America, Oil and OPEC
Michel Morkos Al-Hayat - 10/03/08//
Every time the international oil market is hit by turmoil or oil prices rise, OPEC immediately comes under huge pressures. This scene has been recurring at a rapid pace, especially with the continued record increases in the price of black gold. The US, industrialized countries, and organizations concerned with energy affairs have joined arms in pressing OPEC to increase its output, whereas non-OPEC oil-producing countries are spared such pressures. This raises the question: Why OPEC but not the others?
Undoubtedly, OPEC maintains a strategic position on the global map of non-renewable energy resources and this puts it in the lead as a source to satisfy the growing global demand for oil. OPEC accounts for 43.5% of global production and holds at the same time 75% of global oil reserves. Both figures stimulate the appetite of nations that consume this energy commodity and drive consumption up as long as sufficient resources are available to serve this global appetite, especially in the US, Europe and emerging nations. In emerging nations, oil consumption is growing at record rates, while figures show a decline of consumption in some industrialized nations.
According to available figures, the global production increased by 0.4% in 2006, while consumption grew at 1.4%. At the same time, OPEC increased its production by 0.7% to exceed the average global production rate. The total increase recorded strong growth between 2003 and 2004 at over 4% before dropping to 1% in 2005 and declining more in 2006, enabling OPEC to maintain its production level last year despite increases that did not exceed the needs of the market or the equilibrium of demand and supply. It is worth noting that the production of crude oil has recorded an annual growth level of 1.41% since 1990. On the other hand, the production level of thirteen of the 30 most productive countries has declined as a result of drying mines as the case is in Britain and Mexico, as a result of political pressures as in Venezuela, internal geopolitical problems at the coasts of Nigeria, or external geopolitical problems as in Iraq.
In this context, increasing production in Central Asia (44% in Azerbaijan) or Angola (4.3%) remains too insufficient to meet global demand. Moreover, production in the US, Russia and Australia is below the 1990s levels. This is despite the 2006 increase in Russia's production over 2005 levels. Furthermore, the reacquisition of oil assets belonging to foreign firms such as BB, Chevron, Conoco-Phillips, Exxon Mobil, Statoil, and Total, has raised doubts and distrust which in return transforms into pressure on the oil sector and anxieties within economic and financial circles.
In addition to these cases that cause convulsions in the oil market, climatic changes and incidents such as hurricanes and declining temperatures as well as the seasonal spike in the prices of petroleum derivative all make the stability of supplies uncertain. This particularly becomes the case when oil becomes a speculative commodity among investors who want to make quick gains at the expense of the global economy at a time when the returns of major capital instruments are uncertain.
Things, however, may go beyond the evident causes of rising crude oil prices. While these evident causes are significant, they do not alone prevent equilibrium in the market. What breaks the equilibrium has more to do with achieving the strategic petroleum reserves by a country such as the United States. The US has imported almost 26% of crude oil and its refined derivatives in 2006 as did Europe, but both sides account for no more than 6.5% of global exports. This means that the US alone needs about 25% of total production.
It is noted that over the past few weeks, there has been distortion in the balance between estimates and actual figures for crude and derivative reserves, particularly with the announcement of an actual decline when the opposite was expected. This may be attributed to the fact that the US is carrying out an unannounced plan to increase its strategic reserve. In November 2001, President George Bush called for using the maximum capacity of wells allocated for the strategic reserve. These are four wells in Texas and Louisiana, and since that date, the capacity of the wells has increased from 572 million barrels to 691 million. At the same time, turning caves into containers and melting the salt inside them has not ceased. In January 2007, Bush asked the Congress to double the strategic reserves to 1.5 billion barrels until 2027 which, according to the current consumption levels in the US, would suffice for 97 days.
Since the US is running out of oil and reserves, it cannot rely on Mexico's declining production, on Canada's oil which remains unexploited for environmental restrictions, or on Latin America's oil for political reasons. It can only resort to its allies within OPEC to compensate for its needs rather than seek bilateral negotiations with individual states that cannot offer the needed quantities. The global oil reserves map reveals the abundance of oil reserves in Arab countries which are OPEC members. Since Saudi Arabia alone possesses almost 25% of the global reserve, this immediately places it as the first target for global pressures to increase production. The Middle East alone exports 39% of total global exports while importing no more than 0.7%.
The pressure on OPEC which groups the Arab producing countries aims at reversing the pricing equation. The depreciating dollar bears significant responsibility for the rising oil price. Thus, if these countries increased their production and oil prices consequently declined, the revenues of these countries would also drop. These revenues are mostly used to finance the state budgets and extensive infrastructure projects and social needs, but the costs of these projects and plans are rising since they are associated with raw material s and agricultural products whose prices are already skyrocketing. In this case, OPEC member states will no longer be able to meet the demands of their societies since oil represents their economic backbone.
Consequently, the equilibrium between supply and demand or an increase in supply can relieve the pressure on exporting countries only to shift it to producing countries. Such an equilibrium must be accompanied by an equilibrium between exchange rates and the prices of raw materials to enable the oil-producing countries to complete their development projects as a basic right to achieve human welfare.
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