August 25, 2003
by Irwin Stelzer
We now know four things about the oil market: prices are staying high, the Saudis are ignoring their promise to cap prices at $28, Iraq will not become a major exporter soon, and when Iraq does become a major exporter it will return to the embrace of the OPEC cartel.
Hopes that a successful conclusion of the war to depose Saddam would bring oil prices down have been dashed, even though oil-producing facilities were largely undamaged during the brief period of hostilities. Prices have stayed at or above $30, some 15 percent higher than last year at this time, and show no sign of coming down, not even to the higher end of the $22-$28 range that the OPEC cartel says it finds acceptable.
Never mind that the Saudis promised to produce enough oil to keep prices from piercing the $28 ceiling, and now say they are trying to bring prices down. Bijan Mossavar-Rahmani, president of Mondoil and a shrewd observer of producer-country practices, says it is nonsense to believe that the Saudis are unhappy that prices are topping $30. The Kingdom’s princes need the money to support their lavish lifestyles, to dole out to the largely unemployable generation their Wahhabi-dominated school system has produced, and to continue funding a variety of terrorist organizations.
Although Venezuela is having difficulty getting its output to levels prevailing before a strike crippled its industry, Nigerian production is increasingly threatened by domestic turmoil, and Iraq’s output is curtailed by sabotage, the Saudis reportedly have nevertheless cut production by about one million barrels per day. With an economic recovery taking hold in America, China in need of increasing amounts of oil to fuel its 16 percent annual increase in industrial production, Japan desperate to replace its shut-down nuclear plants with oil-fired generation, and inventories in consuming countries at low levels, it comes as no surprise that the Saudis’ decision to curtail output has kept prices well above the ceiling they pretend to want to maintain.
Any hopes that exports from Iraq would dampen prices have been dashed by the inability of the coalition forces to contain looting and prevent sabotage of production facilities and pipelines. Hard numbers are difficult to come by, but it seems unlikely that Iraq will reach its prewar output of somewhere between 2.5 million and 3 million barrels per day any time soon, despite optimistic reports from the Coalition Provisional Authority and its ironically named Restore Iraqi Oil group.
Reports from Iraq suggest that needed repairs in the fields cannot be postponed much longer, and that production from many wells will have to be halted while those repairs are made. Worse still, no one knows where the $10 billion estimated to be needed to pay for the near-term fixes of Iraq’s fields will come from. Iraq’s State Oil Marketing Organization (SOMO) has announced that it has no interest in surrendering its monopoly grip on the nation’s oil industry, and will welcome foreign investment only when entirely new areas are to be explored and developed. No matter: most oil companies have no interest in exposing their capital and personnel to the risks of operating in present-day Iraq.
But even if we assume that the money can be found to restore output to something approximating prewar levels, there will not be enough oil available for export to affect world prices. Of the two million barrels per day that Iraq might be able to produce by year end, about 200,000 must be reinjected to maintain oil pressure in the fields, and some 500,000 barrels (estimates range from 350,000 to 750,000) will be needed to satisfy domestic needs for gasoline and, in the heating season, kerosene. Both are in such short supply that riots are breaking out in gasoline lines, and will break out when kerosene is rationed during the winter. Odd that, since nearby Saudi Arabia could meet much of Iraq’s needs if the Kingdom’s princes were truly interested in helping to establish a stable, democratic government on its border.
In addition, I am reliably informed (but cannot independently confirm) that export potential is further reduced because the Kurds in the North are skimming for their own use tens of thousands of barrels off of oil headed for export.
So much for the near term. Prices are high (a surprise to those who thought they would fall at war’s end), the Saudis were economical with the truth when they said they would keep prices from piercing OPEC’s $28 target ceiling (a surprise only to the U.S. State Department and members of the Bush family), and Iraq will not be a major exporter for the foreseeable future.
Which brings us to the fourth fact now apparent to us. In the long run Iraq will return to the OPEC fold. At the moment, the cartel’s Arab members don’t want to deal definitively with Iraq’s oil administration because—get this—the government has not been democratically elected. But when an internationally recognized government is in place, the welcome mat will be out. It will cause the Saudis little pain to maintain prices by cutting back their production to make room for the dribble of oil that Iraq will be able to bring to world markets in the next few years.
If the world’s consumers think that restoration of calm to Iraq will mean relief from OPEC exactions, they had better think again. Only sensible use of strategic reserves, and the development of tax and other policies to curtail dependence on Saudi oil hold any promise of limiting the cartel’s power. If you think America is capable of adopting such policies, just think of what its politicians have left undone since the great blackout of forty years ago.
This article appeared in London’s Sunday Times on August 24, 2003.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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