A future of high oil prices looms

The decision by the Organization of Petroleum Exporting Countries (OPEC), about three weeks ago, for an immediate, major cut in production, led, naturally, to worries about a sudden rise in global oil prices. OPEC member states may account for just 34 percent of global oil production, but their role in shaping global prices is crucial since OPEC has succeeded in maintaining its cohesion to a large extent, acting like a true cartel. OPEC’s decision is twofold, in the sense that the organization will implement a 10 percent cut in production by early April – the second cut in less than four months. At the same time, it has decided to demand that members comply with the production quotas decided last November, which limited total production by 900,000 barrels per day (bpd) to 25.5 million bpd. Given the additional cut by 950,000 bpd, to be implemented by early April, we can see that there will be considerable pressure on the supply of crude oil. Rising prices Already, earlier this month, March futures in NYMEX reached $34.50 per barrel and in London’s IPE, Brent crude for mid-March delivery was selling for $31.50 per barrel. Although prices have slightly retreated since, market analysts believe prices could rise to over $35 per barrels in the coming weeks. The same analysts remark that OPEC’s decision did not take the market completely by surprise. It has been known for some time that many of the member states were «cheating» – that is, their actual production exceeded the agreed quota – in an effort to maximize revenues during winter, when the needs of consumers living in the northern hemisphere are higher. Ali Naimi, Saudi Arabia’s minister of petroleum and mineral resources, said that international prices may appear high now, but no one knows how they will evolve by June. «We wouldn’t like to find ourselves in a difficult position like in 1998, when prices collapsed to $10 per barrel,» he says. «This decision by OPEC is a clearly preventive act, aiming at preserving the price spread – between $22 and $28 per barrel – that we have decided should prevail in the market,» United Arab Emirates’ Oil Minister Obeid bin Saif Al Nasiri said. Such positions make markets wonder why, since oil prices had been maintained at a high level ($29-$32 per barrel) over the past three months, OPEC is now implementing a policy that is certain to push prices higher. OPEC’s plans Even though many analysts express reservations about whether OPEC will succeed in keeping its members in line over the new reduced production quotas – hence the hope that prices will not rise immediately – they nonetheless remark that the recent decision inaugurates a new tactic whereby OPEC will seek, at any cost, to maintain high prices. OPEC’s official line about a supposed collapse in prices toward the summer is not convincing. Another argument recently adopted by the Saudi Arabian government is that it wants, through high prices, to keep consumer states’ reserves (currently averaging 90 days with a rising trend) at low levels and, at the same time, establish a position as the main guarantor of the uninterrupted flow of oil. Naimi’s dream, he says, is to make his country a sort of world central oil bank. Official statements, in reality, hide a plan of limited economic war with two main goals: first, to increase the Gulf states’ revenues and thus reduce their external debt, which has risen dangerously as a result, among other factors, of purchasing extremely expensive defense systems from the United States; second, to provide an incentive, through the high prices, to search for more oil deposits, since current deposits will last for only about 40 years. According to inside sources, OPEC’s leadership has completely revised its view of the global oil market in recent months, coming to the conclusion that the global economy can live with oil prices higher than $30 per barrel. The same sources say that OPEC also wants to send a message to the United States that it has the means to create obstacles to its economic recovery. Saudi Arabia’s role Saudi Arabia contributes 25 percent of OPEC’s, and 10 percent of global, production. It is also the only OPEC country with the ability to vary its production level immediately. This makes the above reasoning plausible. With the help of the other OPEC member states, the Saudi leadership is determined to raise the stakes in its dispute with Washington, by choosing a tactic of escalating tension. Saudi Arabia is troubled by the USA’s increasing interference in its internal affairs and also suspects that it may be the next military target in George W. Bush’s open-ended war on terrorism. We should also not underestimate Saudi Arabia’s annoyance at the US government’s continuing unconditional support for Israel. OPEC’s decision, prompted by Saudi Arabia, also has an internal policy dimension. The royal family, of the 5,000 princes and 500 palaces, feels threatened by Islamic fundamentalists and is willing to meet them halfway. Insisting on high oil prices is a way to satisfy part of their demands. If the current regime manages to survive and is not overthrown by fundamentalists, we will see a gradual transition to higher oil prices, a level which many analysts put between $35 and $40 per barrel. However, if the house of Saud is overthrown by forces close to Al Qaeda, then there will be a rupture with the West and a temporary embargo on exports toward the West, something that would make oil prices skyrocket. Long before September 11, 2001, Osama bin Laden had declared that any oil price lower than $140 per barrel was theft directed against the Saudi people and that the US «owes» the Arab world $36 trillion, a sum that now, by his reasoning, should exceed $50 trillion. Greece’s dependence on oil As we enter a period of high oil prices, the effect on Greece’s economy, and the Greek consumer, is expected to be very serious, but not as dramatic as in the past, when a rise in the price of oil of $1 to $2 per barrel was enough to produce an avalanche of rises in commodity prices. The reason for the attenuated effect is mostly the strong euro but also Greece’s decreased dependence on oil and oil products for production. The use of oil in electricity generation, for example, has been reduced to a minimum. Industrial and commercial firms are increasingly turning to natural gas. The same is expected soon to happen with households, as connections with the main gas network increase. On the other hand, consumption of oil products for transport has skyrocketed, as the increase in the standard of living has led to an increase in the number of vehicles. Currently, Greece imports about 20 million tons of oil, the equivalent of 395,000 barrels per day. The country’s energy consumption is still 70 percent oil-dependent. With domestic production from the Prinos oil field down to about 4,000 bpd, the dependence on imported oil is almost total. Last year, Greece paid about 3.4 billion euros (that is, close to $4 billion) on oil imports, a sum equivalent to 18.5 percent of the country’s balance of payments or 2.3 percent of its gross domestic product. These figures alone show the importance of oil imports to the country’s economy, an importance which will increase when prices begin to rise, slowly but steadily. At a price of oil equal to $35 per barrel, and provided the exchange rate between the dollar and the euro stays around $1.20 to the euro, Greece’s bill for importing crude will rise to $5 billion annually. This will further increase the already considerable balance of payments deficit, and will force Greece to borrow even more money at a period when the country’s exports are almost stagnant compared to ever-increasing imports of goods and services to satisfy the natives’ consumerism. Alternative sources With high oil prices and Greece’s dependence on important fuels growing daily – due, mostly, to increases in natural gas imports – it remains to be seen whether the government that will emerge from the March 7 election will wake up to the dangers involved and take effective measures to lessen the country’s dependence on imported energy. According to experts, these measures must have two main goals: first, saving energy in all aspects of everyday life, and, second, developing and taking maximum advantage of domestic sources of energy, including renewable energy sources and the not inconsiderable hydrocarbon deposits. However, none of the two major parties have submitted proposals to this effect. This is worrying. (1) Costis Stambolis is managing director of Delos Communications.