A rather ambiguous article from Stratfor
Oil Embargo Threats Carry More Weight 5 April 2002
Summary
The threat of an oil embargo against the West, particularly the United States, has
more weight in light of the current violence in the Palestinian territories. However, an
embargo seems unlikely for a number of reasons. Any targeted state would be able to
procure replacement oil from a number of sources. Furthermore, those that would be
hit hardest by an embargo include countries in Asia that are sympathetic to the
Palestinian cause and are still struggling with the effects of Asia's own regional
recession.
Analysis
Stripped of the Middle East's political complications, the underlying energy market is
broadly stable. That does not mean oil prices are likely to drop back into the
$15-per-barrel range. The escalation of the Israeli-Palestinian crisis has nurtured a
climate in which spurious threats can develop quite long legs. Recent threats of
embargos against the United States may not hold any more weight than they did last
year, but against a bloodier backdrop, they carry more significance.
Oil prices have moved up from lows of $16.60 a barrel in November 2001 to a high of
$27 a barrel on April 5. Yet despite this recent price rise, the oil market's underlying
fundamentals are largely stable. Typically spring is the season of weakest demand,
but a rapidly recovering American economy is helping pick up the slack. Furthermore,
the increase in U.S. military demand for oil is helping prices spike.
There are only two systemic factors that might upset this equilibrium before 2003.
First, Angola and Russia are both dramatically expanding their production capabilities.
By year's end the two countries will likely be pumping another 500,000 bpd
collectively. Second, the lack of investment in the oil sector by Venezuelan President
Hugo Chavez has gutted that country's long-term ability to function as a major oil
supplier. Venezuela may also face a short-term problem, with oil workers from the
state-owned Petroleos de Venezuela (PDVSA) threatening a strike that could shut
down production temporarily.
But while the oil markets themselves can be analyzed on a long-term basis stripped of
political factors, these complications must be included when generating short-term
analysis. That is particularly true in the current case given that political factors --
specifically the current Israeli-Palestinian conflicts -- are almost wholly behind the oil
price surge in recent weeks. Certainly major U.S. military actions in the region would
heighten oil prices. However, despite the latest statements of the Bush administration,
current U.S. deployments do not show this as imminent.
The key here is not Palestinian militants, but Israel's reactions to them. While the level
of violence may cause the markets to become jittery, Palestinians are neither major
producers nor consumers of oil. It is the Israeli retaliation to Palestinian attacks -- and
then wider Arab reactions to those Israeli actions -- that really make the oil markets
jump. These actions and reactions have added about a $5 per barrel premium in the oil
markets.
This premium, however, is likely to hold in place only so long as the region remains
tense. If there are no bombings and no retaliation, there will be no international
condemnations, and tensions will alleviate, at least in the short term. Meantime the
tensions provide a climate that heightens the significance of threats that would
previously have been dismissed out of hand.
Iranian supreme leader Ayatollah Ali Khamanei made such a threat April 5 when he
called upon all Muslim states to "shake the world" by halting oil exports to "pro-Israel"
Western states. Such an embargo is unlikely since without accompanying revenue
and production cuts, any targeted state can easily procure oil from alternative
producers. Furthermore, any serious embargo that includes real production cuts would
inflict far more harm upon countries that are sympathetic to the Palestinian cause,
particularly in Asia.
This, obviously, hasn't stopped Khamanei from threatening a potential embargo.
Indeed, his simply making the proposal at Friday prayer services in Tehran jacked oil
prices up to $27 per barrel, a level not seen since the week immediately after Sept. 11.
Short-term prices would certainly skyrocket if an embargo did indeed occur because
other producers lack the spare capacity to cover the shortfall. Under the kindest of
estimates, Mexico and Norway can add only 200,000 bpd each. Angola and Russia
might be able to accelerate their production plans, but neither has any spare capacity
to bring on line. The two non-Muslim OPEC states -- Nigeria and Venezuela -- can add
only 400,000 and 300,000 bpd. In the event of massively high prices, Venezuela could
tap its vast tank farms and potentially add 1 million bpd for 70 days from existing
stocks. But even this could hardly lessen the impact of a concerted effort to cut
supplies to the United States by Muslim producers who collectively control over 20
million bpd of production.
Still, in the unlikely event of an actual embargo, the Muslim producers would quickly
discover the weaknesses of their actions. The West is not nearly as dependent upon
oil as it was in 1973. The United States consumes only 60 percent as much oil per
dollar of GDP generated as it did in 1973. It is the reverse situation for most of Asia.
For an oil embargo now to deliver the same level of economic shock to the West as
did the 1973 energy crisis, the per barrel price would need to hit $90, a target well
beyond the Muslim world's ability to deliver. Any oil embargo large enough to actually
harm the West would decimate Asia, including Muslim countries, which has yet to
recover from the 2001 global recession. |
