20 Mar 2009, ET Bureau
NEW DELHI: India’s inflation rate skidded to a record low of 0.44% in the first week of March, well on course for a widely expected move into Financial crisis negative territory, triggering hopes authorities would be forced to intervene with steps to shore up demand in the economy.
The inflation rate as measured by the wholesale price index fell from 2.43% in the preceding week, led by plunging food prices and cheaper fuels. Very soon, buyers in wholesale markets may be paying less for most items, except food, than what they paid last March.
Economists say there is a good chance prices may continue falling longer than expected unless the government moves quickly to rev up demand. They expect Reserve Bank of India (RBI) to infuse more liquidity to counter this trend, besides cutting policy rates further.
“The higher base effect along with low demand in the economy is expected to keep inflation in negative territory for five to six months. Inflation will turn negative starting from April and will remain so until the end of 2009... We expect the Reserve Bank to ease liquidity to support growth,” said economist Tushar Poddar at Goldman Sachs.
Given the inflation outlook and macro environment, Goldman Sachs expects a 150 basis point cut by June in the cash reserve ratio, the funds banks have to keep with the RBI. Analysts say further infusion of funds through increased lending by banks may keep the system flush with liquidity.
“We expect continued policy action, including unconventional measures, to stem the deceleration in growth,” Citi analyst Rohini Malkani said in a research note. But the government maintained that though prices may drop to below 2008 levels, demand continues to remain strong. “I do not see any signs of deflation as demand for certain core sectors like steel, cement and automobiles is picking up, along with rural demand,” said cabinet secretary KM Chandrasekhar, who is the government’s seniormost bureaucrat. “Only those sectors that are heavily dependent on overseas demand will take time to pick up,” he added.
When prices decline, consumers typically postpone purchases in anticipation of catching the bottom. This causes further shrinkage of demand. Even so, companies manufacturing household electronic items say they are not worried.
“We are observing a slight easing of consumer spending and with the inflation coming down, we expect a positive impact on consumer spending,” said R Zutshi, deputy managing director of Samsung India.
One reason why companies remain optimistic is that prices in the retail market continued to rise faster than before in the week ended March 7. Retail inflation, measured by various consumer price indices (CPI), is still high. CPI for industrial workers has moved to 10.45% in January, the highest in over a decade.
But even retail inflation may eventually cool, if food, especially fruits and vegetables, become substantially cheaper in the coming months. They are already less expensive compared to January. Annual food inflation index has dropped to 7.24% from a 10-year high of 11.64% in January.
Prices of manufactured products, with a 64% weight in the WPI, did not change over the week. Inflation in this category could fall further if demand for manufactured goods does not pick up. While auto, cement, steel and retail sales in February beat market expectations, sectors such as real estate, freight and port traffic continue to be a cause of concern for policymakers.
The International Monetary Fund said this week that India should rely more on monetary policy to support the economy because it has already exhausted options such as additional spending and tax sops.
Friday, March 20, 2009
Sunday, March 8, 2009
Obama vows to bring 'all pillars' in place to boost economy
New York (PTI): U.S. President Barack Obama has assured Americans that he will bring "all the pillars in place" this year for speedy economic recovery of the nation and asked people to allay their fears about future.
"I don't think that people should be fearful about our future. I don't think that people should suddenly mistrust all of our financial institutions," Mr. Obama said.
However, he could not assure Americans on whether economy will begin growing again this year and urge Americans not to "stuff their money in their mattresses".
In an interview published in the New York Times on Sunday, Mr. Obama indicated that the end was not in sight when it came to the economic crisis and suggested that he expected it could take another $750 billion to address the problem of weak and failing financial institutions beyond the $700 billion already approved.
As he pressed forward with ambitious plans at home to rewrite the tax code, expand health care and curb climate change, Mr. Obama dismissed criticism from conservatives that he was driving the country toward socialism, the paper said.
After the interview, Mr. Obama called reporters from the Oval office to assert his actions have been "entirely consistent with free-market principles" and pointed out that large-scale government intervention in markets and expansion of social welfare programmes began under President Bush.
"I wish I had the luxury of just dealing with a modest recession or dealing with health care or with energy or Iraq or Afghanistan," Mr. Obama said adding that "I don't have that luxury, and I don't think the American people do, either."
The budget plan he released last month included a placeholder estimate of $250 billion for additional bank bailouts an amount that represents the projected long-term cost to taxpayers of a $750 billion infusion into the financial sector. Mr. Obama indicated that those figures were what he was likely to seek from Congress. "We have no reason to revise that estimate."
Addressing the fear and uncertainty among Americans as job losses mount and stock markets sink, Mr. Obama urged Americans to "be prudent" in their personal financial decisions, but not to hunker down so much that it would further slow the recovery.
"What I don't think people should do is suddenly stuff money in their mattresses and pull back completely from spending," he said.
Still, the paper said, he avoided guessing when the situation might begin to turn around.
"Our belief and expectation is that we will get all the pillars in place for recovery this year. How long it will take before recovery actually translates into stronger job markets and so forth is going to depend on a whole range of factors," Mr. Obama said.
He added that "part of what you're seeing now is weaknesses in Europe that are actually greater than some weaknesses here, bouncing back and having an impact on our markets." Mr. Obama's uncertain forecast about when the economy will begin to rebound contrasted with the projections embedded in the budget he recently released, the paper noted.
That plan, the paper said, rested on the assumption that the economy would shrink by 1.2 per cent this year, a projection that many economists, including some in his administration, consider overly optimistic because it implies the economy would bounce back in the second half of this year.
"I don't think that people should be fearful about our future. I don't think that people should suddenly mistrust all of our financial institutions," Mr. Obama said.
However, he could not assure Americans on whether economy will begin growing again this year and urge Americans not to "stuff their money in their mattresses".
In an interview published in the New York Times on Sunday, Mr. Obama indicated that the end was not in sight when it came to the economic crisis and suggested that he expected it could take another $750 billion to address the problem of weak and failing financial institutions beyond the $700 billion already approved.
As he pressed forward with ambitious plans at home to rewrite the tax code, expand health care and curb climate change, Mr. Obama dismissed criticism from conservatives that he was driving the country toward socialism, the paper said.
After the interview, Mr. Obama called reporters from the Oval office to assert his actions have been "entirely consistent with free-market principles" and pointed out that large-scale government intervention in markets and expansion of social welfare programmes began under President Bush.
"I wish I had the luxury of just dealing with a modest recession or dealing with health care or with energy or Iraq or Afghanistan," Mr. Obama said adding that "I don't have that luxury, and I don't think the American people do, either."
The budget plan he released last month included a placeholder estimate of $250 billion for additional bank bailouts an amount that represents the projected long-term cost to taxpayers of a $750 billion infusion into the financial sector. Mr. Obama indicated that those figures were what he was likely to seek from Congress. "We have no reason to revise that estimate."
Addressing the fear and uncertainty among Americans as job losses mount and stock markets sink, Mr. Obama urged Americans to "be prudent" in their personal financial decisions, but not to hunker down so much that it would further slow the recovery.
"What I don't think people should do is suddenly stuff money in their mattresses and pull back completely from spending," he said.
Still, the paper said, he avoided guessing when the situation might begin to turn around.
"Our belief and expectation is that we will get all the pillars in place for recovery this year. How long it will take before recovery actually translates into stronger job markets and so forth is going to depend on a whole range of factors," Mr. Obama said.
He added that "part of what you're seeing now is weaknesses in Europe that are actually greater than some weaknesses here, bouncing back and having an impact on our markets." Mr. Obama's uncertain forecast about when the economy will begin to rebound contrasted with the projections embedded in the budget he recently released, the paper noted.
That plan, the paper said, rested on the assumption that the economy would shrink by 1.2 per cent this year, a projection that many economists, including some in his administration, consider overly optimistic because it implies the economy would bounce back in the second half of this year.
Monday, February 2, 2009
Chavez protests EU with oil threat -Oil Game plan -4
(CNN) -- Venezuelan President Hugo Chavez threatened not to sell oil to European Union countries that follow new rules on immigration, but oil analysts said the threat was largely symbolic since no European country buys oil from Venezuela.
Instead, Venezuela sends what crude it does export to Europe to its own refineries there.
"Our oil shouldn't go to those countries" that voted for the EU's new policy, approved on Wednesday of detaining and deporting illegal immigrants, Chavez said in a televised address from Caracas.
The legislation lays out re-entry bans and maximum 18-month detention periods but also includes legal safeguards.
The directive "will encourage the voluntary return of illegal immigrants but otherwise lay down minimum standards for their treatment," according to the EU in a news release.
Parliament adopted the measure by a vote of 369 to 197, with 106 abstentions.
Britain and Ireland have not adopted the policy
Instead, Venezuela sends what crude it does export to Europe to its own refineries there.
"Our oil shouldn't go to those countries" that voted for the EU's new policy, approved on Wednesday of detaining and deporting illegal immigrants, Chavez said in a televised address from Caracas.
The legislation lays out re-entry bans and maximum 18-month detention periods but also includes legal safeguards.
The directive "will encourage the voluntary return of illegal immigrants but otherwise lay down minimum standards for their treatment," according to the EU in a news release.
Parliament adopted the measure by a vote of 369 to 197, with 106 abstentions.
Britain and Ireland have not adopted the policy
Chavez makes US oil export threat -The Oil Game Plan --3
Chavez's speech talked about the need to defeat imperialism
Oil exports to the US could stop amid growing tensions between the two countries, Venezuelan President Hugo Chavez has said.
He described recent US government actions as "aggressive" in a speech at a youth festival in Caracas.
As a result, Venezuelan oil "instead of going to the United States, could go elsewhere," he said.
Venezuela exports about 1.3 million barrels a day to the US and is the world's fifth largest oil producer.
Tensions between the two countries have escalated since President Chavez accused the US Drug Enforcement Administration (DEA) of spying on his government.
Washington denies the charge and has accused Caracas of failing to co-operate in the fight against drug-trafficking.
On Friday the Venezuelan government withdrew diplomatic immunity from DEA agents working in the country in response to a US decision to revoke the visas of six Venezuelan officials based in Washington.
Venezuela is an important transport route for cocaine from neighbouring Colombia, which produces 80% of the world's supply.
Oil exports to the US could stop amid growing tensions between the two countries, Venezuelan President Hugo Chavez has said.
He described recent US government actions as "aggressive" in a speech at a youth festival in Caracas.
As a result, Venezuelan oil "instead of going to the United States, could go elsewhere," he said.
Venezuela exports about 1.3 million barrels a day to the US and is the world's fifth largest oil producer.
Tensions between the two countries have escalated since President Chavez accused the US Drug Enforcement Administration (DEA) of spying on his government.
Washington denies the charge and has accused Caracas of failing to co-operate in the fight against drug-trafficking.
On Friday the Venezuelan government withdrew diplomatic immunity from DEA agents working in the country in response to a US decision to revoke the visas of six Venezuelan officials based in Washington.
Venezuela is an important transport route for cocaine from neighbouring Colombia, which produces 80% of the world's supply.
Gulf oil earnings to touch record $562 bn in 2008 -The end Beneficiary of Game plan-2
Gulf oil earnings to touch record $562 bn in 2008
Aug 21st, 2008
Dubai, Aug 21 Oil producing nations in the Gulf will earn a record $562 billion by the end of this year, as oil prices are expected to remain above $100 a barrel, according to a new report.
The London-based Centre for Global Energy Studies (CGES), in its monthly oil report for August, has said the combined oil export earnings of the six Gulf Cooperation Council (GCC) countries will soar to their highest level of $562 billion this year even as they pumped at their highest level, the Emirates Business 24-7 newspaper reported.
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) comprise the GCC.
‘The UAE’s income will swell to an all-time high of $97 billion while that of Saudi Arabia will surge to $307 billion and that of Qatar and Kuwait will peak at $89 billion and $32 billion respectively,’ the newspaper, which received a copy of the report ahead of its publication, said.
The income, it added, is nearly $234 billion above their 2007 revenues of $328 billion and more than four times their earnings of $137 billion in 2003.
In 1998, the GCC’s combined revenues plummetted to one of their lowest levels of around $56 billion after oil prices collapsed below $10 a barrel and averaged $12 through the year.
‘The revenue forecasts for the Gulf states and other Opec (Organisation of Petroleum Exporting Countries) members are based on an average Opec basket price of around $110.8 this year compared with nearly $69 in 2007,’ said Leo Drollas, deputy manager of CGES, said in the report.
Giving a breakdown, he said Saudi Arabia’s earnings this year would be nearly 75 percent higher than in 2007 while those of the UAE would surge 67 percent.
Kuwait’s income would surge by around 71 percent and Qatar’s by 68 percent. The revenues of Oman and Bahrain - which are not Oec members - would be rise 70 percent and 33 percent, respectively.
According to the report, Opec’s total income would jump by around 53 percent to a record $1.014 trillion this year from $598 billion in 2007.
Drollas said the forecast was based on a $110.8 oil price and average crude production by the 13-nation Opec of around 32.6 million barrels per day (bpd) compared to 30.7 million bpd in 2007.
Though the figures did not include revenue projections for Oman and Bahrain, the Organisation of Arab Petroleum Exporting Countries (OAPEC) said the earnings of those two GCC members are also expected to climb to a record $29 billion and $8 billion respectively.
Iran will be the third-largest earner in 2008 after Saudi Arabia and the UAE, with a projected income of $92 billion, the CGES report said.
Among other Opec countries, Angola’s earnings are estimated at $76 billion, Iraq’s at $71 billion, Venezuela’s at $73 billion, Nigeria’s at $66 billion, Libya’s at $60 billion, Algeria’s at $47 billion and Ecuador’s at $76 billion.
Indonesia, however, would suffer from a deficit of $8 billion because of its surging oil imports compared with around $5 billion in 2007.
According to the report, the four GCC Opec members - UAE, Saudi Arabia, Kuwait and Qatar - would account for nearly 52 percent of the group’s total income in 2008 compared to 51 percent in 2007.
Aug 21st, 2008
Dubai, Aug 21 Oil producing nations in the Gulf will earn a record $562 billion by the end of this year, as oil prices are expected to remain above $100 a barrel, according to a new report.
The London-based Centre for Global Energy Studies (CGES), in its monthly oil report for August, has said the combined oil export earnings of the six Gulf Cooperation Council (GCC) countries will soar to their highest level of $562 billion this year even as they pumped at their highest level, the Emirates Business 24-7 newspaper reported.
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) comprise the GCC.
‘The UAE’s income will swell to an all-time high of $97 billion while that of Saudi Arabia will surge to $307 billion and that of Qatar and Kuwait will peak at $89 billion and $32 billion respectively,’ the newspaper, which received a copy of the report ahead of its publication, said.
The income, it added, is nearly $234 billion above their 2007 revenues of $328 billion and more than four times their earnings of $137 billion in 2003.
In 1998, the GCC’s combined revenues plummetted to one of their lowest levels of around $56 billion after oil prices collapsed below $10 a barrel and averaged $12 through the year.
‘The revenue forecasts for the Gulf states and other Opec (Organisation of Petroleum Exporting Countries) members are based on an average Opec basket price of around $110.8 this year compared with nearly $69 in 2007,’ said Leo Drollas, deputy manager of CGES, said in the report.
Giving a breakdown, he said Saudi Arabia’s earnings this year would be nearly 75 percent higher than in 2007 while those of the UAE would surge 67 percent.
Kuwait’s income would surge by around 71 percent and Qatar’s by 68 percent. The revenues of Oman and Bahrain - which are not Oec members - would be rise 70 percent and 33 percent, respectively.
According to the report, Opec’s total income would jump by around 53 percent to a record $1.014 trillion this year from $598 billion in 2007.
Drollas said the forecast was based on a $110.8 oil price and average crude production by the 13-nation Opec of around 32.6 million barrels per day (bpd) compared to 30.7 million bpd in 2007.
Though the figures did not include revenue projections for Oman and Bahrain, the Organisation of Arab Petroleum Exporting Countries (OAPEC) said the earnings of those two GCC members are also expected to climb to a record $29 billion and $8 billion respectively.
Iran will be the third-largest earner in 2008 after Saudi Arabia and the UAE, with a projected income of $92 billion, the CGES report said.
Among other Opec countries, Angola’s earnings are estimated at $76 billion, Iraq’s at $71 billion, Venezuela’s at $73 billion, Nigeria’s at $66 billion, Libya’s at $60 billion, Algeria’s at $47 billion and Ecuador’s at $76 billion.
Indonesia, however, would suffer from a deficit of $8 billion because of its surging oil imports compared with around $5 billion in 2007.
According to the report, the four GCC Opec members - UAE, Saudi Arabia, Kuwait and Qatar - would account for nearly 52 percent of the group’s total income in 2008 compared to 51 percent in 2007.
Iran says oil may hit $100/barrel on geopolitics -Game plan -1
Reuters Friday, 4 August 2006
Iran's Deputy Oil Minister Mohammad Hadi Nejad-Hosseinian said on Friday global crude oil prices could touch $100 a barrel on geopolitical tension and soaring winter demand.
"There is still a possibility of crude reaching $100 a barrel due to geopolitical problems worldwide and peaking of winter demand," the minister, in the Indian capital for two days of talks on a proposed $7 billion gas pipeline, said.
He did not see the possibility of Iran withdrawing crude supplies from global markets in the event of U.S. military action against Tehran over its controversial nuclear program.
Concerns over Iran persisted as its president, Mahmoud Ahmadinejad, insisted on the country's right to produce nuclear fuel, despite a United Nations resolution demanding that Tehran suspend its nuclear activities by Aug. 31
or face the threat of sanctions.
In the Middle East, the situation remains tense as hostilities between Israel and Hizbollah raged on despite efforts by the international community to agree on a ceasefire. Traders fear the conflict could spread to Middle East
oil producers.
Israeli warplanes pounded buildings in Beirut, which it said housed Hizbollah offices as both sides threatened to escalate the war. Hizbollah leader Sayyed Hassan Nasrallah threatened to hit Tel Aviv if Israel struck at central Beirut.
An Iranian official warned oil prices could hit $200 if international sanctions were imposed on his country in its nuclear dispute with the West, though analysts shrugged off the remark as saber-rattling.
Saudi Arabia, the world's biggest crude exporter, believes oil should not be used as a weapon even if the conflict between Israel and Hizbollah escalates, its foreign minister said this week.
Adding to worries over supplies, an Iraqi pipeline carrying crude from the country's northern oilfields to Turkey's Ceyhan port was bombed on Monday, pushing back the planned restart of exports along the route.
Iran's Deputy Oil Minister Mohammad Hadi Nejad-Hosseinian said on Friday global crude oil prices could touch $100 a barrel on geopolitical tension and soaring winter demand.
"There is still a possibility of crude reaching $100 a barrel due to geopolitical problems worldwide and peaking of winter demand," the minister, in the Indian capital for two days of talks on a proposed $7 billion gas pipeline, said.
He did not see the possibility of Iran withdrawing crude supplies from global markets in the event of U.S. military action against Tehran over its controversial nuclear program.
Concerns over Iran persisted as its president, Mahmoud Ahmadinejad, insisted on the country's right to produce nuclear fuel, despite a United Nations resolution demanding that Tehran suspend its nuclear activities by Aug. 31
or face the threat of sanctions.
In the Middle East, the situation remains tense as hostilities between Israel and Hizbollah raged on despite efforts by the international community to agree on a ceasefire. Traders fear the conflict could spread to Middle East
oil producers.
Israeli warplanes pounded buildings in Beirut, which it said housed Hizbollah offices as both sides threatened to escalate the war. Hizbollah leader Sayyed Hassan Nasrallah threatened to hit Tel Aviv if Israel struck at central Beirut.
An Iranian official warned oil prices could hit $200 if international sanctions were imposed on his country in its nuclear dispute with the West, though analysts shrugged off the remark as saber-rattling.
Saudi Arabia, the world's biggest crude exporter, believes oil should not be used as a weapon even if the conflict between Israel and Hizbollah escalates, its foreign minister said this week.
Adding to worries over supplies, an Iraqi pipeline carrying crude from the country's northern oilfields to Turkey's Ceyhan port was bombed on Monday, pushing back the planned restart of exports along the route.
The Oil Play - Iran Russia-Veninsula -Black hands behind the Gloom
Turkey and Iran Potential Conflicts Mean Crude Oil on Course to Hit $100 per barrel
Tension in the Middle East has always been a favorite tactic for the “Axis of Oil” – Iran, Russia, and Venezuela, to keep the price of crude oil pegged at artificially high levels. Talk of war in the world's most unstable region can inflate a hefty “war premium” into each barrel of OPEC and Russian oil. In the Middle East, wars seem to break-out every few years, and lulls in the fighting are often just a timeout, in order to re-supply and prepare for the next round of combat.
Earlier this week, crude oil jumped $5.50 to as high as $89 /barrel in New York, and is commanding a “war premium” of roughly $10 /barrel. The price of West Texas Sweet is $10 /bl higher since Sept 12th, when the OPEC cartel agreed to boost its daily oil output by 500,000 to help meet winter demand. But the token increase in OPEC output has done little to hold down surging premiums for Mid-East oil.
Instead, with the Americans looking for a way out of the Iraqi quagmire, Arab oil kingdoms worry that if the US falters and Iraq degenerates into a failed state, it could spread instability and terror through the region. The ingredients are there for civil war on three levels, Arabs against Kurds, Shi'ites against Sunnis and everyone against the US, all battling for control of Iraq's 220 billion barrels of oil.
An accurate reading of the global supply and demand picture is certainly a big help in predicting global oil prices. But if one wants to point the “finger of blame” at the biggest culprit behind the historic rise in crude oil prices, it's no other than Federal Reserve chief Ben “B-52” Bernanke, whose decision to bail-out Wall Street brokers and banks this past summer, by slashing short-term interest rates, set in motion another US dollar devaluation, and sent global oil prices and gold sharply higher.
The Fed is the guardian of the world's top reserve currency, and has a responsibility to defend the purchasing power of the greenback, and keep global inflation in check. But when push comes to shove, Mr Bernanke has always voted to speed up the printing presses, to inflate the US economy out of a tough bind. Today, the US M3 money supply is 14.7% higher than a year ago, it's fastest in history, and up from 8% when Bernanke got his hands on the printing presses in March 2006.
Bernanke's money printing binges are supported by his cohorts at the Fed. On October 9th, St Louis Fed chief William Poole said, “I do not see any implication for inflation, at least with the magnitude of the US$ depreciation that we've seen so far. I did not see any evidence of a raft of dollar price increases for foreign goods. For manufactured goods, I think the pass through is very, very small,” he said.
On Sept 287th, Federal Reserve Governor Frederic Mishkin was trying to brainwash his audience at a globalization conference held in Washington DC. “Inflation has come down in the old-fashioned way. Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations,” Mishkin declared. On Sept 11th, Mishkin said, “Gold was not a particularly useful indicator of inflation."
When answering an audience question about inflation after a speech before the New York Economic Club on Oct 15th, “B-52” Ben did admit, “One cannot deny that when the dollar depreciates there is some inflationary impact.” However, to alleviate any fears that the Fed might combat inflation with higher interest rates, Bernanke added, that “expectations for slower growth may moderate price increases." Yet history might judge Mr Bernanke harshly, for guiding the US economy into the "Stagflation" trap.
Whenever the stock market has a bad day, reporters from the mainstream media try to find plausible explanation, for why the market turned south. This week, the surge in crude oil prices above $85 per barrel was widely blamed for the market's sudden tremors. Yet since the first quarter of 2003, the Dow Jones Industrials and crude oil have thrived together in peaceful harmony, both climbing in unison to all-time highs. So why blame the stock market's downturn on an “oil shock” this week?
At what point, would sharply higher oil prices begin to rattle the global stock market? (This topic will be covered in an audio broadcast on October 17th, for paid subscribers to Global Money Trends). And how would Ben “B-52” Bernanke, react in a “Twilight Zone” episode in which crude oil jumps to $100 per barrel? Nobody knows for sure, but on October 21, 2004, Mr Bernanke responded to such as question, “I would argue that the Fed's response to the inflationary effects of an increase in oil prices should depend to some extent on the economy's starting point.”
“If inflation has recently been on the low side of the desirable range, and the available evidence suggests that inflation expectations are likewise low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices. In this case, monetary policy need not tighten and could conceivably ease in the wake of an oil-price shock,” Bernanke said. So don't be surprised if “B-52” Ben argues that a weak US economy and doctored inflation statistics, justify a further easing in Fed policy, pouring more gasoline on the flames of inflation, in the event of a surge in crude oil prices to $100 per barrel.
Turkish Saber Rattling lifts Crude Oil
Earlier this week, Turkish PM Recep Erdogan asked his parliament to approve plans for an invasion into northern Iraq to attack Kurdish militants, defying a US demand for restraint. Turkey built up its military forces on Iraq's border, a move meant to pressure Baghdad to rein in the rebels of the Kurdistan Workers' Party, who are launching raids into southeast Turkey from hideouts in Iraq. Turkey must also deal with its own rebellious Kurdish minority, which makes up 20% of its population.
But Ankara also has its eyes on a bigger prize, the oil fields of Kirkuk that contain 40% of Iraq's proven oil reserves. Ankara still holds its claim to Kirkuk, which was taken from Turkey as a result of the 1923 Lausanne Treaty. Turkish nationalists still regard it as historically part of Turkey. Ankara also asserts guardianship over the Turkmen ethnic minority in northern Iraq.
Ankara fears that Baghdad will allow the Kurds to make Kirkuk part of their autonomous zone. For Ankara, this would be excessive Kurdish autonomy, its red line in Iraq, and it might resort to military intervention to prevent the emergence of an oil-rich Kurdish political entity on its southern border.
Erdogan said his country will not be deterred by the diplomatic consequences if it decides to stage a cross-border offensive against Kurdish rebels. “If such an option is chosen, whatever its price, it will be paid. There could be pros and cons of such a decision, but what is important is our country's interests.” With regards to whether or not a Turkish invasion of Iraq could destroy the relationship with the US Erdogan said, “Let it snap from wherever it gets thin.”
Republicans call for Military Strike against Iran,
A possible Turkish invasion into northern Iraq is only a small sideshow compared to the heated rhetoric that's building up on the Republican campaign trail. On October 16th, Republican candidates Rudy Giuliani and John McCain said they would use military force against Iran to prevent it from getting nuclear weapons. Giuliani said Iran is a state sponsor of terrorism that is seeking nuclear weapons, and needs to understand how the US would respond.
“Anybody who wants to be president of the United States would say a prayer at the beginning that you would never have to use American military power. But as president, you can't hesitate to do that, if it's in the best interest of the US. You have to stand up to dictators and tyrants and terrorists. Weakness invites attack. Strength keeps you safe,” Guilianni declared.
On Iran specifically, he said, “We've seen what Iran will do with ordinary weapons. If I'm president, I guarantee you we will never find out what they would do with nuclear weapons because they're not going to get them.” McCain agreed, “At the end of the day, we cannot allow the Iranians to acquire nuclear weapons.”
On July 4th, Republican presidential candidate Mitt Romney said he would use military force against Iran if attempts to isolate and pressure its current regime fail. “I'm not going to shrink away from Iranian President Ahmadinejad,” Romney said. “Ahmadinejad is a dangerous man and a threat to US interests.” On Oct 16th, Romney added, “It's time to take Ahmadinejad at his genocidal word.”
On June 12th, the UN atomic agency said Iran could have 8,000 centrifuges enriching uranium by December, a significant rise in nuclear capability likely to fuel fears that Tehran seeks nuclear weapons. “The concern is that they will have a sensitive number of centrifuges without having resolved the question marks surrounding the history of Iran's program. It becomes a greater proliferation concern,” IAEA chief Mohamed El-Baradei told political leaders in private conversations.
Then on October 15th, US Defense Secretary Robert Gates called Iran “an ambitious and fanatical theocracy. With a government of that nature, only a united front of nations will be able to exert enough pressure to make Iran abandon its nuclear aspirations. Our allies must work together on robust, far-reaching and strongly enforced economic sanctions. We must exert pressure in the diplomatic and political arenas as well,” he said. “And, as President Bush has said, with this regime we must also keep all options on the table,” he said, in a veiled reference to possible military action.
Gates said Iran seems increasingly willing to act contrary to its own interests. “We should have no illusions about the nature of this regime or its leaders - about their designs for their nuclear program, their willingness to live up to their rhetoric, their intentions for Iraq, or their ambitions in the Gulf region.” Among the US objectives in the Middle East, Gates listed an “Iran that does not build nuclear weapons or holds Israel hostage with the threat of attack.
Gates will meet with Israel's new defense minister, Ehud Barak, in Washington on October 16th, to discuss the joint anti-missile Arrow-2 project, designed to intercept missiles that could deployed by Iran and Syria. Israel's satellite, the Ofek-7, flies over Iran, Iraq, and Syria once every 90 minutes.
Last month, Barak, Israel's most decorated soldier and legendary former commander of the Sayeret Matkal, directed an attack on a secret military compound near Dayr az-Zawr in northern Syria, inhabited by North Korean nuclear technicians. Today, the site lies in ruins after it was pounded by Israeli F15I's, reminiscent of the attack on Iraq's Osirak in 1980. The UK's Sunday Times said preparations for the attack began in May, when Meir Dagan, the head of Mossad, presented PM Olmert with evidence that Syria was seeking to buy a nuclear device from North Korea. Dagan feared such a device could later be mounted on North-Korean-made Scud-C missiles. Sergei Kirpichenko, the Russian ambassador to Syria, warned President Bashar al-Assad last month that Israel was planning an attack, but suggested the target was the Golan Heights.
Equally important, the Pantsyr-S1E missiles, purchased by Syria from Russia, failed to down the Israeli jets that penetrated northern Syrian airspace from the Mediterranean. The “absolute jamming immunity” which the Russian manufactures promised for the Pantsyr missiles were immobilized by the superior electronic capabilities of the Israeli jets. Such valuable information on Russian missile consignments to Syria or Iran is vital to any US calculation of whether to attack Iran over its nuclear program. Iran is especially concerned over the failure of the Russian-made radar systems, and is slated to purchase more radar equipment in a future deal worth $750 million, the American weekly Aviation Week reported on October 4th.
Battle for the Strait of Hormuz,
On June 12th, Admiral Ali Shamkhani, a former Iranian defense minister, told the US Defense News weekly, in the event of an American attack on Iran's nuclear installations, “Ballistic missiles would be fired in masses against targets in Persian Gulf states and Israel. The objective would be to overwhelm US missile defense systems with hundreds of missiles fired simultaneously at specific targets.” He said Iran anticipates that US forces will strike without warning against its military's command-and-control network, and will order ballistic and cruise-missile battery crews to launch the plan within an hour after a US attack begins. In retaliation, “Iran will open a freeway for 40,000 suicide bombers from Afghanistan all the way to Lebanon, to strike in almost every country in the Middle East.
Most importantly, is the potential shutdown of oil supplies through the Strait of Hormuz, a strategically important stretch of water between the Gulf of Oman and the Persian Gulf. On average around 17-million barrels of oil is shipped thru the Straits of Hormuz each day, roughly 20% of the world's daily oil production.
The closing of the Straits for the passage of tankers will create a severe shortage that would send shock waves to the energy markets already beset by tight supplies and a limited spare capacity. It is anybody's guess as to how high the price of crude oil could go if Iranian threats were materialized. A surge above $100 per barrel could trigger a world economic recession of untold consequences.
Yet Tehran, with all of its threats and alleged ability to destroy anything that sails or floats in the Straits of Hormuz, might opt for a less risky retaliation, since the cessation of its crude oil exports and gasoline imports could bring down the Islamic regime. With unemployment rates as high as 20% any disruption in the levels of food and gasoline subsidies, from the drying up of oil revenues, could trigger a serious riot in the volatile Iranian street against the Mullahs in Tehran.
France hints at Military action against Iran,
One is not accustomed to hearing threats of war from the enlightened French government, but since Nicolas Sarkozy became the president of France and moved into the Elysee, France has changed course and is almost reflecting the same policies as the neo-cons of the United States. In his speech to the UN General Assembly on Sept 25th, Sarkozy said, “There will be no peace in the world if the international community falters in the face of nuclear arms proliferation.”
“If we allow Iran to acquire nuclear weapons, we would incur an unacceptable risk to stability in the region and in the world.” And in a broader warning against the dangers of appeasement, the new French leader said, “Weakness and renunciation do not lead to peace. They lead to war.” Sarkozy said that if the UN Security Council was unable to agree on further financial sanctions, the European Union should take its own measures to raise pressure on Iran.
In light of the Iranian nuclear crisis, French Foreign Minister Bernard Kouchner shocked the world on Sept 16th, “We have to prepare for the worst, and the worst, sir, is war,” he said in an interview on LCI television and RTL radio. Iran's state-run news agency IRNA angrily attacked the French government on Sept 18th, “The new occupants of the Elysee want to copy the White House,” it declared
Mr. Sarkozy went to Moscow on October 10th, urging tougher economic pressure on Tehran, but Russian kingpin Vladimir Putin quickly deflated the idea. “We don't have information showing that Iran is striving to produce nuclear weapons. That's why we're proceeding on the basis that Iran does not have such plans,” Putin said. The Kremlin is a member of the “Axis of Oil” and a staunch ally of Tehran, and is unlikely to agree to tougher economic sanctions on Iran.
In a visit to Tehran on October 16th, Putin declined to say when Russia will start delivering fuel to Iran's nuclear power plant in Bushehr. “At the moment Russia and Iran are discussing the issue of changing the contract. In general there is a common understanding of the problem. As soon as this is solved, supplies of nuclear fuel will start. Russia declares that it is committed to carrying out the contract,” Putin said
Oct 16th, Putin said Russia would not accept military action against Iran and he invited Iranian President Mahmoud Ahmadinejad to Moscow for talks. In comments aimed at the United States, Putin said, “We should not even think of using force in this region. We need to agree that using the territory of one Caspian Sea state in the event of aggression against another is impossible," he declared.
The Caspian nations of Iran, Azerbaijan, Kazakhstan, and Turkmenistan backed Putin's call, saying “under no circumstances will we allow the use of our territories by third countries to launch aggression or other military action against any of the member states.” According to the UK Telegraph's Sept 16th edition, Pentagon planners have developed a list of up to 2,000 bombing targets in Iran, anticipating that diplomatic efforts to slow Iran's nuclear weapons program are doomed to fail.
But the next day, US president Bush upped the ante, at a White House news conference, warning the world must do more to isolate the Islamic Republic. "We've got a leader in who has announced that he wants to destroy Israel," Bush said. "So I've told people that, if you're interested in avoiding World War III, it seems like you ought to be interested in preventing them from having the knowledge necessary to make a nuclear weapon. I'm looking forward to getting President Putin's read-out from the meeting, (in Iran). The thing I'm interested in is whether or not he continues to harbor the same concerns that I do. I look forward to having Vladimir Putin clarify his comments," Bush said
Senior American defense and intelligence officials told the Telegraph that Mr Bush's inner circle has decided not to leave office with Iran capable of developing a nuclear weapon. Yet should the Bush team decide to take military action against Iran's nuclear program, Venezuela's mercurial leader Hugo Chavez, has vowed to retaliate, by cutting-off two million bpd of oil exports to the US.
Chavez pushed two US oil giants, ConocoPhillips and ExxonMobil out of his country in June, as part of his socialist revolution, “This is the unity of the Persian Gulf and the Caribbean Sea,” he declared on a July 2nd visit to Tehran. Before heading to Iran, Chavez met Russian kingpin Vladimir Putin and called for a global revolution against Washington. He has also discussed possible purchases of submarines, surface to air missiles, and other weapons from Russia, arguing that these are needed to defend his oil-rich country against the United States. Last year, Russia sold 24 aircraft and 53 helicopters to Venezuela, worth $3 billion.
Tension in the Middle East boosts the Kremlin's Coffers
“A series of crises in oil supply is likely over the coming decades,” predicted Russian Industry and Energy Minister Victor Khristenko nearly two years ago, on October 24, 2005. “The first, related to the peak and decline of non-OPEC production, is practically upon us and underpins the currently high oil prices. The imminent inability of non-OPEC production to meet incremental demand and its decline after 2010 precipitates the second crisis as OPEC's diminishing spare capacity becomes less and less able to accommodate short-term fluctuations,” he said.
“The third crisis, due to OPEC's incremental supply being unable to meet incremental demand, follows in the first half of the next decade. This assumes that OPEC's reserves are as published. These crises will have global economic and geopolitical significance. The oil price will be high and volatile, and demand growth will have to be curtailed,” Mr Khristenko warned two years ago.
But alas, there are no central banks in the world that are willing to slow down their economies, to reduce the demand for crude oil. Just the opposite has transpired, with central banks in Australia, Brazil, China, the Euro zone, India, and the United States expanding their money supplies at double digit rates, and all aiming for maximum growth, through a game of competitive currency devaluations. The Bernanke Fed is the chief culprit behind the devaluation game.
Moscow is a big winner from tension in the Middle East, and a war between the US and Iran would only increase its clout on the world stage. Russia's foreign currency reserves have grown nearly 20-fold from four years ago to a record $415 billion, the third largest stash in the world, behind Japan and China. How Moscow decides to invest some of its stash in its new sovereign wealth fund, can have a big impact on global commodity and stock markets.
In keeping with world market trends, the Russian Finance Ministry lifted the tax of Russian oil exports by $26 to $250 per ton, which will bring even more money into the Kremlin's coffers. Russia's oil production has stagnated since growing 9% in 2004 and a record 11% in 2003, with growth of merely 2.7% last year, due to the higher tax burden, which is stifling investment in oil exploration and production.
Yesterday, the price of Russia's benchmark Urals crude oil rose to $81.25 per barrel, up from $25 per barrel just four years ago, helping to lift Russian exports to a record high of $31 billion in August. From January to August, Russia exported 160 million tons of oil, up 5% from a year ago. In cash terms, oil exports rose by 5.3% during the first eight months of this year to $69.7 billion. Exports to non-CIS countries amounted to 148 million tons worth $65.4 billion.
It's no wonder that Putin wants to stymie any UN initiative that can halt Iran's nuclear drive by non-military means. The current balance of tension and terror in the Middle East is bloating Kremlin's treasure chest. But if Mr Khristenko's outlook for peak oil after 2010 is correct, the Kremlin will see its clout and wealth multiply exponentially in the years ahead, with or without a war in the Middle East.
China deepens Ties with Tehran
Beijing is trying to strengthen its ties with Iran, its major supplier of crude oil and natural gas, required for its development and modernization. China imports 50% of its oil demand, and wants to reinforce its relations with Iran and reach the energy resources of the Caspian Sea to lessen its dependence on maritime oil imports from the Arab oil kingdoms of the Persian Gulf, securing an uninterrupted flow of oil.
Iranian crude oil-and gas reserves are largely untapped because of the threat of US sanctions on companies doing business with the Mullahs, leaving a large part of its petroleum fields unexplored. Since Tehran does not have adequate technology to increase its refined-oil production. China can assist Iran modernize its petroleum industry with technology, capital, engineering services and nuclear technology.
Beijing sees Tehran as a geopolitical ally to combat US influence in the Middle East, and wants to avoid United Nations sanctions against Iran. China buys 15% of its oil demand from Iran, and pays for its imports in Euros. Chinese crude oil imports hits a record high of 14.8 million tons in July, and in the first half of this year rose 11.2% from the same year-ago period to 81.54 million tons.
China's biggest oil producer, PetroChina, PTR.N, 0857.hk, would like to develop Iran's oil and natural gas fields. PTR.N's market value has soared to $460 billion, the second highest in the world, behind Exxon Mobil's $518 billion value. PetroChina is expected to announce big oil and natural gas discoveries in the northern Liaohe and Dagang areas, PTR.N Chairman Jiang Jiemin said on October 15th. The offshore finds will add to reserves from the Jidong Nanpu field, China's largest oil find in 50-years.
OPEC can't Stop Oil Spike
OPEC says there is no fundamental justification for a price run-up that has lifted oil from below $70 in mid-August. “OPEC cannot do much now,” said Libya's hawkish oil chief Shokri Ghanem on October 16th. “OPEC did all that it can. It is not because of a lack of crude oil. There is all the uncertainty in Iraq and the Gulf area,” he said. Indonesia's oil chief Maizar Rahman added, “The market fundamentals are in balance. There is too much speculative money coming into the market.”
“OPEC is carefully watching developments in the oil market and has observed with concern the recent escalation in oil prices. The rising oil prices which we are currently witnessing are, however, largely being driven by market speculators. Persistent refinery bottlenecks and seasonal maintenance work, ongoing geopolitical problems in the Middle East and fluctuations in the US dollar, also continue to play a role in pushing oil prices higher. Additional political tensions, seen during recent days, are also pressurizing oil prices upwards,” the cartel said on October 16th.
OPEC is reluctant to boost oil output beyond the scheduled 500,000 bpd increase in November, realizing that the Federal Reserve and other central banks are simply printing large amounts of monopoly money to pay for higher crude oil imports. To compensate for the fiat currency devaluations, OPEC seeks a higher oil price, and is expected to keep a tight rein on oil supply.
At some point, it would become necessary for the Bernanke Fed to reverse course, and start slowing down the money printing machine, if it wants to prevent an out-break of hyper-inflation. Yet one has to wonder if Mr Bernanke has the political license to tighten the money supply, when US Treasury chief Henry Paulson wants to keep the US stock market artificially high to offset weaker US home prices.
Tension in the Middle East has always been a favorite tactic for the “Axis of Oil” – Iran, Russia, and Venezuela, to keep the price of crude oil pegged at artificially high levels. Talk of war in the world's most unstable region can inflate a hefty “war premium” into each barrel of OPEC and Russian oil. In the Middle East, wars seem to break-out every few years, and lulls in the fighting are often just a timeout, in order to re-supply and prepare for the next round of combat.
Earlier this week, crude oil jumped $5.50 to as high as $89 /barrel in New York, and is commanding a “war premium” of roughly $10 /barrel. The price of West Texas Sweet is $10 /bl higher since Sept 12th, when the OPEC cartel agreed to boost its daily oil output by 500,000 to help meet winter demand. But the token increase in OPEC output has done little to hold down surging premiums for Mid-East oil.
Instead, with the Americans looking for a way out of the Iraqi quagmire, Arab oil kingdoms worry that if the US falters and Iraq degenerates into a failed state, it could spread instability and terror through the region. The ingredients are there for civil war on three levels, Arabs against Kurds, Shi'ites against Sunnis and everyone against the US, all battling for control of Iraq's 220 billion barrels of oil.
An accurate reading of the global supply and demand picture is certainly a big help in predicting global oil prices. But if one wants to point the “finger of blame” at the biggest culprit behind the historic rise in crude oil prices, it's no other than Federal Reserve chief Ben “B-52” Bernanke, whose decision to bail-out Wall Street brokers and banks this past summer, by slashing short-term interest rates, set in motion another US dollar devaluation, and sent global oil prices and gold sharply higher.
The Fed is the guardian of the world's top reserve currency, and has a responsibility to defend the purchasing power of the greenback, and keep global inflation in check. But when push comes to shove, Mr Bernanke has always voted to speed up the printing presses, to inflate the US economy out of a tough bind. Today, the US M3 money supply is 14.7% higher than a year ago, it's fastest in history, and up from 8% when Bernanke got his hands on the printing presses in March 2006.
Bernanke's money printing binges are supported by his cohorts at the Fed. On October 9th, St Louis Fed chief William Poole said, “I do not see any implication for inflation, at least with the magnitude of the US$ depreciation that we've seen so far. I did not see any evidence of a raft of dollar price increases for foreign goods. For manufactured goods, I think the pass through is very, very small,” he said.
On Sept 287th, Federal Reserve Governor Frederic Mishkin was trying to brainwash his audience at a globalization conference held in Washington DC. “Inflation has come down in the old-fashioned way. Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations,” Mishkin declared. On Sept 11th, Mishkin said, “Gold was not a particularly useful indicator of inflation."
When answering an audience question about inflation after a speech before the New York Economic Club on Oct 15th, “B-52” Ben did admit, “One cannot deny that when the dollar depreciates there is some inflationary impact.” However, to alleviate any fears that the Fed might combat inflation with higher interest rates, Bernanke added, that “expectations for slower growth may moderate price increases." Yet history might judge Mr Bernanke harshly, for guiding the US economy into the "Stagflation" trap.
Whenever the stock market has a bad day, reporters from the mainstream media try to find plausible explanation, for why the market turned south. This week, the surge in crude oil prices above $85 per barrel was widely blamed for the market's sudden tremors. Yet since the first quarter of 2003, the Dow Jones Industrials and crude oil have thrived together in peaceful harmony, both climbing in unison to all-time highs. So why blame the stock market's downturn on an “oil shock” this week?
At what point, would sharply higher oil prices begin to rattle the global stock market? (This topic will be covered in an audio broadcast on October 17th, for paid subscribers to Global Money Trends). And how would Ben “B-52” Bernanke, react in a “Twilight Zone” episode in which crude oil jumps to $100 per barrel? Nobody knows for sure, but on October 21, 2004, Mr Bernanke responded to such as question, “I would argue that the Fed's response to the inflationary effects of an increase in oil prices should depend to some extent on the economy's starting point.”
“If inflation has recently been on the low side of the desirable range, and the available evidence suggests that inflation expectations are likewise low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices. In this case, monetary policy need not tighten and could conceivably ease in the wake of an oil-price shock,” Bernanke said. So don't be surprised if “B-52” Ben argues that a weak US economy and doctored inflation statistics, justify a further easing in Fed policy, pouring more gasoline on the flames of inflation, in the event of a surge in crude oil prices to $100 per barrel.
Turkish Saber Rattling lifts Crude Oil
Earlier this week, Turkish PM Recep Erdogan asked his parliament to approve plans for an invasion into northern Iraq to attack Kurdish militants, defying a US demand for restraint. Turkey built up its military forces on Iraq's border, a move meant to pressure Baghdad to rein in the rebels of the Kurdistan Workers' Party, who are launching raids into southeast Turkey from hideouts in Iraq. Turkey must also deal with its own rebellious Kurdish minority, which makes up 20% of its population.
But Ankara also has its eyes on a bigger prize, the oil fields of Kirkuk that contain 40% of Iraq's proven oil reserves. Ankara still holds its claim to Kirkuk, which was taken from Turkey as a result of the 1923 Lausanne Treaty. Turkish nationalists still regard it as historically part of Turkey. Ankara also asserts guardianship over the Turkmen ethnic minority in northern Iraq.
Ankara fears that Baghdad will allow the Kurds to make Kirkuk part of their autonomous zone. For Ankara, this would be excessive Kurdish autonomy, its red line in Iraq, and it might resort to military intervention to prevent the emergence of an oil-rich Kurdish political entity on its southern border.
Erdogan said his country will not be deterred by the diplomatic consequences if it decides to stage a cross-border offensive against Kurdish rebels. “If such an option is chosen, whatever its price, it will be paid. There could be pros and cons of such a decision, but what is important is our country's interests.” With regards to whether or not a Turkish invasion of Iraq could destroy the relationship with the US Erdogan said, “Let it snap from wherever it gets thin.”
Republicans call for Military Strike against Iran,
A possible Turkish invasion into northern Iraq is only a small sideshow compared to the heated rhetoric that's building up on the Republican campaign trail. On October 16th, Republican candidates Rudy Giuliani and John McCain said they would use military force against Iran to prevent it from getting nuclear weapons. Giuliani said Iran is a state sponsor of terrorism that is seeking nuclear weapons, and needs to understand how the US would respond.
“Anybody who wants to be president of the United States would say a prayer at the beginning that you would never have to use American military power. But as president, you can't hesitate to do that, if it's in the best interest of the US. You have to stand up to dictators and tyrants and terrorists. Weakness invites attack. Strength keeps you safe,” Guilianni declared.
On Iran specifically, he said, “We've seen what Iran will do with ordinary weapons. If I'm president, I guarantee you we will never find out what they would do with nuclear weapons because they're not going to get them.” McCain agreed, “At the end of the day, we cannot allow the Iranians to acquire nuclear weapons.”
On July 4th, Republican presidential candidate Mitt Romney said he would use military force against Iran if attempts to isolate and pressure its current regime fail. “I'm not going to shrink away from Iranian President Ahmadinejad,” Romney said. “Ahmadinejad is a dangerous man and a threat to US interests.” On Oct 16th, Romney added, “It's time to take Ahmadinejad at his genocidal word.”
On June 12th, the UN atomic agency said Iran could have 8,000 centrifuges enriching uranium by December, a significant rise in nuclear capability likely to fuel fears that Tehran seeks nuclear weapons. “The concern is that they will have a sensitive number of centrifuges without having resolved the question marks surrounding the history of Iran's program. It becomes a greater proliferation concern,” IAEA chief Mohamed El-Baradei told political leaders in private conversations.
Then on October 15th, US Defense Secretary Robert Gates called Iran “an ambitious and fanatical theocracy. With a government of that nature, only a united front of nations will be able to exert enough pressure to make Iran abandon its nuclear aspirations. Our allies must work together on robust, far-reaching and strongly enforced economic sanctions. We must exert pressure in the diplomatic and political arenas as well,” he said. “And, as President Bush has said, with this regime we must also keep all options on the table,” he said, in a veiled reference to possible military action.
Gates said Iran seems increasingly willing to act contrary to its own interests. “We should have no illusions about the nature of this regime or its leaders - about their designs for their nuclear program, their willingness to live up to their rhetoric, their intentions for Iraq, or their ambitions in the Gulf region.” Among the US objectives in the Middle East, Gates listed an “Iran that does not build nuclear weapons or holds Israel hostage with the threat of attack.
Gates will meet with Israel's new defense minister, Ehud Barak, in Washington on October 16th, to discuss the joint anti-missile Arrow-2 project, designed to intercept missiles that could deployed by Iran and Syria. Israel's satellite, the Ofek-7, flies over Iran, Iraq, and Syria once every 90 minutes.
Last month, Barak, Israel's most decorated soldier and legendary former commander of the Sayeret Matkal, directed an attack on a secret military compound near Dayr az-Zawr in northern Syria, inhabited by North Korean nuclear technicians. Today, the site lies in ruins after it was pounded by Israeli F15I's, reminiscent of the attack on Iraq's Osirak in 1980. The UK's Sunday Times said preparations for the attack began in May, when Meir Dagan, the head of Mossad, presented PM Olmert with evidence that Syria was seeking to buy a nuclear device from North Korea. Dagan feared such a device could later be mounted on North-Korean-made Scud-C missiles. Sergei Kirpichenko, the Russian ambassador to Syria, warned President Bashar al-Assad last month that Israel was planning an attack, but suggested the target was the Golan Heights.
Equally important, the Pantsyr-S1E missiles, purchased by Syria from Russia, failed to down the Israeli jets that penetrated northern Syrian airspace from the Mediterranean. The “absolute jamming immunity” which the Russian manufactures promised for the Pantsyr missiles were immobilized by the superior electronic capabilities of the Israeli jets. Such valuable information on Russian missile consignments to Syria or Iran is vital to any US calculation of whether to attack Iran over its nuclear program. Iran is especially concerned over the failure of the Russian-made radar systems, and is slated to purchase more radar equipment in a future deal worth $750 million, the American weekly Aviation Week reported on October 4th.
Battle for the Strait of Hormuz,
On June 12th, Admiral Ali Shamkhani, a former Iranian defense minister, told the US Defense News weekly, in the event of an American attack on Iran's nuclear installations, “Ballistic missiles would be fired in masses against targets in Persian Gulf states and Israel. The objective would be to overwhelm US missile defense systems with hundreds of missiles fired simultaneously at specific targets.” He said Iran anticipates that US forces will strike without warning against its military's command-and-control network, and will order ballistic and cruise-missile battery crews to launch the plan within an hour after a US attack begins. In retaliation, “Iran will open a freeway for 40,000 suicide bombers from Afghanistan all the way to Lebanon, to strike in almost every country in the Middle East.
Most importantly, is the potential shutdown of oil supplies through the Strait of Hormuz, a strategically important stretch of water between the Gulf of Oman and the Persian Gulf. On average around 17-million barrels of oil is shipped thru the Straits of Hormuz each day, roughly 20% of the world's daily oil production.
The closing of the Straits for the passage of tankers will create a severe shortage that would send shock waves to the energy markets already beset by tight supplies and a limited spare capacity. It is anybody's guess as to how high the price of crude oil could go if Iranian threats were materialized. A surge above $100 per barrel could trigger a world economic recession of untold consequences.
Yet Tehran, with all of its threats and alleged ability to destroy anything that sails or floats in the Straits of Hormuz, might opt for a less risky retaliation, since the cessation of its crude oil exports and gasoline imports could bring down the Islamic regime. With unemployment rates as high as 20% any disruption in the levels of food and gasoline subsidies, from the drying up of oil revenues, could trigger a serious riot in the volatile Iranian street against the Mullahs in Tehran.
France hints at Military action against Iran,
One is not accustomed to hearing threats of war from the enlightened French government, but since Nicolas Sarkozy became the president of France and moved into the Elysee, France has changed course and is almost reflecting the same policies as the neo-cons of the United States. In his speech to the UN General Assembly on Sept 25th, Sarkozy said, “There will be no peace in the world if the international community falters in the face of nuclear arms proliferation.”
“If we allow Iran to acquire nuclear weapons, we would incur an unacceptable risk to stability in the region and in the world.” And in a broader warning against the dangers of appeasement, the new French leader said, “Weakness and renunciation do not lead to peace. They lead to war.” Sarkozy said that if the UN Security Council was unable to agree on further financial sanctions, the European Union should take its own measures to raise pressure on Iran.
In light of the Iranian nuclear crisis, French Foreign Minister Bernard Kouchner shocked the world on Sept 16th, “We have to prepare for the worst, and the worst, sir, is war,” he said in an interview on LCI television and RTL radio. Iran's state-run news agency IRNA angrily attacked the French government on Sept 18th, “The new occupants of the Elysee want to copy the White House,” it declared
Mr. Sarkozy went to Moscow on October 10th, urging tougher economic pressure on Tehran, but Russian kingpin Vladimir Putin quickly deflated the idea. “We don't have information showing that Iran is striving to produce nuclear weapons. That's why we're proceeding on the basis that Iran does not have such plans,” Putin said. The Kremlin is a member of the “Axis of Oil” and a staunch ally of Tehran, and is unlikely to agree to tougher economic sanctions on Iran.
In a visit to Tehran on October 16th, Putin declined to say when Russia will start delivering fuel to Iran's nuclear power plant in Bushehr. “At the moment Russia and Iran are discussing the issue of changing the contract. In general there is a common understanding of the problem. As soon as this is solved, supplies of nuclear fuel will start. Russia declares that it is committed to carrying out the contract,” Putin said
Oct 16th, Putin said Russia would not accept military action against Iran and he invited Iranian President Mahmoud Ahmadinejad to Moscow for talks. In comments aimed at the United States, Putin said, “We should not even think of using force in this region. We need to agree that using the territory of one Caspian Sea state in the event of aggression against another is impossible," he declared.
The Caspian nations of Iran, Azerbaijan, Kazakhstan, and Turkmenistan backed Putin's call, saying “under no circumstances will we allow the use of our territories by third countries to launch aggression or other military action against any of the member states.” According to the UK Telegraph's Sept 16th edition, Pentagon planners have developed a list of up to 2,000 bombing targets in Iran, anticipating that diplomatic efforts to slow Iran's nuclear weapons program are doomed to fail.
But the next day, US president Bush upped the ante, at a White House news conference, warning the world must do more to isolate the Islamic Republic. "We've got a leader in who has announced that he wants to destroy Israel," Bush said. "So I've told people that, if you're interested in avoiding World War III, it seems like you ought to be interested in preventing them from having the knowledge necessary to make a nuclear weapon. I'm looking forward to getting President Putin's read-out from the meeting, (in Iran). The thing I'm interested in is whether or not he continues to harbor the same concerns that I do. I look forward to having Vladimir Putin clarify his comments," Bush said
Senior American defense and intelligence officials told the Telegraph that Mr Bush's inner circle has decided not to leave office with Iran capable of developing a nuclear weapon. Yet should the Bush team decide to take military action against Iran's nuclear program, Venezuela's mercurial leader Hugo Chavez, has vowed to retaliate, by cutting-off two million bpd of oil exports to the US.
Chavez pushed two US oil giants, ConocoPhillips and ExxonMobil out of his country in June, as part of his socialist revolution, “This is the unity of the Persian Gulf and the Caribbean Sea,” he declared on a July 2nd visit to Tehran. Before heading to Iran, Chavez met Russian kingpin Vladimir Putin and called for a global revolution against Washington. He has also discussed possible purchases of submarines, surface to air missiles, and other weapons from Russia, arguing that these are needed to defend his oil-rich country against the United States. Last year, Russia sold 24 aircraft and 53 helicopters to Venezuela, worth $3 billion.
Tension in the Middle East boosts the Kremlin's Coffers
“A series of crises in oil supply is likely over the coming decades,” predicted Russian Industry and Energy Minister Victor Khristenko nearly two years ago, on October 24, 2005. “The first, related to the peak and decline of non-OPEC production, is practically upon us and underpins the currently high oil prices. The imminent inability of non-OPEC production to meet incremental demand and its decline after 2010 precipitates the second crisis as OPEC's diminishing spare capacity becomes less and less able to accommodate short-term fluctuations,” he said.
“The third crisis, due to OPEC's incremental supply being unable to meet incremental demand, follows in the first half of the next decade. This assumes that OPEC's reserves are as published. These crises will have global economic and geopolitical significance. The oil price will be high and volatile, and demand growth will have to be curtailed,” Mr Khristenko warned two years ago.
But alas, there are no central banks in the world that are willing to slow down their economies, to reduce the demand for crude oil. Just the opposite has transpired, with central banks in Australia, Brazil, China, the Euro zone, India, and the United States expanding their money supplies at double digit rates, and all aiming for maximum growth, through a game of competitive currency devaluations. The Bernanke Fed is the chief culprit behind the devaluation game.
Moscow is a big winner from tension in the Middle East, and a war between the US and Iran would only increase its clout on the world stage. Russia's foreign currency reserves have grown nearly 20-fold from four years ago to a record $415 billion, the third largest stash in the world, behind Japan and China. How Moscow decides to invest some of its stash in its new sovereign wealth fund, can have a big impact on global commodity and stock markets.
In keeping with world market trends, the Russian Finance Ministry lifted the tax of Russian oil exports by $26 to $250 per ton, which will bring even more money into the Kremlin's coffers. Russia's oil production has stagnated since growing 9% in 2004 and a record 11% in 2003, with growth of merely 2.7% last year, due to the higher tax burden, which is stifling investment in oil exploration and production.
Yesterday, the price of Russia's benchmark Urals crude oil rose to $81.25 per barrel, up from $25 per barrel just four years ago, helping to lift Russian exports to a record high of $31 billion in August. From January to August, Russia exported 160 million tons of oil, up 5% from a year ago. In cash terms, oil exports rose by 5.3% during the first eight months of this year to $69.7 billion. Exports to non-CIS countries amounted to 148 million tons worth $65.4 billion.
It's no wonder that Putin wants to stymie any UN initiative that can halt Iran's nuclear drive by non-military means. The current balance of tension and terror in the Middle East is bloating Kremlin's treasure chest. But if Mr Khristenko's outlook for peak oil after 2010 is correct, the Kremlin will see its clout and wealth multiply exponentially in the years ahead, with or without a war in the Middle East.
China deepens Ties with Tehran
Beijing is trying to strengthen its ties with Iran, its major supplier of crude oil and natural gas, required for its development and modernization. China imports 50% of its oil demand, and wants to reinforce its relations with Iran and reach the energy resources of the Caspian Sea to lessen its dependence on maritime oil imports from the Arab oil kingdoms of the Persian Gulf, securing an uninterrupted flow of oil.
Iranian crude oil-and gas reserves are largely untapped because of the threat of US sanctions on companies doing business with the Mullahs, leaving a large part of its petroleum fields unexplored. Since Tehran does not have adequate technology to increase its refined-oil production. China can assist Iran modernize its petroleum industry with technology, capital, engineering services and nuclear technology.
Beijing sees Tehran as a geopolitical ally to combat US influence in the Middle East, and wants to avoid United Nations sanctions against Iran. China buys 15% of its oil demand from Iran, and pays for its imports in Euros. Chinese crude oil imports hits a record high of 14.8 million tons in July, and in the first half of this year rose 11.2% from the same year-ago period to 81.54 million tons.
China's biggest oil producer, PetroChina, PTR.N, 0857.hk, would like to develop Iran's oil and natural gas fields. PTR.N's market value has soared to $460 billion, the second highest in the world, behind Exxon Mobil's $518 billion value. PetroChina is expected to announce big oil and natural gas discoveries in the northern Liaohe and Dagang areas, PTR.N Chairman Jiang Jiemin said on October 15th. The offshore finds will add to reserves from the Jidong Nanpu field, China's largest oil find in 50-years.
OPEC can't Stop Oil Spike
OPEC says there is no fundamental justification for a price run-up that has lifted oil from below $70 in mid-August. “OPEC cannot do much now,” said Libya's hawkish oil chief Shokri Ghanem on October 16th. “OPEC did all that it can. It is not because of a lack of crude oil. There is all the uncertainty in Iraq and the Gulf area,” he said. Indonesia's oil chief Maizar Rahman added, “The market fundamentals are in balance. There is too much speculative money coming into the market.”
“OPEC is carefully watching developments in the oil market and has observed with concern the recent escalation in oil prices. The rising oil prices which we are currently witnessing are, however, largely being driven by market speculators. Persistent refinery bottlenecks and seasonal maintenance work, ongoing geopolitical problems in the Middle East and fluctuations in the US dollar, also continue to play a role in pushing oil prices higher. Additional political tensions, seen during recent days, are also pressurizing oil prices upwards,” the cartel said on October 16th.
OPEC is reluctant to boost oil output beyond the scheduled 500,000 bpd increase in November, realizing that the Federal Reserve and other central banks are simply printing large amounts of monopoly money to pay for higher crude oil imports. To compensate for the fiat currency devaluations, OPEC seeks a higher oil price, and is expected to keep a tight rein on oil supply.
At some point, it would become necessary for the Bernanke Fed to reverse course, and start slowing down the money printing machine, if it wants to prevent an out-break of hyper-inflation. Yet one has to wonder if Mr Bernanke has the political license to tighten the money supply, when US Treasury chief Henry Paulson wants to keep the US stock market artificially high to offset weaker US home prices.
Iran's Other Potential WMD: Crude Oil -January 26, 2006
January 26, 2006
“We've already seen that Iran is willing to talk about using oil as a weapon, and I think the markets are taking that threat seriously.”Ian Bremmer, president of the Eurasia Group consulting firm
January 26, 2006 · For the past few weeks, Iran has tweaked the noses of world powers -- especially the United States -- as it continues its pursuit of nuclear power. Iran insists its nuclear program is strictly for peaceful purposes. The U.S. and its European allies worry that Iran plans on developing nuclear weapons.
It's not only nuclear weapons, however, that the world is worried about. Iran has another weapon at its disposal: oil. Iran's "oil weapon" may not be as worrisome as a nuclear weapon, but experts say it poses a very real and immediate threat to the world economy.
Iran is the world's fourth-largest oil producer. Every day, it exports more than two million barrels of crude -- twice as much as Iraq. Any move by Iran to cut off or curtail its oil exports would quickly translate into higher oil prices worldwide.
"Oil markets are already reacting," says Ian Bremmer, president of the Eurasia Group consulting firm. "We've already seen that Iran is willing to talk about using oil as a weapon, and I think the markets are taking that threat seriously."
Analysts say that should Iran act on its threat to unleash its "oil weapon," oil prices could skyrocket to $100 a barrel, or about $4 a gallon at the pumps. While that is clearly not an appealing prospect, neither is the prospect of a nuclear-armed Iran, say U.S. officials and lawmakers. On the on CBS political talk show Face the Nation, Sen. John McCain (R-AZ) put it plainly: "If the price of oil has to go up, then it's a consequence we would have to suffer."
The question, analysts say, is whether such a price hike would be short-lived or long term. The current state of the global oil market gives Iran a stronger hand. These days, countries like China and India are thirsty for oil, and there isn't a lot of surplus oil sloshing around on the global market.
In the past, the United States could rely on North Sea oil, for instance, to make up for shortfalls. Today, it must turn to nations like Venezuela and Nigeria. The recent hurricanes in the Gulf of Mexico have also hurt oil production. "Most of these supply situations are fraught with some kind of peril," says Frank Verrastro, head of the energy program at the Center for Strategic and International Studies.
But would Iran really follow through on its threat to unleash its "oil weapon?" After all, the government of Iran derives half of its revenue, and 80 percent of its hard currency, from oil sales. By cutting off those sales, wouldn't Iran be committing economic suicide?
Most experts say a complete cutoff of Iranian oil is unlikely -- but "there are a lot of things that the Iranians can do short of cutting off oil which are going to impact gas prices in the United States," says Ian Bremmer of the Eurasia Group. For instance, he says, Iran could threaten the movement of oil tankers in the Straits of Hormuz, a vital waterway that it controls.
"The Iranians can ramp this up or back as they're pressed," says Bremmer. "And thus far, they have shown every inclination to do precisely that."
Eric Weiner
“We've already seen that Iran is willing to talk about using oil as a weapon, and I think the markets are taking that threat seriously.”Ian Bremmer, president of the Eurasia Group consulting firm
January 26, 2006 · For the past few weeks, Iran has tweaked the noses of world powers -- especially the United States -- as it continues its pursuit of nuclear power. Iran insists its nuclear program is strictly for peaceful purposes. The U.S. and its European allies worry that Iran plans on developing nuclear weapons.
It's not only nuclear weapons, however, that the world is worried about. Iran has another weapon at its disposal: oil. Iran's "oil weapon" may not be as worrisome as a nuclear weapon, but experts say it poses a very real and immediate threat to the world economy.
Iran is the world's fourth-largest oil producer. Every day, it exports more than two million barrels of crude -- twice as much as Iraq. Any move by Iran to cut off or curtail its oil exports would quickly translate into higher oil prices worldwide.
"Oil markets are already reacting," says Ian Bremmer, president of the Eurasia Group consulting firm. "We've already seen that Iran is willing to talk about using oil as a weapon, and I think the markets are taking that threat seriously."
Analysts say that should Iran act on its threat to unleash its "oil weapon," oil prices could skyrocket to $100 a barrel, or about $4 a gallon at the pumps. While that is clearly not an appealing prospect, neither is the prospect of a nuclear-armed Iran, say U.S. officials and lawmakers. On the on CBS political talk show Face the Nation, Sen. John McCain (R-AZ) put it plainly: "If the price of oil has to go up, then it's a consequence we would have to suffer."
The question, analysts say, is whether such a price hike would be short-lived or long term. The current state of the global oil market gives Iran a stronger hand. These days, countries like China and India are thirsty for oil, and there isn't a lot of surplus oil sloshing around on the global market.
In the past, the United States could rely on North Sea oil, for instance, to make up for shortfalls. Today, it must turn to nations like Venezuela and Nigeria. The recent hurricanes in the Gulf of Mexico have also hurt oil production. "Most of these supply situations are fraught with some kind of peril," says Frank Verrastro, head of the energy program at the Center for Strategic and International Studies.
But would Iran really follow through on its threat to unleash its "oil weapon?" After all, the government of Iran derives half of its revenue, and 80 percent of its hard currency, from oil sales. By cutting off those sales, wouldn't Iran be committing economic suicide?
Most experts say a complete cutoff of Iranian oil is unlikely -- but "there are a lot of things that the Iranians can do short of cutting off oil which are going to impact gas prices in the United States," says Ian Bremmer of the Eurasia Group. For instance, he says, Iran could threaten the movement of oil tankers in the Straits of Hormuz, a vital waterway that it controls.
"The Iranians can ramp this up or back as they're pressed," says Bremmer. "And thus far, they have shown every inclination to do precisely that."
Eric Weiner
Geopolitical Diary: An Iranian Oil Mystery -The Black Hands Behind Gloom -3
May 16, 2008
Iran confirmed on Thursday that it has booked a supertanker to store up to 270,000 tons of crude oil for up to 90 days. The Very Large Crude Carriers (VLCCs) that Iran commissioned from Singapore-headquartered Tanker Pacific are expected to arrive in Iran the first week of June.
Iran already has more than 28 million barrels of oil floating in tankers outside its main export terminal in the Persian Gulf. The fleet of tankers storing this crude is owned by NITC, a subsidiary of state-owned oil firm National Iranian Oil Co. (NIOC), and has a capacity of more than 30 million barrels of crude — the equivalent of more than a week of Iran’s oil output.
There is something very wrong with this picture.
With oil prices soaring above $127 per barrel, any energy-producing country would be jumping at the opportunity to sell its crude and reap hefty profits. The Iranians, however, are choosing to store a huge bulk of their crude offshore in large tankers. Instead of making money off crude sales, Iran is expending loads of petrodollars to store nearly 30 million barrels of crude for weeks. Storing crude in offshore tankers for long periods of time is certainly not cheap.
So, what is Iran up to?
There are several possible explanations to Iran’s curious energy policy. Some energy analysts have speculated that Iran is holding out for a better market price to sell its oil. But with oil prices already hitting record highs, this explanation does not add up.
Another explanation is that the current policy is a result of the NIOC’s inferior management skills — which is certainly possible, given Iran’s poor track record in managing its investment-deprived energy sector. The intent behind such a policy would be for Iran to manipulate global crude prices by reducing exports and driving up demand.
Iranian President Mahmoud Ahmadinejad already threw around threats in recent days to cut Iranian oil output, sending jitters through the energy market that ended up pushing oil prices to $127 per barrel. From the standpoint of the Iranian Energy Ministry, the threats to reduce output combined with a reduction in exports could drive up prices further and allow the Iranians to get a better deal on their crude sales.
But it appears that the Iranians already tried this strategy — and failed — in the summer of 2006. Beginning in March of that year, the Iranian government issued threats that it would cut its crude production while storing around 20 million barrels of oil in tankers. But instead of selling at a higher price, the Iranians found that oil traders simply looked elsewhere to make up for the difference. In the end, the Iranians wound up selling the bulk of that crude at a major discount to Royal Dutch/Shell and India’s Reliance.
Moreover, Iran is highly unlikely to follow through with its threats of dropping crude output. The Iranians are already producing oil at capacity at 4.02 million barrels per day (bpd). With the Iranian oil sector accounting for approximately 80 percent of Iran’s total exports (with 12 percent of the country’s gross domestic product absorbed in energy subsidies), the country cannot afford to cut production and absorb the loss in income. Despite being the world’s fourth-largest oil producer, Iran is also the world’s second-largest importer of gasoline due to its faltering refining sector; and it is a major food importer. With food prices and inflation rising, Iran is all the more dependent on its oil revenues to maintain internal political stability, and it would be shooting itself in the foot if it took the hit of cutting its oil output.
The more likely reason behind Iran hoarding its oil is a drop in demand for Iranian crude — which spells far more serious consequences for the Islamic Republic.
Iran’s main oil export is a heavy crude that is difficult for refiners to convert into transport fuel. Most of the oil currently being stored off the Iranian coast comes from the Soroush and Nowruz fields, which produce approximately 190,000 bpd of low-quality, high-sulfur crude. Iran has already had a difficult time finding buyers for this heavy sour crude, but still is highly reluctant to cut the price down. The Iranians appear to have now reached a point where they have little choice but to take the hit in income and store the crude, in the hopes that demand for their product will rebound.
The main energy clients for Iranian crude include Japan, China, India, South Korea, Italy and other Organization for Economic Cooperation and Development nations. But as the global food crisis worsens and inflation rates continue to soar worldwide, these countries will be loath to put up with Iran’s high prices for low-quality crude.
Iran can easily disguise its energy woes with rhetoric on how it is punishing the West by cutting output and driving up global crude prices. These threats will continue to send a jolt through energy investors and bump up prices a notch or two. But Iran will have a much harder time reaping the benefits of high energy prices as long as its energy income is strained by a drop in demand for its crude. Oil is the backbone of the Iranian economy, and if Iran is resorting to storing up loads of crude in the Gulf for lack of buyers, its financial — and thus internal political — stability will soon be coming into serious question.
It’s important to remember that Iran has an incredibly delicate social stability index to manage, with only about 55 percent of its population composed of ethnic Persians. The remaining population is made up of ethnic minorities who are kept in check by Tehran through a combination of military force and heavy state subsidies. If it is already having trouble sustaining its oil exports — and its economic problems continue to worsen — Iran runs the risk of losing its ability to function as a state, much less an aggressive one.
Iran confirmed on Thursday that it has booked a supertanker to store up to 270,000 tons of crude oil for up to 90 days. The Very Large Crude Carriers (VLCCs) that Iran commissioned from Singapore-headquartered Tanker Pacific are expected to arrive in Iran the first week of June.
Iran already has more than 28 million barrels of oil floating in tankers outside its main export terminal in the Persian Gulf. The fleet of tankers storing this crude is owned by NITC, a subsidiary of state-owned oil firm National Iranian Oil Co. (NIOC), and has a capacity of more than 30 million barrels of crude — the equivalent of more than a week of Iran’s oil output.
There is something very wrong with this picture.
With oil prices soaring above $127 per barrel, any energy-producing country would be jumping at the opportunity to sell its crude and reap hefty profits. The Iranians, however, are choosing to store a huge bulk of their crude offshore in large tankers. Instead of making money off crude sales, Iran is expending loads of petrodollars to store nearly 30 million barrels of crude for weeks. Storing crude in offshore tankers for long periods of time is certainly not cheap.
So, what is Iran up to?
There are several possible explanations to Iran’s curious energy policy. Some energy analysts have speculated that Iran is holding out for a better market price to sell its oil. But with oil prices already hitting record highs, this explanation does not add up.
Another explanation is that the current policy is a result of the NIOC’s inferior management skills — which is certainly possible, given Iran’s poor track record in managing its investment-deprived energy sector. The intent behind such a policy would be for Iran to manipulate global crude prices by reducing exports and driving up demand.
Iranian President Mahmoud Ahmadinejad already threw around threats in recent days to cut Iranian oil output, sending jitters through the energy market that ended up pushing oil prices to $127 per barrel. From the standpoint of the Iranian Energy Ministry, the threats to reduce output combined with a reduction in exports could drive up prices further and allow the Iranians to get a better deal on their crude sales.
But it appears that the Iranians already tried this strategy — and failed — in the summer of 2006. Beginning in March of that year, the Iranian government issued threats that it would cut its crude production while storing around 20 million barrels of oil in tankers. But instead of selling at a higher price, the Iranians found that oil traders simply looked elsewhere to make up for the difference. In the end, the Iranians wound up selling the bulk of that crude at a major discount to Royal Dutch/Shell and India’s Reliance.
Moreover, Iran is highly unlikely to follow through with its threats of dropping crude output. The Iranians are already producing oil at capacity at 4.02 million barrels per day (bpd). With the Iranian oil sector accounting for approximately 80 percent of Iran’s total exports (with 12 percent of the country’s gross domestic product absorbed in energy subsidies), the country cannot afford to cut production and absorb the loss in income. Despite being the world’s fourth-largest oil producer, Iran is also the world’s second-largest importer of gasoline due to its faltering refining sector; and it is a major food importer. With food prices and inflation rising, Iran is all the more dependent on its oil revenues to maintain internal political stability, and it would be shooting itself in the foot if it took the hit of cutting its oil output.
The more likely reason behind Iran hoarding its oil is a drop in demand for Iranian crude — which spells far more serious consequences for the Islamic Republic.
Iran’s main oil export is a heavy crude that is difficult for refiners to convert into transport fuel. Most of the oil currently being stored off the Iranian coast comes from the Soroush and Nowruz fields, which produce approximately 190,000 bpd of low-quality, high-sulfur crude. Iran has already had a difficult time finding buyers for this heavy sour crude, but still is highly reluctant to cut the price down. The Iranians appear to have now reached a point where they have little choice but to take the hit in income and store the crude, in the hopes that demand for their product will rebound.
The main energy clients for Iranian crude include Japan, China, India, South Korea, Italy and other Organization for Economic Cooperation and Development nations. But as the global food crisis worsens and inflation rates continue to soar worldwide, these countries will be loath to put up with Iran’s high prices for low-quality crude.
Iran can easily disguise its energy woes with rhetoric on how it is punishing the West by cutting output and driving up global crude prices. These threats will continue to send a jolt through energy investors and bump up prices a notch or two. But Iran will have a much harder time reaping the benefits of high energy prices as long as its energy income is strained by a drop in demand for its crude. Oil is the backbone of the Iranian economy, and if Iran is resorting to storing up loads of crude in the Gulf for lack of buyers, its financial — and thus internal political — stability will soon be coming into serious question.
It’s important to remember that Iran has an incredibly delicate social stability index to manage, with only about 55 percent of its population composed of ethnic Persians. The remaining population is made up of ethnic minorities who are kept in check by Tehran through a combination of military force and heavy state subsidies. If it is already having trouble sustaining its oil exports — and its economic problems continue to worsen — Iran runs the risk of losing its ability to function as a state, much less an aggressive one.
Iran says oil price too low at 115 dollars a barrel -The Black Hand Behind the Gloom
Apr 18, 2008
TEHRAN (AFP) — Even at 115 dollars a barrel, oil is priced too low, Iranian President Mahmoud Ahmadinejad said in comments published on Saturday adding that the commodity "should find its real value".
"Oil at 115 dollars a barrel in today's market is a deceiving figure, oil is a strategic commodity and should find its real value," the state broadcaster's website quoted Ahmadinejad as saying on Friday.
New York's benchmark contract, light sweet crude for delivery in May, surged 1.83 dollars to a record close of 116.69 dollars a barrel on Friday. It had earlier hit an intra-day all-time peak of 117 dollars.
Iranian Oil Minister Gholam Hossein Nozari, whose country is OPEC's number-two oil producer and exporter, on Wednesday rejected calls from oil consuming countries for the cartel to take action to bring down prices.
"The oil price has reached 114 dollars a barrel. When the price is suitable and supply is higher than demand, this shows the reason is somewhere else and we should deal with this other reason," he said.
The Organisation of Petroleum Exporting Countries -- which produces 40 percent of the world's oil -- has refused to raise its daily output quota which is currently fixed at 29.67 million barrels.
Ahmadinejad suggested that the sharp fall in the value of the US dollar was a driving force behind the rise in oil prices.
"The dollar is no longer money, they just print a bunch of paper which is circulated in the world without any commodity backing," he said.
Late last year, Iran announced that it had stopped carrying out its oil transactions in dollars.
"At the moment, selling oil in dollars has been completely halted, in line with the policy of selling crude in non-dollar currencies, " Nozari was quoted as saying in December.
The world's fourth largest oil exporter, Iran massively reduced its dependence on the US dollar during last year in the face of US pressure on its financial system amid the standoff over its nuclear programme.
On Thursday, OPEC announced that the price of oil sold by its members had hit a record high of 106.65 dollars per barrel.
Oil ministers from the 12-nation cartel will be joined by chief executives of major producers as some 500 delegates assemble for the International Energy Forum in Rome on Sunday.
Pressure for a rise in the cartel's output ceiling is likely to intensify as the record crude prices weigh down on a slowing world economy
TEHRAN (AFP) — Even at 115 dollars a barrel, oil is priced too low, Iranian President Mahmoud Ahmadinejad said in comments published on Saturday adding that the commodity "should find its real value".
"Oil at 115 dollars a barrel in today's market is a deceiving figure, oil is a strategic commodity and should find its real value," the state broadcaster's website quoted Ahmadinejad as saying on Friday.
New York's benchmark contract, light sweet crude for delivery in May, surged 1.83 dollars to a record close of 116.69 dollars a barrel on Friday. It had earlier hit an intra-day all-time peak of 117 dollars.
Iranian Oil Minister Gholam Hossein Nozari, whose country is OPEC's number-two oil producer and exporter, on Wednesday rejected calls from oil consuming countries for the cartel to take action to bring down prices.
"The oil price has reached 114 dollars a barrel. When the price is suitable and supply is higher than demand, this shows the reason is somewhere else and we should deal with this other reason," he said.
The Organisation of Petroleum Exporting Countries -- which produces 40 percent of the world's oil -- has refused to raise its daily output quota which is currently fixed at 29.67 million barrels.
Ahmadinejad suggested that the sharp fall in the value of the US dollar was a driving force behind the rise in oil prices.
"The dollar is no longer money, they just print a bunch of paper which is circulated in the world without any commodity backing," he said.
Late last year, Iran announced that it had stopped carrying out its oil transactions in dollars.
"At the moment, selling oil in dollars has been completely halted, in line with the policy of selling crude in non-dollar currencies, " Nozari was quoted as saying in December.
The world's fourth largest oil exporter, Iran massively reduced its dependence on the US dollar during last year in the face of US pressure on its financial system amid the standoff over its nuclear programme.
On Thursday, OPEC announced that the price of oil sold by its members had hit a record high of 106.65 dollars per barrel.
Oil ministers from the 12-nation cartel will be joined by chief executives of major producers as some 500 delegates assemble for the International Energy Forum in Rome on Sunday.
Pressure for a rise in the cartel's output ceiling is likely to intensify as the record crude prices weigh down on a slowing world economy
The Iranian 'War Premium' Vanishes from Crude Oil
December 13, 2007
This Nearly two years ago, on January 10th, 2006, Iranian leader Mahmoud Ahmadinejad raised the stakes in a battle of wits between Tehran and the Bush administration, ordering the removal of UN seals on centrifuges to enrich uranium, a process which can make atomic reactor fuel or weapons-grade material. “We are not going to yield to pressure to abandon our rights, and we have the necessary tools to protect ourselves,” Ahmadinejad told the Qatari foreign minister.
Ahmadinejad’s daring move quickly set off a “war of words” with US President George Bush and vice-president Dick Cheney, which in turn, built-up an Iranian “war premium” of roughly $12 per barrel into the price of crude oil. On January 19, 2006, Cheney warned, “Whether or not there would be a spike in the price of oil, if in fact there is some kind of a crisis with Iran is entirely possible. But I think the consequences of that would be less significant than the consequences of having Mahmoud Ahmadinejad armed with nuclear weapons,” Cheney told CNBC.
The unrelenting “war of words” between Tehran and the Washington neocons reached a climax on Oct 17, 2007, when Bush suggested that if Iran obtained nuclear weapons, it could lead to war. “I’ve told people that if you’re interested in avoiding World War III, it seems like you ought to be interested in preventing Iran from having the knowledge necessary to make a nuclear weapon,” he warned.
But on Dec 3rd, the latest US National Intelligence Estimate was released, and effectively destroyed a four-year diplomatic effort by the Bush administration to isolate Iran over its nuclear weapons program. The US spy agencies have done another 180-degree turn, and now say the mullahs of Iran abandoned their nuclear weapons program in 2003, lifting the American military axe from over Iran’s nuclear and economic infrastructure.
The Pentagon’s top brass, led by chairman of the US Joint Chiefs of Staff Admiral Michael Mullen, US defense chief Robert Gates and Admiral William Fallon, commander of the US Central Command, rubber stamped a US spy report, that squashed mounting speculation of a US aerial attack on Iran during Mr Bush’s final year in the White House. The US military contributes nine of the 16 intelligence agencies whose views are cobbled together into the NIE.
Tehran knows it holds the ultimate “trump card”, in its high stakes confrontation with the Bush clan. In March 2005, Iranian Expediency Council secretary Mohsen Rezai first raised the prospect of Iranian retaliation against all Middle Eastern oil exports. “An attack on Iran will be tantamount to endangering Saudi Arabia, Kuwait and in a word, the entire Middle East oil. Iran could easily block the Straits of Hormuz and use its missiles to strike tankers and GCC oil facilities,” he warned.
About 40% of the world’s crude oil exports pass through the two-mile wide channel of the strategic Straits of Hormuz, with Iranian military forces deployed at the head of the channel. Seeking to avoid a spike in crude oil to $200 per barrel, the Bush administration pursued a dual track policy of “psychological warfare” with Iran through the media, while trying to enlist other nations to enact economic sanctions against Iran, in a failed effort to stop Iran’s quest for nuclear invincibility.
Just 18% of American voters believe the NIE claim that Iran has halted its nuclear weapons program. The latest Rasmussen Reports national telephone survey found that 66% disagree and say Iran has not stopped its nuclear weapons program. But the odds of a US / Israeli strike on Iran before December 2008, according to online futures markets, have plummeted from 50% in November to 18% today.
The other casinos where bets on war in the Middle East are made each day are the crude oil markets in London and New York. “The market is increasingly driven by forces beyond OPEC’s control, by geopolitical events and the growing influence of financial investors,” said Mohammed bin Dhaen al-Hamli who is the UAE oil minister.
Just prior to the bombshell NIE report, there was erroneous speculation that Saudi Arabia would agree to increase in its daily oil output by anywhere from 500,000 to 750,000 bpd, as a gift to its military patron in Washington. Speculation of a Saudi oil output hike knocked the price of crude oil from a record high of $99.25 /barrel on Nov 26th, to around $87 /barrel a week or so later, but in retrospect, the slide in oil prices was simply wiping out the $12 /barrel Iranian “war premium”.
On Dec 5th, Riyadh sided with the hawks of OPEC – Libya, Iran, and Venezuela, and refused to increase its oil output, citing ample global oil inventories. Saudi king Abdullah had escorted Iranian president Mahmoud Ahmadinejad along a red carpet just two days earlier, and saw eye to eye with his Persian neighbors. “Our position is that demand and supply are balanced and there is no need to increase oil to the market,” said Iranian Oil Minister Gholamhossein Nozari.
Anticipating a tight fisted OPEC this winter, the US Energy Information Agency said on Dec 11th that global oil demand in Q’1 of 2008 would climb to 87.4 million bpd, up 2% from a year earlier, and exceeding global supply, forcing oil consuming countries to dip into their emergency oil inventories. “OECD nations will have just 49.3 days of forward crude oil supply cover by February 2008, the lowest inventory buffer since December 2004, as demand growth outpaces supply” the EIA warned.
The Saudi shift into the hawkish camp of OPEC threatens to unravel the latest recovery in the Dow Jones Industrials, which rallied 1,000-points towards the 13,800 level, on high hopes that crude oil had topped out, and would slide towards $75 per barrel. Instead, OPEC’s hard-line put a floor under crude oil at $87 /barrel, and “black gold” zoomed above $90 per barrel a week later, after the Bernanke Fed lowered the fed funds rate to 4.25%, and announced a plan to inject tens of billions of dollars into the banking system, whetting the appetite of crude oil speculators, and investors seeking a hedge against monetary inflation.
To make matters worse, internal oil consumption in the five biggest oil exporting nations - Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates is growing at a 6% annualized rate, forcing their governments to reduce oil exports by 3 percent. If sustained, that could reduce their crude oil exports as much as 2.5 million barrels a day by the end of 2010.
As a consequence, “Oil prices will hit $100 a barrel before dipping to $80,” Texas oilman and trader T. Boone Pickens predicted on Dec 11th. “Get ready for $100, it is coming up. A hundred dollars will come before $80. You’ll see $100 oil within the next six months. A hundred dollars is going to become routine,” he declared.
Gary Dorsch
This Nearly two years ago, on January 10th, 2006, Iranian leader Mahmoud Ahmadinejad raised the stakes in a battle of wits between Tehran and the Bush administration, ordering the removal of UN seals on centrifuges to enrich uranium, a process which can make atomic reactor fuel or weapons-grade material. “We are not going to yield to pressure to abandon our rights, and we have the necessary tools to protect ourselves,” Ahmadinejad told the Qatari foreign minister.
Ahmadinejad’s daring move quickly set off a “war of words” with US President George Bush and vice-president Dick Cheney, which in turn, built-up an Iranian “war premium” of roughly $12 per barrel into the price of crude oil. On January 19, 2006, Cheney warned, “Whether or not there would be a spike in the price of oil, if in fact there is some kind of a crisis with Iran is entirely possible. But I think the consequences of that would be less significant than the consequences of having Mahmoud Ahmadinejad armed with nuclear weapons,” Cheney told CNBC.
The unrelenting “war of words” between Tehran and the Washington neocons reached a climax on Oct 17, 2007, when Bush suggested that if Iran obtained nuclear weapons, it could lead to war. “I’ve told people that if you’re interested in avoiding World War III, it seems like you ought to be interested in preventing Iran from having the knowledge necessary to make a nuclear weapon,” he warned.
But on Dec 3rd, the latest US National Intelligence Estimate was released, and effectively destroyed a four-year diplomatic effort by the Bush administration to isolate Iran over its nuclear weapons program. The US spy agencies have done another 180-degree turn, and now say the mullahs of Iran abandoned their nuclear weapons program in 2003, lifting the American military axe from over Iran’s nuclear and economic infrastructure.
The Pentagon’s top brass, led by chairman of the US Joint Chiefs of Staff Admiral Michael Mullen, US defense chief Robert Gates and Admiral William Fallon, commander of the US Central Command, rubber stamped a US spy report, that squashed mounting speculation of a US aerial attack on Iran during Mr Bush’s final year in the White House. The US military contributes nine of the 16 intelligence agencies whose views are cobbled together into the NIE.
Tehran knows it holds the ultimate “trump card”, in its high stakes confrontation with the Bush clan. In March 2005, Iranian Expediency Council secretary Mohsen Rezai first raised the prospect of Iranian retaliation against all Middle Eastern oil exports. “An attack on Iran will be tantamount to endangering Saudi Arabia, Kuwait and in a word, the entire Middle East oil. Iran could easily block the Straits of Hormuz and use its missiles to strike tankers and GCC oil facilities,” he warned.
About 40% of the world’s crude oil exports pass through the two-mile wide channel of the strategic Straits of Hormuz, with Iranian military forces deployed at the head of the channel. Seeking to avoid a spike in crude oil to $200 per barrel, the Bush administration pursued a dual track policy of “psychological warfare” with Iran through the media, while trying to enlist other nations to enact economic sanctions against Iran, in a failed effort to stop Iran’s quest for nuclear invincibility.
Just 18% of American voters believe the NIE claim that Iran has halted its nuclear weapons program. The latest Rasmussen Reports national telephone survey found that 66% disagree and say Iran has not stopped its nuclear weapons program. But the odds of a US / Israeli strike on Iran before December 2008, according to online futures markets, have plummeted from 50% in November to 18% today.
The other casinos where bets on war in the Middle East are made each day are the crude oil markets in London and New York. “The market is increasingly driven by forces beyond OPEC’s control, by geopolitical events and the growing influence of financial investors,” said Mohammed bin Dhaen al-Hamli who is the UAE oil minister.
Just prior to the bombshell NIE report, there was erroneous speculation that Saudi Arabia would agree to increase in its daily oil output by anywhere from 500,000 to 750,000 bpd, as a gift to its military patron in Washington. Speculation of a Saudi oil output hike knocked the price of crude oil from a record high of $99.25 /barrel on Nov 26th, to around $87 /barrel a week or so later, but in retrospect, the slide in oil prices was simply wiping out the $12 /barrel Iranian “war premium”.
On Dec 5th, Riyadh sided with the hawks of OPEC – Libya, Iran, and Venezuela, and refused to increase its oil output, citing ample global oil inventories. Saudi king Abdullah had escorted Iranian president Mahmoud Ahmadinejad along a red carpet just two days earlier, and saw eye to eye with his Persian neighbors. “Our position is that demand and supply are balanced and there is no need to increase oil to the market,” said Iranian Oil Minister Gholamhossein Nozari.
Anticipating a tight fisted OPEC this winter, the US Energy Information Agency said on Dec 11th that global oil demand in Q’1 of 2008 would climb to 87.4 million bpd, up 2% from a year earlier, and exceeding global supply, forcing oil consuming countries to dip into their emergency oil inventories. “OECD nations will have just 49.3 days of forward crude oil supply cover by February 2008, the lowest inventory buffer since December 2004, as demand growth outpaces supply” the EIA warned.
The Saudi shift into the hawkish camp of OPEC threatens to unravel the latest recovery in the Dow Jones Industrials, which rallied 1,000-points towards the 13,800 level, on high hopes that crude oil had topped out, and would slide towards $75 per barrel. Instead, OPEC’s hard-line put a floor under crude oil at $87 /barrel, and “black gold” zoomed above $90 per barrel a week later, after the Bernanke Fed lowered the fed funds rate to 4.25%, and announced a plan to inject tens of billions of dollars into the banking system, whetting the appetite of crude oil speculators, and investors seeking a hedge against monetary inflation.
To make matters worse, internal oil consumption in the five biggest oil exporting nations - Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates is growing at a 6% annualized rate, forcing their governments to reduce oil exports by 3 percent. If sustained, that could reduce their crude oil exports as much as 2.5 million barrels a day by the end of 2010.
As a consequence, “Oil prices will hit $100 a barrel before dipping to $80,” Texas oilman and trader T. Boone Pickens predicted on Dec 11th. “Get ready for $100, it is coming up. A hundred dollars will come before $80. You’ll see $100 oil within the next six months. A hundred dollars is going to become routine,” he declared.
Gary Dorsch
Iran crisis bumps up crude prices - The Black Hands of Recession-2
Guardian.co.uk, Friday 30 March 2007
Oil prices shot up to their highest in over six months today on continued tension between Britain and Iran over British naval staff held by Tehran.
London Brent crude futures jumped over $1 a barrel, pushing through $69 for the first time since early last September during hectic trading. It later retreated towards $68 but dealers said any further escalation in the spat between the two countries would be immediately reflected in the oil price.
US light crude futures pushed through $66 a barrel, up more than 50 cents a barrel.
Iran's embassy in London said Britain was in close contact with the Iranian government to resolve the incident with the captured British military personnel.
"This case can and should be settled through bilateral channels. The British government's attempt to engage third parties, including the Security Council, with this case is not helpful," the Iranian embassy said.
The UN Security Council's statement on Thursday called for a swift end to the situation.
Iran broadcast footage of a second "confession" from one of its British military captives as Iran's president said the UK should apologise for "violating" Iranian waters.
The oil market was also nervous as a strike affecting a key oil hub in France threatened to shut down several refineries in the coming days.
The AA said the rises in oil prices in the past week had pushed unleaded petrol prices through 90 pence a litre and predicted it would move higher still if oil prices continued to rise. Prices are up 4p a litre since early February.
In the budget, Gordon Brown postponed the annual rise in petrol duty until September when it will go up by 2p and by the same again next March. Duty is currently 48.3p a litre.
Oil prices shot up to their highest in over six months today on continued tension between Britain and Iran over British naval staff held by Tehran.
London Brent crude futures jumped over $1 a barrel, pushing through $69 for the first time since early last September during hectic trading. It later retreated towards $68 but dealers said any further escalation in the spat between the two countries would be immediately reflected in the oil price.
US light crude futures pushed through $66 a barrel, up more than 50 cents a barrel.
Iran's embassy in London said Britain was in close contact with the Iranian government to resolve the incident with the captured British military personnel.
"This case can and should be settled through bilateral channels. The British government's attempt to engage third parties, including the Security Council, with this case is not helpful," the Iranian embassy said.
The UN Security Council's statement on Thursday called for a swift end to the situation.
Iran broadcast footage of a second "confession" from one of its British military captives as Iran's president said the UK should apologise for "violating" Iranian waters.
The oil market was also nervous as a strike affecting a key oil hub in France threatened to shut down several refineries in the coming days.
The AA said the rises in oil prices in the past week had pushed unleaded petrol prices through 90 pence a litre and predicted it would move higher still if oil prices continued to rise. Prices are up 4p a litre since early February.
In the budget, Gordon Brown postponed the annual rise in petrol duty until September when it will go up by 2p and by the same again next March. Duty is currently 48.3p a litre.
Iranian missiles drive up oil - Black hands behind Global Economic Crisis
Oil zooms up $5-plus on Iran fears
Oil settles $5.60 higher to $141.65 as Middle East tensions have investors on edge. OPEC reports that global demand will grow by 50% by 2030.
Iranian missiles drive up oil
Increased less than 10%Increased 10% or moreDecreased less than 10%Decreased 10% or more or View results
NEW YORK -Oil rallied late Thursday, settling more than $5 a barrel higher, as traders reacted to talk of further turbulence in Iran and Nigeria, raising new supply concerns.
Light, sweet crude settled $5.60 higher to $141.65 a barrel. Prices had soared as high as $142.04 just before the settlement.
Traders said rumors that Iran test fired more missiles and of the apparent end of a cease-fire in Nigeria pushed prices up at the end of the trading day.
When global supply is as tight as it is right now, traders do not wait to confirm rumors, said Neal Dingmann, senior energy analyst at Dahlman Rose & Co.
"People are shooting first and asking questions later," he said, especially when the rumors are concerned such oil-rich countries as Iran and Nigeria.
Iran media reported that Tehran had test-fired a series of missiles in the Persian Gulf for the second day on Thursday, putting investors on edge.
However, American radar and satellite data do not back the reports. A senior military source said that Iran launched only one missile on Thursday, not a full round of tests, according to the latest U.S. intelligence assessments.
Mark Waggoner, president of Excel Futures, said that tensions throughout the Middle East are pushing up the price of oil, but he said that the recent events in Iran are of particular concern today.
Rumors of tension. Waggoner and Dingmann both noted that there was talk that they may have been an end to a cease fire in Nigeria, and said those rumors could have pushed up prices as well.
If tensions in the Middle East were to subside, Waggoner said, "I would think you would get $10 off [the price] almost immediately."
With the market so sensitive, geopolitical unrest, especially in Iran, which sits on 10% of the world's oil supply, any news of instability is enough to push the price of oil higher, said Stephen Schork, publisher of the industry newsletter, The Schork Report.
"This is still a bullish market that is trading as much on psychology as fundamentals," said Schork.
Escalating tensions in Iran could shut down the Strait of Hormuz, a key passageway for Middle East oil, posing a big problem in transporting oil and putting pressure on global supply, said Schork.
OPEC report. The Organization of Petroleum Exporting Countries said Thursday in its "World Oil Outlook for 2008" that global energy demand will spike by more than 50% by 2030.
"Oil has been in the leading position in supplying the world's growing energy needs for the past four decades, and there is a clear expectation that this will continue," said the summary of the 214-page report.
OPEC also noted, however, that oil reserves, conservation and new methods of discovery mean that supply will keep pace with demand.
The summary that accompanied the report said that "the transportation sector will be the key to future oil demand growth." More than 4 billion people live in countries with fewer than one car for every 20 people, suggesting a growing global demand for vehicles.
According to the report summary, "there is certainly enough supply, and there is ample investment," which should lead to falling oil prices.
The summary cited the "significant weakening" of the greenback as one of the reasons that oil prices have been climbing. In addition, OPEC said that skyrocketing futures trading and "paper barrel" trading allows "unlimited and undetected speculation."
Climbing back up. Crude prices slid more than $9 a barrel Monday and Tuesday after Iranian president Mahmoud Ahmadinejad said he did not expect a future armed conflict with Israel or the United States.
The unwinding of oil prices after came just after prices hit a fresh record high. Crude futures surged to $145.85 a barrel on the Thursday ahead of the three-day July 4 holiday, before settling at a record close of $145.29 a barrel.
"I think it is clear that while there is a bubble built into this marketplace," said Schork, he is expecting "a rebound and another run to $150," by the end of the summer.
Waggoner also anticipates that crude oil prices will continue to charge forward. "Ultimately, we are still in a raging bull market," he said. "I expect the market to go up to $152."
In addition to geopolitical tensions, oil prices are being sent higher on "the draws on crude oil combined with the dollar problems and the government doing nothing to support the dollar," said Waggoner.
On Wednesday, crude prices settled flat after a bigger-than-expected gain in gasoline supplies countered tensions in Iran.
Gasoline prices retreat. A government report released Wednesday showed an unexpected climb in national gasoline stockpiles, which analysts say could indicate that drivers just aren't buying as much fuel.
Retail gas prices backed away from their record highs overnight, a daily survey by motorist group AAA showed on Thursday. The price of regular unleaded gasoline fell four-tenths of a cent to $4.104 a gallon.
Through the first half of the week, gas prices held at a record high of $4.108 a gallon. Gas prices have surged roughly 40% in the past year.
Oil settles $5.60 higher to $141.65 as Middle East tensions have investors on edge. OPEC reports that global demand will grow by 50% by 2030.
Iranian missiles drive up oil
Increased less than 10%Increased 10% or moreDecreased less than 10%Decreased 10% or more or View results
NEW YORK -Oil rallied late Thursday, settling more than $5 a barrel higher, as traders reacted to talk of further turbulence in Iran and Nigeria, raising new supply concerns.
Light, sweet crude settled $5.60 higher to $141.65 a barrel. Prices had soared as high as $142.04 just before the settlement.
Traders said rumors that Iran test fired more missiles and of the apparent end of a cease-fire in Nigeria pushed prices up at the end of the trading day.
When global supply is as tight as it is right now, traders do not wait to confirm rumors, said Neal Dingmann, senior energy analyst at Dahlman Rose & Co.
"People are shooting first and asking questions later," he said, especially when the rumors are concerned such oil-rich countries as Iran and Nigeria.
Iran media reported that Tehran had test-fired a series of missiles in the Persian Gulf for the second day on Thursday, putting investors on edge.
However, American radar and satellite data do not back the reports. A senior military source said that Iran launched only one missile on Thursday, not a full round of tests, according to the latest U.S. intelligence assessments.
Mark Waggoner, president of Excel Futures, said that tensions throughout the Middle East are pushing up the price of oil, but he said that the recent events in Iran are of particular concern today.
Rumors of tension. Waggoner and Dingmann both noted that there was talk that they may have been an end to a cease fire in Nigeria, and said those rumors could have pushed up prices as well.
If tensions in the Middle East were to subside, Waggoner said, "I would think you would get $10 off [the price] almost immediately."
With the market so sensitive, geopolitical unrest, especially in Iran, which sits on 10% of the world's oil supply, any news of instability is enough to push the price of oil higher, said Stephen Schork, publisher of the industry newsletter, The Schork Report.
"This is still a bullish market that is trading as much on psychology as fundamentals," said Schork.
Escalating tensions in Iran could shut down the Strait of Hormuz, a key passageway for Middle East oil, posing a big problem in transporting oil and putting pressure on global supply, said Schork.
OPEC report. The Organization of Petroleum Exporting Countries said Thursday in its "World Oil Outlook for 2008" that global energy demand will spike by more than 50% by 2030.
"Oil has been in the leading position in supplying the world's growing energy needs for the past four decades, and there is a clear expectation that this will continue," said the summary of the 214-page report.
OPEC also noted, however, that oil reserves, conservation and new methods of discovery mean that supply will keep pace with demand.
The summary that accompanied the report said that "the transportation sector will be the key to future oil demand growth." More than 4 billion people live in countries with fewer than one car for every 20 people, suggesting a growing global demand for vehicles.
According to the report summary, "there is certainly enough supply, and there is ample investment," which should lead to falling oil prices.
The summary cited the "significant weakening" of the greenback as one of the reasons that oil prices have been climbing. In addition, OPEC said that skyrocketing futures trading and "paper barrel" trading allows "unlimited and undetected speculation."
Climbing back up. Crude prices slid more than $9 a barrel Monday and Tuesday after Iranian president Mahmoud Ahmadinejad said he did not expect a future armed conflict with Israel or the United States.
The unwinding of oil prices after came just after prices hit a fresh record high. Crude futures surged to $145.85 a barrel on the Thursday ahead of the three-day July 4 holiday, before settling at a record close of $145.29 a barrel.
"I think it is clear that while there is a bubble built into this marketplace," said Schork, he is expecting "a rebound and another run to $150," by the end of the summer.
Waggoner also anticipates that crude oil prices will continue to charge forward. "Ultimately, we are still in a raging bull market," he said. "I expect the market to go up to $152."
In addition to geopolitical tensions, oil prices are being sent higher on "the draws on crude oil combined with the dollar problems and the government doing nothing to support the dollar," said Waggoner.
On Wednesday, crude prices settled flat after a bigger-than-expected gain in gasoline supplies countered tensions in Iran.
Gasoline prices retreat. A government report released Wednesday showed an unexpected climb in national gasoline stockpiles, which analysts say could indicate that drivers just aren't buying as much fuel.
Retail gas prices backed away from their record highs overnight, a daily survey by motorist group AAA showed on Thursday. The price of regular unleaded gasoline fell four-tenths of a cent to $4.104 a gallon.
Through the first half of the week, gas prices held at a record high of $4.108 a gallon. Gas prices have surged roughly 40% in the past year.
Oil Price History and Analysis- Price Movement History
Annual Average Domestic Crude Oil Prices
1946-Jan 2009
U.S. Average
(in $/bbl.)
Year Nominal Inflation Adjusted
1946 $1.63 $17.76
1947 $2.16 $20.58
1948 $2.77 $24.72
1949 $2.77 $24.99
1950 $2.77 $24.42
1951 $2.77 $22.63
1952 $2.77 $22.20
1953 $2.92 $23.23
1954 $2.99 $23.61
1955 $2.93 $23.22
1956 $2.94 $22.96
1957 $3.14 $23.74
1958 $3.00 $22.05
1959 $3.00 $21.90
1960 $2.91 $20.88
1961 $2.85 $20.25
1962 $2.85 $20.05
1963 $2.91 $20.20
1964 $3.00 $20.56
1965 $3.01 $20.30
1966 $3.10 $20.32
1967 $3.12 $19.84
1968 $3.18 $19.41
1969 $3.32 $19.22
1970 $3.39 $18.56
1971 $3.60 $18.88
1972 $3.60 $18.29
1973 $4.75 $22.73
1974 $9.35 $40.29
1975 $12.21 $48.21
1976 $13.10 $48.91
1977 $14.40 $50.48
1978 $14.95 $48.71
1979 $25.10 $73.44
1980 $37.42 $97.47
1981 $35.75 $83.54
1982 $31.83 $70.07
1983 $29.08 $62.02
1984 $28.75 $58.78
1985 $26.92 $53.15
1986 $14.44 $27.99
1987 $17.75 $33.19
1988 $14.87 $26.70
1989 $18.33 $31.40
1990 $23.19 $37.69
1991 $20.20 $31.51
1992 $19.25 $29.15
1993 $16.75 $24.62
1994 $15.66 $22.45
1995 $16.75 $23.35
1996 $20.46 $27.71
1997 $18.64 $24.67
1998 $11.91 $15.52
1999 $16.56 $21.12
2000 $27.39 $33.79
2001 $23.00 $27.59
2002 $22.81 $26.94
2003 $27.69 $31.97
2004 $37.66 $42.35
2005 $50.04 $54.01
2006 $58.30 $61.37
2007 $64.20 $64.93
2008 (Jun) $126.33 $123.88
2008 (Ave) $99.65 $99.65
1946-Jan 2009
U.S. Average
(in $/bbl.)
Year Nominal Inflation Adjusted
1946 $1.63 $17.76
1947 $2.16 $20.58
1948 $2.77 $24.72
1949 $2.77 $24.99
1950 $2.77 $24.42
1951 $2.77 $22.63
1952 $2.77 $22.20
1953 $2.92 $23.23
1954 $2.99 $23.61
1955 $2.93 $23.22
1956 $2.94 $22.96
1957 $3.14 $23.74
1958 $3.00 $22.05
1959 $3.00 $21.90
1960 $2.91 $20.88
1961 $2.85 $20.25
1962 $2.85 $20.05
1963 $2.91 $20.20
1964 $3.00 $20.56
1965 $3.01 $20.30
1966 $3.10 $20.32
1967 $3.12 $19.84
1968 $3.18 $19.41
1969 $3.32 $19.22
1970 $3.39 $18.56
1971 $3.60 $18.88
1972 $3.60 $18.29
1973 $4.75 $22.73
1974 $9.35 $40.29
1975 $12.21 $48.21
1976 $13.10 $48.91
1977 $14.40 $50.48
1978 $14.95 $48.71
1979 $25.10 $73.44
1980 $37.42 $97.47
1981 $35.75 $83.54
1982 $31.83 $70.07
1983 $29.08 $62.02
1984 $28.75 $58.78
1985 $26.92 $53.15
1986 $14.44 $27.99
1987 $17.75 $33.19
1988 $14.87 $26.70
1989 $18.33 $31.40
1990 $23.19 $37.69
1991 $20.20 $31.51
1992 $19.25 $29.15
1993 $16.75 $24.62
1994 $15.66 $22.45
1995 $16.75 $23.35
1996 $20.46 $27.71
1997 $18.64 $24.67
1998 $11.91 $15.52
1999 $16.56 $21.12
2000 $27.39 $33.79
2001 $23.00 $27.59
2002 $22.81 $26.94
2003 $27.69 $31.97
2004 $37.66 $42.35
2005 $50.04 $54.01
2006 $58.30 $61.37
2007 $64.20 $64.93
2008 (Jun) $126.33 $123.88
2008 (Ave) $99.65 $99.65
Oil Price History and Analysis
A discussion of crude oil prices, the relationship between prices and rig count and the outlook for the future of the petroleum industry.
Introduction
Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.
The U.S. petroleum industry's price has been heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the wellhead averaged $24.98 per barrel adjusted for inflation to 2007 dollars. In the absence of price controls the U.S. price would have tracked the world price averaging $27.00. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.04 in 2007 prices. That means that only fifty percent of the time from 1947 to 2007 have oil prices exceeded $19.04 per barrel. (See note in box on right.)
Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices which was reminiscent of the late 1970s.
Crude Oil Prices 1947 - May, 2008
*World Price - The only very long term price series that exists is the U.S. average wellhead or first purchase price of crude. When discussing long-term price behavior this presents a problem since the U.S. imposed price controls on domestic production from late 1973 to January 1981. In order to present a consistent series and also reflect the difference between international prices and U.S. prices we created a world oil price series that was consistent with the U.S. wellhead price adjusting the wellhead price by adding the difference between the refiners acquisition price of imported crude and the refiners average acquisition price of domestic crude.
The Very Long Term View
The very long term view is much the same. Since 1869 US crude oil prices adjusted for inflation have averaged $21.05 per barrel in 2006 dollars compared to $21.66 for world oil prices.
Fifty percent of the time prices U.S. and world prices were below the median oil price of $16.71 per barrel.
If long term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $16.71 per barrel half of the time. The very long term data and the post World War II data suggest a "normal" price far below the current price.
Crude Oil Prices 1869-2007
The results are dramatically different if only post-1970 data are used. In that case U.S. crude oil prices average $29.06 per barrel and the more relevant world oil price averages $32.23 per barrel. The median oil price for that time period is $26.50 per barrel.
If oil prices revert to the mean this period is likely the most appropriate for today's analyst. It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details below influence over oil prices is not equivalent to control.
Crude Oil Prices 1970-2007
Post World War II
Pre Embargo Period
Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 2006 dollars an entirely different story emerges with crude oil prices fluctuating between $17 - $18 during the same period. The apparent 20% price increase just kept up with inflation.
From 1958 to 1970 prices were stable at about $3.00 per barrel, but in real terms the price of crude oil declined from above $17 to below $14 per barrel. The decline in the price of crude when adjusted for inflation was amplified for the international producer in 1971 and 1972 by the weakness of the US dollar.
OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Two of the representatives at the initial meetings had studied the the Texas Railroad Commission's methods of influencing price through limitations on production. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.
Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another way to say it is that there was no more spare capacity and therefore no tool to put an upper limit on prices. A little over two years later OPEC would, through the unintended consequence of war, get a glimpse at the extent of its power to influence prices.
World Events and Crude Oil Prices 1947-1973
Middle East, OPEC and Oil Prices 1947-1973
Middle East Supply Interruptions
Yom Kippur War - Arab Oil Embargo
In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel. While Arab nations curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up by increased production in other countries. The net loss of 4 MMBPD extended through March of 1974 and represented 7 percent of the free world production.
If there was any doubt that the ability to control crude oil prices had passed from the United States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of prices to supply shortages became all too apparent when prices increased 400 percent in six short months.
From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per barrel to $13.55 per barrel. When adjusted for inflation the price over that period of time world oil prices were in a period of moderate decline.
U.S. and World Events and Oil Prices 1973-1981
OPEC Oil Production 1973-2007
Crises in Iran and Iraq
Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November, 1978 and June, 1979. At one point production almost halted.
While the Iranian revolution was the proximate cause of what would be the highest prices in post-WWII history, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution production was up to 4 million barrels per day.
Iran weakened by the revolution was invaded by Iraq in September, 1980. By November the combined production of both countries was only a million barrels per day and 6.5 million barrels per day less than a year before. As a consequence worldwide crude oil production was 10 percent lower than in 1979.
The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from from $14 in 1978 to $35 per barrel in 1981.
Twenty-six years later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran.
Iraq's production remains about 1.5 million barrels below its peak before the Iraq-Iran War.
Iran Oil production 1973-2007
Iraq Oil production 1973-2007
US Oil Price Controls - Bad Policy?
The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer.
Did the policy achieve its goal? In the short term, the recession induced by the 1973-1974 crude oil price rise was less because U.S. consumers faced lower prices than the rest of the world. However, it had other effects as well.
In the absence of price controls U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less.
US Oil Price Controls 1973-1981
OPEC's Failure to Control Crude Oil Prices
OPEC has seldom been effective at controlling prices. While often referred to as a cartel, OPEC does not satisfy the definition. One of the primary requirements is a mechanism to enforce member quotas. The old joke went something like this. What is the difference between OPEC and the Texas Railroad Commission? OPEC doesn't have any Texas Rangers! The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity.
With enough spare capacity at times to be able to increase production sufficiently to offset the impact of lower prices on its own revenue, Saudi Arabia could enforce discipline by threatening to increase production enough to crash prices. In reality even this was not an OPEC enforcement mechanism unless OPEC's goals coincided with those of Saudi Arabia.
During the 1979-1980 period of rapidly increasing prices, Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears.
Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment -- much of the reaction to the oil price increase of the end of the decade was permanent and would never respond to lower prices with increased consumption of oil.
Higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and higher supply from outside the organization.
From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC produced beyond their quotas. During most of this period Saudi Arabia acted as the swing producer cutting its production in an attempt to stem the free fall in prices. In August of 1985, the Saudis tired of this role. They linked their oil price to the spot market for crude and by early 1986 increased production from 2 MMBPD to 5 MMBPD. Crude oil prices plummeted below $10 per barrel by mid-1986. Despite the fall in prices Saudi revenue remained about the same with higher volumes compensating for lower prices.
A December 1986 OPEC price accord set to target $18 per barrel bit it was already breaking down by January of 1987and prices remained weak.
The price of crude oil spiked in 1990 with the lower production and uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world and particularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwait than they did Persian Iran. The proximity to the world's largest oil producer helped to shape the reaction.
Following what became known as the Gulf War to liberate Kuwait crude oil prices entered a period of steady decline until in 1994 inflation adjusted prices attained their lowest level since 1973.
The price cycle then turned up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997 world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. Declining Russian production contributed to the price recovery. Between 1990 and 1996 Russian production declined over 5 million barrels per day.
World Events and Crude Oil Prices 1981-1998
U.S. Petroleum Consumption
Non-OPEC Production & Crude Oil Prices
OPEC Production & Crude Oil Prices
Russian Crude Oil Production
OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among its member countries.
The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998 Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral. In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.
Prices began to recover in early 1999 and OPEC reduced production another 1.719 million barrels in April. As usual not all of the quotas were observed but between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.
With minimal Y2K problems and growing US and world economies the price continued to rise throughout 2000 to a post 1981 high. Between April and October, 2000 three successive OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price increases. Prices finally started down following another quota increase of 500,000 effective November 1, 2000.
World Events and Crude Oil Prices 1997-2003
OPEC Production 1990-2007
Russian production increases dominated non-OPEC production growth from 2000 forward and was responsible for most of the non-OPEC increase since the turn of the century.
Once again it appeared that OPEC overshot the mark. In 2001, a weakened US economy and increases in non-OPEC production put downward pressure on prices. In response OPEC once again entered into a series of reductions in member quotas cutting 3.5 million barrels by September 1, 2001. In the absence of the September 11, 2001 terrorist attack this would have been sufficient to moderate or even reverse the trend.
In the wake of the attack crude oil prices plummeted. Spot prices for the U.S. benchmark West Texas Intermediate were down 35 percent by the middle of November. Under normal circumstances a drop in price of this magnitude would have resulted an another round of quota reductions but given the political climate OPEC delayed additional cuts until January 2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. This had the desired effect with oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continued to rise and U.S. inventories reached a 20-year low later in the year.
By year end oversupply was not a problem. Problems in Venezuela led to a strike at PDVSA causing Venezuelan production to plummet. In the wake of the strike Venezuela was never able to restore capacity to its previous level and is still about 900,000 barrels per day below its peak capacity of 3.5 million barrels per day. OPEC increased quotas by 2.8 million barrels per day in January and February, 2003.
On March 19, 2003, just as some Venezuelan production was beginning to return, military action commenced in Iraq. Meanwhile, inventories remained low in the U.S. and other OECD countries. With an improving economy U.S. demand was increasing and Asian demand for crude oil was growing at a rapid pace.
The loss of production capacity in Iraq and Venezuela combined with increased OPEC production to meet growing international demand led to the erosion of excess oil production capacity. In mid 2002, there was over 6 million barrels per day of excess production capacity and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare capacity to produce oil was under a million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from most OPEC producers.
In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel.
Other major factors contributing to the current level of prices include a weak dollar and the continued rapid growth in Asian economies and their petroleum consumption. The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol have contributed to higher prices.
World Events and Crude Oil Prices 2001-2007
Russian Crude Oil Production
Venezuelan Oil Production
Excess Crude Oil Production Capacity
One of the most important factors supporting a high price is the level of petroleum inventories in the U.S. and other consuming countries. Until spare capacity became an issue inventory levels provided an excellent tool for short-term price forecasts. Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone.
Impact of Prices on Industry Segments
Drilling and Exploration
Boom and Bust
The Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production and sale of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry. In a very real sense it is a measure of the oil and gas industry's confidence in its own future.
At the end of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated crude oil prices to over 2000 in 1979. From 1978 to the beginning of 1981 domestic crude oil prices exploded from a combination of the the rapid growth in world energy prices and deregulation of domestic prices. At that time high prices and forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running had more than doubled.
It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline which continued until the 1986 price collapse. The one year lag between crude prices and rig count disappeared in the 1986 price collapse. For the next few years the economy of the towns and cities in the oil patch was characterized by bankruptcy, bank failures and high unemployment.
U.S. Rotary Rig Count 1974-2005
Crude Oil and Natural Gas Drilling
After the Collapse
Several trends established were established in the wake of the collapse in crude prices. The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months. (Note that the graph on the right is limited to rigs involved in exploration for crude oil as compared to the previous graph which also included rigs involved in gas exploration.) Like any other industry that goes through hard times the oil business emerged smarter, leaner and more conservative. Industry participants, bankers and investors were far more aware of the risk of price movements. Companies long familiar with accessing geologic, production and management risk added price risk to their decision criteria.
Technological improvements were incorporated:
Increased use of 3-D seismic data reduced drilling risk.
Directional and horizontal drilling led to improved production in many reservoirs.
Financial instruments were used to limit exposure to price movements.
Increased use of CO2 floods and improved recovery methods to improve production in existing wells.
In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 15 percent until a recent resurgence. U.S. Rotary Rig Count
Exploration for Oil
U.S. Rotary Rig Count
Percent Exploring for Crude Oil
Well Completions - A measure of success?
Rig count does not tell the whole story of oil and gas exploration and development. It is certainly a good measure of activity, but it is not a measure of success.
After a well is drilled it is either classified as an oil well, natural gas well or dry hole. The percentage of wells completed as oil or gas wells is frequently used as a measure of success. In fact, this percentage is often referred to as the success rate.
Immediately after World War II 65 percent of the wells drilled were completed as oil or gas wells. This percentage declined to about 57 percent by the end of the 1960s. It rose steadily during the 1970s to reach 70 percent at the end of that decade. This was followed by a plateau or modest decline through most of the 1980s.
Beginning in 1990 shortly after the harsh lessons of the price collapse completion rates increased dramatically to 77 percent. What was the reason for the dramatic increase? For that matter, what was the cause of the steady drop in the 1950s and 1960s or the reversal in the 1970s?
Since the percentage completion rates are much lower for the more risky exploratory wells, a shift in emphasis away from development would result in lower overall completion rates. This, however, was not the case. An examination of completion rates for development and exploratory wells shows the same general pattern. The decline was price related as we will explain later.
Some would argue that the periods of decline were a result of the fact that every year there is less oil to find. If the industry does not develop better technology and expertise every year, oil and gas completion rates should decline. However, this does will not explain the periods of increase.
The increases of the seventies were more related to price than technology. When a well is drilled, the fact that oil or gas is found does not mean that the well will be completed as a producing well. The determining factor is economics. If the well can produce enough oil or gas to cover the additional cost of completion and the ongoing production costs it will be put into production. Otherwise, its a dry hole even if crude oil or natural gas is found. The conclusion is that if real prices are increasing we can expect a higher percentage of successful wells. Conversely if prices are declining the opposite is true.
The increases of the 1990s, however, cannot be explained by higher prices. These increases are the result of improved technology and the shift to a higher percentage of natural gas drilling activity. The increased use of and improvements to 3-D seismic data and analysis combined with horizontal and and directional drilling improve prospects for successful completions. The fact that natural gas is easier to see in the seismic data adds to that success rate.
Most dramatic is the improvement in the the percentage exploratory wells completed. In the 1990s completion rates for exploratory wells have soared from 25 to 45 percent.
Oil and Gas Well Completion Rates
Oil and Gas Well Completion Rates
Oil and Gas Well Completion Rates
Development
U.S. Oil and Gas Well Completion Rates
Exploration
Workover Rigs - Maintenance
Workover rig count is a measure of the industry's investment in the maintenance of oil and gas wells. The Baker-Hughes workover rig count includes rigs involved in pulling production tubing, sucker rods and pumps from a well that is 1,500 feet or more in depth.
Workover rig count is another measure of the health of the oil and gas industry. A disproportionate percentage of workovers are associated with oil wells. Workover rigs are used to pull tubing for repair or replacement of rods, pumps and tubular goods which are subject to wear and corrosion.
A low level of workover activity is particularly worrisome because it is indicative of deferred maintenance. The situation is similar to the aging apartment building that no longer justifies major renovations and is milked as long as it produces a positive cash flow. When operators are in a weak cash position workovers are delayed as long as possible. Workover activity impacts manufacturers of tubing, rods and pumps. Service companies coating pipe and other tubular goods are heavily affected.
U.S. Workover Rigs and Crude Oil Prices
Introduction
Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.
The U.S. petroleum industry's price has been heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the wellhead averaged $24.98 per barrel adjusted for inflation to 2007 dollars. In the absence of price controls the U.S. price would have tracked the world price averaging $27.00. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.04 in 2007 prices. That means that only fifty percent of the time from 1947 to 2007 have oil prices exceeded $19.04 per barrel. (See note in box on right.)
Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices which was reminiscent of the late 1970s.
Crude Oil Prices 1947 - May, 2008
*World Price - The only very long term price series that exists is the U.S. average wellhead or first purchase price of crude. When discussing long-term price behavior this presents a problem since the U.S. imposed price controls on domestic production from late 1973 to January 1981. In order to present a consistent series and also reflect the difference between international prices and U.S. prices we created a world oil price series that was consistent with the U.S. wellhead price adjusting the wellhead price by adding the difference between the refiners acquisition price of imported crude and the refiners average acquisition price of domestic crude.
The Very Long Term View
The very long term view is much the same. Since 1869 US crude oil prices adjusted for inflation have averaged $21.05 per barrel in 2006 dollars compared to $21.66 for world oil prices.
Fifty percent of the time prices U.S. and world prices were below the median oil price of $16.71 per barrel.
If long term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $16.71 per barrel half of the time. The very long term data and the post World War II data suggest a "normal" price far below the current price.
Crude Oil Prices 1869-2007
The results are dramatically different if only post-1970 data are used. In that case U.S. crude oil prices average $29.06 per barrel and the more relevant world oil price averages $32.23 per barrel. The median oil price for that time period is $26.50 per barrel.
If oil prices revert to the mean this period is likely the most appropriate for today's analyst. It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details below influence over oil prices is not equivalent to control.
Crude Oil Prices 1970-2007
Post World War II
Pre Embargo Period
Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 2006 dollars an entirely different story emerges with crude oil prices fluctuating between $17 - $18 during the same period. The apparent 20% price increase just kept up with inflation.
From 1958 to 1970 prices were stable at about $3.00 per barrel, but in real terms the price of crude oil declined from above $17 to below $14 per barrel. The decline in the price of crude when adjusted for inflation was amplified for the international producer in 1971 and 1972 by the weakness of the US dollar.
OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Two of the representatives at the initial meetings had studied the the Texas Railroad Commission's methods of influencing price through limitations on production. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.
Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another way to say it is that there was no more spare capacity and therefore no tool to put an upper limit on prices. A little over two years later OPEC would, through the unintended consequence of war, get a glimpse at the extent of its power to influence prices.
World Events and Crude Oil Prices 1947-1973
Middle East, OPEC and Oil Prices 1947-1973
Middle East Supply Interruptions
Yom Kippur War - Arab Oil Embargo
In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel. While Arab nations curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up by increased production in other countries. The net loss of 4 MMBPD extended through March of 1974 and represented 7 percent of the free world production.
If there was any doubt that the ability to control crude oil prices had passed from the United States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of prices to supply shortages became all too apparent when prices increased 400 percent in six short months.
From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per barrel to $13.55 per barrel. When adjusted for inflation the price over that period of time world oil prices were in a period of moderate decline.
U.S. and World Events and Oil Prices 1973-1981
OPEC Oil Production 1973-2007
Crises in Iran and Iraq
Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November, 1978 and June, 1979. At one point production almost halted.
While the Iranian revolution was the proximate cause of what would be the highest prices in post-WWII history, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution production was up to 4 million barrels per day.
Iran weakened by the revolution was invaded by Iraq in September, 1980. By November the combined production of both countries was only a million barrels per day and 6.5 million barrels per day less than a year before. As a consequence worldwide crude oil production was 10 percent lower than in 1979.
The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from from $14 in 1978 to $35 per barrel in 1981.
Twenty-six years later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran.
Iraq's production remains about 1.5 million barrels below its peak before the Iraq-Iran War.
Iran Oil production 1973-2007
Iraq Oil production 1973-2007
US Oil Price Controls - Bad Policy?
The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer.
Did the policy achieve its goal? In the short term, the recession induced by the 1973-1974 crude oil price rise was less because U.S. consumers faced lower prices than the rest of the world. However, it had other effects as well.
In the absence of price controls U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less.
US Oil Price Controls 1973-1981
OPEC's Failure to Control Crude Oil Prices
OPEC has seldom been effective at controlling prices. While often referred to as a cartel, OPEC does not satisfy the definition. One of the primary requirements is a mechanism to enforce member quotas. The old joke went something like this. What is the difference between OPEC and the Texas Railroad Commission? OPEC doesn't have any Texas Rangers! The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity.
With enough spare capacity at times to be able to increase production sufficiently to offset the impact of lower prices on its own revenue, Saudi Arabia could enforce discipline by threatening to increase production enough to crash prices. In reality even this was not an OPEC enforcement mechanism unless OPEC's goals coincided with those of Saudi Arabia.
During the 1979-1980 period of rapidly increasing prices, Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears.
Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment -- much of the reaction to the oil price increase of the end of the decade was permanent and would never respond to lower prices with increased consumption of oil.
Higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and higher supply from outside the organization.
From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC produced beyond their quotas. During most of this period Saudi Arabia acted as the swing producer cutting its production in an attempt to stem the free fall in prices. In August of 1985, the Saudis tired of this role. They linked their oil price to the spot market for crude and by early 1986 increased production from 2 MMBPD to 5 MMBPD. Crude oil prices plummeted below $10 per barrel by mid-1986. Despite the fall in prices Saudi revenue remained about the same with higher volumes compensating for lower prices.
A December 1986 OPEC price accord set to target $18 per barrel bit it was already breaking down by January of 1987and prices remained weak.
The price of crude oil spiked in 1990 with the lower production and uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world and particularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwait than they did Persian Iran. The proximity to the world's largest oil producer helped to shape the reaction.
Following what became known as the Gulf War to liberate Kuwait crude oil prices entered a period of steady decline until in 1994 inflation adjusted prices attained their lowest level since 1973.
The price cycle then turned up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997 world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. Declining Russian production contributed to the price recovery. Between 1990 and 1996 Russian production declined over 5 million barrels per day.
World Events and Crude Oil Prices 1981-1998
U.S. Petroleum Consumption
Non-OPEC Production & Crude Oil Prices
OPEC Production & Crude Oil Prices
Russian Crude Oil Production
OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among its member countries.
The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998 Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral. In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.
Prices began to recover in early 1999 and OPEC reduced production another 1.719 million barrels in April. As usual not all of the quotas were observed but between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.
With minimal Y2K problems and growing US and world economies the price continued to rise throughout 2000 to a post 1981 high. Between April and October, 2000 three successive OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price increases. Prices finally started down following another quota increase of 500,000 effective November 1, 2000.
World Events and Crude Oil Prices 1997-2003
OPEC Production 1990-2007
Russian production increases dominated non-OPEC production growth from 2000 forward and was responsible for most of the non-OPEC increase since the turn of the century.
Once again it appeared that OPEC overshot the mark. In 2001, a weakened US economy and increases in non-OPEC production put downward pressure on prices. In response OPEC once again entered into a series of reductions in member quotas cutting 3.5 million barrels by September 1, 2001. In the absence of the September 11, 2001 terrorist attack this would have been sufficient to moderate or even reverse the trend.
In the wake of the attack crude oil prices plummeted. Spot prices for the U.S. benchmark West Texas Intermediate were down 35 percent by the middle of November. Under normal circumstances a drop in price of this magnitude would have resulted an another round of quota reductions but given the political climate OPEC delayed additional cuts until January 2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. This had the desired effect with oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continued to rise and U.S. inventories reached a 20-year low later in the year.
By year end oversupply was not a problem. Problems in Venezuela led to a strike at PDVSA causing Venezuelan production to plummet. In the wake of the strike Venezuela was never able to restore capacity to its previous level and is still about 900,000 barrels per day below its peak capacity of 3.5 million barrels per day. OPEC increased quotas by 2.8 million barrels per day in January and February, 2003.
On March 19, 2003, just as some Venezuelan production was beginning to return, military action commenced in Iraq. Meanwhile, inventories remained low in the U.S. and other OECD countries. With an improving economy U.S. demand was increasing and Asian demand for crude oil was growing at a rapid pace.
The loss of production capacity in Iraq and Venezuela combined with increased OPEC production to meet growing international demand led to the erosion of excess oil production capacity. In mid 2002, there was over 6 million barrels per day of excess production capacity and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare capacity to produce oil was under a million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from most OPEC producers.
In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel.
Other major factors contributing to the current level of prices include a weak dollar and the continued rapid growth in Asian economies and their petroleum consumption. The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol have contributed to higher prices.
World Events and Crude Oil Prices 2001-2007
Russian Crude Oil Production
Venezuelan Oil Production
Excess Crude Oil Production Capacity
One of the most important factors supporting a high price is the level of petroleum inventories in the U.S. and other consuming countries. Until spare capacity became an issue inventory levels provided an excellent tool for short-term price forecasts. Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone.
Impact of Prices on Industry Segments
Drilling and Exploration
Boom and Bust
The Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production and sale of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry. In a very real sense it is a measure of the oil and gas industry's confidence in its own future.
At the end of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated crude oil prices to over 2000 in 1979. From 1978 to the beginning of 1981 domestic crude oil prices exploded from a combination of the the rapid growth in world energy prices and deregulation of domestic prices. At that time high prices and forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running had more than doubled.
It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline which continued until the 1986 price collapse. The one year lag between crude prices and rig count disappeared in the 1986 price collapse. For the next few years the economy of the towns and cities in the oil patch was characterized by bankruptcy, bank failures and high unemployment.
U.S. Rotary Rig Count 1974-2005
Crude Oil and Natural Gas Drilling
After the Collapse
Several trends established were established in the wake of the collapse in crude prices. The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months. (Note that the graph on the right is limited to rigs involved in exploration for crude oil as compared to the previous graph which also included rigs involved in gas exploration.) Like any other industry that goes through hard times the oil business emerged smarter, leaner and more conservative. Industry participants, bankers and investors were far more aware of the risk of price movements. Companies long familiar with accessing geologic, production and management risk added price risk to their decision criteria.
Technological improvements were incorporated:
Increased use of 3-D seismic data reduced drilling risk.
Directional and horizontal drilling led to improved production in many reservoirs.
Financial instruments were used to limit exposure to price movements.
Increased use of CO2 floods and improved recovery methods to improve production in existing wells.
In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 15 percent until a recent resurgence. U.S. Rotary Rig Count
Exploration for Oil
U.S. Rotary Rig Count
Percent Exploring for Crude Oil
Well Completions - A measure of success?
Rig count does not tell the whole story of oil and gas exploration and development. It is certainly a good measure of activity, but it is not a measure of success.
After a well is drilled it is either classified as an oil well, natural gas well or dry hole. The percentage of wells completed as oil or gas wells is frequently used as a measure of success. In fact, this percentage is often referred to as the success rate.
Immediately after World War II 65 percent of the wells drilled were completed as oil or gas wells. This percentage declined to about 57 percent by the end of the 1960s. It rose steadily during the 1970s to reach 70 percent at the end of that decade. This was followed by a plateau or modest decline through most of the 1980s.
Beginning in 1990 shortly after the harsh lessons of the price collapse completion rates increased dramatically to 77 percent. What was the reason for the dramatic increase? For that matter, what was the cause of the steady drop in the 1950s and 1960s or the reversal in the 1970s?
Since the percentage completion rates are much lower for the more risky exploratory wells, a shift in emphasis away from development would result in lower overall completion rates. This, however, was not the case. An examination of completion rates for development and exploratory wells shows the same general pattern. The decline was price related as we will explain later.
Some would argue that the periods of decline were a result of the fact that every year there is less oil to find. If the industry does not develop better technology and expertise every year, oil and gas completion rates should decline. However, this does will not explain the periods of increase.
The increases of the seventies were more related to price than technology. When a well is drilled, the fact that oil or gas is found does not mean that the well will be completed as a producing well. The determining factor is economics. If the well can produce enough oil or gas to cover the additional cost of completion and the ongoing production costs it will be put into production. Otherwise, its a dry hole even if crude oil or natural gas is found. The conclusion is that if real prices are increasing we can expect a higher percentage of successful wells. Conversely if prices are declining the opposite is true.
The increases of the 1990s, however, cannot be explained by higher prices. These increases are the result of improved technology and the shift to a higher percentage of natural gas drilling activity. The increased use of and improvements to 3-D seismic data and analysis combined with horizontal and and directional drilling improve prospects for successful completions. The fact that natural gas is easier to see in the seismic data adds to that success rate.
Most dramatic is the improvement in the the percentage exploratory wells completed. In the 1990s completion rates for exploratory wells have soared from 25 to 45 percent.
Oil and Gas Well Completion Rates
Oil and Gas Well Completion Rates
Oil and Gas Well Completion Rates
Development
U.S. Oil and Gas Well Completion Rates
Exploration
Workover Rigs - Maintenance
Workover rig count is a measure of the industry's investment in the maintenance of oil and gas wells. The Baker-Hughes workover rig count includes rigs involved in pulling production tubing, sucker rods and pumps from a well that is 1,500 feet or more in depth.
Workover rig count is another measure of the health of the oil and gas industry. A disproportionate percentage of workovers are associated with oil wells. Workover rigs are used to pull tubing for repair or replacement of rods, pumps and tubular goods which are subject to wear and corrosion.
A low level of workover activity is particularly worrisome because it is indicative of deferred maintenance. The situation is similar to the aging apartment building that no longer justifies major renovations and is milked as long as it produces a positive cash flow. When operators are in a weak cash position workovers are delayed as long as possible. Workover activity impacts manufacturers of tubing, rods and pumps. Service companies coating pipe and other tubular goods are heavily affected.
U.S. Workover Rigs and Crude Oil Prices
Saturday, January 31, 2009
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