OIL CRISIS: Black gold is becoming more precious and scarce
Youssef M. Ibrahim

April 20, 2005

Last week oil prices climbed down from close to $60 to about $50 a barrel and markets rejoiced far too early.

This is a long-term crisis and the world had better get used to the fact that it will linger. American congressional sanctions against oil producing countries will not resolve it nor will it be overcome cheaply.

The bottom line is that the price of oil has moved several notches up and likely to stay there until a substitute to oil can be found, which isn`t for tomorrow.

One statistic says a lot about this year alone: By the end of this year global oil demand will rise 3.3 million barrels a day to 86.1 million barrels a day. Few oil suppliers can produce the extra oil.

The additional demand represents more than double what Saudi Arabia, the world`s largest oil producing country, can produce even if it were to open all its valves.

Other oil producers in OPEC and outside are pumping all the oil they can.

Much of the new appetite originates with two Asian economic tigers, China and India, neither of which will slow down soon.

Unless the biggest oil consumer of all, the United States, dramatically tempers its thirst for oil, the twenty-first century may very well become known as the `oil wars` century.

This is a man-made crisis, one that has been coming a long time. Its four major components have come together over the past three decades, unfolding before our eyes.

In the past few years two of the largest oil pools discovered in Western democracies peaked. The North Sea hit its peak of 6.03 million barrels a day in 1999.

It has declined ever since at a rate of 3 percent a year. Alaska`s oil fields dropped by half since 1994 from 2 million barrels a day to 900,000 barrels now.

Simultaneously, as these huge oil lakes tapered off, a persistent lack of investments by Middle Eastern oil producers and others left them unable to make up the difference. That in itself is no surprise.

Given a choice between allocating part of the new oil revenues to develop oil fields or using the new money to boost welfare at home, repay accumulated debts and liven up morbid economies, most governments choose shoring up their budgets.

Finding new oil is an expensive proposition. Roughly speaking it takes investments of between $30 billion and $50 billion and several years in exploration, construction of pipelines and boosting stations to get another 1 million barrels a day out of the ground and ship it.

Such investments have not been made by Saudis or others for nearly two decades, resulting in the tight squeeze we are witnessing.

The circle of pressure was rounded on the consuming side as an array of environmental regulations mushroomed over the past decades in the US, making refining a risky and losing proposition for big oil.

So even if the extra oil arrives at US shores, it may have to be parked until it can be refined, contributing to the shortage.

A vast array of politically inspired sanctions were imposed by the US on several major oil producers including Iran, Libya and Iraq in the past two decades keeping large American companies out while allowing European, Chinese, Russian and Norwegian oil giants to displace them.

As a result the ranks of the largest 10 oil companies today are populated with Shell (Dutch-British), BP (British), Lukoil (Russian), Agip (Italian) and Total (French), Petrobas (Brazilian) and Cinopec (Chinese), all of which possess almost just as much technology as large US companies.

It is very difficult to reverse such erosion that has placed much of the world exploration and production of oil outside America`s sphere of influence.

And the US has refused any measures to discourage consumption such as raising fuel taxes, as Europe does or rein in the production and sale of SUVs and other gasoline guzzlers.

Major oil producing countries inside and outside OPEC will not relinquish their control of their oil to a free enterprise system allowing, say, large foreign publicly owned oil companies to come in and pump all the oil that they can.

That is the case in Saudi Arabia as it is in Mexico, both allies of the US.

Even Russia, which went the free enterprise way in liberalizing its oil sector in the Nineties, is now reversing that trend as the partial takeover by the Russian government of the Lukoil company that produced more than one-quarter of Russian oil, shows.

Finally, if the US invasion of Iraq has proven anything, it is that no power can control oil fields by force.

Iraqi insurgents have blown up enough oil facilities to reduce, not increase, the country`s oil exports dramatically over the past two years resulting in a net drop of 2 million barrels a day of Iraqi oil exports.

Should any Middle East oil producer become unstable, the Iraqi experience means that the US will not be able to secure desert oil fields by force.

Worries over such an occurrence have installed a permanent `fear premium` on top of oil prices anticipating unpredictable sabotage or political instability that has become a somewhat permanent tax on oil prices.

Simply put, there is not enough of the stuff to go around.

Youssef M. Ibrahim, a former Middle East correspondent for The New York Times and energy editor of the Wall Street Journal, is managing director of the Dubai-based Strategic Energy Investment Group.