National Energy Security Issue: Effects of Cheap Oil

Photo Liberated from Patterson UTI Drilling

Once again the oil and gas industry has done too good a job is finding and developing new sources - so much so that its success is eating the drilling industry - the Oil & Gas Journal reports US rig count nearing lowest level in generations:

The US rig count dropped 12 units to 502 during the week ended Feb. 26, according to Baker Hughes Inc. data. While the decline is the smallest thus far this year, it represents the eighth straight weekly double-digit drop to begin 2016.
The total is the lowest since Apr. 30, 1999, a week after the 1998-99 downturn hit its bottom of 488. With additional losses in the coming weeks, the current count could dive to a level not seen in generations.

The NYTimes has reported on the "simple economics" behind the drop in oil prices:

. . . [I]t boils down to the simple economics of supply and demand.

Well, yeah.

The NPR folks have noted that these low prices, coupled with a decline in exploration and drilling, might just have an impact on the overall U.S. economy as businesses associated with that part of the oil and gas industry find less demand in Why Cheap Gas Might Not Be Good For The U.S. Economy:

Arora analyzed government data, and found that what's changed is that the oil and gas industry as a share of GDP has about doubled in the past decade. Now it has grown so large that it's changed the basic equation of whether cheap gas is a good thing overall.

"The benefits to consumers could be around $140 billion from gasoline savings," Arora says. "But the losses on the other side due to lower production, less investment, less build-out of infrastructure could be around that amount. So we're kind of at a wash."

This might help to explain why the economy still isn't exactly charging forward even with the stimulus of cheap energy. But Arora himself notes that the question needs more study.

Meanwhile, analysis by the research firm Moody's Analytics finds that cheap oil and gas are still a net positive. And plenty of experts remain in that camp.

Last year the NYTimes offered up Lower Oil Prices Provide Benefits to U.S. Workers:

Wall Street may be growing anxious about the negative impact of falling oil prices on energy producers, but the steep declines of recent weeks are delivering substantial benefits to American working-class families and retirees who have largely missed out on the fruits of the five-and-a-half-year economic recovery.

Just last week, the federal Energy Information Administration estimated that the typical American household would save $750 because of lower gasoline prices this year, $200 more than government experts predicted a month ago. People who depend on home heating oil and propane to warm their homes, as millions do in the Northeast and Midwest, should enjoy an additional savings of about $750 this winter.

“It may not have a huge effect on the top 10 percent of households, but if you’re earning $30,000 or $40,000 a year and drive to work, this is a big deal,” said Guy Berger, United States economist at RBS. “Conceptually, this is the opposite of the stock market boom, which was concentrated at the top.”

Of course, more dollars in the pockets of the 90% of the households not in the top 10% really ought to mean much more money available in the economy because of the law of big numbers. More from the NYT:

But the latest drop in energy prices — regular gas in New England now averages $2.35 a gallon, compared with $2.94 in early December, and it is even cheaper in the Midwest at $1.95 — is disproportionately helping lower-income groups, since fuel costs eat up a larger share of their more limited earnings.
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“Oil prices, gas prices, food prices — luckily it’s going down, which is great,” Ms. Smith said, explaining that when prices were higher she had to scale back on groceries to save money for heating oil. “I hope it keeps going.”

You might want to, at this point, recall President Obama's plan to increase taxes on oil as discussed in Oil Dumbness from President Obama an increase in taxes is paid for by customers of the oil companies just like Ms. Smith.

This ought to be self-evident, but here's another source talking about the effect of higher gas prices.

It's not just the U.S. that rides this roller coaster of oil prices. Oil exporting states like Saudi Arabia are also taking hits, as discussed in this Forbes article, 4 Reasons Saudi Arabia Can't Control Oil Supply:

In the past, OPEC—led by Saudi Arabia—would reduce production in order to maintain the oil price. Today, however, the process isn’t that easy, and there are four reasons for that…

Reason #1: The US
Oil above $60 or $70 would mean that US production would continue to increase, and the US is already the world’s #1 producer. OPEC would have no choice but to keep cutting further in order to maintain that price.

Reason #2: Cheating among OPEC Members
OPEC members (other than Saudi Arabia) almost always cheat on their production quotas when they can. Considering that other OPEC nations are desperate for income, the incentive to cheat is all powerful.

Reason #3 The US-Iran Nuclear Deal
The deal and subsequent lifting of sanctions means that an additional one million barrels per day will soon hit the market. As international oil companies vie for the privilege of drilling more oil in Iran, it will put further upward pressure on supply.

Reason #4: US Production in the Market
Although drilling rig usage in the US is down by nearly 75%, production has just now begun to fall off. It will take some time before enough US production comes off the market to put upward pressure on prices.

The U.S. Energy Information Adminsitration produces all sorts of reports on oil production like this one:

The "International Energy Agency" (which is actually a creature of its 29 member countries)has issued its 2016 Medium Term Market Report:

Global oil supply growth is plunging as an extended period of low prices takes its toll, the International Energy Agency (IEA) said in its annual Medium-Term Oil Market Report (MTOMR) released today. While U.S. light, tight oil (LTO) output is falling steeply for now, the market will begin rebalancing in 2017 – and by 2021 the United States and Iran are seen leading production gains among non-OPEC and OPEC countries, respectively.

There is this warning:

“It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future,” said IEA Executive Director Fatih Birol, launching the report at IHS CERAWeek.(emphasis added)

What "oil-security surprises?"

From the downloadable Overview of the IEA report:

Another downside to low oil prices is the impact on investment. The IEA has regularly warned of the potential consequences of the 24% fall in investment seen in 2015 and the expected 17% fall in 2016. In today’s oil market there is hardly any spare production capacity other than in Saudi Arabia and Iran and significant investment is required just to maintain existing production before we move on to provide the new capacity needed to meet rising oil demand. The risk of a sharp oil price rise towards the later part of our forecast arising from insufficient investment is as potentially de-stabilising as the sharp oil price fall has proved to be.

In addition to the effects of insufficient investment there are the lost "experience" costs that will result from personnel cutbacks in the oil and gas industry as rig counts and exploration budgets drop. Experienced oil field workers will, as they have in the past, move to other jobs (assuming they exist) that might pay less.

Ah, you might say, "So what?"

The "so what" is the lag time it would take to get those workers back into the fields should there be a national need for an increase in U.S. crude oil and natural gas production.

That lag time has national security issues.

Suppose, for example, Russia decides to cut off natural gas supplies to Europe beginning in late 2016 using that gas as an economic weapon to force the nations dependent on Russian gas to accept Russian claims in the Ukraine or the Baltic States. One way for the West to resist this pressure is to have some assurance that the U.S. and its allies will be able to set into motion a stream of LNG ships carrying gas to replace that of the Russians, ameliorating the gas situation for those affected states. In addition to LNG shipping, a force of air and naval escorts protecting that LNG stream at sea might be required to prevent interference with the flow of gas in competition with that of the Russians.

Or, suppose the Chinese interfere with the flow of gas and oil through the South China Sea sea lanes to Taiwan,South Korea and Japan. Can the U.S. and Canada help mitigate the harm while alternative sea lanes that avoid the South China Sea are developed? Who will protect those shipments and how?

Or, what if Iran or someone else takes the big step of managing to destroy the Saudi oil production - say through using nuclear weapons - can the U.S. and non-Middle East producers step up and provide  at least minimal supplies to the world now depending on Middle East oil?

Cheap oil is good, but not all good.

Stopping Gulf of Guinea Pirates: U.S. Navy and Local Navies Put Training to Use

USNS Spearhead (U.S. Navy photo)

Nice AP article about a serendipitous situation in which 4 navies joined to thwart some Gulf of Guinea pirates in "Training exercise off W. Africa becomes real-life navy drama"

Capt. Heidi Agle, the commodore, had been directing a training exercise against piracy with maritime agencies of Ghana when the hijacking provided a real-life lesson, she said in a telephone interview Friday from her base in Italy.

First word came from the French Embassy, which sent information to Agle's USNS Spearhead via Ghanaian officials and U.S. diplomats of a possible pirate ship loitering off Abidjan, Ivory Coast.

There, pirates seized the Dubai-owned MT Maximus, on lease to a South Korean company and carrying 4,700 tons of diesel fuel, on Feb. 11.

The Spearhead tracked down the hijacked Maximus, identified it and then monitored its

Area involved

progress for two days as it sailed from Ivorian into Ghanaian waters. Then Agle handed over to Ghana's Navy, which continued to shadow the ship until it entered the waters of Togo, when that country's navy took over.

Eventually, after the hijacked ship neared the waters of Sao Tome and Principe the Nigerian navy successfully assaulted the captured ship and took the ship back. One pirate died during the recapture.

The rescue was directed by Nigerian Rear Admiral Henry Babalola, who told the AP that it was made possible by a maritime agreement allowing Nigeria to patrol Sao Tome's waters.

"When we challenged them (the pirates), they said that they were in international waters" with the law of the sea on their side. But the agreement allowed the Nigerians to storm the ship after eight hours of attempted negotiations.

"International cooperation is the new mantra for maritime security," Babalola said. "We cannot go it alone."

Six pirates were captured and 18 crew members freed. Several pirates escaped with two crew members who remain hostages, Steffen said.

More about Spearhead here

On Midrats 28 Feb 2016 Episode 321: The Year of the Monkey in the South China Sea w/Toshi Yoshihara

Please join us on 28 Feb 2016 at 5pm EST, for Midrats Episode 321: The Year of the Monkey in the South China Sea w/Toshi Yoshihara:

Claims hundreds of year old in the South China Sea are being acted on today. Ethnic tensions that date back to recorded time are returning to the surface with renewed importance.

Regardless of what may be happening in the Middle East or Europe, China and the nations that border the South China Sea have their own set of priorities they will pursue this year.

To discuss the present state of play in the area and the events to look for as the year unfolds will be returning guest of the show, Dr. Toshi Yoshihara from the Naval War College.

Professor Toshi Yoshihara holds the John A. van Beuren Chair of Asia-Pacific Studies and is an affiliate member of the China Maritime Studies Institute at the Naval War College. Before joining the College faculty, he was a visiting professor in the Strategy Department at the Air War College. Dr. Yoshihara has also served as an analyst at the Institute for Foreign Policy Analysis, RAND, and the American Enterprise Institute. He holds a Ph.D. from the Fletcher School of Law and Diplomacy, Tufts University, an M.A. from the School of Advanced International Studies, Johns Hopkins University, and a B.S.F.S. from the School of Foreign Service, Georgetown University. He is co-author of Red Star over the Pacific: China’s Rise and the Challenge to U.S. Maritime Strategy and other books related to maritime concerns in national defense policy.

Join us live if you can or pick the show up later by clicking here. Or get the show from our iTunes page here

Saturday Is Old Radio Day: Inner Sanctum Mystery - "The Death Ship"

Inner Sanctum was on the radio from 1941 to 1952, with the voice of "Raymond" as host kicking things off.

Friday Films: "Rigging: Use and Care of Fiber Rope" (1944) and "Synthetic Line Snap Back"

Hey, I was a deck division officer back in the day - on an ammo ship. Here's a 1944 film about an important aspect of the job:



Predates synthetic line which has its own hazards:


There are not many safe things at sea.

Psst.Psst. Wanna Distribute Your Lethality on the Cheap?

Ok. So over at CIMSEC they are have fun with Distributed Lethality Week, a topic which by some other names I have been plugging since Pluto was a pup or perhaps since back when Pluto was a planet.

You could go back to back to December 2008, when I posted Department of Crazy Ideas: How about a cheap inshore fleet? or you refer to CIMSEC piece I wrote, CHEAPER CORVETTES: COOP AND STUFT LIKE THAT which was also covered at this blog as Cheapening the Discussion of Corvettes (ships not cars) which contains a nice reference back to the CIMSEC piece. Life is a circle or some such thing.

And this resurrection of the 2008 piece with a reference to the CIMSEC post :

. .. in which I suggested that if "payloads" are the key to the future then the "platform" end of some naval force could allow for a different approach to getting drones of various types out to sea and, even more importantly, out to where the action might be. There is a nice follow on Non-Traditional Drone Motherships by NavalDrones.

And, of course a lengthy repeat of the 2008 post (I must have really liked that post).

The underlying goal, of course, was to suggest a way of getting lots more platforms out there - with lots more weapons and capabilities. Cheaper, faster, and, if not better, certainly "good enough." As I wrote somewhere,

If the answer to the Navy’s future is robotics, then Admiral Greenert’s July 2012 U.S. Naval Institute Proceedings piece, “Payloads Over Platforms, Charting a New Course” opens up a whole new world of possibilities for using existing small ship platforms as “trucks” to deliver large numbers of modern weapons platforms to areas of interest.

I brought the topic up again last month in A Blast from the Past - Department of The Expendable Ship Division : "How to Make the Navy Bigger, Sooner, Cheaper" Revisited where I wrote,

And don't worry that they are expendable. It's a feature, not a flaw.

Lately I've been sent links to a UK site (ThinkDefence with that obstinate Brit spelling of defense) covering the concept of using merchant hulls and turning them into warships of a sort as in A Ship that Still Isn’t a Frigate:

If one wants a Frigate (light or global) ask those nice chaps at BAE to design and build one for you.

So, why bother, the simple point, the whole raison d’être for this, is one of cost, trying to squeeze the maximum utility from the smallest pot of cash. A class of ships that fulfils a plethora of roles that are less than high-intensity combat, and might use some notional future budget for an Argus and Diligence replacement, and perhaps with a nod to future mine countermeasures and survey budgets.

These ships would be either a conversion of a second-hand civilian vessel, or largely based on a civilian design with minimal modifications during build.

Yeah, exactly.

I think it's a great idea and have been saying so for what - 7 years- that's what.

The ThinkDefence author says, "don’t take it too seriously" but I think we should take this concept very seriously indeed.

We need hulls on the water carrying weapons to distribute all that lethality stuff.

And we really don't need to spend a fortune - we just need to be smart enough to not always think in great big gray hulls.

Back in the day they had Naval Trawlers:

A naval trawler is a vessel built along the lines of a fishing trawler but fitted out for naval purposes. Naval trawlers were widely used during the First and Second World Wars. Fishing trawlers were particularly suited for many naval requirements because they were robust boats designed to work heavy trawls in all types of weather and had large clear working decks. One could create a mine sweeper simply by replacing the trawl with a mine sweep. Adding depth charge racks on the deck, ASDIC below, and a 3-inch (76 mm) or 4-inch (102 mm) gun in the bow equipped the trawler for anti-submarine duties.

ASW drones, UAVs, USVs - the trawler model works today, too.

Remember Arapaho. And see here.

Nice oilfield boat conversions at Shadow Marine. It would be nice to have helo deck to help with part of the delivery of lethal stuff.

Everything old is new again. That circle thing.

U.S. Navy Office of Naval Intelligence Piracy Info to 17 Feb 2016 and an "Advisory" About the Gulf of Guinea

From the U.S. Navy's Office of Naval Intelligence  this

Gulf of Guinea Piracy Advisory

The Office of Naval Intelligence advises all shipping entities operating in the Gulf of Guinea region to maintain vigilance in light of the on-going piracy threat. Recent activity, specifically - a tanker hijacked within the
past week off the coast of Ivory Coast, indicates pirates may be actively seeking to hijack another vessel, potentially in the near-term. The regionat-large remains at-risk to piracy although this advisory is intended to put special emphasis for ships within 100 nautical miles of Tema, Ghana; Lome,Togo; and Contonou, Benin.

Or, basically, offshore of the countries lining the Gulf of Guinea, especially those in the northern rim.

And the latest World Wide Threat to Shipping:

Worldwide Threat to Shipping (WTS) Report 18 January - 17 February 2016

Distributed Lethality Week at CIMSEC

If you are reading my blog right now, I suggest a better use of your time is to go over to the CIMSEC blog for Distributed Lethality Week, because there is much good stuff over there -

This week CIMSEC is hosting articles exploring the US Navy’s Distributed Lethality concept. The US Navy is investigating distributed lethality as a potentially game changing approach for the conduct of naval warfare.

Game changing? Decide for yourself.

It is a hot topic.

Midrats on 21 Feb 16: "Late February Free for All"

Please join us at 5pm EST for Midrats Episode 320: Late Feb Free For All

We're back live after a mid-winter break!

If there were some topics you'd like us to cover, or want to call in with a question for the hosts - now is your time.

We have a full and open hour. Call in at the number above or join in the chatroom as we catch up on the developments in the national security arena this month.

From the Med, to the South China Sea, to shipbuilding, to Syria, and whatever else strikes our fancy, we'll be there.

If you can't join us live, pick the show up later by clicking on the link above or getting the show from our iTunes page.

Saturday Is Old Radio Day: The Green Hornet - "The Devil's Playground"

The Green Hornet

The Green Hornet is a fictional character, a masked crime-fighter, created by George W. Trendle and Fran Striker, with input from radio director James Jewell, in 1936. Since his radio debut in the 1930s, the Green Hornet has appeared in numerous serialized dramas in a wide variety of media.
***
Though various incarnations sometimes change details, in most versions the Green Hornet is the alter ego of Britt Reid, wealthy young publisher of the Daily Sentinel newspaper by day. But by night Reid dons the long green overcoat, green fedora hat and green mask of the mysterious "Green Hornet" to fight crime as a vigilante. Reid is accompanied by his loyal and similarly masked partner and confidant, Kato, who drives their technologically advanced car, the "Black Beauty". Though both the police and the general public believe the Hornet to be a criminal, Reid uses that perception to help him infiltrate the underworld, leaving behind for the police the criminals and any incriminating evidence he has found.

More on the Hornet here from whence I borrowed the ad above.

Friday Fun Film: "The Benefits of Loooking Ahead"

When taking diving training the slogan I most recall was "Plan Your Dive - and Dive Your Plan" which turns out to be pretty good advice for life, too. You might have heard it as "Begin with the end in mind" or something similar.

In any event, here's one of those old Coronet films the substitute teachers used to show us back in the day of school film projectors, bobby socks and when you were expected to take care of your own future:

Must Read: Holmes on China

Important reading from Peter Navarro's interview with Professor James Holmes of the U.S. Naval War College at Real Clear Defense's Crouching Tiger: James Holmes on China:

Holmes: The Chinese have been very forthcoming with us about what their aims are. I'm not sure that there's a lack of transparency at all. They've told us face to face, including in meetings here in Newport [at the Naval War College] that they want to set the terms of access to the waters and the skies they claim as their own. That's very straightforward and it conforms pretty much ideally to what they have actually done over the past five years since they seemed to have cast off their soft power offensive – their charm offensive towards the region.

On President Obama’s “pivot” to Asia, Holmes pulls no punches:

Holmes: The metric that President Obama and his advisors have put out is that the United States is going to a 60-40 split [of ships] between the Atlantic and Pacific fleets. But if you look at what ten percent of the United States Navy is going to the Pacific, a lot of it is a lighter combat and literal [sic] combat ships. These are not high-end combat assets. So it's a little bit misleading -- and also the pivot is happening very slowly as well. So as diplomatic signals go, as deterrence signals go, this is a pretty Bush{sic] league thing.
****
Holmes: The Chinese have been very adept and I've actually been rather impressed with their ability to have a truly maritime strategy. A truly maritime strategy incorporates not just navies but also shore-based hardware – aircraft, missiles, and so forth. It also incorporates law enforcement assets; and for the Chinese, it also includes the fishing fleet. These things that we would think of as commercial vessels – they act as an unofficial arm of Chinese sea power at times.

I think the asymmetry between white hulls and gray hulls is very important. The Chinese are very deft at using these coastguard cutters to essentially stake their claims. These are police assets. The other coastguards reigning in the South China Sea are not nearly big enough or strong enough to stand up to even the China Coastguard.

So if you think about the dilemma that it would put the Philippines or Vietnam or any of these other nations in to counteract these China Coastguard patrols, they would have to use naval force and if it came to shooting, who's going to look like the bad guy? So that's a serious asymmetry that we are still coming to terms with and trying to figure out how, how do you counter such a strategy.

In the face of China’s white-hulled strategy, one of Holmes big concerns is the lack of pushback by a US hamstrung by a shrinking navy. Here, Holmes sees China strategy of expanding its authority as an attempt to establish its own Monroe Doctrine for Asia...

I encourage you to read the whole piece and watch the video at the above link.

As I have noted before, China has the "neighborhood bully" syndrome writ large and hopes to present the world with a fait accompli of "ownership" of the Souh China Sea. The weakness demonstrated by the U.S. in the face of China's actions serves only to assure China's leaders that they are punching a paper dragon.

It doesn't help that  our senior leadership has an very ivory tower, law professor-ish view of the world that seems to  believe that the rule of international law can be enforced through "understandings," vague "agreements" and quasi-treaties, instead of by the willingness and ability to apply proportionate (and perhaps more than proportionate) force to deter bad actors.

 In short, to borrow a phrase from Chairman Mao, ""Political power grows out of the barrel of a gun." - a concept well understood by the Chinese leaders.

 Which thinking applies, surprise, surprise to international politics, too. Or, perhaps, especially to international politics. See Clausewitz, "War is the continuation of politics by other means."

Fishing Wars

Palau lies between Indonesia and the Philippines

Another excellent article in the Ian Urbina NYTimes "The Outlaw Ocean" series Palau vs. the Poachers detailing some of the effort of a small island nation to fend off the "fish pirates" who are stripping the oceans of fish stocks - some of which ends up on your plate:

More than two-thirds of the planet is covered by water, and much of that liquid expanse is ungoverned and potentially ungovernable. Criminal enterprise has flourished in the breach. The global black market for seafood is worth more than $20 billion, and one in every five fish on American plates is caught illegally.

Recommended reading.

About that Nicaragua Canal . . . and Volcanoes

The proposed Nicaragua alternate canal to the one in Panama may have issues in light recent volcanic activity in Nicaragua like two erupting in a single week as noted in Authorities activate emergency plans after two volcanoes erupt in Nicaragua

Authorities in Nicaragua activated emergency plans after explosions occurred at both the Momotombo and Telica volcanoes on Saturday.

Meanwhile, the Masaya volcano has also witnessed an increase in seismic activity in recent days.

According to the Nicaraguan Institute of Territorial Studies (INETER), the Telica volcano, located in the Leon department, erupted at 8:28 a.m. Saturday morning, launching a column of ash and gas some 1,000 meters (3,280 feet) into the air. At least 20 smaller eruptions were recorded at the volcano in the subsequent hours. Ashfall was reported in some nearby communities.

About two hours after the first explosion at Telica, the Momotombo volcano – which had been essentially dormant for 100 years before exploding to life in December – launched a column of ash and gas more than 1,600 feet (500 meters) into the air.

There were no injuries reported in either event, though Civil Defense and municipal authorities said they were activating emergency plans in order to provide a rapid response should communities become at risk. Civil Defense authorities also visited communities near the Momotombo to coordinate evacuation routes should a major incident occur.

See also here and here.

U.S. Navy Office of Naval Intelligence "Worldwide Threat to Shipping (WTS) Report 1 1 January - 10 February 2016"

Unclassified report from the U.S. Navy's Office of Naval Intelligence:

The Worldwide Threat to Shipping (WTS) message provides info on piracy threats to, and criminal action against, merchant vessels worldwide in the last 30 days. This report is produced primarily to inform merchant mariners and naval forces.

U..S. Navy Worldwide Threat to Shipping (WTS) Report 1 1 January - 10 February 2016

From the ONI Piracy Analysis and Warning Weekly dated 11 Feb 16, a graphic on the activity in the Gulf of Guinea: