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 THE ROVING
EYE
Oil's
slippery slope
By Pepe Escobar
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.
Saudi trouble
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.
Petro-dependency
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?
NEXT: The Russia-US energy
relationship
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