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Why OPEC won't turn off the oil
Fact is, OPEC nations -- and especially Saudi Arabia -- can't afford to turn off their oil supplies because they're as dependent on Western money as the West is on their oil.
By Jim Jubak
President Bush had barely finished explaining how his plan to spend less than a billion in new money would end U.S. addiction to Middle Eastern oil before Saudi Arabia and the rest of OPEC fired back.
If the United States reduced its dependence on Middle Eastern oil, the Organization of Petroleum Exporting Countries would be forced, with deep sorrow certainly, to abandon plans to invest billions in developing new supplies of oil.
President Bush's plan to reduce U.S. demand for Middle Eastern oil would result, producers warned, in a global crisis in oil supply.
Yeah, right. As lines in the sand go, this one certainly sounds dramatic, but it's empty posturing. In fact, as full of too-little-too-late promises as President Bush's Jan. 31 State of the Union address was (see my Feb. 3 column, "The state of coal stocks is strong"), I'd give the nod to OPEC's performance over the president's for creativity and sheer chutzpah. As empty threats go, this is a doozy.
OPEC's grand experiment
As addicted as the United States may be to Middle Eastern oil, the oil producers, especially Saudi Arabia, are even more addicted to continued U.S. oil consumption. The Saudis, the Kuwaitis, the Nigerians and the rest of OPEC can't afford to stop investing in new production any more than the U.S. can afford to go cold turkey on Middle Eastern oil.
Look at the world from the perspective of the Saudis and the other OPEC oil producers.
To them, 2005 -- the year of $60-to-$70-a-barrel oil -- was a huge and successful experiment. For years, oil producers had kept their target price for oil relatively low: The official OPEC price band for crude oil was $22 to $28 at the time of the organization's Dec. 12 meeting. OPEC has kept the target so low because it worried that high oil prices would cut global demand for oil. OPEC has also worried that high oil prices would spur the development of alternative energy resources, such as Canada's oil sands, and alternative energy technologies such as nuclear and solar.
Related news and commentary on MSN Money
So OPEC watched with some concern as war in Iraq, hurricanes in the Gulf of Mexico, unrest in Nigeria and turmoil in Russia drove the price above $70 a barrel. And OPEC breathed a sigh of relief when prices above $60 a barrel didn't stop global economic growth in its tracks, didn't lead to crash programs of energy conservation and didn't force OPEC's customers to develop alternative fuel sources.
Now that the world has proven quite able to live with $60 to $70 a barrel oil, OPEC is quite happy to go along. The official target band may not move for some time, even though the more aggressive OPEC members, such as Iran and Venezuela, have called for official production cuts and higher official price targets. So far, OPEC isn't inclined to go on record in favor of higher prices. The organization will be quite happy to blame the price increase on market forces, Chinese demand and Western speculators for as long as possible. But the target price is now clearly above $50 a barrel, no matter what OPEC says officially.
Let's invade Canada for the oil
You can buy a piece of the action, so the military may not be necessary. Consider these four companies with exposure to Alberta's oil sands. Click here to read SuperModels.
Power rankings
Despite much higher oil prices, not all is well in OPEC's world. Like the rest of the world, OPEC has a supply-demand problem. For oil-consuming nations, that problem expresses itself as a huge increase in the cost of oil. For OPEC, and particularly for the Saudis, the problem is the potential for a loss of control over the global oil markets. Top World Oil Producers
 | 1) Saudi Arabia
2) Russia
3) United States
4) Iran
5) Mexico
6) China
7) Norway
8) Canada
9) Venezuela
10) United Arab Emirates
11) Kuwait
12) Nigeria
13) United Kingdom
13) Iraq (tied with U.K.)
Source: Energy Information Administration. Latest data from 2004. OPEC members in italics.
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Right now, OPEC still calls the tune in the global oil market -- and not just because it's the source of 40% of the world's oil, although that certainly doesn't hurt.
And Saudi Arabia isn't the most powerful country in OPEC just because it produces more oil than anyone else in the world, although that certainly isn't a bad foundation for power, either. The Saudis, at 10.4 million barrels a day at the end of 2004, aren't that far ahead of No. 2, Russia, at 9.3 billion, or No. 3, the United States, at 8.7 million.
Power in today's oil market involves two questions:
- Is your production rising or falling in the long run? Right now, non-OPEC production is falling in comparison to OPEC production. That puts OPEC in the driver's seat. (At least until Canada's oil sands projects start full production.)
- In the shorter run, do you have any excess production capacity that can add oil to the global markets at crunch time? When global supply is running just barely ahead of demand, as it is at the moment, countries with excess production capacity, the marginal producers, have tremendous market power and the ability to set prices.
Right now there's really only one country in the world with any surplus production capacity. That's Saudi Arabia. And that puts the Saudis in a position to defeat Venezuela's proposals on price and to overrule Iran on quotas.
But this power -- for Saudi Arabia and for OPEC -- isn't guaranteed for the long term. It's based on the ability of the countries in the organization as a whole to increase production to meet demand, so that oil consumers don't have a reason to get more aggressive about finding other sources of energy. And for the Saudis, in particular, it's based on their ability to increase production so that the country remains the global source of excess production capacity.
Meeting those goals won't be easy. And it will require massive investment in the region's oil reserves.
Drilling for the dregs
Even if you don't believe in peak oil -- the theory that global oil production either has peaked or will soon peak -- the problems facing the global oil industry, OPEC and Saudi Arabia are immense. The current generation of peak-oil theorists, building on the work of the late M. King Hubbert, predicts that world oil production will decline -- slowly at first and then more quickly -- as the rate at which new oil is discovered falls behind the depletion of current proven reserves.
Buttressing the theory are signs that some of the biggest proven reserves are indeed showing their age. For example, the United Kingdom, which has been a net exporter of energy for the last two decades thanks to the huge oil and gas deposits discovered in the North Sea about 35 years ago, became a net importer of natural gas in 2005. Oil analysts estimate that the United Kingdom has pumped between 50% and 75% of the available oil and gas in its North Sea fields. From its peak at the end of the 1990s, United Kingdom oil production has fallen by about 30%.
I think it's too early to tell if the Peak Oil theory is right -- and to predict when the peak might come. Another part of the theory, however, seems to me undeniably accurate. Peak Oil theories predict that production from a field will peak and start to fall long before all the oil is extracted, since the more easily pumped oil deposits are extracted first. And that extracting the remaining oil will get increasingly more difficult and more expensive.
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