Middle East retains supremacy in global oil supplies

By Nicolas Sarkis, Le Monde diplomatique, June 2002

Alan Greenspan, chairman of the United States Federal Reserve Board, is applying pressure on Opec to prevent any increase in the price of oil at its June meeting. Russia has already decided to boost its own output levels, but the needed increase in global oil will mostly gush from the Middle East.

The global oil industry is in trouble again after the 11 September attacks, which severely affected the international economic and political scenes. With two-thirds of proven oil reserves and 44.5% of the world's oil exports, the countries of the Middle East are now at the top of the list in the war on terrorism. They are also the birthplace of Osama bin Laden's al-Qaida and most other Islamist movements. Iraq and Iran, together with North Korea, make up what Bush calls the axis of evil.

Saudi Arabia, the world's leading oil producer and exporter, is one of the United States' chief allies in the Middle East. It is currently walking a tightrope, given the demands and accusations it faces in connection with its support of Islamist movements. The same applies to Syria, Yemen, Lebanon's Hizbollah, the Palestinian Hamas and some Gulf emirates that are said to overlook charitable groups suspected of less-than-charitable activities. The latest carnage in the Palestinian territories, the widening Arab-Israeli conflict and the prospect of a US military intervention in Iraq all point to a potential conflagration that could topple more than one Arab regime. A mixture of oil and guns is volatile.

Until now the effects of 11 September on the oil market were limited to sudden price changes. Over the four-month period from August to December 2001 the Opec (Organisation of Petroleum Exporting Countries) basket price plunged by 28.3%, dropping from $24.46 to $17.53 a barrel (1). Several factors may be responsible: falling demand, fears of a worldwide recession and persistently high supply levels in both Opec and non-Opec countries (2).

Since January prices have risen sharply, with the Opec price at $24.48 per barrel in May, 39.6% more than in December. The turnaround reflects improvements in the US economy, dwindling oil reserves in the industrialised nations and speculation concerning US military intervention in Iraq. Over the next few months oil prices should continue to yo-yo, driven by fluctuating supply and demand, the prospect of shifting Opec output levels and the looming conflict between Washington and Baghdad. Still, it seems unlikely that oil prices will top $25 a barrel long term.

There is idle production capacity estimated at roughly 6.5m barrels per day (bpd)—Saudi Arabia accounts for more than half of this; the Opec nations would immediately increase their output if a military attack led Iraq to suspend its exports or if global demand otherwise began to outstrip supply. Even though the Opec nations' current economic difficulties mean that they would benefit from higher oil prices, they are striving to maintain prices in the $22-28 a barrel range. Some Arab regimes, notably in the Persian Gulf, have been alarmed by the recent Bush administration show of force. These governments are content to buy their security—and survival—by increasing their daily output by several hundred thousand barrels.

The long-term effects of 11 September on the oil industry could involve more than just sudden price changes. The fight against international terrorism has worried oil-importing countries about the security of oil supplies, and there are fresh doubts about the Middle East's supremacy in oil. The landscape has begun to shift: closer ties between the US and Russia, heightened interest in alternative oil-producing regions such as central Asia and west Africa. It is unlikely that such changes will be enough to really reduce global dependence on Middle Eastern oil or prevent new energy crises.

US sanctions may become harsher. Whether willingly or not, the industrialised nations have rallied to the US's call to fight terrorism, and any differences of opinion between the US and the European Union concerning secondary sanctions on Iran and Libya are now moot (3). It is doubtful that companies from Europe, Japan or elsewhere will continue to ignore US sanctions against third-party countries by entering into any new exploration and production agreements with Iran or Libya in the near future. The best-case scenario in Iraq would mean the US attaching even more stringent conditions to the oil for food programme as part of its smart sanctions. This would slow down oil-related investments in Iraq, Iran and Libya, which together account for almost a quarter of the world's oil reserves.

Oil-related investments in the Middle East are now inadequate, and the freeze on investments is prompting the multinationals to turn to west African countries like Angola, as well as Russia and the nations bordering the Caspian sea. In fact Kazakhstan's Kashagan oilfield is estimated to be double the size of the United Kingdom's North Sea reserves. The proven reserves of the countries on the Gulf of Guinea, including Nigeria, are estimated to be 39bn barrels (5.2% of the worldwide total). The central Asian countries only account for 1.6% of global reserves, as against the Middle East's 66%.

Middle East, nerve centre

Since 11 September there have been warmer US-Russian relations, together with a larger role for US businesses in development projects in the Russian oil and gas sectors. In the late 1980s Russia was the world's leading oil producer, with its output reaching 11.4m bpd in 1987-88 before falling off to 6.2m by 1996. Over the past five years the country's production has risen to 7.3m bpd, helped along by price increases in 1999-2000, the restructuring of the oil and gas sectors in 1992-93 and the devaluation of the rouble following Russia's financial crisis of August 1998. In the coming years Russia hopes to increase its own output and exports once again. Given its own oil reserves—roughly 48.6bn barrels or 4.6% of the worldwide total—this goal would seem within reach. But Russia's rising domestic consumption rates mean that its current share (6.3%) of the global export market will only rise to 7-8% by 2010.

Even if Africa, central Asia and Russia contribute significantly to global oil requirements, rising demand means that the Persian Gulf countries should retain their pre-eminent position. Every global energy forecast predicts that the Middle East will remain the oil industry's saving grace for many years. Thanks to the region's vast proven reserves, huge untapped deposits in Iraq and Iran and low operating costs, the Middle East should be able to handle much of the expected increase in worldwide consumption.

Last November the International Energy Agency (IEA) issued a report, World Energy Outlook, as a timely reminder of these realities. The IEA's most recent projections for global supply and demand over the next 20 years are in keeping with the previous year's: an average 1.9% annual increase in demand for oil, leading to a global demand of 95.8m bpd by 2010 and 114.7m bpd by 2020. Demand will increase by 20m bpd by 2010 and by more than 40m bpd by 2020. By 2010 additional capacity—the equivalent of doubling Saudi Arabia's present capacity - will be needed. By 2020 130% of Opec's current capacity will be required. For the moment no one is saying how - or if—such a massive undertaking could succeed.

Long-term demand is much easier to forecast than supply since it depends on more predictable factors like economic growth, population increases, price elasticity and extrapolations based on past patterns. Foreseeing the vagaries of supply is much harder since the dynamics involved are so daunting: investment-related uncertainties, political stability concerns in most of the oil-producing countries, sanctions on Iraq, Iran and Libya and the exporting nations' oil policies.

The IEA calculates that non-Opec supplies should remain stable at roughly 46-47m bpd until 2010 before dropping off. To meet demand Opec will have to increase its output to 44.1m barrels per day by 2010 and 61.8m by 2020, in effect doubling its production over a 20-year period. Five Opec nations in the Middle East—Saudi Arabia, the United Arab Emirates, Kuwait, Iran and Iraq—would have to boost their output from 1997's total of 19.5m bpd to 30.5m bpd in 2010 and 46.7m in 2020. These countries' contribution to global output should climb from 26% in 1997 to 32% in 2010 and 41% in 2020.

The oil-consuming countries' dependence on imported (primarily Middle Eastern) oil should thus continue to rise. Between 1997 and 2020 North America's reliance on foreign oil will jump from 44.6% to 58%; in Europe the corresponding rise will be from 52.5% to 79%, and from 88.8% to 92.4% in the Asia-Pacific region. Middle Eastern natural gas output should also experience phenomenal growth between 2000 and 2020, soaring from 223bn to 524bn cubic metres.

There are important questions concerning the massive investments needed to offset the oilfields' natural decline in productivity and develop new production capacity. According to some estimates, investments of at least $300bn will be required in the primary Middle Eastern countries and $1,000bn in the non-Opec nations over the 10-year period from 2001 to 2010. For now there are no indications of investments of that magnitude, especially given the uncertainty after 11 September.

These difficulties stem less from the policies adopted by the oil-exporting countries than from price levels and the international political climate. The Libyan revolution in 1969, Iran's Islamic revolution in 1979 and the war against Iraq in 1991 all serve to illustrate the fact that, regardless of which regime is in power, countries seek to increase their oil production and exports because they benefit from higher oil and gas revenues. But to boost output they must avoid sanctions, while providing the stability needed to attract foreign investment and maintaining oil prices at appropriate levels. Adjusted for inflation, an oil price of $25 a barrel today represents only $7.20 in 1973 dollars and is less than half the level it was in the early 1980s.

The real problem is not available resources but price levels and political stability in the Middle East. That region will remain the nerve centre of the world's oil industry for decades to come.

Notes

(1) The Opec basket price is the average of the following representative crude oils: Saharan Blend (Algeria), Arabian Light (Saudi Arabia), Minas (Indonesia), Bonny Light (Nigeria), Dubai (United Arab Emirates), Tia Juana Light (Venezuela) and Isthmus (Mexico).

(2) Opec, the Organisation of Petroleum Exporting Countries, has 11 member countries: Saudi Arabia, Iraq, Iran, Kuwait, Qatar, UAE, Algeria, Libya, Nigeria, Venezuela and Indonesia.

(3) These secondary sanctions are part of the US Iran-Libya Sanctions Act (Ilsa), which applies to companies that invest more than $40m in energy projects in Libya and Iran.