Influence of the price of crude oil
on its future production and use

Subscribe to the FREE GIU
Subscription!
Stratfor Global Intelligence Update. Red Alert June 8, 1998
http://www.stratfor.com/
From the Persian Gulf to Latin America: A New Epoch in Energy Policy With the Indian subcontinent calming down, and Russia moving back from the brink by cutting interest rates to a mere 60 percent, the main global focus this week was on oil prices. Oil ministers from Saudi Arabia, Venezuela and Mexico met in Amsterdam this week and agreed to cut oil production for the second time in recent months. Oil prices, which have been historically low for nearly a generation, have dropped to near the lowest they have been in this century, when measured in real terms.  

a bottomless pit of wealth, is in fact in serious financial trouble, as are other Persian Gulf oil producers. For example, Kuwait's oil minister, Sheikh Saud Nasser al-Sabah, said recently that his country could face "economic catastrophe" if the price of oil didn't rise. The fall of oil prices to the low teens has left the economies of oil producers stretched to the limit.

It was in this context that Saudi Arabia, Mexico and Venezuela met in Amsterdam this week to initiate a second round of oil production cuts. The first round of cuts, initiated after the Riyadh meeting, seemed to stop the fall in oil prices, but failed to raise prices sufficiently. It is unclear, of course, whether the fall was stopped by the cuts or whether the market had reached equilibrium by itself. Thus, it is unclear whether a second round of production cuts can achieve the desired effects. Initial reaction was fairly subdued, with prices rising modestly and the markets apparently waiting to see whether other producers would be joining in the Amsterdam round of cuts.

There are several reasons why the markets don't expect production cuts to work. First, unlike the situation in the 1970s, oil production is no longer concentrated in the hands of the relatively few players that make up OPEC. This means that there is no institutional mechanism in place for imposing and monitoring production. Mexico, for example, has become a crucial player in the oil production game, but is not a member of OPEC. This diffusion of production capacity not only makes decision making difficult, it also makes monitoring impossible. It is one thing to announce production cuts. It is quite another to know whether those cuts have actually been implemented. The temptation to announce cuts and then to covertly try to take advantage of competitor's cuts by increasing production is sometimes overwhelming. In a vast market like that for petroleum, the ability to verify agreements is severely limited. It follows that, where verification is impossible, trust is limited. Thus, regardless of what producers promise, the market is dubious. This tends to undermine the ability of producers to raise prices through psychological mechanisms. Production itself must contract, which will take a while at the very least, even if cuts actually happen.


ZIONSAKE COMMENTS : RAMIFICATIONS OF CHANGES IN OIL PRICES

Decreases in oil prices                                                                          

The present low oil price already plays havoc with the economy of oil producing countries mostly dependent on oil exports for their income - like Middle Eastern and North African countries. A further drop in prices will therefore harm their economies to such an extend that it might not be possible for them to produce oil. Ironically, a drop in oil prices will not stimulate higher consumption due to the negative sentiment gaining ground against the use of crude oil as a source of energy. It will lead to the glut on world markets growing even bigger and further drops in oil prices. Our view is that income from oil exports will contribute less and less to the GPD of oil producing countries on the longer term - if ways are not found to increase its use as a raw material in manufacturing.

Increases in oil prices

While it seems unlikely that oil prices could be increased artificially, certain happenings, like war, especially in the Middle East, could certainly force prices up overnight. But whereas the nations just groaned and paid up to ten times more for their oil when prices shot up in the early 70s, it is doubtful that they'll be willing to do it again on the long term should there be another significant rise. The disadvantages of oil, like its inefficient conversion into energy and environmentalb issues, will trigger an all out pursuit of alternatives. The situation has changed markedly  from that of the 70s  in that alternatives and means to save on oil are in advanced stages of development. See the following discussions:


What might happen with crude oil?

As was said above,  a war in the Middle East could dramatically increase the price of crude oil, and that such an increase could turn the world towards changing to alternative fuels. Consequently crude oil will then become a commodity used in manufacturing instead of a strategic source of energy.

According to biblical prophecies that still need to be fulfilled concerning Israel, it seems inevitable that there will still be an internal war between Israel and the Palestinians as well as an external war with Syria and possibly Jordan. (Click on Prophetic for more details about these wars). The result of these wars could be far reaching in that it will lead to the world changing rapidly to alternative fuels, leaving oil producing countries with undeveloped secondary industries in dire straits - if they can't compensate for the loss with sales of gas as an alternative fuel.

Lately the USA hasn't had a clear policy in the Middle East and they don't seem to try to appease oil producers in the region anymore. The oil glut on world markets and the accompanying low prices certainly haven't served as an incentive for the West to be overly interested in the Middle East. Then, at the time this was written (August 1998), something happened that has erupted into a conflict situation of the kind that will not easily be resolved by means of negotiations. It is the way Muslims have reacted to the US retaliation in reply to the bombings of their embassies in Nairobi and Dar E SAlaam. By branding it an attack on Islam, they have actually conceded that terrorism against the West and Israel has all along been the result of Islamic aspirations. The shoe has fitted and they put it on. If it hadn't been for Islamic aspirations there could even have been peace between Israel and the Arabs. This conflict could also lead to the negative sentiment against the use of crude oil for energy purposes increasing to even more. In addition to an resistance to burning fossil fuels for energy suspicion that oil money might be use to finance terror attacks against alleged enemies of Islam. It could lead to an even bigger glut of crude oil and still lower prices with far reaching effect on oil producing countries like most of those in the Middle East.

You NEED this Letterhead! Let Holy Land inc. help you to set it uo
Click to contact Holy Land Inc. to help you set up your WEBSITE, E-MAIL, etc.!

WHAT IS REALLY HAPPENING

THE PRICE OF CRUDE OIL July 1999

IRAN AND NIGERIA TEAM UP TO OPPOSE OPEC 13 January 2000

ENVIRONMENTAL  CONCERNS

ALTERNATIVE FUELS

ALTERNATIVE USES FOR CRUDE OIL

METHODS TO SAVE OIL CONSUMPTION

FUTURE MAIN OIL PRODUCING COUNTRIES

Zionsake Homepage | PublicationsBless Israel | Pro-Israel Sites | Prophetic Wakeup Call! |   Feedback

OIL HOME

Holy Land Inc.

Associates

Project Hosting

Business Page

Holyland Camping

Environment

Alt-Fuels

E-MAIL

-
JORDAN TIMES 30 May '04:
"A new era of higher oil prices should reflect positively on the economies of the region"
By Henry T. Azzam -- Chief Executive Officer of Jordinvest.

QUOTES FROM TEXT:
"It appears that the era of low oil prices has come to an end."
"the long held belief for long term oil prices to stay in a range of $18 to $24 a barrel has been abandoned."

EXCERPTS:
AMMAN - It appears that the era of low oil prices has came to an end.

[IMRA: Prior prices weren't "low". Perhaps political pressure will mount to end OPEC.]

Oil has risen to over $40 a barrel, something that no one had expected just a few months ago.

The factors behind the surge in prices include, higher world demand especially from the US and China, worries about the security of supply from the Middle East region, strong buying by hedge funds and the unexpected strength of OPEC. ...

... the average Brent crude kept above $24.5 a barrel for four years running, but the whole oil price futures curve has moved up.
... the long-held belief for long term oil prices to stay in a range of $18 to $24 a barrel has been abandoned.
... [IMRA: Abandoned by whom?]

On the demand side, the strong economic growth in the US and the record sales of sport utility vehicles (SUVs) have helped push up consumption by more than 4.6 per cent over the past year.

China ... has become much more dependent on oil in recent years ... .
. . .
With the economic recovery in Japan and Europe picking up momentum, the International Energy Agency (IEA) is forecasting a net rise in world demand for oil of two million barrels per day (mb/d) this year, the largest annual increase since 1988.

Another factor propping up oil prices is the supply disruption risk. Political troubles in Venezuela, Nigeria and Indonesia have always undermined market's confidence in the security of supply from these countries.

A bigger aspect of the supply disruption risk is the fear of terrorism that might be targeted at oil infrastructure, especially in Iraq whose exports had frequently been disrupted ... . For now, Iraq is producing 1.5mb/d below the 2.2mb/d of last year when it was exporting under the UN sponsored oil-for-food programme.

,,, any attack ... on Saudi oil infrastructure would have a noticeable impact on oil prices. Saudi Arabia has more than 70 per cent of the world's spare capacity, or close to two mb/d.

The relationship between Saudi Arabia and the US is no where close to what it used to be in the 90s. The Kingdom is not willing anymore to act as a price moderator inside OPEC to please Washington although it will continue
to play the role of a swing producer to maintain stability ... .
[IMRA:$40 oil doesn't mean stability. An attack on Saudi Arabia may cause it to increase the value it places on the US.]
. . .
Speculative investors have also been blamed ,,,. By May 25,2004 ... hedge funds were holding contracts worth more than 111 million barrels of crude oil in the future market, an indication that these investors expect oil prices to increase further.

By historical comparison, contracts held by hedge funds worth 60 million barrels or more were considered "very big."

The long term is equally supportive of higher oil prices.
According to the IEA, world demand for oil is forecast to rise more than 50 per cent by 2025, to 120 mb/d, from 82 mb/d in 2004.

There is little political will on the part of the major consumers to push for conservation. Even if they do, this will slow the growth in demand but will not reverse it.

On the supply side, the Middle East producers, who currently account for about 28 per cent of global production are set to increase their share to 44 per cent by 2025. Saudi Arabia alone sits on about a quarter of the world's proven reserves, followed by Iraq and the other Gulf states.

On the other hand, the big oil reserves found in the 1970s in the North Sea and Alaska are on the decline ... .

According to the IEA, demand for oil from the Gulf is likely to double in the next decade, with demand for Saudi oil exceeding 15 mb/d in 2015. This would encourage the oil producing countries of the region to expand their production capacity and boost output.

Real gross domestic product (GDP) growth rates in the oil sectors are likely to rise. Higher oil prices and production levels will allow governments to pursue expansionary fiscal policies generating ample real growth in the region's public sectors.

Private sector activities in the Gulf will also do well, especially those propelled by strong population growth ...

The non-oil Arab countries, such as Jordan, Lebanon, Syria, and Egypt, will benefit from the spillover effect of strong economic growth in the Gulf countries.

Rising regional tourism, higher remittances of Arab expatriates working in the Gulf, more exports to the booming Gul Cooperation Council (GCC) economies and increasing capital inflows from the Gulf seeking investments in the non-oil Arab countries will help support stronger economic growth conditions there.
[IMRA: Remitances of Arab expatriates are not likely to increase. Saudi Arabia, for example, discriminates against non-Saudi Arabs for employment and is striving to reduce its use of foreign workers.]

The revived business confidence will encourage more repatriation of funds from abroad and reduce capital outflows. This will boost domestic levels of liquidity and reflect positively on the local stock markets and the countries' fiscal and balance of payment positions.

Businesses inside and outside the region are now factoring into their future investment decisions the fact that the new era of higher oil prices will put the economies of the region on a higher growth path.
[IMRA: Hardly for non-oil producers.]

This does not mean that the region will not experience the usual short-term up and down cycles, but its long-term real GDP growth is now distinctively higher than what was forecasted one year ago.

The political uncertainty associated with chaos in Iraq and Palestine and the activities of extremists here and there cannot be dismissed, but it would be a mistake to defer investment plans on the basis of the present risk profile.

Reform measures are being introduced, at a slower pace in some Arab countries than in others, but their positive impact on the economies of the region will start showing in the coming few years. Companies which understand the region are positioning themselves for major expansion plans in anticipation of strong market growth.
--------------------------------------------
IMRA - Independent Media Review and Analysis
Website: www.imra.org.il  | imra@netvision.net.il
-

OIL HOME

Holy Land Inc.

Associates

Project Hosting

Business Page

Holyland Camping

Environment

Alt-Fuels

E-MAIL