| |
OIL AND WAR
Part 2: Crude
assumptions
By Dinkar Ayilavarapu
Part 1: OPEC in the line of fire
Russia has been hailed as the next
energy superpower. Throughout the late 1990s the Russians
increased production and started emerging as a viable
alternative supplier of oil compared to the unstable
states of the Persian Gulf.
Oil has been
a crucial driver of the Russian and Soviet economies
for decades. In the 1990s, this dependence increased due
to the poor performance of other sectors and the high
prices of oil, courtesy the Organization of Petroleum
Exporting Countries (OPEC). Brookings Institution
economist Clifford Gaddy estimates that every dollar of
increase in the price of a barrel of oil translates into
increased export earnings of US$1.5 billion to $2
billion per year. Oil exports contribute close to 90
percent of Russia's GDP growth. Thanks to oil prices,
Russia has had its best three-year period of economic
growth, starting in 1999, since 1966-69.
It
wasn't always so. In the period 1990-95, the Russian
economy contracted to half its previous size. Domestic
demand for oil dropped by 40 percent, leading to a glut
in the market, and hence lower prices. Capacity
constraints in the Soviet pipeline network impeded
exports and Russian oil production had halved since
hitting a peak in 1988. In such times of misery, the
people looked back at the Soviet years nostalgically,
and the former communists staged an impressive comeback
in elections.
But the 1998 devaluation of the
rouble reduced input costs for the oil industry, and
strong international oil prices boosted revenue without
the country even having to make any new investment in
the sector. This, incidentally, coincided with the rise
of Vladimir Putin.
Almost simultaneously,
Russian companies, flush with petrodollars, were
establishing an international presence. They had
acquired drilling rights in Algeria, Libya and Sudan.
Partly state-owned LUKoil, one of country's largest oil
companies, acquired a chain of gas stations along the
American East Coast, and it also made major investments
in Romania, Ukraine and Bulgaria in Eastern Europe.
YUKOS, another giant, acquired a pipeline from
the Slovak oil major Transpetrol. Putin reformed the
regulatory set up and implemented fixed rates at home,
which along with the high oil prices opened the
floodgates to major league foreign investment into
Russia. In 2001, Exxon Mobil made a five year $4 billion
commitment to develop oil fields in the energy-rich
north Pacific Russian island of Sakhalin. The relative
prosperity in Russia in the Putin years has a lot to do
with OPEC oil prices, and Putin for sure wouldn't want
them to go down. The Russians stand to gain the most if
they remain out of OPEC, but sell oil at OPEC-boosted
prices. The two richest Russians - Michael Khodorkovsky
and Roman Abramovich - have oil to thank. Khodorkovsky
controls YUKOS, while Abramovich owns Sibneft.
Russia fancies itself as a long-term player in
the world energy market. And it is here that the
problems emerge. For Russia to stay attractive to oil investors,
prices of oil internationally need to be high.
Saudi Arabia produces a barrel of oil at less than $5,
but for Russia it takes over $10. Also, Russia holds only
5 percent of the world's proven oil reserves, which is
very small compared to the OPEC reserves. Fiona Hill, a
fellow at the Brookings Foreign Policy Study Program, believes
that Russia's energy future lies in natural gas.
It holds about 32 percent of all the world's proven gas
reserves, which is over twice that of OPEC. Gas is fine
for the future, but it is oil that counts for now.
Putin is sending mixed signals on Iraq. He was
supposed to have been on board with President George W
Bush's regime change idea, provided that Russian
interests in Iraq were taken care of. But the Russians
are still negotiating with Saddam's Iraq for a
multi-billion 10-year oil exploration deal. Moscow also
has a $3.5 billion, 23-year agreement for several huge
Iraqi fields that gives a lead position to a Russian oil
consortium led by LUKoil. And the French oil giant
TotalFinaElf has the largest position in Iraq, with
exclusive negotiating rights to develop Majnoon, a field
near the Iranian border, with estimated reserves of 10
billion barrels.
Clearly, the Putin government
wants a strong foothold in the future exploitation of
oil in Iraq. As Michael Margelov, the chairman of the
Foreign Relations Committee in the Russian parliament's
upper chamber said, "We have an opportunity to develop
oil fields together in Central Asia, the Caspian Sea
basin and maybe later in Iraq." More importantly, Putin
would want a post-Saddam Iraq to honor the $7 billion
debt the country has run up with the Russians. In the
longer term, Russia would be a loser if OPEC, which
keeps oil prices high, were to become defunct. But this
would be more than offset if Russia had a stake in the
exploitation of Iraq's oil in a post Saddam world. In
the short term, with prices expected to move northwards
due to war, Russia would surely reap the profits,
especially since it is producing at peak capacity.
Russia is at a crossroads. Their defense and
foreign policy establishments are more than happy to do
business with the erstwhile Soviet client states, such
as Iran and Iraq, but have until now been held back by
Putin. If the regime change plan harms Russian
interests, or is seen to harm Russian interests, then it
would be these very sections who would reassert
themselves and carry out a sudden redirection of Russian
foreign policy. Putin is playing his cards to get his
way with the Americans, as well as to get the Russians
the best deal in the Middle East. In the end, when the
soldiers march into Baghdad, they may just be doing so
with Russian consent.
Saudis won't just roll
over
In the American regime change idea the
biggest losers are the Saudis, besides, off course,
Saddam and co, who stand to lose their heads, whether
metaphorically or not. The Saudis are at the heart of
OPEC and are the largest producer of oil in the world.
Their importance lies in the role that they play in the
world oil market. The Saudis have built immense excess
capacity over the years, which they usually operate at
only 70 percent.
This excess capacity
gives them great flexibility in moving production up or
down, and hence they act as the market guarantor. So
once the oil price is set, it is their job to either
produce more or less to keep the price there. In
previous situations, like in the Gulf War of 1990/91,
they produced more to keep prices in check, or as
happens more often, they produce less to nullify the
quota cheating by smaller players. The Saudis, due to
the sheer volume of oil that they produce, don't feel
the pain of having to compensate for cheating by other
members. For the US, Saudi Arabia is usually the first
port of call before they embark on major adventures
abroad, to guarantee sufficient oil in the market.
For Saudi Arabia, the OPEC mechanism has worked
fine over the years, bringing in billions and billions
of dollars in oil revenue without pushing the world over
the brink into recession. They learnt their lesson from
the 1970s and have kept oil prices low enough to keep
the wheels of the world running and high enough for them
to make a healthy return.
But OPEC has harmed
Saudi interests as well. Aramco, the Saudi state-owned
oil company that explores and produces oil in Saudi
Arabia, hasn't built any new oil facilities or seen new
investment in years now. In addition, the "Saudization"
of Aramco in the 1990s has, if anything, made the oil
company less efficient in its operations. This spurred
Saudi Crown Prince Abdullah, in 1998, to visit
Washington to meet the top executives of major oil
companies (including the four Aramco founders - Exxon,
Chevron, Texaco and Mobil) to figure out means of
reviving the Saudi giant. Abdullah, as has since been
widely publicized, is a pro-Western figure, but he is
hamstrung by hardliners such as his oil minister, Ali
Naemi, who sees no role for foreigners on Saudi oil.
This has resulted in Saudi Arabia producing way below
its capacity allowed under OPEC quotas, and explains the
complete lack of investment in the oil sector for such a
long time.
As mentioned earlier, if things work
according to the American plan, Saudi Arabia might have
to produce more oil to meet revenue targets. This would
lead to the kingdom needing more investment in the oil
sector, which then would boil down to the big Western
oil companies investing and taking control of the Saudi
fields. This would mark the grand finale of the American
strategy - Americans running the show in Iraq and
Americans running the show in Saudi Arabia. The biggest
losers here would again be Aramco and the Saudi state.
This is one reason that the Saudis are opposing the
American idea of a regime change in Iraq. Saddam might
just have got his most strident enemy of the 1990s to
turn into his biggest benefactor.
Besides
opposition and military non cooperation, the Saudis have
few real means of preventing the war. Their most
effective weapon would be not to play ball when the
firing has started. If Saudi Arabia fails to or refuses
to jack up production during the war, then oil prices
will rise and the US may well run into a recession by
the time he stands for re-election in 2004. For all his
admiration of his father, the one thing Bush Jr wouldn't
want to do is repeat his father's electoral debacle of
1992. This would be a very effective weapon in a long,
drawn-out war. But in a short war ending in the US
getting in Baghdad the sort of welcome that it received
in Kabul, not too much damage would have been done for
this to work.
The tactic adopted by the Saudis
now is to play up the threat of Saddam widening the
conflict by lobbing his chemical-tipped Scuds on Israel,
or by blasting the oilfields in Kuwait or Iraq. Both
these would be prominent in the worst-case scenarios for
the Pentagon. A middle quagmire or long war leading to
high oil prices and recession at home are expected to to
be the most persuasive arguments that might prevent Bush
from going to war in Iraq. Saddam himself is helping the
Saudis do the same by making suitably belligerent
statements directed at both the Arab street and at
Washington.
The joker in the pack
The
one big imponderable in the whole equation is Saddam
Hussein. He has tried his best to destabilize
international oil prices by either producing nothing or
by producing at his permitted 2 million barrels a day.
But the very low volume of his produce has not been
effective in hurting the West or his Arab enemies hard.
In the event of war, he has more effective weapons to
use to throw the war into chaos.
The most
expected strategy by Saddam is his widening the conflict
by attacking Israel with the 18 or so Scuds that he is
believed to have hidden from inspectors. To complicate
matters, he may use chemical or biological weapons to do
the same. Attacking Israel would probably bring the
anti-Israel anti-American sentiment, increasingly
widespread since the second Intifada, onto the streets
and threaten the existing regimes in the Arab world. To
pacify their populations, these states might have to
join Saddam in attacking Israel, and thus blur the lines
in Bush's war. This strategy is less attractive to
Saddam since it relies on so many imponderables to
succeed. Philip K Verleger Jr of the Council of Foreign
Relations, puts the odds of Saddam Hussein managing to
widen the conflict at only 5 percent, and hence any
wide-ranging large-scale disruption of oil from the
Middle East is not expected by him.
Sheik Ahmed
Zaki Yamani, the former Saudi oil minister, articulates
Saddam's second strategy. According to him, Saddam may
use his Scuds with chemical and biological warheads to
attack the Kuwaiti and Saudi oil fields and make them
unusable in the near future. This would cut off oil
flows into the international market and jack the oil
price way beyond the $50 a barrel mark. He might even go
one better and try to attack ships in the Straits of
Hormuz, blocking them and stopping oil from flowing out
of the Persian Gulf, with the same result.
Sheik
Yamani adds, "I know the man very well. He could commit
suicide by stopping exports. Oil would jump to $50-$60.
But he would lose his source of income, benefit his
enemies, Saudi Arabia and Kuwait, who would make a
fortune, and hurt his friends, the French and Chinese.
But he would annoy the Americans." So it's unlikely? "I
don't know," Yamani says. He also has heard of the Arab
woman who cuts off her nose to spite her husband. Daniel
Yergin of Cambridge Energy Research Associates
disagrees, saying that Saddam blocking the Straits of
Hormuz is like saying that firing Scuds from Germany can
block the whole of North Sea. The risk, according to
him, comes more from the Saudis than from Saddam.
It doesn't need a crystal ball and gypsies to
say that Saddam's days are numbered. But he can sure
manage to get time, and it is time more than Saddam that
is Bush's worst enemy. Bush ideally would not want a war
before the mid-term polls at home in November. Never in
the history of the US has a lame duck Congress voted for
a war, and the odds are that the lame duck congress
after November won't do so. The new Congress convening
in January is the one that needs to vote for war, in
early 2003. So the best case may yet be a spring war in
the Middle East. This also gives Bush room to quieten
the Palestinian-Israel spat. But any further delay would
push this war too close to the 2004 presidential
elections, as any fallout of the war would directly be
felt in November 2004.
Saddam has managed to buy
time by offering to allow inspectors back into Iraq, and
he might keep them in business until spring next year,
if they ever agree to go. A summer war is an
impossibility for the US in the Middle East, so autumn
2003 might be the next possible date, and that is only a
year from November 2004. If his moves are timed well,
Saddam may just about survive and join Syria's Hafez
Assad as Middle East's second great survivor. He
outlasted the father (Bush Snr), he may outlast the son
as well. Don't count on that though. Cheap oil is on any
day more valuable than United Nations obligations or
procedural details in an inspection program.
Time is the most crucial variable for the
Americans as well. At best of times in its history Iraq
has produced only 3-3.5 million barrels a day. It would
take five years of sustained Western investment for Iraq
to produce anywhere near as much oil to threaten OPEC.
That would be long after George Bush Jr demits office as
president. It may yet be too soon to write off OPEC, or
write off Saudi Arabia.
(©2002 Asia Times Online
Co, Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication
policies.)
|
| |
|
Iraq:
Speed of the essence (Oct 1, '02)
After
Saddam: Fledgling states, oceans of oil (Sep 28,
'02)
Russia,
Iran: Stepping on the gas (Sep 27, '02)
Time
to tap gas, oil-rich nations told (Sep 27,
'02)
Brave
new (Middle Eastern) world (Sep 19, '02)
War
on Iraq: Costs and consequences (Sep 19,
'02)
Iraq:
In all but name, the war's on (Aug 17,
'02)
|
|
|
 |
|
