Marketplace Middle East - Blog
Petroleum pow-wow

The 12 nations that make up O.P.E.C. have always been considered a cartel that tries to control oil prices and therefore not a body the Group of Seven industrialized countries wanted to dialogue with.

That official strategy worked when oil prices were about a third of what they are today, but there has been a major rethink as a result of the doubling in crude prices over the past year.

On June 22 in the Saudi Arabian port city of Jeddah, there will be a meeting of oil producing and consuming nations to look at what if anything can be done to prevent prices doubling again in the next year as predicted this week by Alexei Miller the chief executive of Gazprom, the Russian energy giant.

This initiative is being led by the world’s largest oil producer, Saudi Arabia, one of the founding members of O.P.E.C. and a long-standing ally of the United States. Ahead of the Jeddah summit (guest list still being worked on), the U.K. energy minister Malcolm Wicks has been holding bi-lateral discussions with his Saudi counterpart Ali al-Naimi.

In an interview on Marketplace Middle East, Wicks said a series of questions need to be asked: “You know what are the possibilities in the different nations for increasing production which of course would ease the situation. We just need to understand where we’re both coming from on that critical question.”

While some of that is just good politics to foster dialogue, there are a number of things on both sides that could help deflate prices in the near term:

  1. Fuel subsidies are still the norm in the fastest growing countries of the world like China, India and Brazil. That distorts demand, since consumers are buying more at a lower than market rate. Lifting those subsidies can however be political suicide and will not likely happen overnight.
  2. Rebuild confidence in the U.S. economy and therefore the U.S. dollar. This is not a simple task, but some senior analysts I have spoken to say a good $20 is priced into each barrel based on the weak currency.
  3. Dig in and find out what is really driving the futures market today. The $1 trillion now parked in hedge funds have in part been allocated to buying oil futures, which again is distorting prices. Intervening on that front however may be as they say in cricket a sticky wicket, but again another $20 of the current price can be linked to hedge fund buying.

The reality is most senior people in the industry miscalculated demand and therefore pricing in the past five years. I don’t recall a time since the late 1980s where you have a slowdown in the major economies of the world and demand continues to rise. That is the case now.

The International Energy Agency (I.E.A.) in Paris lowered their forecast for 2008 again, but it still put demand up by nearly one percent to 86.77 million barrels a day. That is unusual, but today’s reality.

I dug up a 2005 article from Daniel Yergin a well known consultant and author on oil. His calculations, when oil was at $60, were that there would be an “unprecedented build up of oil supply in the next few years.” His team pointed to Canada, Kazakhstan, Azerbaijan, Angola and Russia as the new producers who would balance supply and demand and bring prices below that level. All of them have increased production, but no one really timed the surge of the developing countries in the world. Eight to ten percent growth in countries of a billion people or more tends to push up demand!

Which takes me back again to managing expectations in Jeddah. During the oil crisis in the autumn of 1973 when O.P.E.C. turned off the oil spigot, dialogue was at a minimum and confrontation ruled the day. There was not a shortage of oil production, but a lot of political confrontation. Three and half decades later with prices still looking for a top, the dynamics are different. Oil is in short supply, but discussions and meetings are not.

Let’s hope this summit in Jeddah presents some concrete ideas for change and ministers don’t leave the Kingdom empty handed.

The questions is more who can precisely say how much Oil demand there is and how much Oil supply is currently available. Most of the countries which supply the world with Oil, do not have any inclination to give us he exact figures of what their real output capacities are. At the same time what demand are we talking about, petrol prices, heating oil or petrol for the aviation business or for any other industry?
In any case even if crude oil production would be increased by let us say 20%, would that be enough? If this is enough do we have enough refineries around the world? I understood that the current capacity of the world wide refineries is at it end.

At the same time, how can it be that the US government is still blocking the US Oil industry to enter Libya? From what experts have to say Libya has some of the biggest untapped Oil fields in the world. So it is rather interesting to see that the US government is not opening these resources for their own industry. Yes they say that there are still some compensation issues to be clarified concerning the different terrorist attacks in the 80's and 90's, but I believe that this is just an excuse.
The Oil business should be deregulated it should be a 100% free market economy and new oil companies should be created and should be supported by governments so that companies like Shell, BP etc do not run a monopoly and the OPEC should be abolished, since it does not have all Oil producing & exporting countries as members.

All in all I would like to say that yes demand is increasing, no doubt, but production can be higher if supply is truly the answer, but I believe there are other "interest groups" who just like the Oil price to be where it is as well as the dollar. I truly believe this whole thing goes beyond the Oil price, the Oil price is just the end result but not the root of the problem.
The OPEC minister may look you in the eye and say, "We are at war with you infidels and have been since the embargo in the 1970s. You are so arrogant you haven't even recognized it. You have more missiles, bombs, and technology; so we are fighting with the best weapon we have and extracting on a net basis about $700 billion/year out of your economy. We will destroy you! Death to the infidels!

While I am here I would like to thank you for the following:

1. Not developing your 250-300 year supply of oil shale and tar sands. We know if you did this, it would create thousands of jobs for U.S. citizens, expand your engineering capabilities, and keep the wealth in the U.S. instead of sending it to us to finance our war against you infidels.

2. Thanks for limiting Defense Department purchases of oil sands from your neighbors to the north. We love it when you confuse your allies.

3. Thanks for over regulating every segment of your economy and thus delaying, by decades, the development of alternate fuel technologies.

4. Thanks for limiting drilling off your coasts, in Alaska, and anywhere there is an insect, bird, fish, or plant that might be inconvenienced. Better that your people suffer. Glad to see our lobbying efforts have been so effective.

5. Corn based Ethanol. Praise Allah for this sham program! Perhaps you will destroy yourself from the inside with theses types of policies. This is a gift from Allah, praise his name! We never would have thought of this one! This is better than when you pay your farmers NOT TO GROW FOOD. Have them use more energy to create less energy, and simultaneously drive up food prices. Thank you U.S. Congress!

6. And finally, we appreciate you letting us fleece you without end. You will be glad to know we have been accumulating shares in your banks, real estate, and publicly held companies. We also finance a good portion of your debt and now manipulate your markets, currency, and economies for our benefit.

John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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