Cash From Chaos
It was hoped the Iraq invasion would secure a key oil patch and eventually spread freedom. But guess who's getting rich?
Price explosion: Sabotage and terrorist attacks are turning up the heat on the world’s jittery oil markets
By Christopher Dickey and Tom Masland
NewsweekOct. 25 issue - A massive tower of smoke roiled skyward above the green landscape of the Niger Delta on the west coast of Africa. Oil was burning near a ruptured pipeline, and the huge Anglo-Dutch multinational Shell Petroleum Development Co. of Nigeria reported sabotage caused the break. Were rebels behind it? Terrorists? Or just thieves trying to steal oil and scrap metal? The only clue was a hacksaw at the scene, apparently dropped in a moment of panic when the line erupted like a gusher.
International oil markets shuddered. YOUTHS TORCH OIL PIPELINE, PRICE HITS $54.45 PER BARREL, screamed the headline of Nigeria's leading paper the next day, exaggerating the connection, certainly, but not by much. The global oil supply is so tight, the market psychology so close to the brink of crisis that even small disruptions can send prices soaring to new records.
Wasn't it just last year that we heard the invasion of Iraq would help make oil cheaper, safer, more secure? President George W. Bush came to office alarmed about increasing U.S. dependence on autocratic and corrupt regimes that rule atop the world's biggest oilfields: among them the mullahs of Iran, the royal family of Saudi Arabia, the democratic yet venally corrupt government in Nigeria. And then there was Saddam Hussein. By invading Iraq, American forces would remove one dictator and the threat he posed to the interests and security of the United States. They would also stabilize one of the world's biggest oil producers, and begin spreading democracy. More oil would flow to market, and more freedom would flow to the region. Yet we've seen the opposite. The world's autocratic and corrupt oil producers are richer than they have been in years. OPEC members alone expect an estimated $300 billion in total revenues this year, much of it in windfall profits.
"The petrodollars we provide such nations contribute materially to the terrorist threats we face," said former CIA chief James Woolsey and other prominent neoconservatives in an open letter last month. The United States faces a "perfect storm" strategically and economically, they said, if it doesn't reduce its dependency on foreign oil. And there's every indication they're right. But these same pundits, passionate advocates of the Iraq invasion, now mildly insist on the need to use more hybrid cars and other technologies to reduce consumption.
Lowdown on high oil prices
World oil demand is growing at its fastest pace in 16 years. U.S., European and Japanese economies are finally growing again and China is sucking in oil -- imports are 20 percent higher than a year ago -- to power its manufacturing and to make gas for its booming car market. The world consumed 79 million barrels of oil a day in the second quarter. Forecasts call for that to rise to 82.5 million in the fourth quarter.
Stocks of oil are low by historic standards, removing a cushion between demand and supply. The unusually cold winter in the Northern Hemisphere caught oil companies shorthanded, forcing them to run down stocks. But oil companies are keeping less oil on hand than in the past to lower their cost of business. OPEC has kept its stocks low as a matter of policy.
Unrest has disrupted oil production in the Middle East, Nigeria and Venezuela. New production investment has been low in the Persian Gulf and Caspian Sea. Mature U.S. and North Sea oil fields are producing less and new finds have dropped to 6.8 billion barrels annually in 2001-2003 from 11.4 billion barrels per year in the previous five years. U.S refineries are running at near-full capacity, slowing gas deliveries to consumers. Summer driving will only make things worse.
U.S. gas prices rose more than 50 cents per gallon during the first five months of 2004, but higher crude accounted for only about half of that. Severe winter weather delayed U.S. refiners from making their annual switch to summer products. Even if they try to play catch-up, tankers from the Gulf take six weeks to reach the U.S. so new supplies wouldn't reach consumers until late summer. And because different U.S. regions require different gas formulations, a shortage in one can't be met with shipments from another.
Oil prices have jumped 30 percent this year thanks to the supply-and-demand problems, the weaker U.S. dollar and speculation. A 10 percent drop in the dollar against currencies of other oil-consuming countries means a 7.5 percent rise in the dollar price of oil. OPEC officials also blame hedge fund bets that prices will go higher for up to 20 percent of $40 oil. But even at $42, a barrel of oil is cheaper than it was in 1980, when it cost $81 in today's money. (In 1864, oil hit a giddy $8 per barrel -- $92 in 2004 dollars.)
High oil prices push up inflation through higher energy and transportation costs; they can push up interest rates and trim economic growth too. A $1 gain in crude oil prices adds $280 million per year to U.S. airlines' fuel bills. If price rises are steep enough or last long enough, they can trigger recessions, as happened in 1973-1974, when OPEC tripled oil prices overnight, and in the 1980s, when oil prices stayed above today's prices in real terms for seven years.
OPEC's 11-member states pump 39 percent of the world's oil production and half of oil exports. The 44-year old cartel tries to manage prices by regulating output, though quotas rarely reflect true OPEC output. But while OPEC opted to raise output at its June 3 meeting in Beirut, most members are producing at full capacity already. OPEC also has internal policy divisions between pro-U.S. members such as Saudi Arabia and Kuwait and countries less favorably disposed to the Bush administration such as Iran and Venezuela.
Although the U.S. gets only 10 percent of its oil from the Persian Gulf, the Middle East remains the world's largest oil producing region. Recent violence in Saudi Arabia, including a deadly attack by Islamic militants in Khobar, and a fear that al Qaeda-linked forces are trying to provoke civil war in the kingdom have again raised fears about supply interruptions. Continuing unrest in Iraq will delay the return of its oil to world markets in any significant volume.
The world's oil infrastructure has many points open to terrorist attack, but it would take simultaneous strikes to cause a significant disruption. Oil wells, pipelines and tankers are the least of the worries. Ports are a bigger potential chokepoint because most oil producing nations have only one or two terminals. But with U.S. refineries already at full capacity -- no new ones have been built for years because of environmental concerns and NIMBYism -- taking out one would send U.S. fuel prices soaring.
Although oil -- and natural-gas -- prices have risen sharply, they will likely have only mild effects on overall economic activity, making real U.S.gross domestic product only about 0.9 percent lower than it would otherwise be. Not enough to derail the recovery. Businesses also have more experience with energy price shocks; they understand how the shocks affect them and how other segments of the economy will respond. But many of the factors behind the recent surge in prices are likely to persist.
Analysts point to many reasons for the huge spike in prices, more than 60 percent over the past year. In every troubled corner of the oil-producing world the list of shocks has grown, from terrorist attacks in Saudi Arabia to hurricanes in the Gulf of Mexico; the Yukos commotion in Russia; unpredictable demagoguery in Venezuela. Shipping lanes in Asia are plagued by pirates and threatened by terrorists. There's growing unrest along the African coast. All this is happening while demand from China surged 30 percent last year, beyond almost anyone's expectations. A cold winter is coming on, upping demand for heating oil, and Americans keep driving like there's no tomorrow.
Yet it's the untamed insurgency in Iraq that has had the most pernicious impact on energy supplies and price speculation. The country should be a major oil producer. Under Saddam Hussein, despite sanctions, it was able to pump almost 3 million barrels a day. Now, because of widespread sabotage, it has to work very hard to export 2 million. In a tribute to the bravery of its workers, it reached 2.5 million barrels on Sept. 27. But illusions that Iraq could finance its own occupation evanesced like a mirage last year. Officials estimate pipeline sabotage alone is costing the country $7 million a day.
The hard-line mullahs of Iran, however, are awash in cash. "Up through last year, they had come up with something like $20 billion extra they did not have to spend [on the regular budget]," says Azadeh Kian-Thiebaut, author of several studies of modern Iran. "They are rich," she says. And prices have jumped dramatically since then. At the same time, Grand Ayatollah Ali Khamenei and his close allies have marginalized, brutalized and eliminated whatever was left of the democratic and reformist spirit that flourished in the country during the late 1990s.
Resentment of the mullahs' corruption is still widespread. But money helps buy quiet. A reign of fear is returning under the Revolutionary Guard Corps, or Pasdaran, now in de facto control of all major ministries. But protest and unrest are also subdued because of patronage: windfall billions channeled through the mullahs' charitable foundations. "The major problem is Iran's youth unemployment," says Kian-Thiebaut. The Iranian leadership can pump money into the black economy, where little is accounted for, but where most young people earn their living. In rural areas and in many slums, says Kian-Thiebaut, "there are people who really do survive only because of what they get from the government."
Russian President Vladimir Putin has seen the price of a barrel of oil quintuple since 1999, and he's used the income to shore up his own power as he prods the country toward ever more severe autocracy. "Putin has had the money to raise pensions a bit, pay salaries and keep taxes down," says Vladimir Pribylovsky, a political analyst at Moscow's Panorama think tank. By helping ordinary workers in this way, Putin cut the legs out from under his main political opponents, the Communists. Meanwhile, the high price of a barrel also puts him in a strong position when criticized from abroad for rolling back democratic freedoms. "At $50 a barrel," says Pribylovsky, "Putin can do whatever he wants with Bush and Europe." Everybody is knocking at his door, wanting a piece of the action—and a sure supply of petroleum.
But the biggest winner of all is Saudi Arabia. Many in the United States see the kingdom as a problematic ally, with a shaky, geriatric monarchy and a deep tradition of patronizing radical fundamentalism. It was the birthplace of 15 of the 19 hijackers on September 11. Since last year, terrorist groups trying to overthrow the regime have staged several suicide bombings and murdered foreign workers. Yet the desert kingdom accounts for a quarter of the entire world's proven reserves, and it's usually the only country that can inject an extra 2 million or 3 million barrels a day into the market by turning on the tap. The Saudis' own projected windfall is estimated upwards of $50 billion over the next year.
What the Saudi government does with that money is critical, says Rachel Bronson of the Council on Foreign Relations: "The answers will tell us how serious they are about reform." Crown Prince Abdullah, the de facto ruler, has said a large part of the money will go into paying down the country's huge debts. More billions are supposed to go into vocational training for young Saudis, who've been easy recruits for the likes of Osama bin Laden. And there will also be foreign investments. But even Saudi officials close to the top leadership worry the flood of money will bring back the regime's old complacency. "The big risk is overconfidence," says an adviser to one of the senior princes.
In fact, the biggest risk is that the violence we've already seen in Saudi Arabia intensifies, that the Iraq war starts to spill across the border, or there's a dramatic blow to the regime that nobody could anticipate. If a villager with a hacksaw in Nigeria can move prices for a few minutes, an assassin in Arabia could change them for years to come.
With Rod Nordland in Amman, Frank Brown in Moscow and Maziar Bahari in Tehran |
