| Saudi Arabia and oil...What if? - The Economist
Not so long ago, a certain well-known international figure penned a heart-felt speech he called his “Letter to the American People”. In it, he said: “You steal our wealth and oil at paltry prices because of your international influence and military threats. This theft is indeed the biggest theft ever witnessed by mankind in the history of the world.” The author was Osama bin Laden.
The impact of those chilling words is still being felt in today's chaotic energy markets. Oil prices have recently been above $40 a barrel. Politicians in oil-consuming economies are up in arms. Saudi Arabia, the head of the Organisation of Petroleum Exporting Countries (OPEC), has promised relief. It is trying to persuade reluctant cartel members to increase production when they meet on June 3rd in Beirut.
Typically, a decision by OPEC to increase quotas cools prices. This time may be different. A soaring world economy has sucked global inventories dry. Nearly every OPEC producer, save Saudi Arabia, is already producing about as much oil as it can. That means that any new OPEC promise of oil will have to come chiefly from the Saudis themselves—and that is not good news.
The main reason for worry is the so-called “terror premium”. Oil traders report that fears of terrorist attacks that might disrupt Middle-Eastern oil exports may account for as much as $8 of the current per-barrel price. That may be because what was once unthinkable now seems possible, perhaps even inevitable: a major terrorist attack, or series of attacks, on oil facilities within Saudi Arabia.
But how well-founded are these fears? For the terror premium to be justified, one needs to consider three questions: Is Saudi Arabia really so important? Would it in fact be easy to pull off a serious attack inside the desert kingdom? And even if such an attack were to take place, would the oil markets suffer so badly?
First, is Saudi Arabia so important? Until the recent rise in prices, most headlines had trumpeted the growing importance of other oil producers. The revival of Russia , overtaking even Saudi output, was supposed to undermine OPEC. Oil from Alaska would give America “energy independence”. The quest for oil in the Caspian Sea was called the “Great Game”. Striking oil in the waters off Brazil and west Africa was even likened to hunting elephants.
Surely all this investment and discovery prove that the Saudis are ever less important to the oil market these days? Nonsense. Ignore the headlines and look instead at geological and market realities, and it quickly becomes clear that Saudi Arabia remains the indispensable nation of oil. The Saudis not only export more oil than anyone else, but they also have more reserves than anyone else—by a long shot. Fully one-quarter of the world's proven reserves lie in Saudi Arabia. Four neighbours—Iran, Iraq, the United Arab Emirates and Kuwait—each have about one-tenth. Russia, Nigeria and Alaska put together do not match Saudi reserves.
Even more important is Saudi Arabia's role as swing producer. Unlike other countries, the Saudis keep several million barrels per day (bpd) of idle capacity on hand for emergencies. Today Saudi Arabia is the only country with much spare capacity available (see chart 1), though the precise amount is a matter of intense debate. Nansen Saleri, an official at Saudi Aramco, the country's state-owned oil company, will say only that Saudi output will rise in June to about 9m bpd, and that the country can raise its output above 10m bpd “rapidly”.
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| The war for Gulf oil -
openDemocracy
American and British efforts to gain legitimacy and support for their political project in Iraq are entering a new phase, with a draft resolution to the United Nations Security Council being presented and discussed behind closed doors in the UN’s New York headquarters. The resolution seeks UN backing for the proposed handover to Iraqi administration on 30 June, with some doubt as to the role and powers of US forces in Iraq after that date.
Meanwhile, as President Bush on 24 May promised “focused and unrelenting” efforts to “hold this hard-won ground for the realm of liberty”, discussions between his envoy Robert D. Blackwill and the UN’s Lakhdar Brahimi continue to address the “complicated geometry” of Iraqi power relationships after the transfer.
At the same time, the investigation of the affairs of Ahmed Chalabi, the Iraqi figurehead long championed by American agencies to advance their political ambitions in the country, is another indication of the remarkable lack of coherence in United States policy in Iraq, noted in last week’s column in this series. While Donald Rumsfeld protested ignorance of the raid on Chalabi’s Baghdad residence on 21 May, other sources were circulating evidence to indicate that the Iraqi Governing Council member had been used by Iranian intelligence to tempt the US into its Iraqi adventure.
Behind the diplomacy and the political confusion, the Iraqi insurgency continues. A rocket attack on a US base north of Baghdad on 24 May killed an American soldier and wounded four more; the same day, two British civilians connected to the country’s foreign office were killed in an ambush outside the coalition headquarters in Baghdad; two Russian civilian contractors were killed and five wounded in an attack on a bus on 26 May. Most seriously of all, intense fighting around the cities of Najaf and Kufa between coalition troops and forces loyal to the Shi’a radical cleric Muqtada al-Sadr continues, involving controversial damage to the shrine of Imam Ali in Najaf in addition to the deaths of civilians.
Thus, the United States-led coalition remains under severe pressure in Iraq in three areas – political, diplomatic and military. As if they were not enough, a fourth area of concern – economic - has come to the forefront of concern in recent weeks, and it is worth examining how the oil factor connects to American strategy in Iraq and the wider Gulf region over the longer term.
Since January 2004, oil prices have risen 25% to reach over $40 a barrel in late May – and as high as $41.80 on 24 May, the highest level since 1983 - awakening fears of a serious oil price shock reminiscent of the early 1970s and late 1980s. The potential impact on United States and British politics could be especially great, not least as there are suggestions that one of the main reasons for the price increases is the anger of some Arab oil producers at recent coalition actions in Iraq.
The actual situation is rather more complex; a continuation of the price trend is not inevitable. But the longer-term prospects are precarious and there is a deeper truth in the assessment of a link between oil and politics: movements in the oil price are indeed intimately bound up with US policy in the Gulf region (see the articles in this series of 9 January 2002 and 27 December 2002).
The first round of oil price rises, from October 1973 to May 1974, was very much a result of the actions of oil producers. Arab members of the Organisation of Petroleum Exporting Countries (OPEC) cartel put up prices and cut production in order to exert influence on western countries to pressurise Israel over the Yom Kippur/Ramadan war. This set in motion decisions by other OPEC members which, along with the activities of speculators, led to a price rise of over 400% within a few months.
The 1979-80 price increases were less extreme and were due mainly to supply interruptions during the Iranian revolution and the start of the Iran/Iraq war. After this, during the 1980s, the power of the oil producers decreased, even though oil-import dependency was spreading to countries such as China.
On both occasions, the trans-national oil companies (TNOCs) did very little to curb prices. For them, surging bull markets were very good for business – they could buy oil at one price and sell to the consumer at an inflated price within a few weeks, even though it would take 100 days or more for oil to get from the oil fields to the petrol pump.
“Buy low, sell high” was a good tactic and it was little wonder that many of the TNOCs recorded spectacular profits in 1974 and 1980. This was a lesson that western governments had to learn the hard way – especially those who had persisted in the old-fashioned idea that multinational corporations essentially act in the interests of elite countries rather than their own.
The current price surge does stem partly from some modest OPEC cuts in oil production earlier in the year, and there may indeed be an element of displeasure at US policies, but two other factors are at work. First, a continuing increase in demand, especially in China and the United States; second, speculation fuelled partly by the fear of disruptions of supply due to paramilitary action in Iraq.
Repeated attacks on Iraq’s oil infrastructure have caused concern and have added to such speculative pressures. It would normally be possible for the world’s largest exporter, Saudi Arabia, to compensate for any shortages by increasing production. This the Saudis are now doing, but only belatedly, so that there are likely to be some further price increases - especially as demand for gasoline increases with the onset of the summer “driving season” in the United States with its heavy use of air conditioners, vacation cars and trucks.
Such increases might appear to benefit producer countries like Saudi Arabia by improving their revenue streams. In practice it does not work like this. Many of the western Gulf States such as Kuwait and the Emirates have long since invested many of their oil revenues overseas, principally in Europe and North America. Kuwait gets around half of its governmental income from such investments and the other half from oil exports. This means that if the price of oil surges too much, a recession can ensue in the west and investment income falls.
The consequence of this is a fine balancing act. Many OPEC members would like so see the price remain around $35-40 a barrel – enough for lucrative revenues but not enough to damage investment income. The problem is that this is a difficult if not dangerous balance to achieve, given the current political turmoil in the region.
The end result is that oil prices may hold steady at around current levels, but there is a real risk of a sudden further increase, especially if al-Qaida or one of its affiliates can succeed in disrupting Saudi, Kuwaiti or Emirate exports in addition to the current interruptions in Iraq.
This current volatility may only be a taste of what is to come in the longer-term future. The trend of the past thirty years has been for an increase in dependency of the industrialised world on Gulf oil at the expense of almost every other region. In addition to most of Europe and Japan, with their near-total import dependency, even the United States now needs to buy almost 60% of all the oil it uses, and China and India are rapidly increasing their oil imports as well.
Meanwhile, there are more and more discoveries of oil in the Gulf region. Despite exporting vast quantities of oil throughout the 1990s, Saudi Arabia, Iraq, Kuwait and the Emirates have all seen an increase in the size of their oil reserves. Iraq’s estimated reserves actually went up 15% from 1990-2002. Only Iran has seen a decrease, and that has been modest. On 2002 figures, these five states, together with the smaller oil fields in Qatar and Oman, collectively have reserves totalling 690 billion barrels - almost 70% of total world oil reserves.
By comparison, the United States has just 3% of world reserves and the UK’s North Sea reserves are down to less than 0.5%. Even the combined reserves of the Caspian basin and Siberia are little more than half the size of Iraq’s oil. This certainly helps explain why the Bush administration is so attached to the idea of a client government in Baghdad and a nice, friendly, long-term relationship.
This is the current situation, but what also has to be remembered is that this is a snapshot rather than the indicator of a trend. To assess the likely circumstances a generation or two ahead, the signs indicate that Gulf oil reserves will become steadily more important, especially as demand from China and India continues to grow. Put simply, whoever can exert the most influence over the Persian Gulf region, especially if that extends to a capability for military control, will wield quite extraordinary international power.
For that reason alone, if current American policy in Iraq does fail and the result is a disorganised and chaotic withdrawal, the extent of the foreign policy disaster that will unfold will be much greater even than any immediate sense of victory felt by al-Qaida and its affiliated paramilitaries. It could set back US control of the world’s richest energy sources for well over a decade.
In short, it is no exaggeration to say that what happens in Iraq over the next year could have a defining impact on global security trends well into the third decade of the 21st century.
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| Beijing Keen To Pursue Oil Projects With Neighbors - Radio Free Europe
Kazakhstan and China have signed an agreement on the construction of a 1,240-kilometer oil pipeline from Atasu in central Kazakhstan to the Alatauw Pass on the Chinese border. The accord provides for Kazakhstan's Kazmunaigaz and China's National Petroleum Corporation, or CNPC -- both state-owned firms -- to invest jointly in the project.
The deal came as Kazakh President Nursultan Nazarbaev and his Chinese counterpart Hu Jintao last week signed a broad agreement for joint exploration and development of oil and gas resources in the Caspian Sea. The signing came during a four-day trip by Nazarbaev to the Chinese capital Beijing.
Energy analyst John Vautrin, of the international energy consulting firm Purvin and Gertz, said the agreement -- which will ultimately pump some 10 billion tons of crude into China annually -- will benefit both sides, as well as Russia.
"It is significant in terms of China's demand," Vautrin said, adding that it will meet "perhaps 10 percent" of China's import needs. But he said that what is even more significant is that "it will help Russia find another outlet or Kazakhstan find another outlet for crude that they are having difficulty transporting to the market.
The pipeline will not link to Kazakhstan's major oil-producing centers in the country's far west. But Atasu has a pipeline link to the Kumkol fields in central Kazakhstan, as well as connections to Russian oil fields in western Siberia and the southern Kazakh oil region of Shymkent. Crude from these sources should be sufficient to fill the line; Russian crude is already being transported from Omsk to China via rail from Atasu.
The signing represents a breakthrough after nearly a decade of talks. The project is scheduled to be initiated by August, with crude oil inflow and transportation systems to be completed by next year.
However, some analysts question whether the project can in fact move from signature to completion in less than two years. Debate over ownership, funding, and oil prices are potentially serious enough to push the project far off schedule.
Nevertheless, China is keen to proceed. It has reportedly begun building a 400-kilometer section of pipeline from the Kazakh border to CNPC's Dushanzi refinery in Xinjiang and is also mulling an upgrade of the refinery's capacity.
CNPC is also considering the construction of an oil pipeline from Xinjiang to help deliver Dushanzi's output to China's industrialized eastern regions.
Xu Yihe, senior reporter with Dow Jones Newswires in Singapore, said China is pursuing pipeline deals with its neighbors to help meet the booming economy's soaring demand for oil and gas.
"China is growing very fast, with GDP growing at 9.1 percent last year," Xu said. "So the government is very much concerned about domestic-crude supply shortages. China has stepped up its efforts to develop oil and gas resources in the western regions. But [it] has so far failed to make any major discoveries there. That's why China is looking beyond for oil supplies."
Xu said China currently has a deficit of more than 100 million tons of crude a year. The demand growth is forecast to be at about 5-8 percent a year over the next five years.
In order to help fulfill its energy needs, Beijing has signed a framework agreement with Moscow to build a pipeline to deliver Siberian crude to China's major oil center, Daqing. However, Japan offered a rival pipeline that would bypass China and stretch to Russia's Far East port of Nakhodka. Another possible route is a pipeline to Nakhodka with a branch line to China. No decision has yet been made on any of these pipeline options.
Xu noted that Chinese oil companies are also seeking to explore and develop oil and gas reserves around the world.
"Chinese oil companies are almost everywhere in the world. They're dispatching teams of oil experts to negotiate oil projects, especially upstream projects in Asia, Middle East, Africa, and North America," Xu said.
Last year, CNPC took control of the CNPC-Aktobemunaigaz oil field in northwestern Kazakhstan.
China's ShengLi is planning to acquire a stake in Azerbaijan's onshore Qara-Chukur field. Last year, ShengLi purchased a stake in another Azeri onshore field, Pirsat.
China Petrochemical Group has said it has agreed to help Turkmenistan and Kyrgyzstan refurbish old wells and fields in return for oil. It also purchased rights to explore potential new fields in Kyrgyzstan.
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| Jury still out on dollar impact of pricey oil - Forbes
Soaring world oil prices should damage the dollar, investors bet on Tuesday. But are they right?
Only last week many market participants believed that the dollar should benefit from a global flight from riskier assets that was sparked by uncertainty over fuel costs and their impact on the global economy.
But doubts about such benefits have crept into the market this week, showing that the long-term effect on currencies of the oil price's rise to 21-year records is far from clear.
One key question for the dollar is whether high fuel prices will hamper flows into equities or bonds needed to cover the U.S. current account deficit.
Another is whether the European Central Bank will be more hawkish than the Federal Reserve in countering any inflationary pressure from high energy costs.
Much will depend on how many investors still have large holdings of riskier assets that tend to be sold for dollar investments in times of uncertainty and on how U.S. consumers react to costly fuel, analysts say.
"High oil prices will affect all major economies, so it is a symmetric shock," said Thomas Stolper, global markets economist at Goldman Sachs in London.
"In the end, all three G3 (Group of Three) countries will be hurt by high oil prices. So there is no clear argument for a stronger or a weaker dollar."
So far, the dollar has shed more than two cents against the euro after U.S. crude oil futures hit a peak at $41.85 on May 17, the highest level in their 21-year history. The dollar hit two-week lows around $1.2125 per euro on Tuesday.
On Tuesday, oil prices kept near $41 per barrel on persistent concerns over whether supply can meet spiralling global demand.
Many currency strategists argue that a prolonged rise in oil prices and an associated high level of risk aversion in financial markets would eventually bring market attention to the U.S. current account deficit, damaging the dollar.
As the world's largest net oil importer, the U.S. would feel the pressure on its trade balance from the rising cost of oil imports.
"But now there is a window of opportunity for the dollar," said Ian Gunner, head of foreign exchange research at Mellon Bank in London.
"If the oil price was to shoot up again, I would imagine the big dollar positive is that higher risk aversion would mean people exiting trades such as emerging markets for the dollar." However, any boost to the dollar from investors closing growth-oriented bets in high-yielding currencies would eventually run out of steam and leave the U.S. current account deficit exposed.
"Let's assume the liquidation of high risk trades is complete and everyone is left underweight, and we are also seeing increased risks to the U.S. economy," Gunner said.
"Then this would inhibit flows to the U.S. and expose the trade deficit. This is negative for the dollar."
In addition to the long-term impact of high oil prices on cross-country investment flows and their ability to cover the U.S. trade deficit, investors are eyeing the outlook for Fed rate hikes.
So far expectations of Fed tightening have been the key driver of the dollar's recovery from February's record lows against the euro.
But analysts remember the rate cut ordered by the Fed in 1973 to offset the inflationary effect of oil prices soaring under the pressure of an Arab oil embargo.
"If high oil prices start to impact U.S. consumer spending then they will limit rate hikes from the Fed," said Gunner. "On the other hand, strong employment should be boosting confidence."
Any inflationary effect from high oil prices would also impact the oil-importing euro zone, but some analysts said the ECB was likely to be more aggressive on inflation than the Fed.
"The ECB would be very reluctant to cut rates while the Fed may be more flexible if high oil prices lead to a large fall in equities and in consumer confidence," said Mansoor Mohi-uddin, chief currency strategist at UBS in London.
However, many analysts also note that for now concerns over oil impact on world growth may be overdone as prices, in inflation-adjusted terms, are still only half of what they were during the 1970s oil shocks.
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| U.S. Demands Greater Oil Output, Lower Prices - Cato Institute
"Finance ministers from the United States and other major industrialized countries, hoping to affect the outcome of a battle within the Organization for the Petroleum Exporting Countries, formally demanded yesterday that oil-exporting nations raise production and lower prices to a level 'that is consistent with lasting economic prosperity,' the New York Times reports.
"The unusually blunt demand, issued at the close of a meeting in New York held by John W. Snow, the Treasury secretary, came after several oil-exporting countries sharply criticized Saudi Arabia's unilateral decision to increase its production and its proposal that OPEC increase its overall output by two million barrels a day."
In "OPEC Is No Friend of Ours," Jerry Taylor, director of natural resource studies, writes: "If OPEC disappeared tomorrow, oil prices would drop to somewhere around $8 a barrel and gasoline prices would almost certainly be south of $1 a gallon. A price collapse of that magnitude would do more for consumer welfare and the overall health of the American economy than almost anything that's been put on the table by President Bush or his Democratic Party rivals. Accordingly, the OPEC cartel should be resisted, not embraced, and policy should aim at undermining it, not propping it up."
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Tapping the emergency pool would hurt more than help - The Grand Rapids Press
Big prices at gas pumps ought to fuel some fresh thinking about energy use in this country. But one of the options shouldn't be tapping America's emergency pool, the Strategic Petroleum Reserve.
The call to use the reserve came last week from 20 Democratic U.S. senators, among them Michigan's Sen. Debbie Stabenow of Lansing. They want to take at least 60 million barrels of crude over the next two months -- about 9 percent of the reserve's total -- in order to pull down gasoline prices.
Whatever political mileage the idea produces for the senators, there would be little gain for the consumer. U.S. oil consumption is roughly 20 million barrels per day, 20 times what the senators propose to siphon out of the reserve. The withdrawal thus wouldn't be enough to knock more than a few pennies off pump prices, and only temporarily. Former President Clinton tried this just before the November 2000 election, gaining only a few cents' worth of savings for a few weeks.
By reducing the U.S. oil reserve, the senators' also would hand greater energy-price leverage to foreign oil producers and make the country even more vulnerable to supply disruptions.
The biggest problem with the scheme is that the Strategic Petroleum Reserve doesn't exist to insure cheap gas or even, as Energy Secretary Spencer Abraham said the other day, "to simply change prices." The reserve was created in 1975 in reaction to the 1973 Arab oil embargo. The purpose, stated in the initiating law, is to protect the country against disastrous interruptions in oil supply.
That aim took on added cogency after Sept. 11, 2001, so President Bush very rightly has been pumping into the reserve since that time and says he will continue to do so. Before Election Day, he intends to add some 20 million barrels of oil more into the reserve, bringing it near to its 700 million barrel capacity -- or two months' worth of imports.
Raiding the petroleum reserve, in any case, would dodge the real energy issue for this country: that we use more energy than we produce, resulting in a heavy reliance on oil imports to keep our cars and trucks rolling, planes flying and homes heated.
The plan also ducks away the fact that there is no simple explanation for the current spike in pump prices -- and thus no quick fix. Some of the price hike, for sure, is due to the Organization of Petroleum Exporting Countries (OPEC) several months ago tightening its export spigots, in part to correct a revenue decline caused by a weak U.S. dollar. But other causes are at least as important including China's heavy consumption of oil, a general rise in international demand and the continuing resurgence of the U.S. economy.
Among factors in the United States, is that no oil refineries have been built in at least 20 years and those that are on line are bottlenecks, especially because they must produce a complex variety of gas blends to fit federal environmental rules across the country. Americans for a decade have been guzzling ever more fuel with their trucks and SUVs, but only now are mileage standards for such vehicles beginning to edge upward. Requirements for cars have been unchanged for almost 30 years. And while U.S. oil use continues to rise sharply, domestic oil production isn't. Vast areas of the country are closed to exploration.
The answer is for the nation to get serious about energy independence. That means more oil production, but there has to be a long-term shift away from oil, too, with alternate fuel sources for cars and more emphasis on mass transit -- trains -- for both people and freight. The Bush energy bill, stoutly opposed by Democrats, has been stalled in the Senate for more than two years. Even a sharply scaled-back version remains blocked. If Democrats can't pass a workable plan of their own, they have to let the Republicans' ideas go forward. Endless stalemate is not a responsible or affordable alternative.
Anyone having to pump gas these days knows the pain of paying $2 and more per gallon. Little consolation is the fact that, adjusted for inflation, prices in years past have been higher. The country should take this pinch -- however long it lasts -- as a reminder that energy use and policies have to change. Sucking oil out of the Strategic Petroleum Reserve wouldn't be the solution. By adding to our exposure to oil caprice abroad, it would add to the problem.
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