Posted on 01/10/2003 9:37:26 PM PST by NormsRevenge
OPEC's last hurrah?
Commentary: Long-lasting consequences if cartel fails
By Joe Duarte
Last Update: 12:04 AM ET Jan. 11, 2003
NEW YORK (CBS.MW) -- Are OPEC's days numbered? The possibility is higher than most people are willing to admit.
As the U.S. nears its almost certain invasion of Iraq, and potentially establishes a long term foothold in the Middle East, events are likely to follow that will change the world as we know it perhaps for the rest of the 21st century.
Even as the major media postulates that oil prices could reach $40 to $50 per barrel it is important to note that there is enough oil available to power the U.S. for the near future despite rising prices and the fear of a global energy crisis. The only sticking point is whether consumers are willing to pay the increasing costs of exploration, extraction, and security that will continue to increase as the U.S. embarks on its occupation and reshaping of the Middle East into what it hopes will be a more market friendly, al-Quaida-free region.
More important in the developing story of global energy is what the possible repercussions will be when OPEC collapses or becomes nearly ineffective in its quest to control oil prices.
There are two major political and strategic hot spots in the energy world at the moment, and they are both critical to the survival of OPEC. Whatever comes out of these two important places will have crucial relevance to the price of oil and the way the world does business in the foreseeable future.
First there is Venezuela, where the noose is tightening around the neck of President Hugo Chavez, and his Bolivarian revolution. Chavez' government is out of potential revenue as his oil industry is almost completely inactive, at the same time that his foreign currency reserves are drying up.
The collapse of Venezuela is an important domino in the saga of OPEC since under Chavez it has been the strongest proponent of keeping oil prices high by controlling production.
But instead of unity in OPEC as its champion of austerity has fallen, Saudi Arabia and others are stepping up and offering to increase production, making up for the shortfall and decreasing Venezuela's market share of OPEC production, most likely for a long time. The only country that has shipped any oil or significant aid to Venezuela during the crisis is Brazil, which is not an OPEC member. This is a clear sign of the tenuous loyalty within the cartel and a suggestion of what the future holds if another major member runs into the same problems that have all but killed the Venezuelan oil industry.
Venezuela is beyond repair for several years. But the reasons for its fall are not exclusive. All OPEC countries have similar problems due to their non-Democratic governments and the subsequent creation of true economic class-warfare where oil money usually stays in the hands of the government and the ruling class.
Therefore it is not hard to envision a set of circumstances, either concurrent with, or spurred by the U.S. attack on Iraq, where the streets of Riyadh could resemble those of Caracas, and where oil supply disruption from Saudi Arabia could also occur in a similar fashion to Venezuela.
Is there going to be a 1970s style oil crisis in the United States? Not likely, although the possibility is certainly there. For one thing, the U.S. is a much more energy efficient nation now than it was then. And for another, there are plenty of alternate sources of oil available in non-OPEC producers, although it could take some time to bring them online and to do so could be expensive.
But what many are not counting on is the fact that a war in Iraq could spark major political problems in Saudi Arabia, where Islamic militants are numerous and where the ruling family is increasingly unpopular and facing many internal and external difficulties. The major oil companies have not made a deal with the kingdom for a chance to exploit its natural gas reserves, although negotiations have been ongoing for several years. This is a sign that the smart money is finding it much too risky to do business in the kingdom, and that trouble is already present there.
If there is major trouble in Saudi Arabia, the government will have little choice but turn away from international issues in order to preserve its own country, as the oil rich kingdom could become vulnerable to either an externally or internally mediated regime change of its own. It is there that it could easily lose control of OPEC. As a result, internal production controls on the cartel would weaken and most likely disappear altogether.
Once the uncertainty and the shock of the situation fades, the most likely scenario would be a flood of oil hitting the market soon thereafter, and the collapse of the cartel.
The flood is likely to come from other OPEC countries such as Libya, and Nigeria that are desperate for foreign capital and are trying to win favor from the United States, since they don't want to be the next countries to be invaded as the war against terrorism spreads its wings from a newly established U.S. military fortress in Iraq.
Other members of the cartel are already U.S. friendly and include Kuwait and Qatar, where the U.S. has significant military installations present. Non-OPEC countries would also scramble to increase their market share. Iraq's own oil industry could take months to years to bring back up to maximal production levels, so it would not be a short-term solution.
On a longer term basis, perhaps within the next 12-18 months, the U.S. is likely to see increasing supplies from Russia, which is aggressively improving its infrastructure, including a key pipeline to Murmansk, a Siberian port that remains open year around. Russia has already been quietly shipping oil to the U.S. Strategic Oil supply, with the first shipment arriving in July 2002.
Also being ignored are the tar sand deposits from Canada and the restricted lands under the protection of the U.S. Government in Alaska, the Rocky Mountains and the Gulf of Mexico.
Canada may be a longer-term prospect, as there have been technology issues that have slowed development. But U.S. Government land, regardless of environmental group opposition, is easily attainable supply especially under the pretext of national security.
What's the bottom line? We could easily see a short-term and possibly dramatic spike in the price of crude oil, with gasoline near $2.00 a gallon. But as the U.S. gains control of Iraq and the political problems begin in Saudi Arabia, in the wake of an already powerless Venezuela, a collapse in the price of crude is highly likely sooner rather than later, followed by an economic recovery in the U.S., and to a lesser degree, Europe. The biggest winner of all may be Japan and China, whose economies may benefit most from cheap oil.
What's the fly in the ointment? A major setback in the early going for coalition forces once they decide to invade Iraq.
Dr. Joe Duarte's Daily Market I.Q. is available at http://www.joe-duarte.com/. Dr. Duarte is the author of "Successful Energy Sector Investing."
Yeah, right.....
Venezuela is a short term "problem."
Even the worst rads want money and will keep the oil flowing...like the Iran Iraq War where they avoided taking out each others oil industries.
OPEC may fall, but it will be due to Russia and Central Asia. The Saudi gas deal was screwed more ffrom the Saudi side, but now fears may come to play.
More likely the OPEC nations, after a crisis maybe, will cut a deal with Russia, etc., to limit output, but with the OPEC nations sacrificing chunks of their allotment shares - expecially Saudi. Bound to happen with Russia alone. Can't be bullied and Saudi Arabia is in a de facto war with them in Chechnya.
Very interesting game. Has much less to do with the US than these type of writers think, except maybe for liberating Iraq and returning its production proportions to pre-1991 levels, if not higher.
BTW, I heard a few days ago that both Saudi and Russia "volunteered" to meet shortfalls that may be cause by the Iraq war. In other words, Russia has learned the Saudi game of making money off crisis, and portraying themselves as noble about it!
However, if he succumbs to the demands of radical environmentalists--and expecially if he permits government confiscation of private property, either de facto or de jury, e.g. through the Wetlands Protection act--he will loose the support of his most loyal constituency.
Well, our "democrats"
manage class warfare. And we
have democracy...
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