Oil: Power Has Changed Sides

Saturday, 24 May 2008 13:07 By JeanMichel Bezat, Le Monde | name.

Oil: Power Has Changed Sides
Crazy Oil (Art: Nicolas Vial / Le Monde)

    In the beginning of the 1970s, when a barrel of black gold cost less than $2, no one imagined that one day an American president would be reduced to begging the king of Saudi Arabia for an increase in the Organization of Petroleum Exporting Countries' (OPEC's) production to bring down prices. Yet the West has reached that point. After an initial rebuff in mid-January, George W. Bush was at it again on Friday, May 16, during his meeting with King Abdullah in Riyadh. With no more success than the first time, unless one counts a limited and temporary increase.

    The time is long gone when Standard Oil of New Jersey, Anglo-Persian, Gulf Oil and their four other "sisters" dominated the world market. When President Roosevelt got King Ibn Saud to open Saudi wells to foreign companies in exchange for American military protection (1945). When Iranian Prime Minister Mossadegh - guilty of nationalizing hydrocarbons - could be overthrown with impunity (1953). When one could pretend to believe that oil is an inexhaustible cornucopia.

    Market power has changed sides. It has slipped away from consuming countries and from Big Oil (Exxon, Chevron, Shell, BP ...). The development of the price per barrel ($128), is being determined behind the scenes in the Kremlin and in the meanders of the Iranian government, in Nigerian mangroves and on the banks of the Venezuelan Orinoco, in OPEC's Viennese corridors and in the halls of the New York Mercantile Exchange. And, above all, in Saudi palaces.

    The world is experiencing a third oil shock - slower than those of 1973 and 1980. The barrel, the price of which has increased six times in as many years, is more expensive in constant dollars than it was in the beginning of 1981. Its price may ebb by some $10 or $20 in coming months, but nothing is less certain. Analysts as respected as those of investment bank Goldman Sachs see the price going to an average of $141 in the second half of 2008 and to $148 in 2009. OPEC no longer rules out $200.

    The Wahabite kingdom, the only country able to put a million additional barrels on the market, balks at that idea. It even stiffened its tone recently, when it announced that between 2009 and 2020 it would limit daily production to 12.5 million barrels a day to preserve its reserves and the interests of future generations along with them. "Every time there are new discoveries, leave them in the ground, for our children will need them," the king has resolved.

    Nothing induces the Saudis to open the spigots. They consider the market to be well-supplied and stocks of crude and gas to be at good levels. They are especially worried about the United States' energy policy, which aims to reduce US "dependency" on Middle Eastern oil - a watchword launched by Mr. Bush and re-echoed in a single voice by presidential candidates John McCain and Barack Obama. All that's necessary to understand the stakes is to hear the Saudi energy minister's denunciations of the bio-carburants being developed on the other side of the Atlantic. On top of that, comes certain American congresspeople's desire to submit the oil market to the anti-cartel rules of international trade, even to suspend arms sales if Riyadh doesn't increase its oil production. These initiatives worry and exasperate OPEC. The strategy of the Vienna cartel - which has given up setting a price range since 2003 - seems simple: supply the market to avoid any break, reduce the "security cushion" to a minimum (2 million barrels a day) and thus maintain the highest prices possible without compromising economic growth. With three-quarters of global reserves, the thirteen OPEC member states have the means to enforce their policy.

    Spiking Prices

    Consumer countries' dependence is linked to the fragility of the multinational companies. Oil states and their national public companies share 85 percent of the world's reserves. The majors no longer hold more than 15 percent and are having trouble reconstituting that percentage to the extent they draw those reserves down. What weight does "giant" ExxonMobil - the biggest listed company in the world - carry compared to Gazprom or Saudi Aramco? The great Western companies' access to oil fields - closed in Saudi Arabia, Kuwait and Mexico, ever more difficult in Russia, Venezuela and Algeria - would involve "returning to the period before the 1970s' nationalizations," believes Nicolas Sarkis, director of the "Arab Oil and Gas Review."

    Will it be necessary to make war for the precious liquid? Unimaginable, even if the thirst for oil was one motive for the American invasion of Iraq in 2003, as acknowledged by former Fed boss Alan Greenspan. What was the payoff? By increasing tensions in the Middle East and reducing supply, the war contributed to the spike in prices. Taking possession of these reserves by force would be a "rear-guard battle," with the oil-producing countries in "a position of strength" today, Mr. Sarkis notes. "They can sell their enormous dollar reserves and deprive the warmongers of oil by offering it to more pacific countries. To China, rather than America!

    A number of industrialized countries learned their lesson from the 1973 and 1980 crises and reduced their dependence. They need less oil to create the same amount of wealth. In the United States, successive administrations have resolved the issue the same way: "the American way of life is not negotiable." A policy that has led to US dependence on imported oil moving from 60 percent to 80 percent.

    In the immediate future, the problem is geopolitical: access to the resource is contracting. Longer term, the problem is geological. One trillion two hundred billion barrels of oil remain, or forty years' worth of consumption at the current rate of extraction. The most optimistic multiply that number by three, adding in the so-called "unconventional" crudes (heavy oils, bituminous shales). Unfortunately, they are very costly to extract. Fields are diminishing in Saudi Arabia, Russia, Norway, Mexico, Indonesia ...

    The only answer resides in a reduction in consumption. Now, the spike in prices has reduced demand at the margin only, since transportation operates at 97 percent, thanks to crude derivatives. Such a reduction is vital to reinforce energy security and fight global climate change. The least expensive, cleanest oil is oil that isn't burned.

Last modified on Saturday, 24 May 2008 14:44