Brave new world of oil rising
Visit www.smh.com.au for the most up-to-date news March 22 2003
The war will have a profound impact on global oil levels. Barry FitzGerald and Richard Salmons report.
The slogan "No blood for oil" was scrawled in chalk on the pavement outside the Stock Exchange building well ahead of the first missile attacks on Iraq.
While it reflected the views of ardent anti-war campaigners, many of John Howard's "ordinary" Australians also have a suspicion that the war is really about oil and not an attack to take out a despot in control of weapons of mass destruction.
The conspiracy theorists take things further.
Control of Iraq is the first step in a plan by the oil-hungry US to break open the Middle East's stranglehold on the world's biggest oil reserves.
Saudi Arabia will be next, not with bombs but by a US-inspired toppling of the ruling elite.
The end result will be the dawn of a golden economic era, one underpinned by abundant and therefore cheap Middle East oil produced by the US oil majors which also happen to be big supporters of their Texan president.
So they would have you believe.
It does not matter that cheap oil would destroy the US oil majors or that the cost of the war, variously estimated at $US22 billion to $US140 billion ($37 billion to $236 billion), buys a lot of oil, any day of the week.
Whether or not there is any truth in the claims and suspicions about the real reasons for the war will be debated for years to come.
Right or wrong, they will not go away, even if Britain's idea of handing control of the Iraqi oilfields to the United Nations once victory by the "coalition of the willing" is secured sees the light of day.
What is known with certainty is that war in Iraq, or anywhere else in the Middle East for that matter, necessarily has oil at, or near, centre stage.
Iraq is after all a major, albeit frayed, oil producer and, more importantly in the long run, the owner of the world's second biggest reserves.
It had been producing oil at a daily rate of 2.4 million barrels under the supervision of United Nations under the oil-for-food sanctions that came into effect in 1999.
Because of its huge undeveloped reserves Iraq could produce a lot more. But it has not had the capacity to invest in additional production and technically at least, it remains part of OPEC.
OPEC's quota system on production by its member countries has the aim of keeping the oil price as high possible without hurting demand, with a price of $US25 to $US28 a barrel the target.
So while its member countries, whose economies all depend heavily on oil, control two-thirds of the world's reserves, they produce only one- third of the 78 million barrels of oil that the world gobbles up daily. In effect the non-OPEC world produces everything it can and buys the rest from OPEC.
But OPEC is the swing producer in the system. It is the producer that can make a difference to the global oil price by adjusting its quotas. That also makes it the producer that can deliver the non-OPEC world a nasty shock every now and then.
Before even a shot was fired in the war, Australians got a lesson on the interplay between war in Iraq and what it meant for oil prices. The lesson was given at the petrol pump in the form of record prices of more than $1 a litre.
Yet even as petrol stations marked up their boards, analysts were predicting a flood of oil onto the market, as well as a significant drop in demand that would help ease any pressure on prices. It's early days in the war but the predictions are looking good. Oil prices have crashed from just under $US40 a barrel to $US28 a barrel.
While the global markets ran up the price on the fear of war and supply disruptions, they are also took it down on expectations of the war being short and precise.
That wild swing in attitude and pricing served to highlight the precarious nature of the oil market. Despite being a fuel vital to the lifestyle of western countries, oil is still vulnerable to huge volatility.
At present, the volatility is to the downside on price. Analysts believe that the commencement of war could unlock vast supplies of the resource.
"The general consensus view is that there will be a correction back downward, but it depends on what kind of inventory comes back on line," said Salomon Smith Barney analyst Gordon Ramsay. "There will be stockpiles and reserves that will come on to the market, and that will limit the uncertainty," he said.
"The question is, what do countries have in commercial reserves that have been hidden from official statistics?"
Indeed, the oil markets have so far shrugged off concerns that any disruptions could be substantial or last long. In electronic trading on the New York Mercantile Exchange yesterday afternoon (eastern Australian local time), oil was trading at $US28.30 a barrel, close to a three-month low.
The price was some 21 per cent down for the week leading up to the start of the war, again reflecting the belief that a war in Iraq will be quick and that there will be little damage to its oilfields and facilities.
The question in the minds of analysts, though, is how much other factors - including additional production, the release of reserves, and falling seasonal demand in the West - will offset the combination of a cut in supply from Iraq and squeezes elsewhere in other OPEC countries, such as Venezuela and Nigeria.
Up until the commencement of hostilities, Iraq has been exporting but at a reduced rate of about 1.5 million barrels a day. This is balanced by a Saudi Arabian stockpile that could make up for about a month's disruption of those exports, although Saudi officials have said the country does not plan to draw down all 50 million barrels.
But Saudi Arabia is now producing about 9 million barrels a day, or about 1.5 million more than its OPEC quota. The country has about 1.5 million barrels of additional production capacity that it can bring on in less than several weeks, if the need arises.
The US also controls a Strategic Petroleum Reserve of 600 million barrels, but it has said it wants to rely on OPEC production to fill any gap.
In addition, Ramsay noted that Venezuela, which has been the scene of a bitter oil industry strike, is increasing production again. He said output that was 1.6 million barrels a day in January had reached 2 million by the end of February.
Adding further comfort, the arrival of spring and summer in the Northern Hemisphere could reduce demand for oil by as much as 2.7 million barrels a day. In total, private and public oil stocks counted under the auspices of the International Energy Agency officially amount to more than 90 days of imports by Western countries.
While such figures appear to provide a sizeable cushion for any loss of Iraqi supplies, analysts point out that it will take time for new supplies to arrive, and that the conflict comes at a time when overall Western reserves are at a record low.
Analysts are focused on industry crude oil stocks, which includes oil held in refineries, petrol stations and throughout the supply chain. Such stocks total just 270 million barrels in the US, close to the minimum required for smooth refinery operation.
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