LONDON: As American and British troops mass in the Gulf, it is not surprising that crude oil prices are going in only one direction.
But the bad news is that the two-year price highs of US dollars 32 per barrel are caused by other pressures in the oil market. There is no “war premium” yet. The strikes in Venezuela, now entering their eighth week, are behind the current highs, as 2.4 million barrels per day have been removed from world supply.
US oil stocks were at a 27-year low last week, leaving the oil price very sensitive to politics and prompting Senators to argue for exploration in the protected Alaskan wilderness.
So if an attack on Iraq goes ahead, the oil price is likely to rise again through the US dollars 40 peaks reached during the Gulf War. If the conflict spreads outside Iraq’s borders, oil market analysts say ”it would be difficult to see a ceiling” for crude prices.
Goldman Sachs’ commodity team expects oil prices to average between US dollars 31 and US dollars 32 this year, US dollars ten above their forecast in early December.
In particular, if the US and UK fail to get the United Nations behind military action, friendly oil producers would find it difficult to temper prices by pumping out more oil. Any repeat of the Seventies oil crises or even the temporary increase recorded when Iraq invaded Kuwait in 1990, would also inevitably repeat the associated world recessions. A US dollars ten hike in crude prices, sustained for a year, would take roughly 0.5 per cent of industrialised nations’ growth rate.
During the last crisis Federal Reserve chairman Alan Greenspan eased the pain of US dollars 40-a-barrel oil by slashing real interest rates to zero. But on Thursday there is very little space to move, with the Fed Funds’ rate already at 1.25 per cent.
Last week Opec “rode to the rescue” with an “emergency” 1.5 million barrel-per-day (bpd) increase in production. Julian Lee of the Centre for Global Energy Studies believes this was merely a successful public relations exercise: “All they have done is raise the quota to a level close to what the were producing anyway. Opec is still producing a million barrels per day less than the world needs from them. What it promised is pretty empty.”
Opec has been supplying enough oil to meet immediate demand, but not enough for refiners to stock up, making markets more sensitive to geopolitical strife. So the Venezuela output, a loss of 2.4 million bpd, has had a disproportionate effect. Extra production from Arab states amounted to only 400,000 bpd.
Opec is facing a triple whammy. The tension in Venezuela, a war in Iraq, and the emergence of Russian oil production will greatly undermine the oil producers’ cartel and herald a future of markedly cheaper supplies. If the Venezuelans’ strike against President Hugo Chavez succeeds, Opec will lose its galvanising force. Chavez has played the key role in instilling discipline into the squabbling cartel since his election in 1999.
Should US forces win a swift victory in Iraq, oil company executives will be right behind the troops entering Baghdad.
Iraq’s 112 billion barrels of confirmed reserves — the second largest on the planet — could be developed and see the world economy fairly rapidly awash with cheap oil, effectively destroying Opec’s ability to control prices.
Some disagree. Lee says the investment required to develop Iraq’s oilfields would be too high — up to US dollars 30 billion. The Afghanistan experience suggests there is no guarantee of political stability after any war, and development of the oil industry would have to “wait its turn in the queue behind rebuilding basic infrastructure” after a decade of sanctions.
It is not only external politics that threaten Opec, however. Internal strife could unravel the 11 members. Already some are cheating on its quotas. “The cartel is pushing for prices that are substantially higher than the market would otherwise bear, given the sluggish world economy,” says Lee. “[But] this lowers demand and stimulates production outside control of cartel.”
Last year non-Opec output grew by 1.3 million bpd, whereas demand rose by just 0.3 million bpd. Russia has been the key beneficiary of Opec’s cutbacks in production up until last week. Russia has built up production since the beginning of 1999 for three reasons.
High oil prices have meant that Russian oil companies have money to invest. President Vladimir Putin’s grip on power has given rise to a stronger belief in long-term economic stability, so Russia’s oligarchs have begun to reinvest profits rather than move money out of the country. And devaluation of rouble in 1998 made local costs of production cheaper. However, a barrel of oil extracted in Russia still costs as much as US dollars six, compared with US dollars 0.75 for Saudi Arabia.
“Major Russian oil companies, like Yukos and TNK, have begun to act like the major internationals rather than inefficient state-owned companies,” says Lee.
Russian exports now reach the US. There are proposals for trans-Siberian pipelines to serve both China and Japan with Russian oil.
Indeed Russian firms are keen to get in on the act in Iraq. London-listed Lukoil is said to have been negotiating with Washington to keep its concession for the West Qurna field, Iraq’s largest with 15 billion barrels of oil. The Iraqi government reacted angrily, and last month revoked the contract.
The oil market is always ruled by politics. And the odds are on Opec losing out.—Dawn/The Guardian News Service.