Marketplace Middle East - Blog
7/4/08
Over a barrel


Walking through the sprawling Feria de Madrid convention center in the outskirts of the Spanish capital one clearly gets the sense there is plenty of money around. $140 oil can buy a lot of exhibition stand space at the World Petroleum Congress.

On one side, there is Exxon Mobil’s towering display wrapped in semi-transparent modern mesh designed to match its global marketing campaign. In the other hall, front and center the twin stands of Saudi Aramco and Qatar Petroleum are the size of oil platforms. I was told the latter took up 1,200 sq. meters, supported by a full range of recycled goods.

This tri-annual event brings together energy ministers and oil chief executives to rub shoulders and conduct business. This year they all had a lot to say during scores of interviews and press conferences about the price of oil, except when it will peak.

The straight talking Chief Executive of French giant Total, Christophe de Margerie told me: “I was always right to say the price would definitely climb, but unfortunately to a level I did not expect and don’t like”.

He and others don’t like it because they fear the severe spike up will lead to a dramatic fall from where we are today. The International Energy Agency is calling the record price run up a “third oil shock”. A partner at Ernst and Young (E&Y) labels this a “super spike scenario”.

Both groups say the implications of this never ending rally will be far reaching. Don Painter of E&Y believes this particular scenario is interesting because it will “drive changes in behaviour; consumer and consuming nation behavior”.

Having left suburbia for dinner in central Madrid I got a sense of what Painter was talking about. Spain’s Prime Minister José Luis Rodríguez Zapatero faced intense criticism this week before parliament for not calling the economic retreat and energy price spike a crisis.

I guess he did not tune in to see the fuel protests on the streets of the capital. After a tremendous 12 year economic run and property boom, Spain now has the highest unemployment rate amongst the developed countries at nearly 10 percent. Jobless claims rose for the first time since the recession in 1993. $140 oil is starting to bite.

To date, the downturn has been confined to the industrialized world. Asia as a whole continues to grow at six percent and, along with the Middle East continues to buffer the impact of the Western slowdown. If oil does not start to back off, don’t expect India, China and Southeast Asia to withstand the pressure.

This backdrop leads me nicely into the blame game. There were calls by G8 leaders for OPEC to provide more crude to the market. Saudi Arabia, which has most of the world’s spare capacity these days, has responded. This month it will add half a million barrels a day of production and says there are another two and a half million barrels available if demand warrants.

This is the headline: The Kingdom’s oil minister Ali Al Naimi says demand is not there.

In an interview with Marketplace Middle East, the President of OPEC, Chakib Khelil bluntly stated: “If you going to put more oil in the market, somebody has to buy it. If there is no use for that oil then it’s going go into stocks.”

He says inventories are running at better than 50 days, which is normal and not a crisis. Khelil and his other counterparts within OPEC pointed to three distinct factors driving prices higher:

  • The U.S. sub-prime mortgage crisis which has undermined the dollar

  • Geo-political tensions, especially over Iran

  • The role of speculators in the futures markets

Strip out these “special factors” and Khelil and most of the other energy players I spoke to this week said oil would be $80-$90 a barrel.

That may not sound like an entirely rosy scenario. But let’s say in a world where there are two giant countries with more than two billion people -- China and India -- developing their own middle classes and demanding energy at three times the rate of the developed countries, $80 a barrel may be the new $40. This means that producers can make money and consuming nations can survive comfortably when factoring in inflation and the depreciated dollar.

Missing from this debate are some cold hard facts from politicians who are looking to apportion blame somewhere else. Offshore oil drilling on the East and West Coasts of the U.S. won’t solve dependency on ‘foreign oil’ or bring down prices. G8 calls for more oil from OPEC have been answered, but still no response from the market. And it does not help that countries like Iran and Libya seem to relish the pain being inflicted on the West with the high prices.

The chief executive of Exxon Mobil, Rex Tillerson, did not want to be drawn into the debate over prices, but he does feel strongly that the public is not getting the full picture.

“It is unfortunate there is a lot fairly high-pitched rhetoric about energy independence on the part of consuming countries and resource nationalism on the part of producing countries.”

That certainly rang true this week in Madrid and unfortunately seems to be adding to a complicated mix of factors that have nothing to do with supply and demand.


ABOUT THIS BLOG
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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