I once earned the nickname of “Fuels” while participating in a series of Naval War College seminar courses titled National Security Decision Making, Strategy and War, and Joint Maritime Operations. Each course in the series was taught in three-four hour blocks one night per week and lasted for two full academic semesters. Anyone who has ever been in a classroom, meeting or conference with me will agree with the statement that I tend to earn high grades in “class participation”, so you can imagine that my classmates in those seminars got to know my views on the course topics pretty well.
They gave me the nickname because I had a habit of pointing out the important role that fossil fuel resources played in all phases of security, strategy, war preparations, war fighting, and maritime engagements. Many of them told me that they started to see grand decisions in a different light and had learned to appreciate the influence of people with fossil fuel derived wealth and power on national choices.
Most of my fellow students were also career naval officers, either active duty or reserve, but few of them had the experience of running a competitive commodity based business that prospered or struggled partially as a result of actions taken by competitors to control supply and demand. Most of them saw “the law of supply and demand” as a passive one that just happened to people, but they learned that big players in the game often put their fingers or full weight on the scales to tip the balance in their favor so they can make more money.
My classmates learned that I maintained a rather cynical view of the interactions between fossil fuel focused money and world power politics. Some of them began to recognize that the kinds of actions that I was pointing to had been happening for at least 150 years. Not all of them agreed that such motives were the main drivers in decision making, but most came to agree that they played an often glossed-over role.
History writers seem to focus on religion, political systems (democracy versus communism, for example) and ideology as sources of conflicts; I guess they either do not understand business or feel that it cheapens some of the heroics to point out the greedy motives underlying most wars, even those not generally acknowledged to be mostly about resources.
All of that is background throat clearing for some observations on a couple of news articles I thought worthy of discussion.
The BBC published an article titled The ‘unravelling relationship’ between Russia and Iran that discusses the ups and downs in a relationship between Iran and Russia. The author talks about the way that Russia has been making billions by selling Iran partially completed systems that have little actual value because they are not finished. He mentions the long lasting Bushehr nuclear reactor project that is still not producing any electricity and an air defense system where a key component has been held up for more than two years and looks like it may never be delivered.
The author attributes the failure to complete these projects to successful lobbying by the US, Israel, and Saudi Arabia. With my “Fuels” hat on, I want to point out that Iran should never have trusted Russia to complete any energy related project that would enable more Iranian natural gas and oil to be sold into the same international market where Russia earns the vast majority of its hard currency. The author talks about many influencers but ignores the important fact that Iran and Russia are direct competitors in a lucrative commodity market where controlling supply is a major part of controlling profitability.
In a completely separate story, I noticed that Dan Yurman at Idaho Samizdat had published a thought provoking story about political intrigue surrounding the new UK coalition government’s decision to cancel a loan to Sheffield Forgemasters that had been promised by the previous Labor government. I am no expert on the intricacies of British politics, so I looked at the deal with my “Fuels” glasses on.
Here is the brief background. Observers of the nuclear industry’s gradual rise from a long slumber have often pointed out that there was a bottleneck in the supply chain that would hinder its potential growth rate. Because of a long-lasting slow market for new construction projects, an increase in plant sizes over time, and a design decision to avoid welds that may later prove problematic, the world capability to produce certain large steel forgings had degraded to a single supplier – Japan Steel Works (JSW). Only JSW has a press large enough to forge the reactor pressure vessel heads and other large components in a single piece. All reactor vendors currently count on that capacity and all future reactor plant customers have had to fund orders years in advance to establish their place in line.
There have always been other steel component manufacturers that had the basic knowledge required to develop a large component forging capacity, but each of them required a relatively substantial investment with an assured order book before they would make the plunge to develop the capacity. The tools required have a rather specialized output and take up a lot of factory floor space; it would not make any sense to invest in the equipment only to have it lay idle.
The Labor government recognized that Sheffield Forgemasters was one of the limited number of companies in the world that could produce the quality components required if it installed the correct equipment. It also recognized that assisting a British company in putting the financing in place would enable the growth of an entire chain of suppliers. It approved an £80 million loan to the company in March 2010, just before the general elections. Along with the proceeds from advance orders, that loan would have enabled the company to proceed with its plans to install a 15,000 ton press that would allow it to compete with Japan Steel Works for all large reactor vessel head orders.
The newly elected coalition government has now cancelled the promised loan, saying in public that the Labor government had not budgeted sufficient funds and stating that the company directors had indicated a reluctance to dilute their holdings through issuance of additional stock to raise part of the money required for the capacity expansion. Apparently, neither of those statements is actually true. (See, for example, Clegg and Cameron may have misled Parliament on Sheffield Forgemasters and Pat McFadden responds to the government’s cancellation of Sheffield Forgemasters loan)
At least part of the reason that the David Cameron led coalition government has cancelled the loan is that Andrew Cook, a major Conservative Party donor, applied direct pressure to encourage the loan cancellation. (Note: The current coalition includes the Liberal Democrats and the Conservative Party.) Andrew Cook happens to be the owner of William Cook Holdings, another products manufacturer. Cook wrote a letter to Mark Prisk, the business minister, announcing the fact that he is the largest donor to the Conservative Party and claiming that the loan to Sheffield Forgemasters was unnecessary and perhaps illegal.
Not surprisingly, the coalition government denies that the lobbying letter had anything to do with the decision.
The “Fuels” aspect of this controversy is that William Cook Holdings, though it does not directly compete with Sheffield Forgemasters in the market for nuclear component forgings, has a line of products with specialized applications in the oil and gas industry. As far as I can tell, no other commentators that have described Andrew Cook’s involvement have mentioned that it might be related to industrial competition for “fuels” market customers instead of Cook’s expressed ideological opposition to government handouts to selected industries.
I know that it sounds a bit “conspiratorial” to point out that Cook has a direct financial interest in continued oil and gas exploration and production. The size of the markets for the steel components his company manufactures is established by oil and gas company capital expenditures. He most likely has regular interaction with decision makers in that industry.
I am just guessing here, but I would bet Cook’s contacts in the oil and gas industry discussed ways to respond to the fact that the British government was helping the only industry that can hope to take markets away from natural gas. There is nothing unusual or conspiratorial about businessmen talking about government actions that could affect their company’s sales or about businessmen taking actions to influence those actions.
In other news, Chris Huhne, the UK Energy Secretary, was quoted in a Telegraph article titled Chris Huhne to announce increase in wind turbines as follows:
Offshore wind, I think partly as a result of fewer planning issues, is likely to be an important part of our energy independence going forward.
“We have a tremendous natural resource in the Dogger Bank, which is an enormous shallow area of the North Sea, the same size as Wales.
“It’s relatively cheap to put wind turbines in that shallow area. It’s beautifully windy so it does actually produce a lot of electricity – that is a really important natural resource for us.”
I wonder how the British can install off-shore wind turbines “relatively cheaply” when Cape Wind, the US company that is planning to build an installation in an area off of Cape Cod with the same physical features of shallow water and good winds, will be charging 20.7 cents per kilowatt hour escalating at a rate of 3.5% per year for fifteen years – as long as the US government continues to provide its current subsidies of more than 2.1 cents per kilowatt-hour. Any takers on a bet that the UK government is granting wind developers subsidies that far exceed the £80m that the Labor government had promised to LOAN Sheffield Forgemasters?
Christopher Murray Paul-Huhne, aka Chris Huhne, is a full member of the British establishment, having grown up in a wealthy family, attending all of the right schools and making a fortune as a trader in The City. It is hard to imagine being a Brit with those characteristics without having deep interest in maintaining the profitability of oil and gas companies by providing direct government subsidies to alternative energy sources that are weak competitors while discouraging nuclear energy development.
I guess that I should add the smoking gun tag to this post, even though the evidence is all circumstantial.