As we sit down here in Krakow to begin government sessions on shale gas policy, and European Union ministers meet in the southwestern city of Wrocław, Poland, thoughts are turning once again to oil pricing…
In case you haven't been watching, Brent prices in London trade are
accelerating, approaching $113 per barrel, while the West Texas
Intermediate (WTI) benchmark traded in New York is about to break the
$90 per level again.
The spread between the two
remains at all-time highs, indicating that Brent will continue to
appreciate quicker than U.S. pricing, although both are rising.
That spread is "in favor" of Brent.
This creates a continuing problem for the E.U., which is faced with
mounting eurozone currency and liquidity problems, weakness in its
banking sector, and a European Central Bank that's experiencing dissent –
within its own ranks – over the proper course of action.
Today's meeting in Wrocław concerns whether Greece
will receive the next tranche of a bailout package. That package is
already widely perceived as being insufficient to prevent some sort of
Greek default. Plus, the Germans are taking a hard line on what is
necessary for that largess to keep coming.
Meanwhile, the internal dispute is getting intense.
A good example is the decision made this morning by the ministers. Or
actually the non-decision. The ministers decided… not to decide until
next month.
The prospect of higher prices for Brent further complicates matters with the common currency.
The euro has been losing ground against the dollar throughout the
latest period of the debt crisis. Of course, that says less about the
dollar's strength that it does about the euro's enduring weakness.
That, combined with a rise in the cost of energy, means Europe is facing the prospect of a new economic crunch.
This one has the potential of completely derailing this continent-wide recovery already distinctive for its anemic performance.
In Krakow, Too, Our Problem Is Oil
There are essentially three reasons Poland has decided to expedite decisions on developing its domestic shale gas.
First, they may well have a lot of it. The estimate I will be giving
them puts the extractable reserves in the five basins already identified
in the country at more than 187 trillion cubic feet, or five times the
rest of Europe combined.
Second, Poland is dependent upon Russian imported gas, introducing the latest stage in a political disagreement 500 years in the making.
But it is the third reason that is most compelling…
Russia sells that gas to Europe according to long-term (20- to
25-year) contracts, and two provisions are causing great concern in
places like Poland.
First, the contracts contain a "take or pay" provision. That requires
an importing country either to take at least 80% of the contracted gas…
or to pay up anyway.
As grating as that is, though, it is less significant than the second aspect of these contracts.
Second, they set the price for gas according to a basket of crude oil
and oil product prices. This means, as the price of oil increases, the
price of natural gas increases right along with it. With Brent pricing
levels moving up, Europe is looking at a more and more expensive attempt
to keep warm this winter.
That is, of course, if the latest row between Russia and Ukraine does
not turn into a repeat of January 2009. Then, a similar dispute
prompted Kiev to cut gas passing through its territory to Europe. You
see, 70% of all Russian gas going west crosses Ukraine.
It could get ugly.
While we were sitting down to a late lunch today, a reminder of the
massing problem began to circulate: Goldman Sachs just issued a report
forecasting the price of oil to exceed $130 a barrel in the next year.
Most of us just smiled.
There wasn't anybody at the table who thought the price would be that low 12 months from now.
Sincerely,
Kent Moors.
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