Whatever the twists and turns are in global politics, whatever the ebb of imperial power and the flow of national pride, one trend in the decades following World War II progressed in a straight and rapidly ascending line — the consumption of oil. If it can be said, in the abstract, that the sun energized the planet, it was oil that now powers its human population, both in its familiar forms as fuel and in the proliferation of new petrochemical products. — Daniel Yergin, 1992
Oil is the undisputed King, in a world preoccupied with the consumption of its natural resources. It is the basic fuel for growth, the foundation for industrial expansion and clearly the single most important strategic resource for the global economy, besides providing the physical base for the world’s largest commodity market.
Bridging the divide between politics and oil money is one of the most complex subjects on the face of the earth. The primary reason is that the oil trade covers a gamut of geopolitical issues, from oil exploration to investment to consumption, which are the three primary matters that stand out purely by virtue of their originality and their vast implications. But oil prices often behave in unexpected ways as market fundamentals interact with operational constraints, speculative pressures and political interests.
By some oil experts in the know, the “central paradox” of the oil business is as follows: consumers are racing through the high-cost oil (found in places like the United States) and avoiding the low-cost oil (produced in the Persian Gulf). Implicitly, everyone who invests in producing energy outside the Persian Gulf gambles that the Saudis, Kuwaitis, and others will not flood the market with huge amounts of inexpensive oil. If they did, their oil would drive everyone else’s oil company out of business. This situation makes oil prices inherently precarious, although the gamble is a good one for the Saudis, et al. They have little incentive to overturn the proverbial apple cart.
Petroleum geologists have thought for the past 50 years that global oil production would “peak” and begin its inevitable decline within a decade of the year 2000. Moreover, no renewable energy systems have the potential to generate more than a fraction of the power now being generated by fossil fuels. The alternative is the “soft landing” that many people hope for – a voluntary change to solar energy and green fuels, energy-conserving technologies, and less overall consumption. This is a utopian alternative that, as suggested above, will come about only if severe, prolonged hardship in industrial nations makes it attractive, and if economic growth and consumerism can be removed from the realm of ideology.
Unfortunately, America may soon lose the stability the founding fathers worked so hard to create partly because it is becoming wholly dependent upon inherently unstable (authoritarian) oil-producing Muslim nations. It happened twenty-five years ago when OPEC quadrupled world oil prices and plunged America into “stagflation.” Fortunately, the non-OPEC producers still had a HUGE unexploited oil cushion to fall back on and simply pumped central bankers out of their economic crisis.
The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, in September 1960, to unify and coordinate members’ petroleum policies. OPEC members’ national oil ministers meet regularly to discuss prices and to set crude oil production quotas. By some estimates, the current eleven OPEC members account for almost 40% of world oil production and about two-thirds of the world’s proven oil reserves. OPEC members now include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.
At its March 2000 meeting, OPEC set up a price band mechanism, triggered by the OPEC basket price, to respond to changes in world oil market conditions. According to the price band mechanism, OPEC basket prices above $28 per barrel for 20 consecutive trading days or below $22 per barrel for 10 consecutive trading days would result in production adjustments. This adjustment was originally automatic, but OPEC members changed this so that they could fine-tune production adjustments at their discretion. Since its inception, the informal price band mechanism has been activated only once. On October 31, 2000, OPEC activated the mechanism to increase aggregate OPEC production quotas by 500,000 barrels per day.
The OPEC basket price rose above $28 per barrel on December 2, 2003, and has traded above that level for over 100 consecutive trading days. However, the price band mechanism was not triggered, and there have been no announcements to date that it will be activated. The OPEC basket price averaged $28.10 per barrel in 2003, an increase of over 15% from the 2002 average of $24.36 per barrel. In 2001, the OPEC basket price averaged $23.12 per barrel.
From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per barrel to $13.55 per barrel. Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980, when crude oil prices more than doubled from $14 in 1978 to $35 per barrel in 1981. From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC would produce beyond their quotas. Saudi Arabia linked their oil prices to the spot market for crude and by early 1986-increased production from two MMBPD to five MMBPD. Crude oil prices plummeted below $10 per barrel by mid-year.
Following the Gulf War, crude oil prices entered a steady decline until 1994 when inflation-adjusted prices attained their lowest level since 1973. The price cycle then turned around and headed back up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997, world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to the price recovery that extended into 1997. http://www.wtrg.com/prices.htm
The prospects for oil prices diminishing significantly prior to the driving season now have weakened considerably, and there is a high likelihood of additional gasoline price increases through spring into the summer driving season. Even if unexpected significant refinery or pipeline disruptions are avoided, national monthly average gasoline prices are expected to be at record levels in nominal dollar terms, and the highest inflation-adjusted summer average since 1985. For 2004 as a whole, national regular gasoline pump prices are now expected to average around a $1.84 per gallon, 15 cents higher than many previous projections. About half of the increase reflects higher crude oil prices, with the remainder reflecting the impact of low inventories, robust demand, and uncertain availability of gasoline imports.
Two factors that could reduce the risk of sharply higher pump prices would be a more rapid decline rate for crude oil prices than currently expected and solid improvement in the availability of gasoline import volumes from those seen so far this year. As a side note, worldwide demand for oil is expected to rise through 2005, reaching approximately 82.2 million barrels per day, which is a 7.5 percent increase from 2003 levels. By the year 2010, the oil and gas industry will have to provide 43 million barrels per day just to meet projected demand.
The political problem with this scenario is that industry analysts predict that Muslim controlled countries will soon control virtually all of the world’s most significant oil reserves. The Middle East alone has 64 percent of the world’s proved oil reserves. In total, the Muslim nations around the world have roughly 73 percent of the total world’s proven oil reserves. Now that’s money in the oily bank account, and the Muslims hold the checkbook.
It may be just a matter of time before the political fallout from the recent events in Iraq and Afghanistan cause these Muslim-controlled countries to coordinate their efforts and solve their cash flow problems for decades to come. By 2010, Muslim nations could control 60 percent of the world’s oil production and, more importantly, 95 percent of the world’s oil exports. In short, the Muslim exporting nations have Western economies by the throat.
The United States, like many developed countries, is physically unable to produce enough oil domestically to keep their economies thriving and are subsequently forced to rely on imports. In 1998, the United States imported 53 percent of its oil needs, much of it from Muslim controlled sources. And this deficit is growing — and will continue to grow even with the recent push by the Bush administration to expedite an increase in U.S. oil production, which is coming up a day late and a dollar short, falling prey to political and environmental obstacles.
Readily available energy is the prerequisite for any economic activity and a rapidly growing economy must eventually consume more energy than it can buy. When America spends more-than-one unit of energy to produce enough goods and services to buy one unit of energy, it will be physically impossible to cover that deficit with money. Since neither capital nor labor can create energy, money in this environment becomes irrelevant. At that point, America’s economic machine is “out of gas.”
As we enter the Age of the Dwindling Hydrocarbons, our relationships with many of the world’s oil producing nations are going up in flames. Terrorism fears and political unrest around the world have further rattled the oil markets and China’s insatiable demand for oil is adding another straw to the camel’s back.
If oil prices continue their march skyward and remain high through the summer months, corporate earnings could be weakened, consumers’ confidence could be dampened and the issue could become a hot button in what looks to be a close election this fall.
