Posted on 04/05/2002 5:49:39 PM PST by knak
History tells us that fears of another oil crisis are ill-founded, says George Trefgarne
YOU have to hand it to the Arabs. They are pretty useless at many things - like democracy, for instance - but they have an impish talent for propaganda.
This week was a case in point as Iraq called on its fellow Gulf States to use "the oil weapon" against the West in retaliation for supporting Israel. That old outlaw Saddam Hussein is trying to position himself as saviour of the Arab people in general and the Palestinians in particular. He was also indulging his favourite pastime: goading the Americans.
As a soundbite, "the oil weapon" is pretty good. At one point this week, traders on the International Petroleum Exchange in London, concerned that an oil embargo is a far greater threat than Saddam's rusty Scud missiles, drove the benchmark price for a barrel of crude for delivery in May through $28 a barrel to its highest for six months.
There are distant echoes here of 1973, when Arab countries announced an oil embargo to punish the West for supporting Israel in the Yom Kippur War. Egypt and Syria had attacked when Israeli citizens were in the synagogue, and the move precipitated the first oil crisis (the second was in 1978 when the fundamentalist revolution began against the Shah of Iran).
The oil price quadrupled and there were queues for petrol across America and Europe. This provided the backdrop to the shambles of 1970s Britain: power cuts, miners' strikes, Ted Heath, inflation and currency crises.
There is now a "war premium" for oil. Analysts say that without all the scimitar-rattling in the Middle East, the price would be close to $20. Petrol in the UK has followed oil upwards, although most of the cost is taxation. Prices have risen by 3p in the last month, and there is about 2p still to come. Gordon Brown has signalled that this will not put him off adding still more to his tax take the week after next.
All this comes at a difficult time for President Bush, whose finger is itching on the trigger of his six-gun. It is just over two months since he dubbed North Korea, Iran and Iraq the "axis of evil". He stopped short of actually announcing he was going to attack them, but warned: "I will not stand by as perils draw closer and closer." The message was clear: they better co-operate, or it's High Noon.
Oil is one of the many strands which link the Israeli-Palestinian conflict to the war on terror. So far, the connection is a political one. The oil market is hypersensitive to any sign of tension in the Middle East, even though the black stuff nearly always continues to flow. Speculators, like Saddam Hussein, are gamblers. They recognise that oil is the ace for Arab states against the US.
As the old saw has it, the American Republic is built not so much on the Constitution, but Gas, God and Guns. The US itself produces 7m barrels a day - about 10pc of the world total and nearly as much as Saudi Arabia - but it consumes even more, and must import 11m barrels a day. It is the world's biggest oil importer by far, absorbing 25pc of world imports.
It is not surprising that since the President's speech, the oil price has risen by $8 a barrel, to the point where higher petrol prices might impact on the fragile economic recovery underway in America.
Expensive oil also worries central banks, which have cut interest rates to their lowest level for a generation. Any sign of inflation and rates will rise quickly, as happened when there was a jump in the oil price in 2000. More expensive borrowing helped prick the dotcom bubble and, by September, the fuel protests were underway in France and Britain.
It is too early yet to man the barricades, block motorways and start hoarding petrol. Another oil crisis looks improbable. There are three reasons the price could soon fall back.
First, it is by no means certain the US will attack Iraq. The American military build-up in the Gulf is so far limited to about 20,000 personnel and a couple of carrier battle groups. That is about one tenth the size of the coalition assembled in the Gulf War.
Even if it does attack, and Iraqi supplies are temporarily lost, there is little chance that the oil price will rise above $40 a barrel, the level it hit in the Gulf War, far less the inflation-adjusted $60 of the 1970s. Once an attack had begun, one of the first objectives would, presumably, be to secure Iraq's oil fields, which would then be in much safer and more efficient hands than they are now.
Second, Iraq is probably bluffing. It would not be the first time Saddam Hussein fired his Kalashnikov into the air to no great effect. Saudi Arabia, the most powerful member of the Opec exporters' cartel, has so far said an oil embargo would be inappropriate. In 2000, Opec adopted a resolution saying that oil should not be used as a political instrument. Only Iraq failed to agree to the resolution.
Arab nations are heavily dependent on oil and could not afford to withhold supplies for long. With the exception of a bit of tourism, they have failed to develop any other industry. Saud al-Faisal, the Saudi foreign minister, recognised this earlier in the week when he said: "If they [Arab countries] want to strengthen themselves against Israeli aggression, they have no alternative but to continue to exploit oil and gas."
The Saudi Arabian government is already running a budget defict, while Iran is depressingly poor. According to the World Bank, income per capita is only about £1,700 a year, and it has over $100 billion of debts run up during the war with Iraq in the 1980s.
Since 1996, the United Nations has allowed Iraq to export about 2.5m barrels of oil a day in order to buy food. The UN said on Wednesday that, in the last two weeks, Iraq has actually increased its exports rather than cut them. It relies on oil completely for foreign exchange. Without it Saddam is skint.
Third, we are far less dependent on Arabian oil than we used to be. President Putin of Russia, spying his opportunity to cuddle up to the West, has urged his country's producers to accelerate. The West has turned a blind eye to his war in Chechnya, and he returned the favour by refusing Opec's requests to cut production.
Russia is the new oil superpower, with an output which should overtake Saudia Arabia's this year. Opec supplies only around a third of the world's oil now, down from a half in the 1970s.
As it stands, there is plenty of oil washing around, and the world economy isn't guzzling it fast enough to cause any serious problems. The oil market recognises this. It is in what is known as 'contango', where futures prices are higher than spot prices (ie for immediate delivery) by about 40 cents a barrel.
The latest figures from the American Petroleum Institute on US commercial stocks show there are more than 820m barrels of oil at refineries, which is above average. The rise in the futures price for crude is not, therefore, based on a physical shortage, merely on a bet by speculators that there may be a shortage later in the year. The bet is political, not economic.
In June, Opec will meet to discuss whether to continue the production cuts it began two years ago. Then, the oil price was less than $10, and the organisation has learned that engineering an oil shortage also produces a glut in its wake. Any sustained price over $25 would encourage new supplies from the former Soviet Republics, Nigeria and Alaska.
A re-run of 1973 is still unlikely. A crisis would require genuine shortages. But as a weapon, oil is like a blunderbuss: rather old fashioned and liable to blow up in the user's face. We should be far more worried about the other, more modern, armaments Saddam may have in his locker.
Consequently, traders are buying up futures contracts as insurance against a possible temporary disruption.
The current price of oil isn't even expensive, from a historical perspective. It's higher than it was six months ago, but it's far less than what it was when Clinton did his phoney baloney Strategic Petroleum Reserve sale in order to win the election from Al Gore.
When you are facing a man with huge military power, who is just looking for an excuse to destroy you, the smart thing to do is see if you can make him real angry.
That is what Sadam is doing and the idiot that wrote this Article thinks it is smart.
Let me see. Long before the Birth of Christ the Greeks conquered the arabs. Then for a thouand years the Romans had them conquered. Then for almost 1,500 years the Turks had them conquered. Until England and France defeated the turks in WWI. From the end of WWI until the end of WWII the French and English had them conquered.
At the end of world war II the USA set them free. The Arabs for the first time in nearly 3,000 years were no longer the colonial possessions of a powerful outside state.
They are so bright that they have spent the last 50 years trying to hurt the nation that gave them their freedom.
Perhaps they need to be conquered again. They are following the stupid polocies that got them conquered by the Gtreeks, the Romans, the Turks, the French and British.
Arabs have a talent for godeing powerful nations into making them subservient slaves. That is what they have spent most of the the last 3,000 years doing. And and Ronald Reagan was wont to say, "There you go, again."
BTW, as the people in the Middle East are finding out, God punishes sin, but what he really enjoys doing is punishing stupidity.
Russia: Middle East Tensions And Cooperation With OPEC [Is the Intifada an OPEC Pricing Strategy?]
The Arab states simply can't afford to halt oil shipments for more than a symbolic moment.
They have no other source of income.
Thus, any scarcity will be fleeting.
For a few weeks or months. In the long-run, it means the end of sanctions, the end of what is already an enfeebled OPEC, and lower energy prices for all.
Our ace is the atomic bomb.
--Boris
Actually, it's the dollar bill.
Aside from petroleum, the combined exports of the Arab states are equivalent to Finland's.
They simply can't sell enough dates to make up the difference...
Interesting if true.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.