Israeli news and conflicts

The Kremlin has finally awoken from its arrogant stupor and is facing the reality of today’s energy market. Russia’s 2009 federal budget was based on the assumption that oil would sell for $95 a barrel. Recent prices have been as low as $36 and this has been a slap in Moscow’s face as sobering as a Siberian winter.
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Prime Minister Putin has ordered the budget to be revised on a $41 a barrel price. This move is far more realistic considering the global economic situation, because there is no end in sight to the world-wide downturn.
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This new budget is likely to have an adverse affect on state finances and the ruble. Economic Development Minister Elvira Nabiullina said that the ruble could fall to 35.1 to the dollar (it is 32.8 today, 22 January, and this is up from 23 during the summer). Arkady Dvorkovich, the Kremlin’s top economic advisor, said the government expected a budget deficit of at least 5% of GDP, while private sector analysts predict a 5-7% of GDP deficit.
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Even worse, Finance Minister Alexei Kudrin predicted that the Russian economy would grow between 0-2% in 2009. All this means that the government will have to siphon money out of the Reserve Fund (1 billion rubles) to cover the expected shortfalls.
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Gone now is the former confidence and even arrogance regarding the ruble. There are reports in Russian news that some businesses are going back to the practice of pricing things in U.E. instead of rubles. This is a conditional unit. It used to be based solely on the dollar but these days it is based on a range of values between the dollar and the euro or a ratio of the two.
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Gone too is the laughable idea of making the ruble a base currency of trade to replace the dollar in dealings with China and oil-producing partners. Putin has been rather silent these days, which is quite uncharacteristic of him. Nothing wakes people up like a good hit to the wallet and Russia has had its financial legs cut out from under it. Now it is time for sober thought and analysis instead of rhetoric and bluster. Hopefully, Russia’s economic team will guide the country through this dark financial time.

Like receiving manna from heaven in the desert, Israel has just made a timely and momentous discovery.  The Jerusalem Post reports that ‘three massive gas reservoirs have been discovered 80 kilometers off the Haifa coast, at the Tamar Prospect.’  The find was made under the seabed in 5500 feet of water (1650 meters) by Noble Energy Inc. and is the biggest in the company’s history.

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The Jerusalem Post quoted Yitzhak Tshuva, owner of Delek Group Limited (own of the owners of the test wells) who said, ‘the discovery is one of the biggest in the world’ and ‘I have no doubt that this is a holiday for the State of Israel.  We will no longer be dependent (on foreign sources) for our gas, and will even export.  We are dealing with inconceivably huge quantities; Israel now has a solution for future generations.’

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This news has caused so much excitement that the Meimad Green Movement party has already called for a planned coal-fired power plant in Ashkelon to be shelved and replaced by a gas-fired one.  The first cubic meter of gas has not even been brought in yet but plans are being made for it all.

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What does this mean for Israel?  If the size of the reserves pan out as claimed, Israel will not only become energy independent (in gas at least), but will also become an exporter.  This is particularly important considering that most oil-and-gas exporting countries are not on good terms with the Jewish state and that there is always the threat of an energy embargo.  That weapon will now be mostly useless. 

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Israel currently buys natural gas from Egypt at a very good price, but Cairo has been under extreme internal pressure to review the whole arrangement.  Eventually, Israel will have to pay the Egyptians more for the gas or face a cut off.  A recent court case in Egypt recently ruled against Israeli interests but Cairo has so far refused to carry out the court order to raise fees or cut service.

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Another positive aspect of this discovery is its export potential and the diplomatic influence that it entails.  The Muslim world literally gets away with murder because the rest of the world needs their hydrocarbons and they know it.  That is one reason why Europe always goes hard on Israel but treads carefully with the Arab states.  Now that Europe is being screwed silly during a particularly cold winter by Russia and Ukraine over gas deliveries, the EU is more set than ever to diversify its suppliers.  This is where Israel can step in and make a mint on sales and build up a stronger political and diplomatic bargaining position at the same time.  Europe is a whore for energy and always seems to be most understanding with its suppliers.  Israel needs to take advantage of this fact because the next decade is going to be very volatile and dangerous, not only for Israel, but for the entire Middle East, and Jerusalem is going to need all the friends it can buy.

This has been an interesting week among the authoritarian set.  First, Russian Prime Minister Putin amused the world by complaining that the effect of foreign markets on the share prices of Russian companies was unfair; This coming from the destroyer of Yukos.  Second, Venezuelan President Hugo Chavez is having another go at trying to get indefinite re-elections.  He is one man who can’t take no for an answer.  Lastly, Iranian President Mahmoud Ahmadinejad has finally admitted that the Iranian economy is suffering from the sharp fall in oil prices.  I don’t know exactly what it was that changed his mind.  Maybe it was the 10% unemployment rate or the 30% inflation.  Whatever it was, it brought him back from Disney Land.

The Iranian budget is based on the assumption that oil will sell for at least $90 a barrel.  Everything was fine while prices were in the stratosphere, but earlier this week oil fell as low as $47, sparking convulsions throughout the oil-exporting crowd.  (See Iran Urges OPEC to Take Action)  Earlier, Ahmadinejad had put a brave face on it and declared that Iran was immune to the world financial crisis and kept spending away like an out-of-control shopaholic.  Then the Iranian economy began to falter.  Finally, last month, 60 economists wrote Ahmadinejad a third letter blaming him for the countries sky-high inflation.

Now the Iranian government has sobered up and they are trying to work out next year’s budget.  Approximately a month ago, it stated that is was planning to base it on a $50-$60 a barrel oil price.  OPEC met last Saturday and thanks to Saudi Arabia, it decided not to make another round of production cuts.  They will meet again in a few weeks, but the deepening world recession seems likely to keep oil prices suppressed for some time to come no matter what cuts are made.  That may be why Tehran has now adjusted its budgetary base to $30-$35 ‘because we do not decide the price of oil on the global market,’ said the President.

What will be the result of this new budget?  The Iranian President’s Office has already stated that spending programs will have to be slashed and taxes raised.  Some possible casualties may be public utility projects, some new oil and gas exploration projects, and a potential cut in gasoline subsidies for cars.  This last point can be a sticky one because Iranians love their cars and cheap gas.  Previous attempts to cut gas subsidies resulted in strong enough backlashes to force the government to reverse course.  Tehran is behind the eight ball here since it has to spend $350 million in hard currency per month to maintain this fuel addiction.

The next presidential election in Iran takes place in June.  Ahmadinejad is literally banking his hopes on the poor because he plans to keep making direct payments to them no matter how badly the budget gets.  However, that may not be enough as the economy continues to tank.  Ahmadinejad needs to do something else quickly because his overall popularity is dropping as fast as the price of his precious oil is.  If it falls much lower and stays that way for any length of time, he will end up like his country’s economy, down and out and broke.

Why is Russia now willing to cooperate with OPEC over oil production and quotas (see Russia to Work with OPEC on Output Cuts) when it spurned such collaboration in the past?  Moscow was happy to pump out as much crude as suited its purposes regardless of what OPEC or anyone else had to say about it.  Why the big change of heart now?

Quite a lot is happening inside the largest country on earth to force it to alter a lot of its decisions and attitudes.  As much as Putin and Medvedev say and pretend otherwise, the world economic crisis has come to Russia and hit harder than anyone there wants to admit.  Many banks are in trouble and have needed assistance, businesses are having great trouble getting credit (even the gas and oil companies!), foreign investment is still fleeing the country and the ruble is being allowed to fall in a controlled devaluation. 

The latter action is most indicative of the severity of the problem.  Russia has recently taken a lot of pride in the strengthen ruble and Moscow has even suggested that it become a benchmark currency.  Putin recently proposed that oil and gas contracts between China and Russia be denominated in rubles instead of dollars, an idea the Chinese cooled on as soon as the dollar strengthened 20% against the ruble.  The Russian government broke its promise not to devaluate the ruble because it had spent $57 billion in the last two months propping it up and it quickly became obvious that this couldn’t go on forever.  In addition, when the dollar starting gaining on the ruble, Putin laughably urged Russian citizens not to buy dollars; advice pretty much ignored by everyone because the average Russian views dollars as a safer financial instrument, plus a quick profit could be made playing the exchange rates.

Everyone knows that oil prices have fallen precipitously, but other things are happening that are just as bad for Russia.  Metal prices, another big source of earnings, are also in freefall.  Some of the biggest enterprises in the country are cutting back production and getting ready to lay off large numbers of workers.  Even worse, natural gas prices are based on the price of oil so now another huge source of revenue is sinking fast.

One of the biggest signs that the Great Bear is almost on its knees is the 180 degree turn it took on its planned wood export tariffs.  Earlier this year, Russia decided to drastically increase its wood tariffs in total contravention to promises to and an agreement signed with Finland, one of its key wood buyers.  Putin felt confident enough to openly thumb his nose at Helsinki and the Finns were already calculating how much their GDP was going to fall as a result (2%).  Two weeks ago, Putin suddenly had a change of heart and suspended the tariff for 9 to 12 months.  He certainly didn’t do this out of any sympathy for the Finns.  Finland was preparing to switch its supplier and in the current economic climate, Russian simply could not afford to lose the business.

When one looks at all of these factors together, it is no mystery why Moscow is now willing to cooperate with OPEC.  With virtually every source of income shrinking and a currency in danger of collapsing, Russia has to do something to try and reverse the situation.  Whether the Russia/OPEC tag team can manage to raise the price of oil significantly remains to be seen.  We may find out soon enough when OPEC meets again in three days (on November 29).  Personally, I think that Russia is more nervous than any of the oil-importing countries.  Its economy is in more trouble and it has far more to lose.

Oil prices have just gone up and it isn’t because there has been a sudden increase in demand.  The prime reason for this rise, among other smaller factors, is that the Russian Energy Minister has announced that his country is going to coordinate its production activities with OPEC in order to defend its state interests.  This is understandable.  Since oil prices have tanked by nearly two-thirds from their recent historical highs, the major oil-exporting countries that depend on this resource to fuel their economies have been getting more and more desperate.

Last month, OPEC had already cut its output by 1.5 million barrels a day and it is meeting in Cairo again on November 29 (in three days) to decide on further cuts.  Since the last round of production cuts failed to stem the fall in prices, it is almost certain that another cut is in store to try to revive the market.

One of the main problems is that the major oil exporters have national budgets that are based on the assumption that oil will sell for much higher prices than they are going for now.  For example, Iran needs at least $75 a barrel to break even on its budget and Russia’s current budget has been calculated based on the same $75 a barrel supposition.  With today’s price at $52, both countries are facing huge budgetary nightmares and a potential fiscal disaster down the road.

Russia has embarked on a wide variety of projects, both civilian and military, that require a constant heavy flow of cash that is quickly drying up.  Already, there are signs of trouble in Russia’s heavy industries and in its business world.  Companies are having trouble securing credit, more and more layoffs are taking place and several high-profile projects have been delayed indefinitely.  For example, the construction of the Russia Tower in Moscow, which was designed by Norman Foster and was to be the tallest building in Europe, has been halted for a lack of funds.  Gazprom has recently shelved plans to build a $1 billion monstrosity in St. Petersburg for the same reason.

Times are tough, and no matter what Prime Minister Putin says, the world economic downturn has most definitely come to Russia and the pain is being felt everywhere.  You can even see the change in the Kremlin.  There is much less swagger and arrogance today as opposed to just a couple of months ago.  It seems as if the realization that the current economic situation is a universal problem has finally hit home with the leadership in Moscow.  Unfortunately, this latest announcement will do little to alleviate the overall problem no matter how hard OPEC and Russia wish that it would do so.

Egypt is feeling the heat these days and it isn’t the sirocco that is causing them to sweat.  Revenues from the Suez Canal are declining and may soon go into freefall if the current situation off of the coast of Somalia isn’t gotten under control.  Piracy is running rampant there (see Somali Pirates Grab 2 Million Barrels of Oil and Somali Pirates Grab 2 More Ships) and shows no sign of abating in the near future.

The first problem is the global economic downturn, which has caused a fall in overall shipping due to decreased demand for shipped goods worldwide.  Egypt receives about $5 billion a year in fees from the Suez Canal.  These revenues declined by $5 million in September and even more in October because of the world’s financial crisis.  Then the pirate problem hit home.

So far this year, nearly 100 ships have been attacked off of Somalia (nearly one-third of all pirate attacks worldwide) with 36 captured, including the 319,430 ton supertanker Sirius Star.  A multinational naval force is currently present to patrol and escort merchant ships in a tight safety corridor but it has only been of limited effectiveness overall. 

The result on business for Egypt has been negligible so far but there are ominous signs on the horizon.  So far for November, only one less ship has transited the Suez Canal than the month before; however, this is about to change.  Europe’s largest shipping company, A.P. Moller-Maersk A/S, has ordered its smaller ships to avoid the Canal and sail around the Cape of Good Hope instead.  Norway’s Odfjell SE ordered its 90+ tankers to do the same.  This move will increase shipping costs by at least 30% as well as simultaneously reducing fees paid to the Egyptian government for use of its Canal.

What is amazing about this situation is that even though the Egyptian government is facing a fiscal disaster, it isn’t willing to lift a finger to help solve the problem beyond demanding the rest of the world tackle the pirate menace for them.  So far, the Egyptians aren’t willing to commit any of their ships or men to the anti-piracy effort. 

The shipping companies aren’t being so shy.  They are resisting suggestions to arm their crews or mount security forces on their ships because it could lead to injuries or even death to their employees as well as damage to their vessels.  Instead, they are demanding a blockade of the Somali coast to choke off the pirate bases and are already beginning to react proactively by rerouting some of their ships.

Even as this article is being written, reports of another ship being captured by the pirates is in the news.  To date, only India has been willing to deal decisively with a suspected pirate ship.  What will it take for others to do the same?  The rerouting of ships around the Cape of Good Hope will make their journeys safer, but with the rise in shipping costs, we will all pay for it in the end.  Unfortunately for Egypt, its people will pay more than the rest of us.

The Somali pirates scored two more goals today.  The 26,000 ton Hong Kong-flagged, Iranian-operated Delight carrying 36,000 tons of wheat to Iran with a crew of 25 and a Kiribati-registered fishing boat with 12 crewman were seized.  This is in addition to the 319,430 ton Saudi supertanker Sirius Star carrying $100 million dollars of oil (2 million barrels) with a crew of 25 that was taken yesterday.  Even though today’s haul adds to this week’s outrage, all eyes are on the Sirius Star.

It is currently anchored near the Somali village of Hararghere, but the US Navy believes the ship is ultimately bound for Eyl, in the autonomous state of Puntland (Somalia).  What is interesting is that the Deputy Sea Port Minister in Puntland said that if the ship anchored anywhere near Eyl, that the forces at his disposal would be used to rescue the ship.  The prospect of force must be making the ship’s Saudi owners very nervous because of the 2 million barrel cargo.  That is a lot of oil to catch fire or get spilled into the sea.

This action has been enough to spark the Saudi’s into joining the international effort to combat the pirates, though whether their assistance will be financial or with their small navy or both remains to be seen.  None of the warships in the region are showing any signs of trying to intercept the captured supertanker, so the pirates seem to have an unopposed voyage ahead of them.  Only bad weather can upset their timetable now.  It seems the only recourse for the owners is to either pay the ransom or wait for Puntland’s forces to storm the ship.  Both options are distasteful.

Today’s action is another middle finger to the international community that has been long on talk and even sending ships to the region but short on balls on how to effectively deal with this increasingly chaotic situation.  As I stated in my previous article on this subject (see Somali Pirates Grab 2 Million Barrels of Oil) I advocated a very violent reactive and proactive policy that will stop these parasites cold by putting them either six feet or six fathoms under.  This situation is only going to get worse if something drastic isn’t done soon.  Eventually, the current timid approach will lead to a great tragedy in life and/or material and then the world will ask why nothing was done earlier to stop it.

At the moment, fourteen ships are currently being held off of Somalia with about 268 crewmembers between them.  The rate of seizure is so high (one-third of all acts of piracy world wide) that some shipping companies are rerouting their ships around the Cape of Good Hope instead of using the Suez Canal.  This will drive up the cost of shipping, and subsequently, the prices of the goods being shipped.  Will it have it take a big hit in everyone’s wallets to get the world to react effectively?  It sure seems that way because up until now the limp-dick response has been decidedly underwhelming.

The Gas Troika that Russia swore up and down that it wouldn’t join, much less organize, is about to become a formal reality in less than a week and a half (see Gas Troika to be the New OPEC?).  An unholy trinity of self-serving countries who think the world doesn’t pay enough for energy is set to approve its draft charter on November 26 and will hold a summit in Moscow on December 23. 

Russia, Iran and Qatar (respectively, the first-, second- and third-ranked countries in total natural gas reserves) are set to have a mirror organization of OPEC, only with more power within its sphere.  OPEC controls about 40% of the world’s oil, but this new troika has about 50% of the world’s gas.  Theoretically, that gives them more leverage over market prices. 

The United States and the European Union see a big danger.  The EU in particular is vulnerable because it gets 40% of its imported gas from Russia, which is 26% of its total consumption.  Central and Eastern Europe have it even worse: Russian gas is 87% of their total imports and 60% of their total consumption.  The threat of a disruption or cut-off gives Moscow great power and persuasion over the rest of Europe that it knows and uses to great effect.  What worries the EU even more is that the demand for gas is set to soar over the next few decades in light of the organization’s commitment to cut down on greenhouse gas emissions in order to combat climate change.

The troika claims that it isn’t a danger at all.  It says that their organization will better coordinate capital expenditure on exploration, extraction and distribution.  However, it is difficult to take this new monster at its word.  One only has to look at the greedy, foaming at the mouth members of OPEC to see the future.  Even in this time of world economic crisis, OPEC can’t think of anything better to do than cut production, then cut it some more to try and keep oil at around $90-100 a barrel.  The fact that more and more of their customers around the world won’t be able to afford their product doesn’t factor into the equation.

Then there is the political part of the problem.  Who can forget how OPEC punished the West for its support of Israel in the Yom Kippur War (1973) by announcing an oil embargo?  What happened before can easily happen again.  Now there are two energy weapons that can be employed against the West.  We had better get smart and do it quickly.  Energy independence must be a top priority for both the US and EU or else there are going to be some difficult times ahead.  Too quickly do people conveniently forget about past problems; that is, until the lights go out.

The Somali pirates have hit again and this time they struck pay dirt.  Today they seized the Saudi Arabian Sirius Star, a 319,430 ton supertanker the size of an aircraft carrier.  The ship has a crew of 25 and, according to shipping sources, can carry up to 2 million barrels of oil.  That would make the Sirius Star the most valuable catch so far for the Somalis.

This is just another of a sad series of seizures made off of East Africa, with the lawless land of Somalia acting as a base for various crews of pirates who have been getting bolder and bolder each month.  A multinational force of naval ships started patrolling the area recently to rein the pirates in, but they quickly changed their strategy and started moving their operations into other areas.  The Sirius Star, for example, was captured off the coast of Kenya.

So far, 33 vessels of different types have been taken this year, with only 16 being released after the payment of large ransoms (most of them in excess of one million dollars).  A guarded corridor was set up through the area on August 22^nd and ninety percent of the vessels sailing through the region have used it without incident.  Again, this successful attack shows how the pirates can successfully adapt to changed circumstances, almost with impunity.

How are the pirates able to do this in the face of modern warships?  Sadly, the answer is: easily.  Each pirate team operates from a mothership, which detects suitable targets and sends out boarding parties in fast small boats armed with GPSs, RPGs and submachine guns.  They avoid the patrolling warships and are taking advantage of the lack of coordination between their various nationalities.

What can be done to curtail this new scourge?  If the world is serious about stopping these parasites, then the international community is going to have to grow some balls and get aggressive; extremely aggressive.  These guys aren’t going to stop unless they stopped, in the permanent sense.  Personally, I think special forces units should be used to retake the over dozen ships that are still currently being held; pirates caught in the act of attacking ships should be sunk without mercy, even if they are retreating; and operations should be run by combined sea and special forces units to identify pirate camps along the Somali coast and proactively destroy them.

I know I am advocating an extremely violent response but that region is an extremely violent place full of extremely violent gangs committing extremely violent acts.  Only extreme violence will stop them.  There are those who would rather negotiate with these scumbags but these pirates, like their brethren from previous ages, only respect pay offs and death.