Fears of an Interruption in Oil Supplies
Walid Khadduri Al-Hayat - 13/08/07//
Crude oil prices have stabilized in recent days at about $75 a barrel. The general trend is toward seeing continuing jumps and prices breaking the previous record of $78 a barrel. Observers attribute this to fear about the possibility of an interruption in oil supplies in the near future, for political and security reasons, and not to a current imbalance in supply and demand levels for crude oil.
There have been many predictions about this matter recently, especially after Venezuela's President Hugo Chavez repeated his expectations about the possibility of the per barrel price reaching $100 by the end of the year. Of course, President Chavez is in an open conflict with Washington, and it is very possible that these kinds of statements are part of his campaign and struggle against the US.
Although it is very difficult to predict future prices and the level at which they will stabilize, it's clear that there are fundamental factors in the markets driving prices up, such as the economic growth seen in the US and China in the last few years, and the continuing and large annual growth in their demand for crude oil. However, this alone does not explain how prices have reached this record level, especially since OPEC states have adopted a clear policy of maintaining a precise balance in supply and demand in international markets and avoiding any scarcity in supplies.
However, what is worrying markets these days is not a currently possible gap in supplies, but the fear of a sudden interruption in the near future, for security reasons. The element of fear plays an important role in feeding speculation on oil markets, which in turn is boosting prices to record levels.
Despite the important and continuing interruption in Nigerian oil exports (compensated for by other OPEC countries) due the sabotaging of oil installations by the Niger Delta Liberation Movement over the past 16 months, which has led to an interruption of between 550,000-900,000 barrels a day (out of the country's total of 2.5 million), the biggest fear in the market is of a future US-Iranian confrontation and the repercussions for the petroleum industry, not just in Iran, but other Gulf countries, and for the general state of petroleum commerce in the region.
In the last three years, the confusing question not just for the Middle East, but for the world economy, has been whether or not this confrontation might take place, and if it does, when and how?
Despite the statements by US Secretary of State Condoleezza Rice during her recent visit to the region and her ranking Iran as the number one enemy in the Middle East, it is difficult to imagine a US-Iranian military confrontation soon, since the direct and indirect signs from Washington indicate a preference for dealing politically and diplomatically with Iran, and not resorting to a military confrontation. In any case, it is not expected that the confrontation will escalate before September, when Congress hears the testimony of General David Petraeus and Ambassador Ryan Crocker about military and political developments in Iraq.
America's involvement in Iraq won't allow the US to undertake a new military action in the region, especially against Iran, which has exerted its influence widely in Iraq during the American occupation. This involvement will also hinder the success of American initiatives in the Middle East because of the sharp divisions on the American scene itself. It isn't expected that the debate in the UN Security Council, which has been underway for the last few months, will lead to approval of a strong resolution that threatens European petroleum companies operating in Iran, in the absence of a clear report by the International Atomic Energy Agency about Iran's nuclear military program, and it doesn't seem like the IAEA is in a hurry to issue such a report.
In light of these conditions, why is there this fear in the markets?
On the one hand, there is legitimate anxiety by refinery owners about securing specific amounts of crude oil that they import, at certain times. Any drop in quantities or tardiness in supplying the necessary supplies, whatever the reason, will affect their work and their petroleum products for gasoline stations, airline companies, electricity stations, and industrial factories.
On the other, there are speculators who on a daily basis trade more than 30 million barrels of oil produced by OPEC. These speculators have penetrated the markets and at times, they represent huge international financial companies, which are only concerned with exploiting opportunities in world financial markets through price fluctuations, and earning the largest profits possible. These days in particular, their money is fleeing international share markets, which have relatively declined recently, to oil markets, where fluctuations result from daily rumors about expected turmoil in the Middle East, and where there are expectations of a resulting price rise. As a consequence of the huge flight of their capital to oil markets, estimated at tens of billions of dollars, they in turn drive up the price of oil to a level that is higher than required by supply and demand factors. The basic job of these speculators involves trading in so-called "paper barrels", trying to take advantage of political, natural and industrial opportunities to reap profit thanks to price fluctuations.
* Dr. Walid Khadduri is an expert in energy affairs.
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