Oil's slippery slope
BRUSSELS and DUBAI - As the neo-conservative dream of a "liberated" Iraq came true in April 2003, who would have predicted that 16 months later oil would become the ultimate time bomb for the Bush administration?
And the Saudi royal/oil family cavalry is not exactly coming to the rescue.
Many factors explain the current rise in the price of oil toward US$50 a barrel - and counting: incapacity - or unwillingness - of the Organization of Petroleum Exporting Countries (OPEC) to respond to growing global demand; maximum terrorist risk in Saudi Arabia; the Yukos saga in Russia; the recent referendum in Venezuela; ethnic trouble in Nigeria; China's unquenchable oil thirst; widespread speculation frenzy propelled by pension funds; and serial pipeline bombing in Iraq.
Average prices for last week stood at $47.02 a barrel in the United States, $44.44 a barrel for North Sea Brent and $41.64 a barrel for the OPEC basket - a more than 4% overall rise on the previous week. Crude futures for October were trading at $46.87 a barrel on Monday.
OPEC, in its latest report, insists the world economy is coping: "On current trends OPEC production will be more than adequate to meet demand in the remainder of 2004 and 2005." A survey by WSJ.com with 55 economists concluded that oil would have to top $60 a barrel to compromise the US economy seriously. But in the real world, the fact is that high oil prices are already set to shave as much as 1% off Asia's gross domestic product in 2004, according to the United Nations' Economic and Social Commission for Asia and the Pacific.
Cheap oil is the Holy Grail of the Bush administration's global strategy. According to the sanitized version of US Vice President Dick Cheney's secret energy report published in May 2001 - the work sessions and the people involved remain classified information - the US in 2020 will be importing 66% of its oil, against 55% in 2001. So, the report says, oil is "the priority of America's foreign and trade policy", and "Russia, Central Asia, the Caspian, the Gulf countries and Western Africa" need "special attention".
This, in the long term, represents one of the explanations for the invasion of Iraq. In the short term, the administration of President George W Bush is in for a lot of trouble when oil-guzzling SUV (sport-utility vehicle) armadas of voters start making the connection between the unmitigated disaster in Iraq and oil at $50 a barrel and beyond. Analysts in Dubai estimate that the Iraqi premium - fueling uncertainty and speculation - adds at least $10 to each barrel of oil.
Welcome to peak oil
According to HSBC, oil is now 136% - and counting - more expensive than before September 11, 2001. The United States - with 5% of the world's population - gobbles up no less than 26% of the world's oil production.
The world currently consumes 81.2 million barrels of oil a day (1 barrel = 159 liters), according to the International Energy Agency (IEA), the energy forum for 26 industrialized consumer nations. But the really alarming figure is 84 million barrels of oil a day: according to the IEA, this will be the global demand by 2005.
A few months ago, the same IEA was saying that demand in 2005 would be of only 82.6 million barrels a day. And more than a year ago, the IEA said we would reach 84 million barrels a day only by 2007 or 2008. This is leading analysts in Dubai to predict that demand - on a very optimistic scenario - will reach 120 million barrels a day in 2020. Additionally, this should mean that if demand continues to grow at the current frenetic level, all proven oil reserves in the world - at the best-estimate level - will be extinguished by 2054.
Way before that happens, of course, we will reach what experts define as "peak oil". The oil-supply bell curve inexorably will be going down - with no return in sight - while the price curve will be going up, toward $100 a barrel and beyond.
Colin Campbell makes no bones about it: for him, peak oil is already here, or around the corner in 2005. For years, Campbell - a PhD in geology at Oxford University in England and former chief executive for BP, Texaco, Amoco and Fina - has been a lonely voice contradicting the supremely powerful oil lobby, according to whom high technology and the invisible hand of the market must guarantee discovery and exploitation of reserves virtually forever.
Already in 2000, Campbell was charging that "oil giants are fooling the planet" and that everybody was myopic - especially producing countries. He was saying that "we only find a new barrel of oil for each four we produce". He is sure that the world has already consumed half of its proven oil reserves, and he is sure that the Middle East will again manipulate oil prices. It turns out that Campbell might have been wrong by a margin of only a few months: he was betting on a new oil shock by 2005, "when production will start to fall and reserves will begin to dwindle at a rate of 3% a year".
In Europe, experts from the IEA, echoed by diplomats, acknowledge that the market is tense and production facilities are extended to the limit, but they insist the current hysteria is a question of "irrational exuberance". One expert says that "there is plenty of oil in the market, and offer is superior to demand". The consensus is to blame traders and speculators who are pushing the price of the barrel higher and higher by brandishing the specter of scarcity.
But things are not so clear cut. Especially because of China, global demand this year will increase by a staggering 2.5 million barrels a day compared with 2003. In terms of offer, analysts in Dubai say that OPEC as of July had an excess production capacity of a maximum 1.2 million barrels a day. OPEC is currently producing 29.1 million barrels a day. This means non-OPEC members such as Russia or Norway must also increase their production to push prices down. But North Sea oilfields have already peaked; and Yukos in Russia, pumping 2% of the daily global demand for oil - 1.7 million barrels - even as it's about to go bankrupt, is also stretched to the limit.
The Chavez factor
They certainly prefer neo-liberalism to Hugo Chavez' "Bolivarian Revolution". But the 50 multinationals involved in the oil-and-gas business in Venezuela - including US majors ExxonMobil, ChevronTexaco and ConocoPhillips - as well as world markets, all badly wanted a Chavez victory in the latest referendum in that country. Chavez could not possibly beat the markets' bete noire: uncertainty. Venezuela is the fifth-largest oil exporter and eighth-largest oil producer, the only Latin American member of OPEC and the supplier of 15% of the United States' oil needs. Chavez played like a master his role of guaranteeing Venezuela's constitutional stability. And markets - when it suits them - do have memory: everybody remembered the December 2002-February 2003 general strike provoked by Chavez' opposition, which led to production falling to 150,000 barrels a day (against 2.5 million to 2.6 million nowadays) and exports to the US being interrupted for the first time in 80 years.
So Venezuela as part of the fear factor may be out of the equation - at least for now. As well as global oil majors and major oil producers, Venezuela is profiting handsomely from high oil prices: the country is scheduled to grow no less than 10% in 2004.
Ali al-Naimi, the Saudi energy minister, is the Alan Greenspan of black gold. In early July, Naimi said on the record that oil at about $35 a barrel was a "fair" price. That was the formal burial of the old OPEC selling price range of $22-$28 a barrel. This extremely important statement in fact meant two things. The first is that there will be no October surprise - or the Saudis coming to President George Bush's rescue. The second is that Saudi Arabia is not able to increase oil production (although they have promised an increase to almost 10 million barrels a day in September: not many in the industry are counting on it). The whole thing leads us back - once again - to peak oil.
When oil reached $45 a barrel, Naimi said again on the record that Saudi Arabia would be ready "immediately" to increase its production by 1.3 million barrels a day. Once again, not many in the industry took him seriously.
Besides, there's the all-important bickering over Saudi oil reserves. According to Saudi Aramco, the kingdom's proven reserves are estimated at 257.5 billion barrels. But analysts in Dubai prefer to cling to Aramco's former executive vice president Sadad al-Hussayni who, in articles appearing in the Oil & Gas Journal, insists proven reserves amount to only 130 billion barrels.
In Dubai, it is estimated that the recent al-Qaeda activities inside Saudi Arabia - via attacks on expats working in the oil business - have increased the geopolitical risk of a barrel of oil by something from $8-$12. Analysts comment that crucial Saudi installations such as Ras Tanura and Abqaiq - the world's largest oil-processing complex - can be extremely vulnerable to an al-Qaeda attack. The ultimate nightmare scenario doing the rounds in the oil business is of Osama bin Laden as a new caliph in a non-Saudi Arabia - before the Americans decide to invade and take over the oilfields. "Five hundred dollars for a barrel of oil, anyone?" scoffs a Dubai analyst.
Investing in Iraq, anyone?
It's fascinating to compare the current situation with the situation in the Middle East prior to the invasion of Iraq.
Back in February 2003, people in Dubai were saying an oil shock was inevitable: the price of a barrel would climb to as much as $50, and in the event of a civil war in Iraq, it would reach $100. They agreed that in the short term this would be a windfall for the Saudis, the Kuwaitis and the United Arab Emirates. Dubai at the time was confident that Saudi Arabia, Kuwait and the UAE - with a combined spare capacity of an alleged 5 million barrels a day - would be able to cover Iraq's production and Venezuela's shortfall caused by the general strike.
Now there's not so much optimism as far as spare capacity is concerned - although oil experts in the Persian Gulf region keep saying that production costs in Iraq are a blessing: only $1.50 per barrel, compared to $2.50 for Saudi Arabia and $4 for the US or North Sea oil. Iraqi oil could be extracted for as little as 97 cents a barrel. But Iraqi equipment is more than 20 years old. Sanctions have devastated the economy and nothing has been upgraded. Water is getting into the pipelines. And 16 months after the Americans took over, the oil industry is still rusting.
Walid Khadduri, editor-in-chief of the Middle East Economic Survey (MEES), believes at least $3 billion is needed to raise Iraqi oil exports to the pre-sanctions level of 3.5 million barrels a day. In his view, this would take at least two or three years of investment after peace has been established - and Iraq is still at war. Others in Dubai believe it would take $10 billion and no less than six years to get to 5 million barrels a day. And to realize Iraq's potential fully, an investment of up to $50 billion in more than a decade will be necessary. This leads the MEES to conclude that Iraq's oil sector will not produce large returns in the next 10 years.
Ahmed el-Sayed el-Naggar, of the al-Ahram Center for Political and Strategic Studies in Cairo, remembers how "Iraq had always been among the hawks in OPEC. As a matter of historical record, Iraq has always presented an obstacle to the US's oil-market strategy. This explains why the US administration's behavior towards that country was so implacably vindictive, and why, in the process of occupying Iraq to drive oil prices down to the cheapest possible levels, it wanted to drive a lesson home to all nations opposed to the US and use the fate of Iraq as an example to intimidate all developing nations."
Whatever the spin from the White House and the Pentagon, the fact is one of the key objectives in the whole Iraqi adventure - completely in line with Dick Cheney's 2001 energy report - was to take over the world's second-largest oil reserves, extirpate Iraq from the much-hated OPEC and maybe kill the cartel for good. Last May in Houston, Asia Times Online confirmed that even the oil business didn't think this was a good idea.
The crumbling Iraq oil infrastructure - on the most optimistic of days - currently cannot produce more than 1.8 million barrels, and much less export it. The Iraqi resistance knows how formidable a weapon is the regular bombing of either the northern pipeline from Kirkuk to Ceyhan, Turkey, or the southern pipeline from Basra. Whenever there is a bombing - or an interruption in pumping because of workers condemning the offensive against Shi'ite cleric Muqtada al-Sadr in Najaf - production in Basra falls to less than 1 million barrels a day. It's always important to remember that even under United Nations sanctions, Iraq exported at least 2.5 million barrels a day.
Officially, not many in the oil business seem prepared to admit that the real big problem today is unprecedented demand by the US, China and India - which production simply cannot match. But if people in the oil business know that consumption is growing at its fastest in more than 20 years, they also know that OPEC - controlling about half of the world's oil export supply - is already pumping at the highest levels since 1979.
China - the second-largest oil consumer in the world, way behind the US - grew 9.7% in the first semester of 2004, and is importing 40% more oil this year than in 2003. Its own production grows very slowly: for example, as its consumption rises feverishly, the production of its main oilfield, Daqing, is declining, according to official Chinese data, by 7% a year (it may be more). Daqing used to be responsible for 50% of China's oil. This leaves China scrambling for all sorts of deals with Gulf countries, Central Asia (especially Kazakhstan), Russia and Africa. China's ultimate nightmare is its "petro-dependency". Energy-saving is now part of the official language, the nuclear program is back, and research for alternative forms of energy is definitely on.
China devoured 6 million bpd in 2003, of which it imported 2.6 million bpd. Oil imports in India, which consumed 2.4 million bpd last year, 1.6 million of which were imported, will increase 11% this year, the state-owned Indian Oil Corp reported.
Some diplomats in Brussels admit that the whole system may face a major structural problem. Huge oilfields are on their way down; there's been no major oil discovery for the past 18 months - despite huge technological progress; and producer countries are operating at their limits.
The key indication of a crisis has been the now famous line by Indonesian Oil Minister and current OPEC president Purnomo Yusgiantoro. "We cannot increase the supply." And this only a few weeks after OPEC guaranteed supply was not a problem. In June, Indonesia admitted it was in the unenviable position of being the first OPEC country to actually become a net importer of oil. Russia has already announced its production will fall in 2005.
In euros, please
From an American perspective, the need to control Iraq's oil is deeply intertwined with the defense of the dollar. The strength of the dollar is guaranteed above all by a secret agreement signed between the US and Saudi Arabia in the 1970s that all OPEC oil sales be denominated in dollars. Saddam Hussein started selling Iraqi oil in euros (and making a handsome profit) in November 2000 - and that's another crucial reason for the Iraqi invasion. Many OPEC countries, not to mention Russia (President Vladimir Putin already referred to it on the record), flirt with the idea of trading their oil in euros. (OPEC is made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.)
A recent analysis published by Goldmoney states that OPEC has already switched, in fact, to trading oil in euros - as oil-exporting countries fight to offset the weak dollar, "It seems clear that OPEC and the other oil exporters are already pricing crude oil in terms of euros, at least tacitly. Whether they start invoicing their crude oil sales in terms of euros remains to be seen."
So what is Cheney doing in the middle of this crisis? He's blaming the Democrats. The failure of Cheney's Russia strategy will be examined in a separate article. But as far as Iraq is concerned, the blowback is obvious. The neo-cons dreamed of exporting "democracy". Instead, they imported geopolitical instability - reflected in the rising price of oil. The Bush administration has not been rewarded with cheap oil: it is now facing a new, slow, mutating oil shock.
The oil business knows that with its oil infrastructure repaired, Iraq could rival or might even surpass Saudi Arabia as the world's largest oil producer. But the neo-con dream of a US military protectorate with US oil companies running the oil business is a more distant prospect by the day. There's no credible evidence that Iraq may become, sooner or even later, a source of spare capacity to world oil production, or be able to stop the migration of OPEC and non-OPEC countries from the petro-dollar to the petro-euro.
Oil at $50 a barrel, and on its way to $60, is an absolute disaster for oil-importing countries (and this means most of the world). Business costs are automatically higher - leading in many cases to job cuts, which means higher unemployment. The days of cheap oil may be over - as most analysts agree. But beyond the current hysteria over oil at $50 and the failure of Cheney's US energy policy, the world seems to be failing to address at least four extremely important questions on which the common future depends: how much oil - proven reserves - is left in the Middle East? How much oil does Russia have? What is the real amount of proven reserves in the Caspian Sea? How long will all this oil last?