tension between Hawk Iran and Dove Saudis
wide shortages could quickly send crude oil to $70/bbl
an excerpt from John Myers of OUTSTANDING INVESTMENTS
April 23, 2002
Mideast Tension Points Out Canadian Oil Opportunities
Dear Outstanding Investments Member,
Calls for a boycott of U.S. products is spreading across the Middle East amid anger over U.S. policies that seem to favor Israel, according to a report in The Wall Street Journal. While the boycotts have not yet had an impact, U.S. manufacturers are worried that they soon could. One reason is that this boycott is not being led by governments, but comes from trade unions and grassroots organizations.
"We expect that it will have an impact," says Ahmed Linjawi, manager of Procter & Gamble Co.'s joint venture in Saudi Arabia. "The biggest concern is our image."
What's at stake is not an insignificant amount of money. U.S. companies sold almost $10 billion worth of goods and services to Saudi Arabia and Egypt last year. A more serious problem facing the United States is not that Arab nations won't buy our goods but rather they won't sell us their oil.
Iraq has made some short-term noise by implementing a 30-day oil embargo. Of greater importance is that given America's war in Afghanistan and threats against Iraq and Iran, plus its support of Israel, there could be a widespread Arab oil embargo.
Growing Cooperation Between OPEC Rivals
The two largest oil powers in the Middle East with 40% of OPEC's crude production are Iran and Saudi Arabia. Iran has consistently been an oil price "hawk." Higher oil prices maximize the country's short-term oil revenue and provide for its rapidly growing population of 65 million.
On the other hand, Saudi Arabia has been an oil price "dove." Saudi Arabia has a population of only 21 million people and proven oil reserves in excess of 260 billion barrels, or one-quarter of the world's total oil reserves. With three times more oil reserves than Iran and just one-third the population, the Saudis have typically wanted to keep oil affordable to dissuade alternative energy initiatives.
The differences between Iran and Saudi Arabia put them in perpetual conflict throughout most of the 1980s and '90s. But by 1999 it was apparent that these former rivals shared concerns over Iraq's military might and America's strategic policies.
In early 1999, the Saudis and Iranians held a series of meetings to reach a consensus on oil production issues that was later rubber-stamped by OPEC members at their March 1999 meeting. The Saudis stunned observers by slashing production by 585,000 barrels per day to 7.44 million barrels per day (mbd), far below the 8 mbd "line in the sand" that Riyadh previously had insisted was its production floor. This cutback comprised more than a third of OPEC's 1.7 mbd reduction. Non-OPEC oil exporters -- Russia, Mexico, Norway and Oman -- also agreed to reduce production, creating a 2 mbd shortfall in world oil supplies that drained oil inventories and pushed oil prices up to $34 per barrel by early March 2000.
Worldwide Shortages Could Send Prices Soaring
Unity among Middle East nations and anger towards the United States comes at a time when America is very vulnerable to an oil embargo. About 20% of all U.S. oil imports come from the Persian Gulf, and that number is growing.
And if that isn't frightening enough, America's allies are even more dependent on Mideast oil. Some 30% of all the oil consumed in Europe is imported from the Persian Gulf, while Japan gets 80% of its oil needs from the region. So while the United States may not be subject to massive shortages, its allies would be, and the price pressure of such an event could probably push crude oil above $70 a barrel.
After all, the oil embargo of the 1970s sent prices as high as $40 a barrel. If we adjust that to the purchasing power of today's dollar, it translates into $80 a barrel. The United States is also more dependent on oil imports, regardless of its origins, than it was 25 years ago. Today the United States imports over 8 mbd, or twice as much as it imported in the 1970s. Conflict in the Mideast and growing dependence on imported oil puts the United States on an energy collision course. One remedy is the further development of Canadian oil production. |
