October 02, 2014

Profiteering with shale

The recent criticism of oil companies and US regulators in Japan and elsewhere in connection with US shale oil exports is meaningless, in my opinion.  The big oil companies are being accused of shale-export profiteering, at the expense of one of their closest allies, Japan and to the detriment of the US population. A four decade old law that held them back which said that US oil could only be exported in the public interest has been conveniently modified for them.

I still say this objection is meaningless because the US has a long history of doing just what it is being accused of- military intervention and support for despots included. So what is new? Why criticise now for an accepted capitalist practice?

The story, briefly, is this: the shale oil revolution in the US has set it up to become the world’s largest oil producer by next year, according to the International Energy Agency. However, it will still remain a large net importer of oil, because the shale oil it produces is too good; it cannot be processed by its own refineries that are geared to handling crude oil from abroad.

Simple solution, build new or retrofit existing refineries in the US to handle shale, right?  

Not so simple. Because the price at which oil companies can sell shale oil in the US is about 20 dollars a barrel lower than what it can sell to Japan. So exports make sense- to the oil companies, that is.  Besides, handling shale oil domestically would mean spending money on refineries. It would also create a glut in shale domestically and bring prices down significantly. Good for the US consumer. Not good for the oil companies. 

So they got together to lobby US (why do we word the word lobby for the US and bribery for India?) politicians to modify a 1973 ban on oil exports that was meant to protect domestic consumers. Obama signed this into law in June, allowing shale oil export. The oil companies are now getting rid of their excess inventories by selling shale to Japan at about 3 dollars a barrel lower than what Japan would pay for crude. And they have China in their sights next.

The US will probably export a million barrels of shale oil a day by next year- a third of Japanese imports- and will produce 3 million barrels a day by 2017.  Unsurprisingly, many companies are lining in the US for export approvals, which, by the way, cost them about a hundred million dollars a pop in administration, engineering consultancy, legal and environmental fees. Amongst them is a company owned jointly by an oil major and Qatar- a country much in the news for being a leader in funding the Islamic State.

Qatar is a US ally that produces the cheapest gas in the world. Given that instability and war in the Middle East always raises oil and gas prices internationally, Qatar’s behaviour of running with the hares and hunting with the hounds is understandable, if smelly. But I am sure that the oil majors and their political backers will simply write this off as just a conflict of interest.


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