News Stories Used in Oil Crisis Word from Commentary
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China Faces 250 Million Ton Oil Shortage by 2020, Oil News Says
July 25 (Bloomberg) -- China may face a shortage of 250 million metric tons of crude oil by 2020 as local production may meet only 44 percent of demand, China Oil News said, citing a Xinhua news agency report.

China's consumption of crude oil may reach 450 million tons by 2020, with local output at 200 million tons, the report said, citing Chen Geng, president of China National Petroleum Corp. The country's demand for gasoline, diesel and kerosene may total 260 million tons by 2020, the report said.

China's oil companies face challenges including lack of domestic crude oil stockpiles, increasing difficulties in finding new sources of oil and the lack of new technology to boost output at its refineries, the report said. China's refineries are now operating at 90 percent of their capacities to meet the country's demand for fuels, Chen was cited as saying.

China, the world's biggest oil consumer after the U.S., may consume about 6.29 million barrels a day this year, an increase of 15 percent, the International Energy Agency said. The country imported 57 percent more oil products in the first half of the year, while rising prices saw the bill climb 66 percent to $4.5 billion, according to customs figures.

Among other products, ethylene demand in China may double to 23 million tons by 2020, Chen was cited as saying. China would need to import 40 percent of its ethylene to meet demand by then, the report said.

China's natural gas output is expected to rise to 120 billion cubic meters by 2020, from 34 billion cubic meters, the report said. Gas demand may rise to 200 billion cubic meters from 30 billion cubic meters, it said.

Energy conservation could help resolve part of China's energy shortages, Chen was cited as saying.
China Oil News is published by China National Petroleum, parent of Hong Kong-listed PetroChina Co.
 
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Analysts: oil supply cushion is thin
Brad Foss 14 August 2004

WASHINGTON, D.C. -- With so much uncertainty roiling oil markets these days, analysts say one thing is clear: The world's supply cushion is perilously thin.

Whether the amount of extra fuel that could be pumped in a pinch is 1 million barrels a day, as many believe, or significantly more than that doesn't really matter, because the amount of actual production at risk these days is even greater.

As a result, the threat of output disruptions in Iraq, Russia, Venezuela and beyond has thrust crude futures above $46 a barrel for the first time -- the latest run-up coming even after Saudi Arabia offered the market all it had. If world demand continues to rise, don't expect cheap prices anytime soon, analysts said.

On Friday, the price of crude for September delivery surged to $46.58 a barrel on the New York Mercantile Exchange, a rise of $1.08. That is crude's highest Nymex settlement on record, although on an inflation-adjusted basis it is still about $11 below the price leading up to the first Gulf War.

In the past, a comfortable surplus of available output, or capacity, could be depended on to temper the effects that geopolitical fears might have on oil markets, said Lawrence Goldstein, president of PIRA Energy Group in New York."

But today all uncertainties must be immediately factored into the price," Goldstein said. "We simply don't have the cushion anymore."

There is no literal shortage of oil right now, and prices probably would fall if the threat of sabotage against Iraqi oil infrastructure waned and if the Russian government and oil-giant Yukos resolved their dispute.

But that still would leave oil markets vulnerable to other geopolitical flare-ups, analysts said, explaining why futures are trading above $40 through the end of next summer and many believe the $50 level will be reached before then.

The world has anywhere from 500,000 to 1.5 million barrels a day of spare capacity -- the bulk of it in Saudi Arabia -- that could be tapped instantly to offset a temporary loss of supply."

This is an exceptionally low ratio for an 81.4 million-barrel-per-day supply system and is well below the 10-year average of 5.0 million barrels per day," notes A.G. Edwards senior oil analyst L. Bruce Lanni.

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World creeping closer to `oil shock'
Energy crisis could loom, experts say Politics, corporate moves are factors

DAVID OLIVE  BUSINESS COLUMNIST

Are we running out of oil? Are we in danger of another energy crisis of the magnitude of the 1970s "oil shocks" that condemned us to a decade of economic stagnation? And with our desultory regard for conservation and alternative energy sources, are we risking ever greater oil dependence on the volatile Middle East?

Yes, yes and yes.
 

Of course we're running out of oil and natural gas; they're non-renewable resources, and the rate of discovery of so-called "elephants" has been on the decline for decades since the halcyon days of Alaska's Prudhoe Bay and the North Sea. Worse, the more recent discoveries have been made in some of the world's most remote and politically unstable places — among them, Nigeria, Sudan, Russia, Indonesia and the former Soviet republics of central Asia.
 

The critical issue is how soon will the oil run out? It's estimated that we've already exhausted about half of the original 2 trillion barrels of oil on Earth, which is a bit alarming given the relatively primitive state of global industrialization in the early decades of oil exploration. We're sure to run through the remaining half of the Earth's oil endowment much faster, especially with the emergence of China, India and other developing world nations as dynamic, oil-hungry economies.

The two factors weighing most heavily on fretful energy forecasters are geopolitics and the behaviour of oil-producing corporations.
 

Political instability:
 

An otherwise sanguine Martin Wolf of U.K.'s Financial Times, who expects current high oil prices to spur discoveries that will ease the world oil price, as in the past, acknowledges that, "After Sept. 11, 2001, the U.S. entered an ideological conflict with the world's oil superpower (that is, the Middle East), which itself is politically riven." The test of wills between the White House and several Mideast regimes "should make us all very nervous," says Wolf, especially given the increasingly precarious state of the ruling House of Saud.
 

The obvious parallel is the 1979 collapse of the Shah of Iran, whose regime, like the current regime in Riyadh, was a U.S. ally with only fragile local support. "If a collapse of the Saudi regime removed the country's supply from world markets, even temporarily, 10 per cent of global output would vanish," Wolf notes.
 

The weak Saudi government, Osama bin Laden's principal target, is highly vulnerable. "Just one successful Al Qaeda attack on the giant production facilities of Saudi Arabia or Abu Dhabi could produce a global recession," writes Don Coxe, chairman of Chicago's Harris Investment Management, in Maclean's.
 

The political uncertainties radiate outward from Riyadh. In Iraq's botched occupation, saboteurs have prevented the world's No. 2 nation in oil reserves from returning even to its prewar output of 2.5 million barrels per day, with the White House's promise of a quick ramp-up to 6 million barrels per day now regarded as a distant dream.
 

Libya is back in business again, now that dictator Moammar Gadhafi has repudiated his nuclear-weapons ambitions, ending an 18-year U.S. embargo against the world No. 9 oil-reserve holder. Here again, though, the caprice of Gadhafi is a real concern. That also applies to the ever-shifting dictates of Russian president Vladimir Putin, Venezuela's Hugo Chavez and kleptocratic dictators in central Asia. Government by fiat is a mighty deterrent for even the world's largest oil companies to commit to multibillion-dollar exploration programs in regions were governments routinely renege on deals, and expropriation and eviction are real prospects.
 

Oil companies' retreat:
 

With oil prices now 30 per cent higher than the average for 2000-2003, and Canadian pump prices approaching $1 per litre, oil companies should, by tradition, be deploying their windfall profits into the search for new reserves.
 

But that's not happening this time. Increased worldwide spending this year on exploration and production (E&P) is projected at just 9 per cent — less than half the increase following previous oil-price jumps. ExxonMobil Corp. and ChevronTexaco Corp. are among the oil majors who've refused to boost their E&P budgets this year. Which means junior and mid-sized producers account for most of this year's modest increase in E&P activity.
 

As noted, the oil majors are super-cautious about committing to mega-projects in unstable regions. They're also jittery about a sudden, sharp decline in oil prices that would make a hash of their long-term payout projections — understandably, given that as recently as the late 1990s, oil slumped to about $10 (U.S.) a barrel, or just one-quarter of today's price.
 

The oil majors have learned from their earlier misplaced exuberance. "What they're saying," analyst Paul Sankey of Deutsche Bank Securities told the Wall Street Journal last month, "is, `we've blown it in the past, we're not going to do that again.'"
 

And, as never before in modern times, the industry's decision-making power is concentrated in very few hands. A rash of late-1990s mergers among top-tier oil producers created a tight fraternity of about half a dozen companies large enough to take on the biggest projects.
 

Merger architects like Lee Raymond of the former Exxon Corp. and Sir John Browne of BP PLC (which triggered the takeover boom by absorbing Amoco Corp. and Arco Corp.), initially hailed their combinations as super-producers uniquely capable of opening up the world's most daunting regions to oil and gas production.
 

Instead, the new giants have focused on paying off their acquisition-related debt, cutting personnel and other costs, shedding marginal properties and buying back their own stock in order to boost share prices to which executive pay is tied.
 

The charitable view is that Big Oil is merely reacting to investor expectations. "CEOs are listening to what institutional shareholders want," Lehman Brothers Inc. analyst James Crandell told Business Week in June. "Production growth is a secondary goal, if it's a goal at all."
 

The less charitable view is that consumers are now at the mercy of a cabal of like-minded Big Oil CEOs who are no longer forced to bet their companies on a potential giant discovery — as the plucky Arco did in Prudhoe Bay in partnership with Exxon — because of a tacit understanding among today's majors that they won't compete for the kinds of projects that once could make a company.
 

Chemical producer Jon Meade Huntsman of Utah, whose firm has been whipsawed by soaring oil prices, along with airlines, power utilities and other sectors, complains in Business Week that "we've got (an oil) monopoly that's, in effect, more dangerous than during the Rockefeller era" of the early 20th century.
 

The current oil price surge has been a boon to alternative-energy entrepreneurs seeking financing for their projects. And concerns about global warming and energy self-sufficiency have put alternatives to fossil fuels on the national agenda of countries like Canada, where in the recent federal election campaign both the Liberal and NDP platforms promised outsized commitments to wind power.
 

But these are long-term solutions, at best. After decades of research, fuel cells have yet to show any sign of becoming a practical alternative to the internal combustion engine. Electricity generated from solar panels is about 10 times more expensive than power generated by traditional means. Wind-turbine technology has dropped significantly in price, and is now competitive with natural-gas-fired power plants.
 

But it's still no match for coal-generated power in price. Thirty-four years since the first Earth Day put environmental awareness on the map, alternatives to fossil-fuel energy will account for only an estimated 6.7 per cent of U.S. energy consumption this year.
 

In the meantime, a nasty combination of political hurdles, arguably misplaced Big Oil priorities, stunted conservation efforts, and unanticipated soaring demand from China and the Indian subcontinent is conspiring to bring on a full-blown crisis.
 

Without a meaningful increase in investment to develop new energy sources, the world could face a severe supply shortage by 2020, British energy consultant John Westwood of Douglas-Westwood Ltd. told the Wall Street Journal last month.
 

"As far as we're concerned, this is not the real crunch," Westwood said of the current oil-supply squeeze. "This is just a practice."

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Skids are Greased for Oil Crisis
by Elizabeth Sullivan

When geologists speak of Hubbert's Peak, they're not talking mountaintops or hairdos. They're referring to a time - maybe not so far off - when the world will run out of fertile new oilfields and new ways to recover oil, and petroleum supplies will begin an inevitable and maybe very fast slide.

Today, almost all OPEC nations appear to be pumping flat-out, yet the world still is just an oil workers strike or pipeline saboteur's attack away from big trouble.

That's a clear sign that the old OPEC cushion - excess capacity that allowed Middle East producers to control the market and price - is no more.

That might be good news, except that Iraqi insurgents are demonstrating almost daily how small groups of fighters can make outsized shock waves through the world economy simply by going after the oil infrastructure.

The potential for Middle East terrorists bent on bringing the West to its knees is sobering.

With supplies so tight and demand surging, even a few disruptions in world oil supplies could fan inflation and torpedo recoveries. Adding to the problem is that Russia, the world's No. 2 oil exporter after Saudi Arabia, could see disruptions to oil shipments. Russian leader Vladimir Putin seems determined to go to any lengths in his political vendetta against oil baron Mikhail Khodorkovsky, even if it means sacrificing the health of the country's oil sector.

But on top of that, a number of major oil-producing nations have lost capacity or face instability threatening output, including Indonesia, Venezuela and Nigeria.

Any excess oil has long since disappeared down the maw of surging economies in China and India and a recovering one in the United States. Only Saudi Arabia can open its spigots at will, but how long its reported 11 million barrel-a-day bonus stream could run before running out is unknown.

Meanwhile, industry experts believe the once-ballyhooed Caspian Sea lode - advertised at potentially 200 billion barrels of oil - almost a second Persian Gulf - could be far less rich and far riskier to develop than once assumed.

Carl Larry, a senior energy analyst for Barclays Capital Inc. in New York, thinks the days of below-$30-a-barrel oil are gone forever - and the days of $50 or $60 a barrel may be coming.

"I don't think a lot of oil companies were prepared to see demand grow as it has," he said.

What hasn't been surprising is how blasé U.S. consumers appear in the face of nearly doubled gas prices. "As long as the economy is strong, people will take higher prices and still drive," said Larry, Barclays' associate director of energy futures.

"Hubbert's Peak" comes from a theory advanced more than 50 years ago that U.S. oil supplies were running out faster than anyone had anticipated. M. King Hubbert, a Shell Oil research geophysicist in Texas after World War II, crunched numbers on known fields and exploratory techniques, sketched out a bell chart and announced that U.S. oil production would peak in the late 1960s or early 1970s and then go into steep decline.

At a time of huge new finds and predictions of 500 years' worth of oil, Hubbert's "pimple" was laughed at. Then, around 1970, it came true.

Ever since, the United States has become increasingly dependent on foreign sources of oil.

Recently, some scientists tried to take the same principles and apply them to the world scene.

Kenneth Deffeyes, a Princeton emeritus professor who used to work with Hubbert at Shell, wrote in "Hubbert's Peak: The Impending World Oil Shortage," that world oil production could begin to drop between 2004 and 2009.

The Hubbert's Peak forecasts have some flaws. They're heavily dependent on accurately projecting how much oil there is in the world - a hotly disputed number. And since they're based on past behavior, they're likely to understate what might happen in times of acute shortage when radical new techniques and approaches will become profitable.

But what Hubbert got right is the human tendency to believe that everything will muddle along approximately as it is, and to assume that short-term fixes will repair all problems, even oil-supply problems.

The market is telling us something today - that investments in the future are needed.

Hubbert's Peak may be only theoretical. But good theories have a way of proving true. It's past time for the United States to take the present-day oil crunch seriously - and to develop serious policies to confront it, including comprehensive energy and gas-tax reforms.

Sullivan is The Plain Dealer's foreign-affairs columnist and an associate editor of the editorial pages.

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Murdoch warns of oil crunch on US
By Geoff Elliott -August 19, 2004

RUPERT Murdoch, chairman and chief executive of The News Corporation Limited, has sounded a warning about the effect of oil prices on the world economy and said that if they go much higher it would "crunch" the US economy.

"The US is going to absorb the oil price where it is today with difficulty, and if they go much higher, it could really crunch us," Mr. Murdoch told The Australian in an interview.
 

"I think we'll get through it all right but the danger is in the Middle East exploding - such as a revolution in Saudi Arabia or somewhere like that - and then you've got oil going $US80 a barrel.
 

"It would stop the American economy, it would stop the Japanese economy and it would stop the Chinese economy.

"There's not a lot of chance of that, but there is more chance than there has been in the past."
 

Mr. Murdoch predicted lower prices ahead of the Iraq war but said yesterday the difficulties in securing peace in Iraq after the successful shock-and-awe campaign had helped send prices higher.
 

"The US had the right number of troops to brilliantly win the war in 10 days/two weeks but not enough troops to police the country and control the borders."
 

Mr. Murdoch said there would be no easy exit for the coalition forces out of Iraq, predicting the campaign would last at least another three or four years.
 

He added oil prices were also surging thanks to the strength of Chinese demand.
 

"You have a recovering world economy - along with Japan which is using more oil, and on top of that a runaway situation in China which is just buying all the raw materials, particularly energy; their need for energy is just leaping up."
 

Mr Murdoch would not be drawn on the forthcoming elections in the US and Australia, other than to say the US poll was too close to call but he expected a clear trend to emerge after the Republican convention next month.
 

He said he was too far removed to comment on the Australian political scene, other than to say a strong economy favours the incumbent.
 

"As a rule of thumb it is the hip-pocket nerve - and people in the whole country are doing well," he said.
 

Mr Murdoch is in Australia to meet shareholders in News Corporation (publisher of The Australian) over the company's plan to move its place of incorporation to the US.
 

Mr Murdoch said Australian investors were disappointed they may be forced to sell out of News Corp because of a decision by US agency Standard & Poor's to exclude News Corp from key investment benchmarks that dictate which companies professional investors can invest superannuation funds in.
 

He said most investors he has met thought the company's decision to move to the US was inevitable and appropriate and he was "very hopeful" it would be approved at a shareholder vote in October.
 

"I wouldn't say it was a done deal, no, and that's why we are here, but I would say we are very hopeful.
 

"We would like to see 15 to 25per cent of (News Corp) shares remain in this country, and certainly we would be very comfortable - having seen what we've seen today - that we would get that, certainly the smaller figure, and I'm talking about permanently."
 

He has also told The Australian News Corp plans to dramatically increase its capital expenditure on its global portfolio of newspapers, as the demand for colour display advertising surges.

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Background Report: German ,,Geopolitics" and the Struggle for Energy Sources
German Foreign Policy

BERLIN - Germany and the European Union must depend increasingly on energy imports. Berlin views the ,,geopolitical consequences" of this dependence on energy resources in other nations as of the ,,utmost strategic importance" for its ambitions as a world power. For that reason, Germany has been urging for some time that the EU engage in joint activities to assert political power. German government advisors leave no doubt that Berlin and Brussels will also have to adjust to using armed conflicts in the drive for diminishing energy sources in this ,,intensifying economic and political competition for power."

Increasing Need for Energy

Berlin's strategies of independent European world power politics presume that securing the energy supply will decide the fate of its far reaching plans for world power. Second to the USA, the EU is currently the biggest importer and user of energy in the world and thus depends to a great degree on access to (preferably low cost) foreign energy sources. According to estimates by the EU commission, the oil and gas reserves of the EU and Norway will last only another 25 years. Two thirds of the demand for oil and gas must currently be covered by imports. The current dependency on imports of 75% of oil from the OPEC states, could increase to 85% by the year 2020. At the moment the EU still covers 50% of the demand for natural gas from its own sources. Since the British sources in the North Atlantic will soon be depleted , the demand for imports of gas will increase further.

In this regard, Berlin is doubly affected: Germany has, on average, been 60% (1999) more energy dependent compared to other EU member countries, it imports about 98 % of its oil and 75% of its needed gas. German dependency on oil imports will increase considerably: The economic ministry's prognosis suggests a drastic increase of three to six times as much consumption of natural gas. Natural gas which has already become the most used energy in German industry, will be the basis of more than half of Germany's energy by 2020. At the same time, German energy companies already control a large part of the European energy supply and now strive for a particularly dominant position in European natural gas supplies. Several countries already depend considerably on German companies for the shipping and sale of natural gas. Berlin's expert advisors on energy policies, principally, see the following options for the future increase of oil and gas imports: Russia, the Middle East. Central Asia and to a lesser extent Africa.

Africa as a ,,Backyard"

Berlin increasingly strives for access to the energy sources of Africa which is viewed as Europe's ,,backyard" because of its connection with the colonial past. Advisors to Berlin's government explain that ,,Europe" must consolidate its relations with African oil and natural gas providers in order to secure its energy supply. German corporations are expanding their involvement in North Africa, i.e. in Libya, RWE invested in oil and natural gas production. The foreign office is interested in Chad. There, significant oil reserves are to be channeled via pipeline through Cameroon to the Gulf of Guinea where considerable oil and natural gas resources are located as well. The government of the booming oil state Equatorial Guinea already promotes German involvement in its country. In the current crisis region of Sudan, a German company is to build a railroad which, among others, will serve to transport oil from the South of Sudan.

,,Strategic Partnership" with Russia

At the moment, however, Germany and the EU are primarily concerned with large imports of oil and gas from Russia. This is expressed in the European-Russian ,,energy partnership" which had been proclaimed in October of 2000. This connection is primarily a German-Russian one: ,,Strategic projects" for energy supplies were the focal point of the summit in Jekaterinburg in October of 2003. With this specifically German-Russian ,,strategic partnership," Berlin intends to reduce the influence of other western states and corporations on the supply of the EU states, especially concerning increasingly important natural gas. In July of 2004 this cooperation was expanded: An agreement with Gazprom (the worlds largest producer of natural gas) facilitates the participation of German companies in the complete processing chain of Russian gas production for the first time - from exploration and transport through the new pipeline to marketing in Western Europe. An additional project is a new gas pipeline from Russia through the Baltic Sea to Germany. This is to pressure, and possibly exclude, the Ukraine and Poland, whose territory had been originally planned for the transit, but which could possibly become unstable and subject to Washington's pressure.¹⁾ Berlin's close cooperation with Moscow is solidified further with the discussion group ,,German-Russian Energy Cooperation," established by representatives of the economies of both states in March of 2003, and with ,,German-Russian energy summits" of which the next one will take place in Moscow in September.

,,Massive Interest" in the Gulf Region

The particular reason for the energy alliance with Russia, which will supply approximately one third of the German oil and gas imports, are the imponderables of developments in the Middle East and Persian Golf regions. According to the unofficial German Association for Foreign Policy (DGAP), strategic trends of a potentially increasing dependency of the EU on significant oil and gas imports caused competition with the US and its energy policies. Berlin is angry because the EU has been placed into a (junior-) partnership with the US due to Washington's militarily reinforced position of power.

Cooperation in shaping the ,,New Order"

Berlin's political advisers of the Stiftung Wissenschaft und Politik (SWP or foundation for science and policy), criticize the EU for disavowing any assertion of ,,geopolitical interests," although for Europe the stakes in energy policy interests are more important than those of the USA: While the EU depends, for a large part of its energy supply, on the resources of the Middle East, it has fewer alternatives. Thus, the EU must have a ,,tremendous interest in access to the natural gas resources of the Gulf Region" especially since Russia's production of natural gas has been decreasing since 1990. Therefore the SWP recommends cooperation with the USA in the ,,new order" of the Gulf Region: ,,It would be sensible if the current crisis in the Gulf would be used to define European interests concerning its guaranteed supply and, if necessary, implement a consistent policy."²⁾

The focus is especially on Iran which holds 15% of the world's oil reserves. Berlin's intention is to decrease German dependence on Russian energy reserves with the help of Iranian natural gas. However, shipping to Germany must still be organized which could create further conflicts. Iran's agreement for the construction of a gas pipeline to Armenia caused considerable disagreements between Moscow and Erewan which, until now, has been considered Russia's closest ally in the southern Caucasus. Russian specialists fear that the pipeline would be extended through Georgia and under the Black Sea to Europe and could diminish the sales of Russian natural gas in Europe. At the time of these disagreements over the pipeline, the foreign office engaged in intensive activities concerning the Caucasus, which could complicate the struggle for dominance in the southern Caucasus even further.

,,Exclusive Connection" with the Caucasus

In order to secure the ,,unhampered energy supply from the southern Caucasus and Central Asia," the Caucasus is of ,,great geo-strategic significance" for German-Europe. Berlin views the EU as a good starting point to challenge the Russian claim to power further in this region: The SWP clarifies that the various activities (OSZE, Energiecharta agreement, membership of all states of the Caucasus in the Council of Europe, partnership and agreements of cooperation with the EU) would offer the basis for an ,,exclusive connection" of the Caucasus and the Caspian region with Europe. Advisers to Berlin's government demand that in this case a further involvement, which might include military intervention (,,contribution to conflict resolution") and a coordinated EU strategy for the region. ,,It should include a European contribution to conflict resolution and a connection with Europe below the threshold of EU membership as well as the design and the conversion of a transport infrastructure which would conform to European interests in securing [energy] supplies."³⁾

,,Some Conflicts"

Generally, the energy policy advisers to Berlin's government assume that, in the future, Germany and the EU will have to assert themselves in a more intense competition for such strategic resources as oil and gas. They say that, in view of the potential increase of the EU's dependency on larger oil and gas imports from the Middle East and the Persian Golf, its own interests are already in ,,some conflict with American energy policies." Similar conflicts are also expected for the other supplying regions. According to present estimates, the amount extracted by Russia will not be sufficient to supply Asia and Europe with the necessary amounts of oil and gas simultaneously. Thus they predict that in the future the EU might compete with Asia and the USA for a ,,partnership" with Russia. In Central Asia, as well, an ,,intensified economic and political competition for power" especially with Japan, India, the US and eventually Russia over diminishing energy sources, cannot be precluded.

The rapidly increasing need for energy which is linked to the economic growth of Asia, especially China, is seen as a new threat to the German-European ,,secure supply." The Asian countries are - as is the EU - increasingly dependent on importing energy. The People's Republic of China (PRC) has already become the world's second largest consumer of energy next to the US. In particular, the Berlin strategists perceive a threat because China seeks access to energy resources especially in those countries in which western energy companies are not well represented (i.e. Iran, Iraq, Yemen or Sudan). That the PRC, as well as India, combine their energy cooperation with the supplying states with relations of a political, economic, military and military technology nature, provides them with increasing influence on these states and strengthens their position in the global playing field.⁴⁾ It is thought that this presents numerous challenges not only to the USA but also to Europe and that ,,geopolitical implications" have, so far, not been sufficiently considered.

War Games

Berlin urges that the EU should actively increase its political as well as its military power.⁵⁾ Concepts based almost exclusively on factors and requirements of the market economy, are not sufficient for the preservation of western energy security, thus: The ,,game of the market powers" will be dominated, even determined, considerably by political power factors in a political crisis or during military conflicts. The German advisers to the government therefore demand that Germany and the EU must prepare for military conflicts in order to secure future supplies of energy.

The ,,Bundesakademie fuer Sicherheitspolitik" (federal academy for security policy) which, as a center for strategy of German war policy and, like no other institution, symbolizes Berlin's purposeful return to imperialistic great power status, discusses in a current publication the ,,geopolitical effects" of the open ,,energy issue." It argues that this is of ,,greatest strategic significance" in striving for a joint foreign and military policy of the EU member states. This makes it ,,compellingly necessary that for future German and European energy policies increased foreign and security policy factors will have to be considered."⁶⁾

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New York crude smashes past US$48 for first time
Media Corp News-Asia - 6 September 2004

NEW YORK : New York crude oil smashed past 48 dollars a barrel for the first time, menacing the 50-dollar mark, as heavy fighting gripped the Iraqi city of Najaf.

New York's benchmark light sweet crude for delivery in September tore 1.43 dollars higher to an unprecedented settlement of 48.70 dollars a barrel.

In electronic trade shortly after the market closed, it spiked at an all-time high 48.82 dollars.

"There is a strong possibility we could see 50 (dollars a barrel) tomorrow," said Alaron Trading analyst Phil Flynn.

"The Iraq situation is taking a turn for the worse."

London's Brent North Sea crude contract for October delivery surged 1.30 dollars to a record close 44.33.

Intense shelling pounded the Old City of Najaf not far from the revered Imam Ali shrine where Shiite militiamen were locked in a stand-off with US-led Iraqi troops, an AFP correspondent said.

The thud of heavy artillery fire could be heard from the direction of the city's vast cemetery.

Earlier, Iraqi Prime Minister Iyad Allawi issued a "final call" for the militia to disarm and said he was still prepared to accept a personal document from Shiite Muslim militia leader Moqtada Sadr on a truce.

Oil traders sweated as an aide to Sadr told Al-Jazeera television that residents of southern Iraq had set oil pipelines on fire and threatened to torch oil wells across Iraq.

"Al Sadr's refusal to lay down arms and to get out of Najaf, as well as Shiite rebels breaking into the Southern Iraqi Oil Company and setting fire to its offices, raises concerns that the oil fields could be next," Flynn said.

"The insurgents are getting extremely bold."

Exports of crude from Iraq's southern oil terminals have been halved to around 40,000 barrels per hour because of threats to infrastructure from Shiite Muslim militia, according to Southern Oil Company officials.

Fadel Gheit, energy market analyst at Oppenheimer, said the market seemed to be driven by speculators.

"It is no longer on automatic pilot, it is out of control," he said.

"I think somebody -- maybe hedge funds or commodity traders -- is making a huge bet that they are going to bring it up to 50 and then they will cash out of their bets and then we will see prices coming down very sharply," Gheit said.

"I cannot think of any logical reason that would push oil prices today by a dollar plus, on the top of the 10 dollar increase in the last weeks. It is just impossible for anybody to comprehend."

Fears of a Venezuela recall referendum degenerating into an oil strike had proven unfounded, Gheit said.

Norway's oil industry had been on strike for six weeks now without any impact on output, he said.

And concerns over financially troubled Yukos, Russia's largest oil producer, had been "totally blown out of proportion" because even if it halted output other Russian firms could immediately replace its exports.

The Iraqi situation appeared to be mishandled by the United States, Gheit said.

"But the worst case scenario is for Iraq to stop production altogether. And I guarantee you, there (would still be) plenty of supply on the market," Gheit said.

Commodities and hedge funds were betting that US President George W. Bush would stick to his refusal to release oil from the emergency Strategic Petroleum Reserve, Gheit said.

"If he comes out and says: 'Enough is enough, I have changed my mind and I am going to release oil from the Strategic Petroleum Reserve,' I guarantee you oil prices will drop by more than 10 dollars in a few days," he said.

The Strategic Petroleum Reserve, an emergency supply stored in huge underground salt caverns along the coastline of the Gulf of Mexico, stands at 666.5 million barrel.

Bush has refused to tap the reserve for any event short of a major disruption to supplies. In November 2001, he ordered that it be filled to the maximum 700-million-barrel capacity.

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Oil prices climb on worries over Hurricane Ivan, US inventories
Media Corp News-Asia – 10 September

LONDON : World crude prices rose, supported by concerns over Hurricane Ivan's potential impact on Gulf of Mexico oil operations and disappointing US inventory data.

The price of benchmark Brent North Sea crude oil for delivery in October climbed eight cents to 42.30 dollars per barrel in early trading in London on Friday.

Brent had soared by 1.83 dollars to close at 42.22 dollars on Thursday.

New York's reference contract, light sweet crude for October delivery, won 20 cents to 44.81 dollars per barrel in pre-opening electronic deals, having risen 1.84 dollars the previous day.

"We are still pretty strong," GNI-Man Financial trader Lee Elliott said.

"It's holding up pretty much on the back of last night. There was good fund buying at the end of last night keeping prices strong with Hurricane Ivan helping to push the market higher," he said.

Hurricane Ivan hurtled toward Jamaica Friday after devastating the Caribbean island of Grenada, where up to 24 people died, and killing nine others in Venezuela, the Dominican Republic and Tobago.

The storm packed winds of up to 230 kilometers (145 miles) per hour as it headed for Jamaica where the authorities ordered the population to take emergency precautions before a predicted impact on Friday.

The hurricane meanwhile appeared likely to move into the Gulf of Mexico, the site of considerable oil production.

"Eyes remain on Hurricane Ivan, which is headed for Jamaica and could hit the oil-producing areas of the Gulf of Mexico by early next week," analysts at the Sucden brokerage firm said.

"The storm has shut some oil production off Trinidad and halted Venezuelan shipments from the eastern ports," they added.

Traders' concern over possible disruption to production in the Gulf of Mexico along with weak inventory reports for the United States ahead of the winter heating season sent prices soaring by almost two dollars on Thursday.

The US Energy Department said distillate inventories, which include heating oils, rose by a modest 200,000 barrels to 126.6 million in the week to September 3, well below analysts' forecasts for a rise of 1.25 million barrels.

"US oil demand remains extremely strong. Heating oil inventories are still not building fast enough, and that feature is likely to become an increasing focus for the market," analysts at Barclays Capital said in a note to clients.

Traders were meanwhile looking ahead to next week's meeting of the Organization of Petroleum Exporting Countries to discuss output policy.

But with prices high and OPEC kingpin Saudi Arabia "pumping at full capacity", Lee said he did not expect much to come out of the meeting in Vienna on Wednesday.

- AFP

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Spiking oil prices threaten U.S. economy

By MICHAEL E. KANELL -The Atlanta Journal-Constitution – 19 Aug 2004

Fear drove oil prices to a record high Thursday, sparking concern that a wobbly U.S. economy might once again be thrown into recession by high energy costs.

Oil ended the day at $48.70 a barrel, jumping $1.42, after renewed violence in Iraq, including an attack on oil industry headquarters there.

Although oil prices were higher in the early 1980s when inflation is factored in, the recent run-up puts prices more than 90 percent higher than they were before the U.S. invasion of Iraq and 60 percent higher than their average since 2000.

That effect is similar to the price spikes that pushed the economy into recession at least three times before.

Anything over $40 a barrel is damaging, but a "true shock" comes at $50 a barrel, said Stephen Roach, chief economist at Morgan Stanley, in an online posting Thursday.

"World oil markets are now too close for comfort to that critical price point," he wrote. "The oil price is firmly in the danger zone."

A weak economy can be hurled into recession by high prices, he said.

"Most of the oil shocks of the past fall into [that] category — hitting economies when they are vulnerable," wrote Roach. "Unfortunately, the Oil Shock of 2004 fits that script to a T."

After a brief recession in 2001, the U.S recovery has been the "most anemic on record," Roach said.

A burst of growth a year ago was fueled by tax rebates, a home refinancing boom and federal spending — and all have since faded. Even so, to pitch the economy into recession, prices must stay high for more than three months, he said.

It also should be noted that the American economy is much more efficient than at the time of the first energy crisis three decades ago — 46 percent less oil is used to produce every $1 of output, Morgan Stanley estimates. Moreover, a strong economy could chug on through a price boost, its speed dampened only slightly.

Some experts say prices should ease. But declines were predicted before as prices climbed through the $30s and then past $40 a barrel. Now, virtually no one expects them to drop dramatically — even though inventories of oil are plentiful enough now to justify a price of $32 a barrel, said energy economist James Williams of Arkansas-based WTRG Economics.

But on the supply side, the news has mostly been good.

A controversial referendum in Venezuela went off peacefully, the Russian dispute with oil giant Yukos has not disrupted deliveries, and Iraqi production has continued — albeit at lower levels.

Meanwhile, the world's largest producer, Saudi Arabia, has boosted pumping. That move alone in the past nearly always sent prices tumbling. Not this time. Oil traders continue to fret: Will there be an oil strike in Nigeria? Will al-Qaida succeed in hitting oil pipelines? Will Iraq be stabilized?

Fear of disruption now accounts for an unprecedented "risk premium," Williams said.

American drivers were hit hard in the spring when oil prices rose, then saw gasoline prices slide. Because refineries were no longer making a transition to summer blends, drivers have been sheltered.

That is over, Williams said.

"If the price stays at $48, you may see no more than another nickel [per gallon]. But if it goes higher than that, it will flow right through to the price you pay at the pump."

As a rule of thumb, every $1 change in the price of oil will shift the price for gas 2.4 cents per gallon.

Higher prices are like sudden tax boosts. For both consumers and firms, energy steals spending that would have gone elsewhere.

Even more damaging to the economy, much of the money flows overseas. However, economist Thorsten Fischer of Economy.com discounted the danger.

Absent a disastrous disruption of supplies, oil prices anywhere near $50 a barrel are "unsustainable," he said. Oil prices have become a "bubble" propelled by speculation, he said.

Fischer said prices will come down from current levels once the speculative bubble bursts. But the longer high prices persist, the more damage.

"The real issue is is not whether oil gets to $50 a barrel or not," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. "The issue is how long it stays there."

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'Oil Shock' Has Some Economists Worried

By Nell Henderson and Justin Blum

Washington Post Staff Writers
Friday, August 20, 2004

Crude oil prices soared yesterday to nearly $49 a barrel, heightening concerns that sustained high energy costs could drag the slowing U.S. and world economies into a more serious downturn.

With growth slowing in China, Europe and Japan, some economists worry that rapidly escalating oil prices will trigger a self-reinforcing spiral of falling demand in the U.S. economy and among its trading partners.

"The economy is near its tipping point," Stephen S. Roach, chief economist for Morgan Stanley, said yesterday. He said the nation would likely fall back into recession if oil prices hover near $50 a barrel for three to six months.

"This is an oil shock, absolutely," Roach said, noting that yesterday's closing price was 68 percent higher than the roughly $29 per barrel average that had prevailed since early 2000. "The oil price is high enough to make a real difference to a vulnerable U.S and global economy."

Roach and other economists also agree that oil prices could reverse and fall suddenly if the market psychology changes, which would give a boost to the U.S. economy, and in turn the rest of the world.

Oil prices have been climbing for months because of rising global demand and fears that supplies could be disrupted by terrorist acts in the Middle East and a legal dispute involving Russia's largest oil producer.

But the pace has quickened in recent weeks as events that would command little notice in a calmer environment fed expectations of rising prices. They were then fanned higher by feverish speculation among traders in the oil markets.

Benchmark U.S. crude oil for September delivery closed at $48.70 on the New York Mercantile Exchange yesterday -- a record since trading began in 1983 -- after surpassing $47 per barrel the day before and exceeding $46 per barrel for the first time on Friday.

"The speculators have totally, totally run away with this market," said Fadel Gheit, senior energy analyst with Oppenheimer & Co. "It is no longer driven by any resemblance to sanity or fundamentals."

The markets have pushed prices higher in reaction to any report of a threat to production. Yesterday, for instance, some traders became alarmed at news that rebels set the offices of an Iraqi oil company on fire. But prices have not retreated significantly in reaction to news that bodes well for production, such as the relative calm that has been maintained during Venezuela's recent presidential recall referendum.

Voters rank the economy among their top concerns, and the presidential campaign of Sen. John F. Kerry (D-Mass.) yesterday blamed record oil prices on President Bush's economic policies.

"The Bush administration seems confused about what records it should be setting during the Olympics," Phil Singer, a Kerry campaign spokesman, said in a statement. "You don't get gold medals for record oil prices, record deficits or record health care costs. This is what happens when you have a White House that lacks a viable strategy for the economy or reducing our dependence on Middle Eastern oil."

Treasury Secretary John W. Snow countered by calling on Congress to pass the president's energy bill to make the economy less dependent on foreign oil, according to the text of a speech he delivered to workers in Missouri.

"The price of oil is causing an economic headwind," Snow said. "The president's plan will lead to lower costs and that's very important for our economy."

Adjusting for inflation, the price of oil remains far below a 1981 peak, when the level was equivalent to more than $72 a barrel in today's dollars, said John C. Felmy, chief economist at the American Petroleum Institute, an industry group based in Washington.

But higher prices have rippled around the globe, as forecasters from Wall Street to Brussels to Seoul trim economic growth estimates.

"Europe is looking pretty fragile right now anyway, so this oil price shock comes at a bad time," said Jonathan Hoffman, chief European economist at Royal Bank of Scotland Financial Markets, according to an Associated Press report. "We are in a different world than what we used to be. . . . Who knows what al Qaeda is doing in Saudi Arabia?"

Meanwhile, higher prices sting U.S. consumers and businesses in a variety of ways.

Americans were paying an average $1.87 yesterday for a gallon of regular gasoline, 15 percent more than a year ago, according to the AAA auto club. Even with rising oil prices, U.S. gasoline prices have slipped from their highs this year in May because of ample supplies relative to domestic demand.

If the price of oil hits $50 a barrel, U.S. households will see their weekly costs rise by an average $14.80 per family, according to a recent study by the National Energy Assistance Directors' Association.

Higher diesel fuel prices raise truckers' costs to haul automobile parts, milk, furniture and other goods from one place to another. Trucking companies increasingly are passing those costs on to other companies.

Action Express Inc., a trucking company based in Milwaukee, is tacking a 7 percent surcharge onto its shipping bills, said Peter Gerasch, the firm's operations manager. On a typical haul between Milwaukee and Detroit to deliver auto parts, that means a surcharge of about $90 a load, he said.

"It makes it more expensive to run loads," Gerasch said. "Pretty much you pass it on, pass it on, pass it on."

Truckers have not been able to pass on all their higher costs, said Bob Costello, chief economist of the American Trucking Associations.

"It hurts," Costello said.

The money-losing airline industry is paying higher prices for jet fuels but is prevented by fierce competition from raising fares to compensate.

United Parcel Service Inc., the delivery company that operates a fleet of 88,000 vehicles and 270 aircraft, is paying more for both diesel and jet fuel.

The company adds a surcharge for express packages delivered by air, and it has been raising the surcharge steadily, said Susan Rosenberg, a company spokeswoman. It plans to lift it to 8.5 percent next month.

UPS has been working to hold down costs by buying fuel in bulk and dispatching its fleet more efficiently, she said.

Staff writer Jonathan Weisman contributed to this report.

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TERRORISM IN SAUDI ARABIA : Serious Repercussions On World Economy

By Sankar Sen
The author is a former Director, National Police Academy

The sharp rise in violent terrorist attacks on foreigners climaxed by the decapitation of American engineer Johnson marks a sinister phase in the upsurge of terrorism in the Saudi kingdom. US secretary of state Collin Powell has warned of a dangerous situation and said that the killing of foreigners was a direct attack on the Saudi regime. This is the first time the Bush administration has acknowledged publicly a dramatic upsurge in terrorist violence threatening the very survival of the Saudi regime.

On 29 May, the terrorists attacked a building in Saudi Arabia’s seaside resort Khobar and butchered foreign workers who even vaguely looked western. The official toll at Khobar was 22 killed and 25 injured and most of them were blue-collar non-Muslim Asian workers. A group calling itself “Quaida Organisation in the Arabian Peninsula” claimed responsibility. One of the attackers, perhaps their ringleader, was captured by the Saudi police and three others were allowed to escape in return for lives of a further 40 hostages.

BBC Cameraman
The terrorists followed up the Khobar attack by killing the BBC cameraman Simon Chambers who was filming a report on fear among the expatriates after the Khobar incident. They also critically injured his colleague Frank Gardener. Al-Quida terrorists again killed one American engineer and kidnapped another. The Al-Qaida issued a statement that it “reserved the right to deal with the Americans in the same way to avenge what the Americans did to our brothers in Abu Gharib prison and Guantanamo”.

It seems that Saudi kingdom is unable to halt the wave of violence. During 2003-04 there were 20 violent terrorist incidents in different parts of Saudi Arabia and this brings into focus the question of stability of the present regime in Saudi Arabia, which contains a quarter of world’s known oil reserve.
Terrorism in Saudi Arabia not only targets westerners who are viewed as the “enemy of Islam” but also aims at overthrow of the Saudi royal family who are looked upon as stooges of western imperialism. The terrorists enjoy a large measure of public support. Many impoverished Saudi young men are imbued with a spirit of revenge against infidels for atrocities perpetrated against the Muslims and the ruling establishment for its profligacy and unaccountability. Among many Saudis, bin Laden is becoming a popular romantic folk-hero. His message of xenophobic fundamentalism resonates well with the growing number of have-nots in Saudi Arabia who detest lack of accountability of many of the 7,000-odd Saudi princes. Though Saudi officials claim that the militants have no support, a recent government poll showed 49 per cent of the respondents support Osama bin Laden’s ideas.

The terrorist attacks have generated fear and panic among 8.8 million expatriates who constitute the backbone of the kingdom’s workforce. Some experts are leaving, despite good pay and perks. Many western firms in Saudi Arabia are taking security in their own hands. Private security firms have reported a sharp increase in the demand for armed guards. The BBC joined the media groups that hire armed guards to protect their correspondents in troubled areas. Many expatriates are of the view that authorities are not doing enough for their protection.

Direct election
The domestic scenario in Saudi Arabia is also not encouraging. King Fahd remains an invalid. The de facto ruler, Crown Prince Abdullah is trying not with great success to introduce reforms. He has ordered direct election for the local council and also given more influence to Mazlis-i-Sura, the closest thing Saudi Arabia has to a Parliament. But his reformist efforts are offset by the growing influence of the interior minister, Prince Nayef who is in favour of the status quo and wants to revive the harsh old regime. But for winning the battle against terror it is necessary to reform the outmoded institutions of the country and involve the people in decision-making processes.

Upheavals in Saudi Arabia will have serious and unforeseen repercussions on the world economy and may cause oil shocks. Today one quarter of world’s oil reserves lie in Saudi Arabia. Saudis not only export oil more than anyone else but also have oil reserves more than anyone else. But far more important is Saudi Arabia’s role as a swing producer. Unlike other oil producing countries Saudis keep several billion barrels per day of idle capacity on hand to meet emergencies. Saudi Arabia is the only OPEC country with considerable spare capacity available and this buffer capacity enables Saudi Arabia to moderate oil prices.

This they had done earlier during Iran-Iraq war when supplies from both the countries were disrupted and also during the First Gulf War. During the present oil crisis also, Saudi Arabia moved unilaterally when some of the OPEC ministers rebuffed the Saudi proposal to raise their output quota. However, Saudi Arabia no longer remains a very safe source of oil because its oil installations and pipelines are targeted by terrorists. The Saudi Arabian government has taken a number of preventive measures to fortify its oil installations and pipelines. They have made arrangements for high technology surveillance and aircraft patrolling for their important oil installations and facilities. But well-known security experts like James Woolsey (a former head of CIA) is of the view that a well coordinated attack by terrorists, some of whom may have infiltrated into the Saudi oil infrastructure, may cripple the system and substantially reduce the flow of oil. This will create a terrible oil shock with unforeseen consequences.

The recent spate of shooting of foreigners follows threats held out by Al-Qaeda to “cleanse Arabian peninsula of infidels”. It seems for the present there is a change of tactics of the terrorists. Instead of Saudi oil installations, Al-Qaeda is targeting foreigners particularly westerners. This change in Al-Qaeda tactics is due to various reasons. First, the expatriates are far more vulnerable. The oil field refinery and ports that comprise the Saudi energy industry are heavily guarded, while the compound where the expatriates live are not. Second, an attack on oil installations will provoke far stronger reactions from the authorities and the population.

Expatriates
A major attack would result in a state of emergency making movements of terrorists far more difficult. Third, attacking expatriates appear to be broadly popular with the Saudi population. There is little love lost between the expatriates and the government, which has never made great efforts to integrate the expatriates or to make them feel secure. Fourth, Al-Qaeda also intends to keep the Saudi oil infrastructure in place. Osama bin Laden has referred to Saudi oil as a “birthright of all Muslims and an instrument for resurrection of Islamic Caliphate”.

After the beheading of the American hostage Paul Johnson, Saudi security forces have shot dead the Al-Qaeda leader Abulahaziz-Al-Muqrin and three of his associates. Though Al-Qaeda has confirmed the killing of Al-Muqrin, it has voiced defiance. The terrorists feel that time is on their side and an increasingly unstable Saudi Arabia will remain fertile ground for recruitment of volunteers, collection of arms and preparation of full-scale uprising.

There is also fear among Saudi liberals that increase of jihadi violence will further strengthen the conservative forces in the country and the royal princes will block any further reform. Stifling conservatism will ultimately strengthen the hands of the terrorists.

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Oil Prices Could Get Even Worse

With surging demand and troubles from Russia to Iraq and Venezuela, we could see $50-plus prices. Hope for a mild winter
By Stanley Reed - 9 August 2004

When will the world get a break from oil prices that seemed unimaginable a few years ago? Not anytime soon, analysts believe. If anything, the upward march seems to be gaining momentum, with U.S. oil prices breaking through $44 a barrel on the New York Mercantile Exchange this week. Paul Horsnell, head of Energy Research at Barclays Capital in London, now says: "The question is not whether $50 [per barrel] will be breached," but whether there will be any pause before the half-century mark is topped.

While there are lots of conspiracy theories about $40-plus barrel prices, a look at the fundamentals goes a long way toward explaining the hike. Growth in demand this year has proved a lot stronger than anyone forecast. The International Energy Agency, the Paris-based consumer group, forecasts that demand will be increase by as much as 2.5 million barrels a day over last year -- about double the increase anticipated.

A WORLD OF WOE.  Indeed, the spurt in demand from China, the U.S., India, and elsewhere has caught just about everyone unawares. Governments, most notably the U.S., have done little to encourage conservation. The entire industry -- from OPEC to the international oil companies -- have failed to invest sufficiently in production capacity. Such investments will gradually increase, but it will be years before the effect is felt. As a result, spare production capacity is only about 1 million barrels per day, vs. 6 million barrels per day two years ago, Horsnell reckons. That razor-thin margin has the markets worried about the possibility of a severe crunch, especially when seasonal demand picks up. With the system already under strain, a cold winter in North America could have severe consequences.

There are also geopolitical situations weighing on the markets. Saudi Arabia, the world's most important oil exporter, is fighting Islamic insurgents who have targeted oil workers. Venezuela, another key producer, is seething with political unrest in the leadup to the Aug. 15 recall referendum on President Hugo Chavez. Russia, which not long ago was the best hope for stable new supplies, is now also a question mark thanks to the Kremlin's decision to go after Yukos, one of the country's two biggest oil producers. Iraq, another potentially promising source, has seen its oil infrastructure come under almost daily attack from insurgents.

If the spare capacity were greater, none of these situations would seem so threatening. But a repeat of last year's oil workers' strike in Venezuela, for instance, would be a disaster. Even a relatively routine occurrence -- a quickly extinguished fire that shut down a BP (BP ) refinery in Texas -- helped send prices up more than $1 a barrel on Aug. 6.

MORE RESERVES.  Another factor: Hedge funds have discovered the oil markets as a volatile asset class that isn't correlated with other securities markets. The presence of these financial investors may add to volatility and accelerate momentum in price runups (see BW Online, 8/6/04, "Hedge Funds Are Everyone's Problem").

Finally, it doesn't help that the Bush Administration lacks an energy policy worthy of the name. In fact, analysts question why the U.S. government will continue adding to the strategic petroleum reserve when the markets are so tight. The Interior Dept. announced on Aug. 6 that it will be adding 100,000 barrels a day for six months, starting Oct. 1.

What will it take to calm worries? A substantial buildup in inventories, which are now well below their 5-year averages. But with little sign of slowing demand, such a change doesn't look likely in the near term. Oil prices are notoriously volatile and unpredictable, but anyone betting on a quick return to cheap gasoline and other oil products is likely to be disappointed.

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China and Japan's oil rivalry unavoidable
Zhang Kexi  -13 July 2004
 

Rivalry for energy, especially oil, between China and Japan on a global scale is unavoidable.
 

China, as a emerging oil consumer, is dramatically changing world oil demand. Many countries, especially Japan, feel gravely uneasy about China's burgeoning demands for crude.
 

Due to historical reasons and geopolitical considerations, competition rather than co-operation is increasingly becoming a characteristic of their relationship.
 

From a Japanese perspective, the emergence of a strong and prosperous China is not a pleasant thought.
 

Although Japanese Prime Minister Junichiro Koizumi has repeatedly said that a strong China is an opportunity instead of a threat, many Japanese politicians still view China's development as a danger and the biggest obstacle to Japan's aspiration for regional dominance.
 

Therefore, joining the United States to contain China naturally becomes a critical component of Japan's national strategy.
 

In the eyes of Japanese, oil is a lethal weapon that can be used to contain China, especially when taking into account the fact that China is one of the largest consumers and is heavily dependent on other countries and regions for crude.
 

Japan's blueprint for future Sino-Japanese relations illustrates that the two will compete rather than co-operate when it comes to energy.

At the end of 2002, under the direct leadership of Koizumi, a special team on foreign relations - a Japanese think-tank - proposed the nation's basic diplomatic strategy for the 21st century.
 

In the proposal, the ascendancy of China, the United States becoming a superpower and the integration of European countries were considered as epoch-making events.
 

The draftees also pointed out that discord and co-operation coexisted in the relationship between China and Japan, and that economics was one of the areas where problems existed.
 

As Japan has highlighted, there are differences between the interests of the nations.
 

Therefore, China should be psychologically prepared to cope with tension while boosting economic links with Japan.
 

Perhaps the biggest reason why China and Japan are competing over energy is because these big consumers are heavily dependent on other countries and regions for oil.
 

Currently, China's ever-increasing demand for oil and the role of one of the largest oil importers contributes to Japanese concern for its own supplies of crude.
 

For resource-poor Japan, increasingly tight international energy markets coupled with soaring oil prices because of increased consumption is a nightmare.
 

China and Japan are not complementary in the field of energy, as they have to compete for it.
 

Therefore, at least on the issue of energy, the national interests of China clash with Japan's, so the latter looks at China as a competitor. Inevitably, Japan will compete with China for oil around the globe.
 

China's future is viewed differently in Japan - some say its economic growth will continue and other suggest a collapse is not far away.
 

To ensure its own economic security, Japan would rather co-operate with Europe and the US, which both have huge oil stocks, rather than partner with China over energy. That automatically pits Japan against China.
 

In addition, Japan has coveted oil and gas resources in the East China Sea for a long time.
 

To fight with China for the resources in the area, Japan has unilaterally demarcated a controversial exclusive economic zone along the median line. Japan holds that the line is the two countries' coastlines, but it is in fact on the continental shelf of the Chinese side.
 

Considering the critical importance of energy to Japan, it is very unlikely that its stance will be softened, especially in the East China Sea.
 

It is likely that China will forever encounter Japan's global energy rivalry, just as the ongoing pipeline route dispute between China and Japan shows.
 

When it comes to the issue of energy, Japan's media have shown a remarkable insight into the fierce competition for oil between the pair.
 

In the Asahi Shimbun on July 7, Funabashi Yoichi, a famed Japanese political analyst, said that by working closely with Russia and the Middle East to secure it crude supplies, China had adopted the opposite approach to Japan's passive energy development attitude.
 

An era of real oil rivalry between Japan and China is just around the corner, he said.

Oil's slippery slope
By Pepe Escobar --Aug 23, 2004, 17:49


BRUSSELS and DUBAI - As the neo-conservative dream of a "liberated" Iraq came true in April 2003, who would have predicted that 16 months later oil would become the ultimate time bomb for the Bush administration?

And the Saudi royal/oil family cavalry is not exactly coming to the rescue.

Many factors explain the current rise in the price of oil toward US$50 a barrel - and counting: incapacity - or unwillingness - of the Organization of Petroleum Exporting Countries (OPEC) to respond to growing global demand; maximum terrorist risk in Saudi Arabia; the Yukos saga in Russia; the recent referendum in Venezuela; ethnic trouble in Nigeria; China's unquenchable oil thirst; widespread speculation frenzy propelled by pension funds; and serial pipeline bombing in Iraq.

Average prices for last week stood at $47.02 a barrel in the United States, $44.44 a barrel for North Sea Brent and $41.64 a barrel for the OPEC basket - a more than 4% overall rise on the previous week. Crude futures for October were trading at $46.87 a barrel on Monday.

OPEC, in its latest report, insists the world economy is coping: "On current trends OPEC production will be more than adequate to meet demand in the remainder of 2004 and 2005." A survey by WSJ.com with 55 economists concluded that oil would have to top $60 a barrel to compromise the US economy seriously. But in the real world, the fact is that high oil prices are already set to shave as much as 1% off Asia's gross domestic product in 2004, according to the United Nations' Economic and Social Commission for Asia and the Pacific.

Cheap oil is the Holy Grail of the Bush administration's global strategy. According to the sanitized version of US Vice President Dick Cheney's secret energy report published in May 2001 - the work sessions and the people involved remain classified information - the US in 2020 will be importing 66% of its oil, against 55% in 2001. So, the report says, oil is "the priority of America's foreign and trade policy", and "Russia, Central Asia, the Caspian, the Gulf countries and Western Africa" need "special attention".

This, in the long term, represents one of the explanations for the invasion of Iraq. In the short term, the administration of President George W Bush is in for a lot of trouble when oil-guzzling SUV (sport-utility vehicle) armadas of voters start making the connection between the unmitigated disaster in Iraq and oil at $50 a barrel and beyond. Analysts in Dubai estimate that the Iraqi premium - fueling uncertainty and speculation - adds at least $10 to each barrel of oil.

Welcome to peak oil
According to HSBC, oil is now 136% - and counting - more expensive than before September 11, 2001. The United States - with 5% of the world's population - gobbles up no less than 26% of the world's oil production.

The world currently consumes 81.2 million barrels of oil a day (1 barrel = 159 liters), according to the International Energy Agency (IEA), the energy forum for 26 industrialized consumer nations. But the really alarming figure is 84 million barrels of oil a day: according to the IEA, this will be the global demand by 2005.

A few months ago, the same IEA was saying that demand in 2005 would be of only 82.6 million barrels a day. And more than a year ago, the IEA said we would reach 84 million barrels a day only by 2007 or 2008. This is leading analysts in Dubai to predict that demand - on a very optimistic scenario - will reach 120 million barrels a day in 2020. Additionally, this should mean that if demand continues to grow at the current frenetic level, all proven oil reserves in the world - at the best-estimate level - will be extinguished by 2054.

Way before that happens, of course, we will reach what experts define as "peak oil". The oil-supply bell curve inexorably will be going down - with no return in sight - while the price curve will be going up, toward $100 a barrel and beyond.

Colin Campbell makes no bones about it: for him, peak oil is already here, or around the corner in 2005. For years, Campbell - a PhD in geology at Oxford University in England and former chief executive for BP, Texaco, Amoco and Fina - has been a lonely voice contradicting the supremely powerful oil lobby, according to whom high technology and the invisible hand of the market must guarantee discovery and exploitation of reserves virtually forever.

Already in 2000, Campbell was charging that "oil giants are fooling the planet" and that everybody was myopic - especially producing countries. He was saying that "we only find a new barrel of oil for each four we produce". He is sure that the world has already consumed half of its proven oil reserves, and he is sure that the Middle East will again manipulate oil prices. It turns out that Campbell might have been wrong by a margin of only a few months: he was betting on a new oil shock by 2005, "when production will start to fall and reserves will begin to dwindle at a rate of 3% a year".

In Europe, experts from the IEA, echoed by diplomats, acknowledge that the market is tense and production facilities are extended to the limit, but they insist the current hysteria is a question of "irrational exuberance". One expert says that "there is plenty of oil in the market, and offer is superior to demand". The consensus is to blame traders and speculators who are pushing the price of the barrel higher and higher by brandishing the specter of scarcity.

But things are not so clear cut. Especially because of China, global demand this year will increase by a staggering 2.5 million barrels a day compared with 2003. In terms of offer, analysts in Dubai say that OPEC as of July had an excess production capacity of a maximum 1.2 million barrels a day. OPEC is currently producing 29.1 million barrels a day. This means non-OPEC members such as Russia or Norway must also increase their production to push prices down. But North Sea oilfields have already peaked; and Yukos in Russia, pumping 2% of the daily global demand for oil - 1.7 million barrels - even as it's about to go bankrupt, is also stretched to the limit.

The Chavez factor
They certainly prefer neo-liberalism to Hugo Chavez' "Bolivarian Revolution". But the 50 multinationals involved in the oil-and-gas business in Venezuela - including US majors ExxonMobil, ChevronTexaco and ConocoPhillips - as well as world markets, all badly wanted a Chavez victory in the latest referendum in that country. Chavez could not possibly beat the markets' bete noire: uncertainty. Venezuela is the fifth-largest oil exporter and eighth-largest oil producer, the only Latin American member of OPEC and the supplier of 15% of the United States' oil needs. Chavez played like a master his role of guaranteeing Venezuela's constitutional stability. And markets - when it suits them - do have memory: everybody remembered the December 2002-February 2003 general strike provoked by Chavez' opposition, which led to production falling to 150,000 barrels a day (against 2.5 million to 2.6 million nowadays) and exports to the US being interrupted for the first time in 80 years.

So Venezuela as part of the fear factor may be out of the equation - at least for now. As well as global oil majors and major oil producers, Venezuela is profiting handsomely from high oil prices: the country is scheduled to grow no less than 10% in 2004.

Saudi trouble
Ali al-Naimi, the Saudi energy minister, is the Alan Greenspan of black gold. In early July, Naimi said on the record that oil at about $35 a barrel was a "fair" price. That was the formal burial of the old OPEC selling price range of $22-$28 a barrel. This extremely important statement in fact meant two things. The first is that there will be no October surprise - or the Saudis coming to President George Bush's rescue. The second is that Saudi Arabia is not able to increase oil production (although they have promised an increase to almost 10 million barrels a day in September: not many in the industry are counting on it). The whole thing leads us back - once again - to peak oil.

When oil reached $45 a barrel, Naimi said again on the record that Saudi Arabia would be ready "immediately" to increase its production by 1.3 million barrels a day. Once again, not many in the industry took him seriously.

Besides, there's the all-important bickering over Saudi oil reserves. According to Saudi Aramco, the kingdom's proven reserves are estimated at 257.5 billion barrels. But analysts in Dubai prefer to cling to Aramco's former executive vice president Sadad al-Hussayni who, in articles appearing in the Oil & Gas Journal, insists proven reserves amount to only 130 billion barrels.

In Dubai, it is estimated that the recent al-Qaeda activities inside Saudi Arabia - via attacks on expats working in the oil business - have increased the geopolitical risk of a barrel of oil by something from $8-$12. Analysts comment that crucial Saudi installations such as Ras Tanura and Abqaiq - the world's largest oil-processing complex - can be extremely vulnerable to an al-Qaeda attack. The ultimate nightmare scenario doing the rounds in the oil business is of Osama bin Laden as a new caliph in a non-Saudi Arabia - before the Americans decide to invade and take over the oilfields. "Five hundred dollars for a barrel of oil, anyone?" scoffs a Dubai analyst.

Investing in Iraq, anyone?
It's fascinating to compare the current situation with the situation in the Middle East prior to the invasion of Iraq.

Back in February 2003, people in Dubai were saying an oil shock was inevitable: the price of a barrel would climb to as much as $50, and in the event of a civil war in Iraq, it would reach $100. They agreed that in the short term this would be a windfall for the Saudis, the Kuwaitis and the United Arab Emirates. Dubai at the time was confident that Saudi Arabia, Kuwait and the UAE - with a combined spare capacity of an alleged 5 million barrels a day - would be able to cover Iraq's production and Venezuela's shortfall caused by the general strike.

Now there's not so much optimism as far as spare capacity is concerned - although oil experts in the Persian Gulf region keep saying that production costs in Iraq are a blessing: only $1.50 per barrel, compared to $2.50 for Saudi Arabia and $4 for the US or North Sea oil. Iraqi oil could be extracted for as little as 97 cents a barrel. But Iraqi equipment is more than 20 years old. Sanctions have devastated the economy and nothing has been upgraded. Water is getting into the pipelines. And 16 months after the Americans took over, the oil industry is still rusting.

Walid Khadduri, editor-in-chief of the Middle East Economic Survey (MEES), believes at least $3 billion is needed to raise Iraqi oil exports to the pre-sanctions level of 3.5 million barrels a day. In his view, this would take at least two or three years of investment after peace has been established - and Iraq is still at war. Others in Dubai believe it would take $10 billion and no less than six years to get to 5 million barrels a day. And to realize Iraq's potential fully, an investment of up to $50 billion in more than a decade will be necessary. This leads the MEES to conclude that Iraq's oil sector will not produce large returns in the next 10 years.

Ahmed el-Sayed el-Naggar, of the al-Ahram Center for Political and Strategic Studies in Cairo, remembers how "Iraq had always been among the hawks in OPEC. As a matter of historical record, Iraq has always presented an obstacle to the US's oil-market strategy. This explains why the US administration's behavior towards that country was so implacably vindictive, and why, in the process of occupying Iraq to drive oil prices down to the cheapest possible levels, it wanted to drive a lesson home to all nations opposed to the US and use the fate of Iraq as an example to intimidate all developing nations."

Whatever the spin from the White House and the Pentagon, the fact is one of the key objectives in the whole Iraqi adventure - completely in line with Dick Cheney's 2001 energy report - was to take over the world's second-largest oil reserves, extirpate Iraq from the much-hated OPEC and maybe kill the cartel for good. Last May in Houston, Asia Times Online confirmed that even the oil business didn't think this was a good idea.

The crumbling Iraq oil infrastructure - on the most optimistic of days - currently cannot produce more than 1.8 million barrels, and much less export it. The Iraqi resistance knows how formidable a weapon is the regular bombing of either the northern pipeline from Kirkuk to Ceyhan, Turkey, or the southern pipeline from Basra. Whenever there is a bombing - or an interruption in pumping because of workers condemning the offensive against Shi'ite cleric Muqtada al-Sadr in Najaf - production in Basra falls to less than 1 million barrels a day. It's always important to remember that even under United Nations sanctions, Iraq exported at least 2.5 million barrels a day.

Petro-dependency
Officially, not many in the oil business seem prepared to admit that the real big problem today is unprecedented demand by the US, China and India - which production simply cannot match. But if people in the oil business know that consumption is growing at its fastest in more than 20 years, they also know that OPEC - controlling about half of the world's oil export supply - is already pumping at the highest levels since 1979.

China - the second-largest oil consumer in the world, way behind the US - grew 9.7% in the first semester of 2004, and is importing 40% more oil this year than in 2003. Its own production grows very slowly: for example, as its consumption rises feverishly, the production of its main oilfield, Daqing, is declining, according to official Chinese data, by 7% a year (it may be more). Daqing used to be responsible for 50% of China's oil. This leaves China scrambling for all sorts of deals with Gulf countries, Central Asia (especially Kazakhstan), Russia and Africa. China's ultimate nightmare is its "petro-dependency". Energy-saving is now part of the official language, the nuclear program is back, and research for alternative forms of energy is definitely on.

China devoured 6 million bpd in 2003, of which it imported 2.6 million bpd. Oil imports in India, which consumed 2.4 million bpd last year, 1.6 million of which were imported, will increase 11% this year, the state-owned Indian Oil Corp reported.

Some diplomats in Brussels admit that the whole system may face a major structural problem. Huge oilfields are on their way down; there's been no major oil discovery for the past 18 months - despite huge technological progress; and producer countries are operating at their limits.

The key indication of a crisis has been the now famous line by Indonesian Oil Minister and current OPEC president Purnomo Yusgiantoro. "We cannot increase the supply." And this only a few weeks after OPEC guaranteed supply was not a problem. In June, Indonesia admitted it was in the unenviable position of being the first OPEC country to actually become a net importer of oil. Russia has already announced its production will fall in 2005.

In euros, please
From an American perspective, the need to control Iraq's oil is deeply intertwined with the defense of the dollar. The strength of the dollar is guaranteed above all by a secret agreement signed between the US and Saudi Arabia in the 1970s that all OPEC oil sales be denominated in dollars. Saddam Hussein started selling Iraqi oil in euros (and making a handsome profit) in November 2000 - and that's another crucial reason for the Iraqi invasion. Many OPEC countries, not to mention Russia (President Vladimir Putin already referred to it on the record), flirt with the idea of trading their oil in euros. (OPEC is made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.)

A recent analysis published by Goldmoney states that OPEC has already switched, in fact, to trading oil in euros - as oil-exporting countries fight to offset the weak dollar, "It seems clear that OPEC and the other oil exporters are already pricing crude oil in terms of euros, at least tacitly. Whether they start invoicing their crude oil sales in terms of euros remains to be seen."

So what is Cheney doing in the middle of this crisis? He's blaming the Democrats. The failure of Cheney's Russia strategy will be examined in a separate article. But as far as Iraq is concerned, the blowback is obvious. The neo-cons dreamed of exporting "democracy". Instead, they imported geopolitical instability - reflected in the rising price of oil. The Bush administration has not been rewarded with cheap oil: it is now facing a new, slow, mutating oil shock.

The oil business knows that with its oil infrastructure repaired, Iraq could rival or might even surpass Saudi Arabia as the world's largest oil producer. But the neo-con dream of a US military protectorate with US oil companies running the oil business is a more distant prospect by the day. There's no credible evidence that Iraq may become, sooner or even later, a source of spare capacity to world oil production, or be able to stop the migration of OPEC and non-OPEC countries from the petro-dollar to the petro-euro.

Oil at $50 a barrel, and on its way to $60, is an absolute disaster for oil-importing countries (and this means most of the world). Business costs are automatically higher - leading in many cases to job cuts, which means higher unemployment. The days of cheap oil may be over - as most analysts agree. But beyond the current hysteria over oil at $50 and the failure of Cheney's US energy policy, the world seems to be failing to address at least four extremely important questions on which the common future depends: how much oil - proven reserves - is left in the Middle East? How much oil does Russia have? What is the real amount of proven reserves in the Caspian Sea? How long will all this oil last?

http://www.atimes.com/atimes/Global_Economy/FH24Dj01.html
 

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