Why US wants higher oil prices. This radical shift in US oil policy has tremendous significance for OS investors and is extraordinarily bullish.
Cheap Gas Creates Potential for Social Explosion in Oil-Rich,
Cash-Poor Countries
The Salt Lake Tribune
With gasoline prices at less than a dollar a gallon -- an all-time
low -- it's easy for Americans to fill up their gas-guzzling
Pathfinders or Tahoes without a twinge of worry.
But the same low fuel prices have also set two trends in motion
overseas that could prove disastrous for the economy of the
Middle East, the fortunes of Western oil companies and,
ultimately, the pocketbooks of those same American consumers.
First, profit-hungry U.S. energy companies, which aggressively pursued alternative sources of
oil after the 1973 Arab oil embargo, now seek cheap investment opportunities in the Persian Gulf.
If the trend continues, America could once again become overly dependent on oil from the Middle
East.
Second, that region's growing economic instability, prompted by low fuel prices, is fomenting
scattered social and political violence. This could leave Americans more vulnerable to supply
disruptions such as physical attacks on pipelines and other oil installations.
Despite some attempts to diversify, most Middle Eastern countries have remained "petrodollar"
economies, deriving most of their foreign exchange earnings from oil exports. The United Arab
Emirates, for example, derives 60 percent of its income from oil sales. In both Yemen and Iran,
oil accounts for more than 80 percent of total exports. In Saudi Arabia, oil income has risen
steadily since 1993 as a percentage of government revenue, and oil sales now account for 35 to
40 percent of its GDP.
The drop in crude oil prices, due in part to falling demand from the battered economies of Asia
and in part to an excessive buildup of oil production, has already affected both Middle Eastern
economies and Western oil company profits. Throughout the Persian Gulf, budget deficits have
widened dramatically, necessitating both tax increases and significant cuts in government
spending.
Iranian ministries have received less than half of their proposed budgets this year. The Yemeni
government, which lost half its income, has cut 55 percent from its budget since 1998 and raised
taxes significantly despite fierce opposition in parliament. The Saudi government, which lost
one-third of its revenues last year and is now $13 billion in the red, has adopted an austerity
budget for 1999 that includes cutting state spending by almost 16 percent.
In the [ West ] , oil company revenues have been eroded by a season of economic crises in Asia
and several mild winters in North America, creating lower demand for heating oil and gasoline.
Chevron's and [ Texaco ] 's reported incomes declined by 40 percent to 50 percent in 1998.
Corporate balance sheets have been damaged as well, with petroleum inventories being adjusted
to reflect lower and lower market values.
As these financial problems continue, Middle Eastern crude will soon become the preferred choice
of multinational oil companies, because the Arab world controls about two-thirds of all known oil
reserves and has the lowest extraction costs. This would reverse the trend of the 1980s and early
1990s, when U.S. oil companies shifted away from the Gulf region and focused their
investments on high-tech production techniques for existing wells, as well as on developing hot
spots for exploration such as Kazakhstan and Turkmenistan in Central Asia.
Cash-strapped Gulf countries have become more receptive to foreign investment. Only 20 years
ago, U.S. oil companies were expelled from Saudi fields in a wave of nationalization and
resentment against U.S. support for Israel. Five months ago, in contrast, Saudi Crown Prince
Abdullah ibn Abdulaziz and his oil minister traveled to Virginia to discuss the possibility of their
investing in exploration and crude oil production. Last month, Energy Secretary Bill Richardson
visited Saudi Arabia, the first such trip by an American official since 1990. And although the
Saudi oil minister ruled out foreign ownership in lucrative ventures such as oil exploration at this
time, he was interested in obtaining foreign investment for less profitable areas.
These seemingly attractive investment prospects could ultimately backfire if social violence grows
in the Middle East. Indeed, physical disruption of oil production and delivery could spread if oil
prices remain low and the region's royal governments do nothing to address several potentially
explosive sources of popular discontent.
For the royal families and surrounding elites who control oil ownership in the Gulf states, life
continues as usual. These elites still indulge in conspicuous consumption, and in some countries
benefit from state perquisites such as free power, mail service and domestic air travel.
But the poor have been hit hard. The sharp disparities between urban wealth and rural poverty
throughout the Middle East have worsened by far in the last two years. In Saudi Arabia, many
people cannot afford basic foodstuffs, and even the urban middle class complains that its standard
of living is deteriorating.
The Saudi government's recent move to generate revenue by allowing foreign participation in
certain oil activities is a step in the right direction, but it may be too little to mitigate the sting of
cutbacks in public services and subsidies. To placate a dissatisfied populace, officials may need to
relinquish at least some control over domestic oil production to foreign companies. But Saudi
royal families, who benefit from about $2 billion in annual stipends from oil revenues, share the
reluctance of many Gulf rulers to give up control.
Falling oil revenues have also led to rising unemployment, worsened by rapid growth in the labor
force. Today, joblessness in the region ranges from 15 percent to 40 percent. Most Gulf
inhabitants are under 25; in Saudi Arabia, a startling 75 percent of the population is under 30.
And because urban and middle-class inhabitants have come to expect an easy life subsidized by
oil revenues, few have developed the skills to replace the foreign workers these desert kingdoms
can no longer afford. Labor opportunities are already limited in the stagnant oil sector, and the
petrodollar economies have failed to develop much of a non-oil private sector.
The explosive social effect of lost oil revenue became vividly clear last June, when riots erupted
in several Yemeni cities after the government discontinued subsidies on bread and fuel. Economic
desperation has also led native tribesmen to dramatically step up their long-simmering terrorist
campaign against foreign oil companies, hoping to secure a larger proportion of dwindling
national oil revenues. In 1998 alone, there were 18 attacks by Yemeni tribesmen against the
pipeline that carries nearly half of Yemen's oil output and is operated by the U.S.-based [ Hunt Oil
Co. ] Repairing damaged equipment has cost an average of $120,000 each.
In Bahrain, economic stagnation has reinvigorated popular resentment against the ruling emir,
who has governed by decree after dissolving parliament in 1975. Arson attacks on fuel tanks,
foreign-owned stores and the police have become more frequent, and a growing political
opposition movement is openly criticizing the country's repressive legal system.
In 1973, when the Arab oil embargo crippled the U.S. economy, the United States was importing
36 percent of its oil. Today, it imports 56 percent. Unless Western oil companies and their
customers exercise more vigilance, they could be in for a lesson.
Consumers must stop topping off their gargantuan gas tanks as if there were no tomorrow. Oil
company shareholders should question their firms' new push into Gulf investments, and
company officials should continue to develop alternative energy sources and technologies. If they
become blinded by the lure of cheap Middle Eastern oil, average Americans may find themselves
footing the bill for the imprudent investments of Big Oil.
Wyszomierski is a Manhattan-based specialist in foreign investments
(Copyright 1999)
_____via IntellX_____
Publication Date: March 14, 1999
Powered by NewsReal's IndustryWatch
...back to top |
