Increase in oil revenue amid unrest in Arab world gives Russia some breathing room

MOSCOW - With the price of oil climbing to more than $100 a barrel, Russia has a little more weight to throw around on the world stage, and it is doing just that.

The stepped-up flow of petrodollars into the government's coffers relieves what had been a worrisome budget deficit and lessens the urgency of reform. Good relations with the West - and especially the "reset" with Washington - are not quite so pressing when the economy here is in good shape.

Russia is benefiting tangibly from the turmoil in the Middle East and North Africa. Urals crude sold for $113 this week, up from $75 a year ago. Of that, $76.50 goes into the Russian treasury. And the spike in oil income has compensated for growing weakness elsewhere. It arrived just as Gazprom - the natural-gas giant that until recently was a potent weapon in Russia's foreign policy - has seen its clout in Europe washing away amid a flood of competition.

An emboldened Prime Minister Vladimir Putin was in Brussels in late February angrily lecturing the Europeans on energy policy and the uprisings in the Arab world. After months in which Moscow and Washington have tried to put their differences over Georgia on a back burner, President Dmitry Medvedev two weeks ago accused the country of threatening the security of the 2014 Winter Olympics, to be held in Sochi, near the border of a breakaway region of Georgia.

Earlier this year, Russia's warming relations with Poland went sour over the handling of the investigation into the plane crash that killed Poland's president and other top leaders this past spring.

But with increased oil revenue also comes the danger of complacency. Bureaucrats, defense contractors, pensioners and workers in construction and finance all stand to gain from the money coming in, along with the oil companies. But the cash also feeds corruption, encourages increased financial opacity and discourages attempts to shake up the system - all of which could spell trouble for Russia down the road.

"All of the dominant groups in Russia get a share of the increased oil revenue," said Alexander Auzan, an economist and adviser to Medvedev. "Yet it contradicts their long-term interests."

Largest oil producer

It's a powerful prop for the status quo - which Auzan and others say is unsustainable.

But as Sergei Guriev, head of the New Economic School in Moscow, pointed out, any change is going to involve a cost for someone, so why take the risk if the money is flowing in?

Russia is currently the world's largest oil producer. When the price last spiked, in 2007, Moscow was flooded with money and people close to Putin were suggesting that Russia was genuinely self-sufficient and had no need to engage more deeply with the West. The economic crisis the following year brought that talk to an abrupt end, and Medvedev began pushing for a Western-oriented program of modernization and diversification away from dependence on energy exports.

The Kremlin moved to stimulate the economy in 2008 by increasing government salaries and hiking pensions by 35 percent. Now it is stuck with those increases. With oil revenue providing 40 percent of the Russian budget, the Gaidar Institute for Economic Policy here has calculated that at any price less than $105 a barrel the government will be in the red.

That tempers any inclination toward hubris, said Daniel Treisman, a political scientist at UCLA who follows Russian developments. The Kremlin was looking at a difficult financial crunch, with parliamentary elections coming late this year and a presidential election next March, so the timing of this rise in revenue is more a relief than a goad to aggressive behavior.

"We don't need high prices," said Leonid Grigoriev, an economist and former World Bank adviser. "We need good relations, a long-term market and reasonable prices," which he put in the $70-to-$90 range.

Russia will not turn its back on the West, by any means, he said. But, especially in an election year, its leaders may be more vocal in pointing up differences with the West. In 2010, Russia had enough problems at home that it was actively trying to avoid them abroad; now, with money to address domestic issues, that caution may not be so evident.

Treisman, like many others, did not think much would ever come of Medvedev's modernization plans - it's not the sort of change, he said, that can be ordered from the top down. But the oil bulge makes the Westernization of the Russian economy less likely. It helps big companies - which, Grigoriev said, already dominate the economy to a much greater extent than in other developed countries - and it hurts small ones, where jobs and creativity tend to be nurtured.

Information technology firms, with high labor costs, will suffer, Guriev said, and they are central to Medvedev's vision for the future of Russia.

Gazprom loses clout

Part of what got Putin so riled up in Brussels was Europe's treatment of Gazprom, a gigantic state-owned operation that at one time had unchallenged sway in the European energy market. Gazprom was a powerful tool in the Kremlin's hands, useful when threatening Ukraine and a reminder to the rest of Europe that Russia had to be given its due.

But that was before American companies began extracting cheap natural gas from shale deposits, and before developments in liquefied natural gas (LNG) technology made inexpensive transportation by ship possible.

Qatar set up a new LNG port to ship gas to the United States, but when it couldn't compete there it turned to Europe instead. Today, Europe can buy gas cheaper from Qatar than it can get by pipeline from Russia. European companies have been renegotiating their contracts with Gazprom - downward - and the European Union has insisted that Gazprom divest itself of its pipelines.

Russia will still sell gas to Europe, said Pierre Noel, an energy expert at England's University of Cambridge, "but the pricing regime is changing." Gazprom, he said, will eventually have to change with it.

But the turmoil in North Africa has temporarily masked even Gazprom's difficulties. When the Libyan gas pipeline across the Mediterranean was shut down, Italy, which is Gazprom's second-biggest customer, relented for now in trying to renegotiate its contract.

If production in Algeria, a much bigger supplier than Libya, were to be disrupted, that would make Gazprom a power to be reckoned with again.

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Gasoline prices hit eight-month low

With the end of the summer driving season just around the corner, traders and investors on Monday drove gasoline prices to an eight-month low on U.S. commodities markets, providing the latest sign of pessimism about the economic recovery.

The sagging commodity market price for gasoline is good news for American motorists, promising a mild easing in pump prices. It also marks the end of a summer of relative stability for retail gasoline prices, which have fluctuated by about 20 cents per gallon since the beginning of the year and have stayed in an 8-cent range for the past 69 days.

Prices have been stuck in neutral because of the continuing weak global economy and fundamental shifts in the U.S. gasoline market, the world's biggest.

The surge in U.S. consumption that many refiners expected earlier this year has not materialized. Last week, the American Petroleum Institute reported that in July, U.S. gasoline deliveries (a measure of demand) were 9.3 million barrels a day, down slightly compared with July 2009. Except for 2008, it was the lowest July gasoline demand number since 2003.

A lack of consumer confidence and continuing high unemployment have kept people cautious about spending and traveling. "With unemployment high and July regular gasoline prices more than 20 cents a gallon above those a year ago, consumers likely have been shopping and vacationing less and trimmed their gasoline purchases accordingly," said John Felmy, the institute's chief economist.

But long-term trends -- such as improvements in the fuel efficiency of American autos -- played a part too, other analysts said. A steady increase in the biofuels component of U.S. motor fuel is another reason; the four week average for ethanol production ending Aug. 13 was 854,000 barrels a day, up nearly 18 percent from a year ago and now more than 9 percent of the volume of motor fuel, according to the Renewable Fuels Association.

With consumption lackluster, U.S. oil companies have been left holding much bigger than usual inventories of gasoline. That, combined with renewed pessimism about U.S. economic prospects, has prompted traders to increase their short selling of gasoline -- betting on a further decline in prices. Short positions jumped 20 percent in the week ended Aug. 17, according to figures compiled by Barclays Capital.

Crude oil prices have also tumbled after a brief surge. The price of a barrel of the benchmark West Texas Intermediate type of crude for delivery next month stood at $72.70 at the end of Monday, down from $82.55 on Aug. 3.

"What is amazing is the degree to which the trading community failed to understand that the gasoline season ended at Memorial Day weekend," said Edward Morse, a veteran oil analyst at Credit Suisse who has been predicting stable prices for months. "All the evidence was in sight that the market was going to be oversupplied."

Morse said that refinery output was "too high, Europe was exporting too much [fuel], biofuel blending components were rising, and the fuel efficiency of the fleet has grown remarkably in the past four years."

The American Automobile Association said Monday that the average retail price of a gallon of regular gasoline eased to just under $2.71 a gallon, down more than 4 cents from a week ago and up only 8 cents from a year earlier, when the economy was more deeply mired in recession.

There have been some signs of economic recovery, however, in petroleum statistics recently. The Petroleum Institute said that there was an 11.6 percent increase in deliveries of low sulfur distillates, which are primarily diesel fuels used in trucking, and a 6.9 percent increase in kerosene jet fuel deliveries. The price of diesel fuel also fell 4 cents a gallon in the past week, but it has climbed 28 cents from a year ago.

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Conventional gas-powered cars starting to match hybrids in fuel efficiency

The new Chevrolet Cruze Eco can reach eye-popping fuel economy levels of more than 50 miles per gallon on the highway, which even in this era of hybrid-electric cars stands among the best.

But here's the real trick: The Cruze Eco is neither a hybrid nor electric. It runs on that "old" technology, the conventional gasoline engine.

Although hydrogen, electric and other alternative cars have garnered more hype and significant federal subsidies, the best immediate hope for restraining the nation's fuel consumption might be some new vehicles that, although powered by conventional engines, run efficiently because they have been stripped of unnecessary weight, streamlined to move smoothly and equipped with gas-sipping engines.

This year, General Motors, Ford and Hyundai began selling cars with conventional engines that achieve 40 mpg or more on the highway, exceeding the fuel efficiency of some hybrids, because their mechanics and shapes have been optimized.

To achieve the efficiency of the Cruze Eco, for example, engineers dropped its weight by 200 pounds, installed shutters to close off part of the grill at higher speeds to reduce wind drag, added a rear spoiler, cut the car's height by one centimeter and adopted an efficient turbocharged engine.

The result is a car that, with a manual transmission, is rated at 42 mpg on the highway by the government but can achieve more than 50 mpg under the right conditions, reviewers say. Likewise, the new Ford Focus, with its "super fuel economy" package, is rated at 40 mpg and the Hyundai Elantra gets the same fuel economy, standard in all models.

With the recent spike in gas prices reawakening consumer interest in fuel economy, the new cars are expected to be particularly appealing, in part because they are typically less expensive than their hybrid counterparts.

"The buzz has been all about electric vehicles and hybrids, but to me, the real buzz should be about the old internal-combustion engine," said Jeremy Anwyl, chief executive of Edmunds.com, an automotive Web site. "It ain't dead yet."

At least since the oil shocks of the 1970s, American politicians have been infatuated with developing alternative sources to power the nation's auto fleet. The George W. Bush administration pushed a hydrogen car; now Congress and the Obama administration are laying out billions of dollars for the development of electric cars.

But the new fuel-efficient gasoline cars, critics say, raise doubts about government efforts that favor any one technology over another. If subsidies are to be made, they argue, they should go to efficient cars, no matter what their power source. Moreover, when the fuel economy of a best-selling gas car is improved even incrementally, it can have much larger effects on the nation's oil consumption than an alternative-technology model that doesn't sell well.

Experts expect alternative fuel technologies to take hold eventually, but hybrid cars still represent only about 3 percent of U.S. car and truck sales. And the latest generation of electric plug-in vehicles hit the market only recently.

"When you take some of the most popular vehicles in the U.S. - say, the Ford F-150 pickup - and improve them by just a few mpg, the effects can add up very quickly," said John DeCicco, a faculty fellow at the Michigan Memorial Phoenix Energy Institute at the University of Michigan. "Much more so than with a niche car."

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Academic scientists say oil from gulf spill is not going away quickly

Academic scientists are challenging the Obama administration's assertion that most of BP's oil in the Gulf of Mexico is either gone or rapidly disappearing -- with one group Thursday announcing the discovery of a 22-mile "plume" of oil that shows little sign of vanishing.

That plume was measured in late June and was described Thursday by scientists from Woods Hole Oceanographic Institution in Massachusetts. The biggest news was not the plume itself: For weeks, government and university scientists have said that oil from BP's damaged well is still underwater.

(Photos: The oil spill cleanup)

The news was what is happening -- or not happening -- to it.

The scientists said that when they studied it, they saw little evidence that the oil was being rapidly consumed by the gulf's petroleum-eating microbes. The plume was in a deep, cold region where microbes tend to work slowly.

"Our data would predict that the plume would still be there now," said Benjamin Van Mooy, a Woods Hole researcher.

(Gulf driller to light up cigar after job is done)

Their research came after a week in which other scientists had taken issue with the government's portrait of where all the oil went. On Thursday afternoon, Jane Lubchenco, the Oceanic and Atmospheric Administration's administrator, defended the government's work, saying it was done by the "best scientific minds" and reviewed by outsiders.

(Transocean accuses BP of withholding data)

"We remain confident in our assessment," she said.

The Woods Hole research, published in the peer-reviewed journal Science, provided one of the most detailed pictures yet of what this oil is doing under the surface.

The scientists said that, using a robot submarine that zigzagged across the deep gulf, they found a plume of oil droplets that was as tall as a 65-story building and more than a mile wide. The plume, whose droplets were so small that the water appeared clear, extended off to the southwest of the well, 3,600 feet deep.

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Oil spill commission questions BP's response plan

The two chairmen of the president's Oil Spill Commission, which is conducting an inquiry into the April 20 Deepwater Horizon disaster in the Gulf of Mexico, expressed skepticism Monday about claims from BP and government officials that initial underestimation of the flow rate of the Macondo well had no impact on the response to the spill.

"It's a little bit like Custer. He underestimated the number of Indians that were on the other side of the hill and he paid the ultimate price for that," said former senator Bob Graham, speaking at a news conference with his co-chairman, William Reilly.

The flow rate of the blown-out well sparked great controversy at the height of the crisis. The Coast Guard initially pegged the leak at 1,000 barrels a day, then upped that to 5,000 barrels, using both government and BP estimates. But the actual rate initially was 62,000 barrels a day, according to scientists in the government-backed Flow Rate Technical Group.

A persistent question is whether BP and the Coast Guard calibrated their initial response plans, at the surface and at the sea floor, to handle the smaller amount of gushing oil. Representatives of both, appearing Monday at a commission hearing at the Marriott Wardman Park Hotel, denied that they made such a mistake, saying they went all-out with every available resource.

"We literally threw everything at it," said Doug Suttles, BP chief operating officer for exploration and production. Coast Guard Capt. Edwin Stanton echoed those remarks.

But Graham said at the news conference that the commission has information suggesting that some of the deep-sea technology used to fight the leak, such as the "top hat" containment cap, was premised on a smaller flow.

There was also new information on how the erroneous flow estimate came to be early in the crisis. Ian MacDonald, a Florida State University physical oceanographer, testified Monday that BP's Regional Oil Spill Response Plan, a 567-page document dated 2008 that covers the Gulf of Mexico and is famous for its provision for saving walruses that do not live in the gulf, contains an incorrect statistical formula for estimating the size of a spill.

The formula in the BP plan underestimates the thickness of black oil on the surface of the sea by a hundredfold, MacDonald said. As a result, BP's "best guess" for the leak as of April 27 was 5,768 barrels, close to the 5,000-barrel estimate initially produced by the National Oceanic and Atmospheric Administration.

MacDonald made headlines early in the crisis when he said that his own scrutiny of satellite images of the slick produced a leak estimate of 26,000 barrels a day minimum. He told reporters Monday that he did not take evaporation into account, and thus the real flow had to be higher yet.

MacDonald said that most of the oil remains in the gulf. This oil "is a highly durable material that resists further dissipation," MacDonald concluded. Referring to the spill as a kind of uncontrolled experiment, he wrote in his prepared testimony that there could be long-term damage to productivity and biodiversity in the gulf: "[W]e must remember that this experiment was performed on an ecosystem that was already badly damaged" by overfishing, coastal runoff and low oxygen levels.

Doug Inkley, senior scientist with the National Wildlife Federation, said in a written statement citing MacDonald's findings, "From Day One, BP and the government have lowballed the volume of the oil in the water and minimized the current and future impacts of this disaster."

Earlier, Graham pressed Suttles about why the company overestimated its ability to handle a massive spill when it applied for a permit in 2009 to drill the ill-fated Macondo well in the Gulf of Mexico. Suttles said he was not involved in the creation of the company's Oil Spill Response Plan.

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Oil spill dumped 4.9 million barrels into Gulf of Mexico, latest measure shows

The blown-out well in the Gulf of Mexico gushed 12 times faster than the government and BP estimated in the early weeks of the crisis and has spilled a whopping 4.9 million barrels, or 205.8 million gallons, according to a more detailed analysis announced late Monday.

BP's Macondo well spewed 62,000 barrels of oil a day initially, and as the reservoir gradually depleted itself, the flow eased to 53,000 barrels a day until the well was finally capped and sealed July 15, according to scientists in the Flow Rate Technical Group, supervised by the U.S. Geological Survey and the U.S. Department of Energy.

The new numbers once again have nudged upward the statistical scale of the disaster. If correct -- the government allows for a margin of error of 10 percent -- the flow rate would make this spill significantly larger than the Ixtoc I blowout of 1979, which polluted the southern Gulf of Mexico with 138 million gallons over the course of 10 months. That had been the largest unintentional oil spill in history, surpassed only by the intentional spills in 1991 during the Persian Gulf War.

The new flow rate figures came as engineers made final preparations for a "static kill" operation that might plug the well permanently even before a relief well intercepts Macondo at its base. BP announced late Monday that the procedure would be delayed, probably until Tuesday, because of a leak in the hydraulic control system on the well's new cap.

(Photos: Oil spills through history)

Macondo's flow rate has been a major source of controversy since the April 20 explosion on the Deepwater Horizon. Early in the crisis, the Coast Guard and BP pegged the flow at 5,000 barrels a day, sticking with that figure even as outside scientists declared that it low-balled the actual rate. The flow rate team, assembled in May, tried to come up with a more solid figure. Scientists examining the surface slick as well as video taken by submersibles soon upped the estimate; by early June, the government declared the flow to be 35,000 to 60,000 barrels a day.

Even the high end of that estimate did not quite do justice to Macondo when it was at full throttle in the early weeks of the crisis. The new figures reflect more data, including high-definition video, sonar measurements of the oil-gas ratio, and pressure readings in the new capping stack before, and then after, the sealing of the well July 15.

"We may never know the exact answer. But as we get more data, you're able to shrink the uncertainty," said Bill Lehr, senior scientist for the National Oceanic and Atmospheric Administration and a leader of one of the teams.

The new figures indicate that the roughly 800,000 barrels of oil that BP managed to capture with its various containment strategies -- a riser insertion tool, a "top hat," and flaring from a surface rig -- represented only about one-sixth of the crude that surged into the gulf over the course of nearly three months. In all, about 1.2 million barrels of oil have been accounted for, either burned, captured or skimmed off the ocean's surface. That's about a quarter of the new estimate for the total spill.

Where the other three-quarters has gone is unclear. Some has evaporated; some has been consumed by microbes; but scientists remain troubled by the possibility that large amounts of oil remain underwater in cloudlike plumes.

"This further confirms that a lot of the oil is still at sea. And we just don't know the implications of it," said Ron Kendall, director of the Institute of Environmental and Human Health at Texas Tech University. Kendall will testify before Congress on Wednesday about his fears that dispersant chemicals have helped much of this oil sink into deep-sea habitats.

For government lawyers preparing a case against BP, this number could help calculate the maximum civil penalty BP might face for the spill. If BP is not found to have acted with negligence, the penalty would be $1,100 per barrel. About 4.1 million barrels escaped into the gulf, according to the new estimate, so that fine would come to $4.5 billion. If BP is found to have acted with "gross negligence" in the lead-up to the spill, the maximum penalty would be $4,300 a barrel, which would work out to $17.6 billion.

"You've got to go in with a number," said David Uhlmann, a law professor at the University of Michigan and the former chief of the Justic Department's Environmental Crimes Section. "And I think these numbers strengthen the government's hand," compared with previous estimates that produced only a range.

In all, the 4.1 million barrels estimated to have polluted the gulf would be enough to fill the Pentagon to a depth of 18 feet or to fill 260 Olympic swimming pools. The entire Gulf of Mexico, by comparison, would fill 880 million Pentagons, or 973 billion Olympic pools.

John Amos at SkyTruth, an organization that uses satellite imagery to study environmental problems, said that this new figure showed how far off BP and the Coast Guard were in the crucial days at the beginning of the spill.

"When the next spill happens, being in the right order of magnitude with the spill estimate is going to be important," he said.

The well remains pressurized and dangerous, but BP and government officials hope that will change with the static kill attempt. The goal is to inject mud into the well and drive the oil back to the source rock.

First comes what BP calls an injectivity test. Mud will be pumped into the well from a surface ship at a gentle rate of one barrel a minute, then two barrels a minute, then three, as engineers monitor pressures and look for signs that the rogue oil is being forced back into the source rock 2 1/2 miles below the seafloor.

"We want to confirm that we can inject the oil that's in the well bore back into the reservoir," BP Senior Vice President Kent Wells told reporters Monday.

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Lan-Secure Wireless Protector Enterprise 4.4

Easily protect your office network Wireless auto switch for automatic disable of WiFi adapter on computers with active LAN connection supporting unlimited network computers.

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Weak PC Growth And Slow Mobile Penetration Weighing On Microsoft

It really is too bad that the conversation on Microsoft (Nasdaq:MSFT) always seems to be dominated by what the company isn't. Bearish analysts and investors hammer the company for its heavy reliance on PCs and fault the company for letting Apple (Nasdaq:AAPL) and Google (Nasdaq:GOOG) build such a large lead in mobile operating systems, while also complaining about the company's relatively weak online business and below-average entertainment profitability.

Those are legitimate criticisms, but only to a point. It is not as though smartphones and tablets have replaced PCs in the office environment, nor are they likely to anytime soon. What's more, Microsoft has a bigger (and faster-growing) presence in enterprise software than is usually appreciated. Last- and by no means least, Microsoft remains an exceptionally profitable company that generates exceptionally large amounts of cash every year.

SEE: Microsoft Vs. Apple

Fiscal Third Quarter Pretty Good Relative To The Market
Given the steady drumbeat of negative news on enterprise and consumer IT spending, I think Microsoft had a pretty solid quarter.

Revenue was slightly below expectation, but up 18% over last year and up about 11% on an adjusted basis. Windows revenue rose 23% as reported, though performance was closer to “flat” after excluding recognized deferrals and down about 9% after excluding Surface revenue. Servers and Tools was up 10%, though, and while that number is below the consensus guess (by about 2%) it was still quite a bit better than the performance at IBM (NYSE:IBM) and Oracle (Nasdaq:ORCL) this quarter.

Microsoft also disappointed a bit with Business revenue, with revenue growth of 9%. Online revenue was up 18%, though, on 22% ad revenue growth and share growth for Bing. Last and not least, Entertainment and Device revenue jumped 57% on very strong Xbox 360 platform growth.

Where Microsoft really delivered this quarter was on its expense control and profit margins. Gross margin did fall about 70bp from last year, but came in more than a point higher than analysts projected. Likewise, operating income rose 19% as reported, with operating margin up 60bp and almost two points better than the average sell-side target.

SEE: A Look At Corporate Profit Margins

Can Microsoft Change The Tone On Win8 And Mobile?
Windows 8 has been on the market for a little while now, and the reviews have not been very good. While there are certainly some fans of the new operating system, most reviews (particularly those not using touch-enabled systems) have been harshly critical. In fact, while it looks like the underlying performance of Windows revenue was better than the reported decline in first quarter PC shipments (down about 14%), more than a few commentators have blamed Windows 8 for the poor pace of PC sales.

On the mobile front, Microsoft continues to make slow progress at best. Nokia (NYSE:NOK) is doing a little better with the Windows-powered Lumia smartphones, but there is nothing in the numbers to suggest that Apple, Google, or Samsung have much to worry about.

Neither of these developments are good for sentiment on the stock, but I'm not sure they're serious long-term problems. Microsoft is preparing an update to Windows (codenamed “Blue”) that would seem to address at least some of the major Win8 complaints, and that should be out later this year. On the mobile front, Microsoft has more than enough time (and cash) to play a long-term game, and I wouldn't rule the company out at this point.

SEE: Microsoft: By The Numbers

The Bottom Line
Even though Microsoft's revenue growth has bounced back into the double digits, nobody expects this to continue – most analysts are calling for mid/high-mid single-digit revenue growth at best for Microsoft over the next few years. Coupled with worries about the demise of the PC and poor strategic/competitive positioning in mobile, Microsoft's improved margins and strong cash flow just don't resonate with what most tech investors want in a stock.

Consequently, I see Microsoft as a value stock, but one that does carry risk of being a value trap. Microsoft has a huge amount of cash, but barring a major increase in the dividend there will always be the nagging question of whether management can/will reinvest it successfully. On a more positive note, even meager free cash flow (FCF) growth in the neighborhood of 1% to 2% is enough to merit a fair value well above $40. For investors with the patience to play the long game, I think Microsoft offers pretty limited downside and at least a fighting chance for respectable long-term performance.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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