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03/14/2002

Control over Crude

Just a few thoughts on the oil front and the emerging battle
between Russia and Saudi Arabia for market dominance. Since
9/11 the contest has heated up for two very simple reasons; first,
Russia sees an opportunity to replace the Saudis as the key
supplier to the West, while, second, Saudi Arabia wants to ensure
that oil plays the key role in the global economy over the coming
decades.

Both sides need help, of course, but first some facts.

--Current global consumption of oil is about 75.9 million barrels
per day (mbd).
--After cutting production 4 times, 5 mbd, over the past year in
an attempt to avert a total price collapse in an environment of
slowing demand, OPEC now pumps out about 22.4 mbd, roughly
one million over its stated objective of 21.5. These figures don’t
include Iraq, which is under U.N. sanctions and the oil-for-food
program. Iraq is currently producing about 2.5 mbd.
--Saudi Arabia, itself, is producing about 7.4 mbd. Non-OPEC
Russia is around 7 million and climbing.
--The U.S. consumes about 25% of the world’s production of oil,
or about 19 mbd.

Russia has been gaining market share at OPEC’s expense as the
cartel has been reducing production. Aside from the fact that
Russia wants to become kingpin, importantly, Moscow has little
control over the oil companies, even if it tried to impose restraint.

One has to remember, with regards to Russia and the other
former Soviet-controlled states, that Russia once produced 12.5
mbd before the Soviet collapse. Back then this represented about
20% of overall global production. This also represented 33%
more than Saudi Arabia’s peak production at the end of 2000.

The Russian oil companies, however, long under state control are
now recently independent and if they want to compete on the
global stage they have to adopt Western corporate governance
standards (then again, in light of recent developments on this
front, why bother?) and follow the rule of law, or they won’t get
the big investment from the likes of U.S. oil companies to help
finance needed projects for enhancing production, as well as
seeking out new opportunities.

Russia can also make huge strides on the Iraqi front. For
example, once they are convinced that a regime change there is
in its best interests, Russia could end up controlling at least 16
mbd in production Russia, 7mm; successor states like
Azerbaijan and Kazakhstan, 3mm; and a new Iraq, 6mm. At
least that’s the potential, just for starters.

But what of the Saudis? Let’s take a look at some future
projections for oil demand. Both the International Energy
Agency and the U.S. Department of Energy project that global
demand could grow from 76 mbd to 120 mbd in 20 years.
OPEC’s production could grow during that same time from 28
mbd (add back production cuts and Iraq) to 60 mbd, with most of
this increase coming from the Middle Eastern members of
OPEC.

With numbers like these you can see that OPEC is not dead.
63% of the world’s proven oil reserves are in the Middle East,
with Saudi Arabia representing 25% itself.

The Saudis goal is to maximize revenues while maintaining, and
extending, its reserves. Edward Morse and James Richard have
written a piece titled “The Battle for Energy Dominance” in the
March / April edition of Foreign Affairs, wherein they state,
“Saudi spare capacity is the energy equivalent of nuclear
weapons, a powerful deterrent against those who try to challenge
Saudi leadership and Saudi goals.”

When it comes to the U.S. role, Washington has generally had no
problem with this Saudi ideal as long as the Kingdom doesn’t use
its influence to “blackmail” the U.S. Currently, America
imports 10 mbd, with the Saudis supplying 1.7 mm. Could the
U.S. replace it with Russian oil? Over time, sure. But while
Saudi Arabia’s and OPEC’s share may be decreasing, future
global energy needs guarantee that Middle East producers will be
a key source for decades to come. For now, Washington still
has an incentive to defend the Saudis, should someone like
Saddam come calling.

So it’s almost as if you have this giant triangle these days. Saudi
Arabia, representing OPEC, Russia and the U.S., with the latter
needing the other two, and Saudi Arabia and Russia needing the
U.S., but both not trusting the other to share the wealth.

It’s a situation that’s only going to get dicier, though as long as
Moscow continues to strengthen its relationship with the U.S.
and Europe, and as Western investment finds its way
increasingly into Russia and the other former Soviet republics,
the U.S. and its allies should have a fairly stable supply of oil,
barring a Middle East war. Of course it’s this last point that
causes great concern. The next 12-24 months may still bear
witness to some major shocks at a time when a still fragile global
economy can least afford it.

Back next week.

Brian Trumbore


AddThis Feed Button

 

-03/14/2002-      
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Hot Spots

03/14/2002

Control over Crude

Just a few thoughts on the oil front and the emerging battle
between Russia and Saudi Arabia for market dominance. Since
9/11 the contest has heated up for two very simple reasons; first,
Russia sees an opportunity to replace the Saudis as the key
supplier to the West, while, second, Saudi Arabia wants to ensure
that oil plays the key role in the global economy over the coming
decades.

Both sides need help, of course, but first some facts.

--Current global consumption of oil is about 75.9 million barrels
per day (mbd).
--After cutting production 4 times, 5 mbd, over the past year in
an attempt to avert a total price collapse in an environment of
slowing demand, OPEC now pumps out about 22.4 mbd, roughly
one million over its stated objective of 21.5. These figures don’t
include Iraq, which is under U.N. sanctions and the oil-for-food
program. Iraq is currently producing about 2.5 mbd.
--Saudi Arabia, itself, is producing about 7.4 mbd. Non-OPEC
Russia is around 7 million and climbing.
--The U.S. consumes about 25% of the world’s production of oil,
or about 19 mbd.

Russia has been gaining market share at OPEC’s expense as the
cartel has been reducing production. Aside from the fact that
Russia wants to become kingpin, importantly, Moscow has little
control over the oil companies, even if it tried to impose restraint.

One has to remember, with regards to Russia and the other
former Soviet-controlled states, that Russia once produced 12.5
mbd before the Soviet collapse. Back then this represented about
20% of overall global production. This also represented 33%
more than Saudi Arabia’s peak production at the end of 2000.

The Russian oil companies, however, long under state control are
now recently independent and if they want to compete on the
global stage they have to adopt Western corporate governance
standards (then again, in light of recent developments on this
front, why bother?) and follow the rule of law, or they won’t get
the big investment from the likes of U.S. oil companies to help
finance needed projects for enhancing production, as well as
seeking out new opportunities.

Russia can also make huge strides on the Iraqi front. For
example, once they are convinced that a regime change there is
in its best interests, Russia could end up controlling at least 16
mbd in production Russia, 7mm; successor states like
Azerbaijan and Kazakhstan, 3mm; and a new Iraq, 6mm. At
least that’s the potential, just for starters.

But what of the Saudis? Let’s take a look at some future
projections for oil demand. Both the International Energy
Agency and the U.S. Department of Energy project that global
demand could grow from 76 mbd to 120 mbd in 20 years.
OPEC’s production could grow during that same time from 28
mbd (add back production cuts and Iraq) to 60 mbd, with most of
this increase coming from the Middle Eastern members of
OPEC.

With numbers like these you can see that OPEC is not dead.
63% of the world’s proven oil reserves are in the Middle East,
with Saudi Arabia representing 25% itself.

The Saudis goal is to maximize revenues while maintaining, and
extending, its reserves. Edward Morse and James Richard have
written a piece titled “The Battle for Energy Dominance” in the
March / April edition of Foreign Affairs, wherein they state,
“Saudi spare capacity is the energy equivalent of nuclear
weapons, a powerful deterrent against those who try to challenge
Saudi leadership and Saudi goals.”

When it comes to the U.S. role, Washington has generally had no
problem with this Saudi ideal as long as the Kingdom doesn’t use
its influence to “blackmail” the U.S. Currently, America
imports 10 mbd, with the Saudis supplying 1.7 mm. Could the
U.S. replace it with Russian oil? Over time, sure. But while
Saudi Arabia’s and OPEC’s share may be decreasing, future
global energy needs guarantee that Middle East producers will be
a key source for decades to come. For now, Washington still
has an incentive to defend the Saudis, should someone like
Saddam come calling.

So it’s almost as if you have this giant triangle these days. Saudi
Arabia, representing OPEC, Russia and the U.S., with the latter
needing the other two, and Saudi Arabia and Russia needing the
U.S., but both not trusting the other to share the wealth.

It’s a situation that’s only going to get dicier, though as long as
Moscow continues to strengthen its relationship with the U.S.
and Europe, and as Western investment finds its way
increasingly into Russia and the other former Soviet republics,
the U.S. and its allies should have a fairly stable supply of oil,
barring a Middle East war. Of course it’s this last point that
causes great concern. The next 12-24 months may still bear
witness to some major shocks at a time when a still fragile global
economy can least afford it.

Back next week.

Brian Trumbore