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As I met with the Polish officials last Friday in Krakow to begin government sessions on shale gas policy, and European Union (EU) ministers met in the southwestern city of Wrocław, Poland, thoughts turned once again to oil pricing.
In case you haven’t been watching, Brent prices in London are approaching $113 per barrel, while the West Texas Intermediate (WTI) benchmark traded in New York is about to break the $90 per barrel 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 EU, which is faced with mounting Eurozone currency and liquidity problems, weakness in its banking sector, and a European Central Bank (ECB) that’s experiencing dissent – within its own ranks – over the proper course of action regarding Greece’s debt issues.
Friday’s meeting in Wrocław concerned 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 last Friday morning by the ministers. Or perhaps more accurately, the non-decision. The ministers decided, well, 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 than 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 distinguished by 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 gave them puts the extractable reserves in the five basins already identified in the country at more than 187 trillion cubic feet – five times the rest of Europe combined.
Second, Poland is dependent upon Russian imported gas, 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 contracts of 20 years to 25 years in duration, and two provisions of those contracts are causing great concern in places like Poland.
The first is 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 troubling provision.
That one lets Russia 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, staying warm in Europe this winter is looking more and more expensive.
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.
As we sat down to a late lunch Friday, a reminder of the massing problem began to circulate: Goldman Sachs Group Inc. (NYSE: GS) 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.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
The euro has losing his game as European countries has failed to defeat the dollar. In my study the IMF and world bank are being governed by the USA and other countries has no options. The debt in form of paper currency. The crisis starts when money market of Europe has hedged the euro to earn better return but u can not hedged any currency unless its financial /economy is to be strong one. the Greece has given free hand to incurr unnecessary expediture in public sector and they have to borrow from the lending countries without considering its effect there on and now they are reduce the budget deficit within next month to get the slice funding of remianing IMF loan. The siemen company which is german base is also park their major chunk of amout eur in european countries to save the eur although they have only company who have get permission to invest in short term financing other wise company who is in manufacturing are re roll over thier investment in their parent company in thier own country to boost their economy so European countries are helping each other .take the example of IRAQ AND other gulf countries they still suirvive due to oil producing and their currecny is still survive. but again in saudi arbia has blink it up as deficit financing is looming up in their economy as they have already invested in the london money market and their sepeculations in hedging are controlled by the jeus lobby which are mostlly by USA . therfore, m view is clear that USA is giant elephenet whiich is basically consumption econcomy and its also heavy amount of difiiciet budget but congress support the obama goverment . USA is using all the tactics to monitor the world economy but again the germany and Russia is co operating to neturize it. China is growing economy but its currency does not weight on it.
take the cae of Turkey who is currently exploring gas and oil in sea and land to boost thier economy . we take the example of our country pakistan which is under develped so called i say it is downsizing economy which has no any parameter match with thier micro andmacro economy .
thanks
Dr. Moors, I read with interest your article3 on European oil, especially Poland , and ask what you think of FX Energy. Is it the right company doing the right thing? Thanks for your response. Tony Jones