[A-List] US imperialism: the geopolitics of oil

["Michael Keaney" <michael.keaney@xxxxxx>]

A nice, revealing quotation from the CEO of Exxon who sure is aware of what
is at stake re China's economic growth.

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Disagreements over production cuts could surface at the emergency meeting
later this month. But the more searching question conc
By Carola Hoyos
Financial Times; Apr 09, 2003

Today tanks are again moving through the Iraqi capital and regime change is
imminent once more. But Opec, having acquired huge power in the intervening
four decades, is entering a period of deepening uncertainty.

An emergency meeting in Vienna on April 24, called by Abdullah Hamad
al-Attiyah, Qatar's oil minister and the current president of the
organisation, promises to be particularly tense.

The most pressing concern in the minds of the cartel's 11 members is the
imminent threat of a glut on world markets. In the past month, as Opec
countries have pumped at almost full capacity, the price of oil has plunged
30 per cent, from a pre-war high of $39.99 a barrel to about $28 a barrel.
With the onset of spring in the northern hemisphere, and the end of the war
in Iraq, some analysts expect prices to hit the low $20 range, below Opec's
preferred target range.

"Opec's current production rate is creating a tidal wave of crude oil that
cannot all be absorbed by current and even rising demand," says Aaron Brady,
senior analyst at Energy Security Analysis, a Boston-based research company.
"A production cut may be unavoidable once the war in Iraq begins to wind
down."

To maintain market equilibrium, according to a recent report by Société
Générale, Opec will have to ensure an average 2003 output of 25.1m barrels a
day, the same level as in 2002 - a big drop from its current 27.7m b/d.

But agreement on how to divide reductions within the cartel will not be easy
to reach. Three members - Nigeria, Algeria and Venezuela - are vying for a
bigger share of total production within it. Nearly every country wants all
the petroleum revenue it can get, to shore up weakened economies and fragile
political systems.

Saudi Arabia, a traditional US ally and the cartel's "swing" producer, given
its role as a strategic supplier of last resort, faces an acute dilemma. Its
relations with Washington are strained. Public opinion at home is agitated
by the US-led war on terror and the invasion of Iraq. Within Opec, price
hawks in other capitals have watched jealously as Saudi Arabia has captured
market share. It has raised production in the past four months to more than
9.5m barrels a day - a level not seen since October 1981 - from about 8m b/d
in December

If action is required on April 24, bickering over production cuts may strain
relations. But the tone of the negotiations will also give a first
indication of how Opec is likely to respond to a far greater challenge to
come: the role of Iraq, post-Saddam Hussein.

Some analysts argue that Iraq's vast reserves could eventually add enough
oil to world output to reduce the cartel to near-impotence. "Oil prices
would be less than $10 today if it were not for Opec's formation and
influence," says Phillip Ellis, analyst at the Boston Consulting Group. "If
the economy is weak and investment in Iraq is enough to add 500,000 barrels
of oil a day each year until 6m b/d is reached, Opec will cease to have an
impact and will, in fact or in effect, dissolve."

Last weekend a meeting of expatriate Iraqi oil experts gathered in London by
the US State Department agreed that Iraq's output should be increased as
quickly as possible. They recommended that any new government sworn in after
an interim authority sign production sharing agreements with international
oil companies. More worrying for Opec, they also recommended that Iraq
should remain part of the cartel but continue to be exempt from the
limitations of a production ceiling.

In practice, Iraq's production will not impact on Opec for at least a year,
before which time it is unlikely to be able to add the 1m barrels a day it
would need to hit its nominal ceiling. Any increase to its capacity is
unlikely to destabilise the cartel for five years. But with global demand
for Opec oil expected to remain flat for the next few years - because of
output increases in Russia, Africa and the Gulf of Mexico - the infighting
could begin much sooner.

Internal squabbling is never good for a cartel that relies on communication
to deter cheating by members tempted to exceed their production quotas. As
the political and economic pressure mounts on Middle East regimes,
discipline is becoming harder to maintain. Few members will relish forgoing
the extra revenue provided by recent high prices and the extra production
allowed to compensate for strikes in Venezuela and Nigeria.

"There is great pressure on key Opec members to grow their oil revenues fast
enough at least to maintain the current standard of living of the general
population," says Mr Ellis. He calculates that Saudi Arabia, Iran, Nigeria
and Venezuela all need to increase oil revenues 5 per cent a year to
maintain their real levels of gross domestic product per capita. "If they
are unable to do so, the standard of living of their people will continue to
decline and political instability will increase - conditions that would
drive each country to try to achieve sufficient revenues independently or
suffer the consequences."

Predictions of a decline in Opec's power have proved wrong before. Indeed,
the cartel has arguably been more successful at maintaining a steady and
high oil price in the past three years than at any other time in its
history.

Saudi Arabia has shown an enduring ability to adjust to the massive changes
in the oil industry. And Opec members are sitting on more than
three-quarters of the world's proven oil reserves.

Experts outside Opec, such as the International Energy Agency, which
represents 26 of the world's largest consumers, and Exxon, the world's
largest non-government producer of oil, predict that by 2010 Opec will have
a tighter grip on supplying the world's energy needs than it does now. The
shift is expected in spite of consuming governments' efforts to diversify
their suppliers, so that they do not depend on a single country for more
than 15 per cent of imports, and their push for less polluting fuels such as
hydrogen, wind power and energy from alternative sources.

As Lee Raymond, Exxon's chairman and chief executive officer, has said: "The
centre of gravity of our industry is inexorably moving to the Far East." The
steady increase in demand from China, which will outstrip the rising
production from international oil companies and non-Opec producers, "will
put the Middle East in an even more dominant market position in supplying
energy needs, and that has very, very significant geopolitical
ramifications".

And while some neo-conservatives in Washington regard Saudi Arabia and other
authoritarian Arab regimes as enemies of the US, other people appear
resigned to Opec's existence. Spencer Abraham, US secretary of energy, has
gone out of his way to praise the cartel for its role in stemming oil price
rises before the invasion of Iraq. Even louder than words was President
George W. Bush's decision not to use the US strategic reserves as prices
rallied - a move that was important to Opec not only because it delayed any
fall in prices but also because it buttressed and to a certain extent
legitimised the cartel's ability to dictate the market.

A stabile oil price, Opec ministers are quick to argue, is good for consumer
and producer. Price fluctuations wreak havoc on western economies.
Persistently low prices would wipe out smaller producers, many of them in Mr
Bush's home state of Texas. They would also make it economically unviable
for international oil companies to tap oil in high-cost areas such as the UK
and the US and in new projects such as Canada's oil sands, leading in the
long term to a far greater dependence on the Middle East.

For now, Opec members hope Mr Bush will go along with the assessment of Ali
Naimi, Saudi Arabia's oil minister, who warned in a recent interview:
"Smashing Opec may sound ideologically appealing to the US but the oil
market has never known a free-for-all in its entire history. If such a
situation occurred, producers would lose revenue irrespective of market
share, international oil companies would have no incentive to invest and
consumers would have no security of supply."

But with demand for Opec oil likely to remain weak for at least three years
and other suppliers increasing production, the cartel faces a difficult
re-adjustment. This month's hastily called meeting is one sign of distress.
It is unlikely to be the last.