability to clearly comprehend long statements and filter out the word “don’t” is compromised. In other words “Walk to the exits” instead of “Don’t run to the exits” should be communicated.

 Additionally the public address announcer should provide regular assuring feedback to the attendees that they are complying to your requests which gives them a sense that everything is going smoothly for the purposes of keeping a cap on the anxiety level. Avoid anything with a military sounding or barking command or staccato tone because it elevates anxiety levels, particularly since the attendees are civilians, not military grunts.

Not only does this method reduces an incident escalating and spiraling out of control calmer and more confident attendees will then take it upon themselves to police those who begin to panic which in turn reduces the burden on security. Essentially the public address announcer is subconsciously deputizing everyone to make the crowd cohesive instead of creating fissures.

Copyright Indo-Brazilian Associates LLC 2016.  All rights reserved.

Indo-Brazilian Associates LLC is a NYC-based global advisory service and think tank with connections at the highest levels specializing in international investment, political and security risk assessments. International business is increasingly complex featuring a highly mobile professional class in all corners of the globe. We provide you the tools to successfully negotiate cross-culturally in your global business endeavors. Tell us about your challenges.  We'll get you on the "Short List".

We provide executive coaching, speaking engagements, speechwriting and workshops. Contact us at www.indobrazilian.com

Saudi Arabia: At the Brink of Falling into Economic Quick Sand

For the first time since they became a world oil producing powerhouse, Saudi Arabia is facing intense and challenging pressure simultaneously from several areas that threaten not only the citizenry’s way of life, but its critical role in an increasing hostile region as well as globally.

The dynamics of world energy and the Middle East are changing rapidly and fundamentally. Although the new Saudi leadership has aggressively undertaken measures to meet those challenges, these may be too little, too late.

For decades the Saudi government has heavily subsidized housing, health care, fuel ($0.50/gallon), electricity $0.01/kwh), and other generous benefits -essentially a systematic massive underwriting exercise  - creating a spoiled society, to keep their citizens at most socio-economic levels content and quell discontent. These short-term tactics worked rather well particularly as a stop-gap during the 2011 Arab Spring.

The Saudi government has never faced a steadily growing political and economic dilemma with respect to demographics. About two-thirds or 18-20 million, of the population is under 25 years old, creating meaningful jobs for Saudi youth is challenged by skyrocketing costs. One of these key costs is health care because the population is living far longer than the average 40-45 year lifespan of the typical Saudi in 1970. Additionally this young population is restive for change specifically personal freedom of expression within the framework of their culture, albeit not a western democracy.

The Saudis are the world’s 6^th largest energy consumer despite a population of only 30 million which makes the economic figures sobering. The Saudis government face a series of daunting long-term economic dilemmas namely low oil prices and tepid global demand resulting in an historical oil glut and increasing production from their chief competitors namely Russia, Iraq and the US (not to mention the upcoming crude exports).

Because of these tectonic shifts an ever greater amount of its estimated current 10.3 million/bbls day production is dedicated to its voracious domestic demand. This demand includes the burning of oil instead of natural gas or coal with inefficient power plants. The Saudis must to produce 8 million bbls/day to collect natural gas that comes out of the ground with oil critical to power residential and industrial needs. For example, air conditioners consumed 70% of electricity use in 2013 and oil is the base fuel for the desalination of water.

Additionally, the lack of refineries means that they must import refined products at international prices because its refineries can’t produce enough of it to satisfy domestic demand. In fact, because of the domestic demand for gasoline, diesel and jet fuel has grown 60% since 2005, the trend has converted the Saudis into a net importer of these fuels. In an expensive but necessary long-term project to meet the increasing domestic consumption needs, Saudi Arabia has a new $22 billion joint venture with Dow Chemical for the construction of several refineries costing $12 billion each. Their completion may be too late.

Exacerbating the problem even the quality of oil has declined resulting in the production of less desirable heavier, sour crudes which are sold cheaply on world markets. Furthermore, there have been no new significant discoveries of oil reserves. For these reasons, the Saudis are highly reluctant to cut.

Historically Saudis’ foreign reserves have cushioned short-term crises. Despite an estimated foreign reserve of $640 billion, this confluence of on-going and longer term issues are draining their reserves faster than projected. In fact this past October the Saudis spent $7 billion of foreign reserves to cover domestic economic shortfalls. To temper this burn rate, the Saudis have dipped into the international debt markets for the first time in decades. Despite possessing burgeoning surpluses for decades they’ve procrastinated and lost numerous opportunities to diversify an oil-dependent economy.

Politically, the greatest threat is internal featuring a potential volatile mix of power struggles amongst the royal family rifts, the clerics, and the young tigers biting at the bit, and a restive, alienated youth. Because it’s a closed society, determining the depth, breadth and intensity of such power struggles is difficult to ascertain.

The short-term forecast is favorable. Saudi Arabia is the most politically stable country in the region and will continue to remain an important, though not as dominant swing producer, and is welcome to continued energy services investments. The Saudis have a long, deep relationship with world banks and energy services firms and still maintain low production costs and robust foreign reserves.

The national oil company ARAMCO is a case study model of efficiency the perfect corporate utopia in a sea of impending chaos. It’s an oasis of a corporate culture representing what Saudi Arabia could or should be but isn’t: a dynamic, superbly run corporation of professional men and women, Sunni and Shia, foreigners and Saudis. Investments to maintain and upgrade facilities, yet the challenge of meeting increasing budgetary needs in a prolonged low oil price environment.

On the other hand the long-term prognosis does not bode well. The demographic changes will continue to put upward pressure on Saudi finances and, according to the IMF, at this burn rate may run out of cash in 5 years making it a debtor country. Even if oil prices magically rebound overnight to $100/bbl, Saudi Arabia’s economic problems would only get delayed because low oil prices have exposed their vulnerability and raised overall risk.

Politically Iran, like today’s Saudi Arabia, was a monarchy from 1925 to 1979 until it was overthrown by religious extremists. In an eerie parallel the Saudis have a restive population angered over corruption and lack of political participation. However what makes the Saudi situation more unstable than the Iranian Revolution is that unlike a stable Cold War environment and high oil prices, the Saudis are surrounded by failed states, plunging revenue because of low oil prices and supporting an expensive protracted war in Yemen.

The Saudis have oil and money but neither can buy more time to swiftly arrest such a powerful confluence of changes. Government planning is one thing, implementation is another because it requires, changing their citizens’ hearts & minds – their mindset. Theirs is an entitled population who is spoiled during many decades of subsidies and who may be highly resistant to the reduction or even elimination of these subsidies despite the onerous economic consequences.

Should any extended or extreme civil unrest or turmoil occur Saudi Arabia will still produce oil but like present-day Iraq, with a weak government, sectarian strife and continued robust oil production regardless of the leadership. An extreme scenario would see an Iranian-style implosion with the emergence of a new leadership that is hostile to the West, perhaps only politically but would control its oil in the manner that Russia controls gas exports to Western Europe – on a whim.

 Copyright Indo-Brazilian Associates LLC 2016.  All rights reserved.

Indo-Brazilian Associates LLC is a NYC-based global advisory service and think tank with connections at the highest levels specializing in international investment, political and security risk assessments. International business is increasingly complex featuring a highly mobile professional class in all corners of the globe. We provide you the tools to successfully negotiate cross-culturally in your global business endeavors. Tell us about your challenges.  We'll get you on the "Short List".

We provide executive coaching, speaking engagements, speech writing and workshops. Contact us at www.indobrazilian.com