Thursday, August 12, 2004

Another Coincidence?

The New York Times reported yesterday that global demand for oil is expected to be higher in 2004 and 2005 than initially forecast. The article cites several factors for the increased demand, including disruption of production in Iraq, the uncertainty surrounding Yukos - Russia's leading oil producer, and increased demand from emerging economies such as China and India.

The International Energy Agency now sees global oil demand at 82.2 million barrels a day in 2004 and 84 million barrels a day in 2005, up about 730,000 barrels a day from previous estimates. The agency's new figures recognize demand that had been previously underestimated, Klaus Rehaag, the author of the agency's monthly oil market report, said in a phone interview.

World oil demand will increase by 1.8 million barrels in 2005, after a record gain of 2.5 million barrels a day this year, the agency said.
This news only confirms fears that have arisen over the past decade as declining global oil supplies, and the lack of new oil field discoveries, has coincided with the exponentially increasing demands for oil from formerly third world economies that have been experiencing frenetic growth. This problem is not going to subside in the near future, but will likely get worse as China, India and other developing economies devour more oil as industries boom and populations, approaching a combined 3 billion, begin to acquire middle class goods and services, such as automobiles and air travel, that require large quantities of refined fuels. According to National Geographic:

"China is currently the world's second largest consumer, but still only consumes about one-third as much oil as the U.S.," said Jeffrey Logan, China program manager for the International Energy Agency.

Logan notes that "growth is increasing very rapidly," however, and said Chinese demand for oil grew more than 10 percent last year and is expected to be about 13 percent this year. "Car ownership and industrial production are the main drivers of this growth in oil demand," he said.
It is noteworthy that China, not exactly a country known for progressive environmental policy, has enacted strict mileage and emissions standards that go well beyond those in the United States. This is an effort to rein in the impending explosion in demand for oil related to burgeoning automobile use, as well as a measure to curb the release of harmful pollutants.

Although the article tried to sound an upbeat note by pointing out that there are prospects for increased production from Russia and Saudi Arabia, a closer examination of the situation vis a vis OPEC reveals a troubling picture in terms of oil output potential going forward.

OPEC, which produces a third of the world's oil, is close to full production capacity. The International Energy Agency found that "effective" spare capacity within OPEC was down to 500,000 barrels a day. The estimate excludes countries like Iraq, Venezuela, Nigeria and Indonesia, which can't boost their production because of disruptions, strikes or civil unrest. OPEC's total spare capacity stands at 1.2 million barrels a day, according to the agency.

"I basically don't think there is any spare capacity left," said Adam Sieminski, global oil strategist at Deutsche Bank in London. "If you have a hiccup anywhere in the world, you can have prices well above $50 or more."
While America is in the throes of a sluggish economy, and the deleterious effects of record oil prices are being felt even more acutely, an interesting turn of events is unfolding involving a familiar savior. Consistent with the claim made by Bob Woodward in his book Plan of Attack, Saudi Arabia appears intent on increasing oil production to help lower fuel prices. According to Woodward, the Saudi rulers, historically close to the Bush family, pledged to assist the re-election efforts of George W. Bush by giving the economy a jolt in the summer by ramping up oil production and driving down the cost of crude. Maybe its yet another instance of serendipity for Bush, but the Times article describes just that phenomenon.

In an effort to calm jumpy markets, Saudi Arabia, the world's largest oil exporter, said today that it held 1.3 million barrels of idle capacity that could be used to meet demand. Saudi Arabia currently produces 9.5 million barrels a day, according to the energy agency.

Ali al-Naimi, the Saudi oil minister, said the kingdom was trying to ensure stability in the oil market "and prevent oil prices from escalating in a way that may negatively affect the world economy or oil demand."

"For achieving this goal, the kingdom has increased its production during the last three months to meet the growing demand for Saudi oil," he said, in a statement distributed by the Saudi Press Agency. "This increase amounted to more than one million barrels per day, bringing to more than 9.3 million barrels daily the average production of the kingdom during the past three months.

"The Saudis are trying to calm the market now and said they're ready to provide the barrels needed," said Lawrence J. Goldstein, president of the New York-based Petroleum Industry Research Foundation. "That's a welcome comment."
Coming on the heels of the recent Pakistani apprehension of a high value al-Qaeda target and the release of such information during the Democratic National Convention, as predicted in an earlier National Review Article, this bailout by the Saudis, as foretold by Woodward, appears to be something more than mere coincidence. Due to circumstances beyond their control, the Saudis may not be able to significantly reduce prices enough to help Bush, but it does appear Prince Bandar (or Bandar Bush) is trying.

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