06/03/2004, 00.00
OPEC - Beirut
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A world overly-dependent on petroleum

by Maurizio d'Orlando

The eyes of the world and particularly of Asia are on Beirut and on the meeting there of OPEC (Organization of Petroleum Exporting Countries), which is looking for ways of reducing the price of petroleum.  Over the past days, the price per barrel had reached 42 dollars, an all-time high that risks slowing down world economic recovery.  Already last night, with OPEC's promise to increase production, prices decreased.  An expert  petroleum  analyst evaluates the moves of the international community.

Milan (AsiaNews): The cost of crude oil has again reached records highs but will decrease since it is in the interests of all, except Al Qaeda and the odd stock gambler, that prices be curbed.  The problem of current high prices of crude oil, as AsiaNews has already pointed out, is due not so much to tensions in the Middle East and to the war in Iraq or the attacks in Saudi Arabia, but to the great increase in demand from China and Asia in general, a development that neither OPEC , the West nor the Chinese and Asians themselves had expected.

Saudi Arabia

To control prices, Saudi Arabia has already announced a unilateral production increase of 800,000 barrels per day (b/d) and, according to estimates, has brought output levels to a record 9 million b/d.  Along with the other Persian Gulf states, it has requested that all OPEC states increase extraction as much as possible.  Only Iran and Venezuela seem opposed to such a production increase.  Not many surprises are expected, in fact, from today's OPEC meeting: it is expected that member states of the organization will increase production by about 2.5 million b/d, equivalent to about 140% of Iraq's current total production.  This represents a 10% increase from the usual limit, foreseen by OPEC accords, of 23.5 million b/d.  In all truth, OPEC states are already surpassing agreed limits by 2 million b/d.  The actual increase that should arise from the decision will therefore be only 500,000 b/d.  Other non-OPEC states, such as Russia and Mexico, have announced that they too will do whatever possible to make additional quantities of crude oil available, to cool down prices.  These production increases should, therefore, be sufficient for reducing the pressure of Asian demand on the market.

China has only a week's worth of supplies

The natural increase of Chinese demand can be estimated at figures between 750,000 and 1 million b/d, and the Chinese government, to avoid heating up its own energy supply costs, has introduced drastic administrative measures, among which partial restrictions to the release of importation licences.  Though effective, these provisions may prove to be a bit too abrupt.  Besides cuts to electrical supplies in most Chinese provinces, there are many indications that fuel availability has been reduced: for example, in some coastal provinces, fleets of fishing boats remain at port.  According to direct sources of AsiaNews, the level of Chinese petroleum supplies is less than the equivalent of a week's consumption.  Drastic administrative measures on the part of the Chinese will probably not fail, however, in capping petroleum purchase prices, as has already occurred with other raw materials.  For example, the international quotations for iron mineral, for which the Chinese government has suddenly blocked importation licences, have literally plummeted in a matter of weeks, if not days.

OPEC puts the breaks on alternative energy sources
Despite benefitting in the short term from high prices, petroleum producing countries themselves have, for two reasons, no interest in keeping quotations high over the middle and long term:

i)  First, high prices risk suffocating global economic recovery which, if strong in Asia, is having trouble getting off the ground in other areas such as Europe.  A result could be a decrease in global petroleum consumption and a subsequent price crash, which would be more damaging than the momentary benefits of initially increased income based on higher prices.  Above all, high prices would determine uncertainty with respect to further petroleum earnings.  Exporting countries, which generate much of their fiscal revenue from production taxes, are instead  interested in income stability, particularly for the purpose of being able to better plan public spending.  If in fact petroleum market prices vary from minute to minute, it is practically impossible for OPEC states to spread out or compress fiscal spending plans: cases in point might be long-term allocations for road construction or public service salaries.  ii) Secondly, petroleum exporting countries much try to avoid that excessively high prices of crude oil push consumers in the middle and long term to seek alternative energy supplies, in particular nuclear energy from conventional installations and hydro-electric energy.  Further on, with advancements in research and technology, the future holds the promise of abundant and extremely inexpensive energy from nuclear fusion.  On the basis of current technology, it is unlikely that sources of renewable energy, derived for example from the sun, wind, or ocean waves, will provide a significant contribution.  The fact is that petroleum is the most convenient source of energy simply because of its extremely low production costs.  The industrial cost of crude oil in the principal producing countries of the Middle East is, in fact, about one dollar per barrel; the rest, i.e. 37/38 dollars per barrel, almost 97.5% of price, consists, in a very large part, in concession fees and drilling taxes.  Petroleum companies earn a much smaller percentage which, however, given the volumes produced, usually guarantees enormous profits.

Consumer countries and petroleum taxes

Strangely enough, even the governments of consumer countries have found the way to finance budgets with petroleum by-products thanks to fuel taxes.  Depending on the country, 60/80% of the retail price of gasoline consists of consumption tax.  In short, a barrel of petroleum which costs one dollar to produce, costs from 100 to 190 dollars per barrel, taxes included, to the final consumer.  In short, a large part of the resources for public spending, in both producing and consumer countries, comes from petroleum.  As a result, everyone involved has an interest in keeping prices stable on competitive levels, including the petroleum companies who are obliged to make very long term investments.  If the production increase that OPEC decides on were not to be sufficient, Saudi Arabia will probably intervene again to increase exports.  World price levels depend in large part on its decisions, as it is practically the only country in the world that can significantly increase or decrease, almost at pleasure, the volume of output and exportation.  All other countries have instead various constraints, above all those of a technical/functional nature.  It can therefore be expected that, in the short run, petroleum prices will decrease.  On the condition, of course, that Al Qaeda terrorists fail in what is by now their obvious intention to block supplies from Persian Gulf sources and to consolidate the Shiite majorities living in the petroleum production areas of Iraq, Arabia and Iran around a program of Islamic intransigence against Western laicist    secularism.

In such a case, one could expect increases of 100/200% in petroleum prices with respect to the long-term equilibrium value that experts estimate at about 30 dollars per barrel.

 

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