News analysis
Oil pressure rising
Feb 23rd 2011, 19:58 by The Economist online
A MONTH ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as Egypt’s ruler. Now he is gone, overthrown by a display of people power that is shaking autocratic leaders across north Africa and the Middle East. And oil has surged above $111. Little wonder. The region provides 35% of the world’s oil. Libya, the scene of growing violence this week, produces 1.7m of the world’s 88m barrels a day (b/d).
So far prices have not been pushed up by actual disruptions to supply. Oil hit a peak even before news emerged that some foreign oil companies operating in Libya would stop some production and that the country’s ports had temporarily closed. As Adam Sieminski of Deutsche Bank points out, oil prices are driven both by current conditions and by future expectations.
Oil markets don’t like surprises. The sudden ousting of Mr Mubarak and the unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a tenth of the world’s oil) have added 16% to oil prices. But the big worry is that spreading unrest will culminate in another shock akin to the oil embargo of 1973, the Iranian revolution or Iraq’s invasion of Kuwait.
Oil is more global than it was during those previous crises. In the 1970s production was concentrated around the Persian Gulf. Since then a gusher of non-OPEC oil has hit markets from fields in Latin America, west Africa and beyond. Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009; OPEC’s share of production has gone from around 54% in the mid-1970s to just over 40% now.
Yet the globalisation of oil supply has not diminished OPEC’s clout as the marginal supplier of crude. Markets are tight at the moment. Bumper inventories, built up during the downturn, are running down as the rich world recovers and Asia puts on a remarkable growth spurt. Demand rose by a blistering 2.7m b/d last year, according to the International Energy Agency, and is set to grow by another 1.7m b/d this year by Deutsche Bank’s reckoning. Many other producers are already running at full capacity; OPEC has its hands on the only spare oil (see chart).
If Libya’s oil stopped flowing importers would look to Saudi Arabia to make up the shortfall. The oil could probably flow to fill the gap in Europe, Libya’s main market, in a matter of weeks. OPEC claims that it has 6m b/d on tap but that looks wishful. Analysts think the true number is nearer 4m-5m b/d, with 3m-3.5m b/d in Saudi hands. That is ample to plug a Libyan gap but would hasten the day when growing world demand sucks up all spare production capacity and sends oil prices rocketing. Analysts at Nomura reckon that it would only take a halt of exports from Algeria as well to absorb all the slack and propel oil to a terrifying $220 a barrel.
Despite rising prices, Saudi Arabia has so far been reluctant to turn its stopcocks. OPEC claims that the world is amply supplied with oil and seems content with a price around $100 a barrel. Traders hope that Saudi Arabia will boost production stealthily or that OPEC will call a special meeting to raise quotas and calm markets.
The worst-case scenario for oil prices would be some kind of disruption to Saudi supply itself. That concern has become livelier given the unrest in neighbouring Bahrain. The tiny island kingdom produces little oil but is of vital strategic importance in the Persian Gulf, a seaway that carries 18% of the world’s oil. America’s 5th Fleet, which polices the Gulf against troublemakers (ie, Iran), uses the country as a base.
The Saudis may also fear that protests by Bahrain’s Shia population could spill over their own borders. Saudi Arabia’s eastern provinces are home to both its oil industry and most of its Shias, who may also have cause for grievance with their Sunni rulers. One crumb of comfort is that oil facilities across the region are generally located far from the population centres, where protests tend to be concentrated, and are well defended against anything but a concerted military assault.
Building stockpiles
What might be the effects of a more general supply crisis in the Middle East and north Africa? The oil shocks of the 1970s spurred the world to build stockpiles, such as the 750m barrels of crude oil in America’s strategic petroleum reserve, to be drawn on in the event of upheaval in the Middle East. China is building a strategic reserve of its own. America’s Energy Information Administration puts total world stocks in the hands of governments and industry at an immense 4.3 billion barrels, equivalent to nearly 50 days of global consumption at current rates.
The impact of a crisis would therefore depend on how much oil production was lost and for how long. Even seismic shocks in oil-producing countries might not cut off supplies for very long. Yet the example of Iran shows what can go wrong. Leo Drollas of the Centre for Global Energy Studies, a think-tank, points out that pre-revolutionary Iran pumped 6m b/d. The new regime ditched Western oil experts and capital, and it has never come close to matching that level of output since; it now produces just 3.7m b/d. Middle Eastern oil is largely state-controlled but, as Amrita Sen of Barclays Capital observes, foreign investment remains vital to north Africa’s oil industry. If new regimes emerged that were more hostile to outsiders, that might have a lasting effect on production.
The world could probably weather a short-lived crisis. But the damage if oil prices spiked and stayed high for a long time could be great for the recovering economies of the rich world. As for the prospects of reducing the importance of the Middle East to global oil supplies, forget it. Strong Asian demand is likely to mean that OPEC’s share of oil production rises again as it pumps extra output eastward. A troubled region’s capacity to cause trouble will not diminish.
Read on: In Britain, high fuel prices have more of a political effect than an economic one
In this blog, our correspondents respond to breaking news stories and provide comment and analysis. The blog takes its name from newsbooks, the 16th-century precursors to newspapers, which covered a single big story, such as a battle, a disaster or a sensational trial
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It seems that the best argument for an alternative to oil is again coming from the region that supplies and benefits the most.
I hope with all the shooting going on, a stray bullet doesn't hit the goose.....
....that lays the oil filled golden egg!
We will now if Democracy has arrived to Egypt if the next Governmennt lift the embargo against Gaza.
Also we will know if Democracy has arrived to Bahrein if the next Republic has a Shia President and the supports of most Shiites (the King will have to live in Saudi Arabia)
Finally, a great article that answers with cold hard numbers all those nagging questions you had over the years:
1. Why is America so involved in Arab affairs?
2. Why did we invade Iraq?
3. Why are we supporting Israel unconditionally?
4. Why did we not go after the real perpetrators of 9/11?
5. Do western "big oil" companies really control oil prices?
6. Why did every president since LBJ talk about independece from OPEC? And why they all ended up lying.
7. Why will our kids all drive Priuses?
8. Why was the game over for the "Big Three" when they lost the small car market? And why bailing them out will just delay the inevitable?
9. Why will we soon be vacationing a lot closer to home?
10. Why will the world end in enthropy?
Well, if you didn't before, now you know.
So this Saudi safety net shows that the Saudi's are keeping reserves away from the general public. Lowering supply of oil, and raising the price of oil. Hurting the general population for their own interests.
One more reason to move to renewable energy fast.
Oil prices are a nuisance.
Mohamed Bouazizi, the Gavrilo Princip of the 21st century.
My prediction, a new strongman promising a pan-arabic, not necessarily an islamic caliphate... but loosely religious, will unite all these upheaved states....ensure all oil production is nationalized.
China and Iran will court and manipulate the new union.
Europe and US will get dragged into a global war when Israel is finally invaded by the Arabs (Entering under the pretense of defending Israel, but really doing it to hopefully break the Arab regime and liberate oil supplies).
Lent begins 3/7/2011, that's going to push the prices up. Oh hey, Daylight Saving Time begins 3/13/2011, we're going to have to push the prices a little higher. Beginning of spring is 3/20/2011, better dig a little deeper into your pocket because the Easter Bunny may cause civil unrest in Podunk Middle East...and Podunk doesn't even produce any oil. What a bunch of greedy, self-serving pieces of pig excrement! How much $ is enough.
Fortunately for me, I don't have to drive if I don't want to.
Libya, in itself, is a rather insignificant oil producer as shown here:
http://viableopposition.blogspot.com/2011/02/muammars-oil-libyas-contribution-to.html
What is significant is the recent release of a Department of State cable from 2007 showing that Saudi Aramco is highly unlikely to be able to increase its daily production to meet the needs of the world's oil markets as shown here:
http://viableopposition.blogspot.com/2011/02/peak-oil-inconvenient-truth...
As the world reaches peak oil, the balancing act between supply and demand becomes increasingly tenuous. This will result in an increase in market volatility over the long term.
Those paying attention have known these numbers for a while thanks to The Economist and other studies. Oil and gas are by far and away the most important natural resources to known to man, and it is arguable that it has shaped world politics for the better part of the past century. When you look deeper, however, as this article does, the question "what makes and loses more money, oil production or oil speculation?" must arise.
With any commodity, traders on Wall Street or anywhere like to use indicators to judge their next step. Indicators, however, only work within the framework of the current market. When the framework of the current market (whether political, financial, or otherwise) is altered, the indicators don't work anymore. And that is where oil consumers' and traders' (and not oil producers and buyers) problems begin. Since the framework of the oil market is under review, old indicators aren't seeming to work anymore. In the end, then, whereas the uncertainty of the overall situation in the MENA region is correlated to oil "pressure", it is not the direct output of said pressure, oil speculation is.
Either way, Hubbert's curve has already predicted that the world's oil has peaked, and we're in trouble. Stop buying oil at the gas station, and start investing it in the financial markets.
Perhaps it should be pointed out the differences between sweet and sour crude and it's impact on the world refineries. While the Saudi may have capacities their crude may not be suitable for certain refineries in Europe and Asia.
I wonder if the oil price surge is to uncertainty of supply or work of Oil Cartel and International Oil Companies, who often make windfall profit? Will the people of the producing countries be benefitted? So far we have heard the Oil companies makes advance purchase and price negotiated now will be applicable for shipments at least 18 - 24 months later.