My Say: Oil a dead political weapon for now

[altpoli...@yahoo.com]

My Say: Oil a dead political weapon for now
By Azam Aris

With a little help from a perceived enemy…" That is the message the
Organisation of Petroleum Exporting Countries (Opec) sent to the
industrialised world at the end of its informal ministerial meeting at its
headquarters in Vienna, Austria, on March 11.
Amid worries that a US-led war against Iraq could be imminent, which could
send oil prices soaring into the US$40 to US$50 a barrel range, Opec
members have agreed to raise oil output should supplies be disrupted.
Although the meeting did not change Opec's current production of 24.5
million barrels per day (bpd), the commitment given that it would exhaust
its available capacity should war erupt was enough assurance for the
jittery international oil market.
With Arab-led Opec, the cartel that the US wants to break, taking such a
stance, the notion that an oil production cut could be used as an
international political bargaining chip by Muslim countries is as good as
dead.
The idea was briefly floated by some members of the Organisation of Islamic
Conference (OIC), including Malaysia, but oil as a political weapon or
instrument just won't work in the present environment.
The last time oil was used as an effective political tool was in 1973. It
wasn't even led by Opec but a group within Opec — the Organisation of Arab
Petroleum Exporting Countries (Oapec). That was the year Muslim Arabs
wanted to prove the point that they could use oil to strengthen their
political clout and solve the ongoing Arab-Israel conflict.
Following the Yom Kippur War and President Richard Nixon's decision to
re-arm Israel to counter surprise attacks by Egypt and Syria, the Arab
states stood united against a common enemy. Led by the world's largest
exporter Saudi Arabia, Oapec implemented a three-point strategy to hike
prices, cut production and impose export embargos on "unfriendly"
countries, including the US.
But they found that high oil prices could be a double-edged sword. It did
bring in a lot of revenue for oil-exporting countries but sustained high
prices created havoc in the world economy. A sluggish world economy
consumes less oil and in time, leads to much lower prices. It also did not
solve the Arab-Israel conflict or lessen US support for Israel.
Today, Israel remains the common enemy but for Saudi Arabia, Kuwait, Qatar
and the United Arab Emirates (UAE), so is Saddam Hussein's Iraq. These four
Oapec and OIC members produce 14.3 million bpd or 58 per cent of Opec's
production. The other Opec members are Iraq, Iran, Algeria, Libya, Nigeria,
Indonesia (all OIC members) and Venezuela.
As front-line states in a possible war with Iraq, these four Oapec
countries along with Turkey host US bases and armed forces. None of them
will want to use oil as a political instrument — not now. Disunity among
the Arabs and OIC members is, in fact, the major factor that makes oil as a
political weapon ineffective.
In addition, since 1973, the landscape of the international oil market
landscape has changed tremendously. To counter Opec's production strength
and overcome prolonged oil shocks, industrialised nations and major oil
consumers have built up strategic reserves, which today are estimated at
four billion barrels. The US has about 600 million barrels stored in
underground salt caverns along the Texas and Louisiana Gulf Coast. Europe,
Japan and South Korea, notably, hold the bulk of the remaining reserves.
These strategic reserves will be released on the market to control
escalating prices and help ease acute short-term supply shortages. The
reserves were used during the Iraq-Iran war in the 1980s and first Gulf War
in 1991 when a few million barrels of oil a day were cut off from the
supply chain. Prices did jump to breach the US$40 a barrel level but the
spike was temporary as producers increased output and consumers released
their oil inventories.
The industrialised world has also managed to diversify its oil supplies
from non-Opec countries. In 1973, the Middle East alone produced 38 per
cent of the world's oil but now, Opec, as a whole, only supplies about 32
per cent of the world's daily production of 77 million barrels.
While the world is still consuming more oil, there have been big
improvements in terms of energy efficiency among the industrialised
countries. Today, these countries can increase industrial output by using
less oil. The use of alternative fuels — hydro, nuclear, gas, coal, solar,
wind and biomass — to power the economy also means that the world can
reduce its dependence on oil.
Another key reason oil cannot be used as an effective political weapon is
that Opec wants to reinvent itself as a responsible organisation that can
provide reliable supply to ensure there is no disruption to the world
economy.
It has fought hard to shed the ugly cartel image of 1973 and has been
consistent in increasing production to overcome shortages in times of
crises.
What Opec wants is to seek a fair price that is commensurate with
investment but is still reasonable for consumers. Its "fair" price range is
from US$22 to US$28 a barrel. If prices drop below US$22, it will cut
production and increase it if prices exceed US$28.
Currently, prices are well over US$30 a barrel, and even touching US$37 a
barrel. The price now carries a war premium of US$5 a barrel that reflects
the possibility of supply disruptions. The oil strike in Venezuela also
contributed to the tight supply.
Otherwise, Opec says there is no shortage of supply. Saudi Oil Minister Ali
Al-Naimi sums it up thus: "Eliminate the drumming of war and price will
moderate."
But what if war breaks out? Expect the price to spiral above US$40 a barrel
as Iraq’s 2.4 million bpd is taken off the market immediately. Another
500,000 bpd from Kuwait are expected to be disrupted as the war progresses,
and even more if Saddam targets Kuwaiti oil facilities.
Figures differ on how much more Opec can produce but excluding Iraq and
Venezuela and its recent increase of one million bpd in February, it is
estimated that the group can produce between one million and two million
bpd more.
Will this be enough to cover the shortfall caused by the war? This will
depend on how long the war in Iraq lasts and how much oil will be released
from the strategic reserves of the industrialised nations. The oil demand
cycle is also moving into a lower market range following the end of winter
in most industrialised countries.
While Opec juggles supply, one thing is certain for now — it is not
interested in using oil as a political weapon. But the fact remains that
oil can be a potent weapon for the Muslim world as the 10 OIC members in
Opec control more than 65 per cent of the world’s proven reserves. The US
and the industrialised world know this.