The International Institute for Middle-East and Balkan Studies (IFIMES) in Ljubljana, Slovenia, regularly analyses events in the Middle East and the Balkans. IFIMES has analysed the fourth oil crisis and its implications. The most important and interesting sections of the comprehensive analysis are given below:
The growth of oil prices on world markets in August 2004 arouse concerns about the future price movements of this strategic raw material. All the analysts agree on the estimation that oil is a strategic and rare raw material which is going to run out one day and that its price increases with the increase in consumption. The latter is also the first rule in trading with oil as its consumption has been constantly increasing since the Second World War.
After the Second World War, the world has experienced nine recessions and four oil crises (including the present August crisis). The first oil crisis hit the world economy in 1973 during the Arab-Israeli War. For the first time in history the Arab states used oil as a weapon against Israel and exerted serious pressure on the USA and the West with the embargo on the supply of oil. Even one year later the world economy did not manage to recover from the consequences of the one-month embargo in October 1973. The Arabs succeeded in their pressure and the British conservatives lost the elections in 1974. In the USA President Gerald Ford similarly lost the 1976 presidential race against the democratic candidate Jimmy Carter. Oil was fatal also for Carter who lost the 1980 elections against Ronald Reagan after the second oil crisis in 1997-1980 (following the victory of the Islamic Revolution in Iran). The third oil crisis from 1990-1991 after Iraqi occupation of Kuwait was fatal for President Bush Sr. who lost the elections in spite of his military triumph and liberation of Kuwait.
From the above it can be concluded that the oil crises caused political and military conflicts in the Middle East which has more than half of the world oil stock. Uncertain situation in this region was the main reason for the price increase of this raw material. The second factor was the increase of consumption during the past three decades. China has for example recorded constant economic growth and consequently increased consumption of oil. According to official Chinese data the country today uses one million barrels a day more than in 2000 and has become the second main importer of oil following, of course, the USA.
The reasons for oil crisis can be classified into seven points:
UNCERTAIN SITUATION IN THE MIDDLE EAST
Saudi Arabia has been hit by a wave of terrorist attacks against foreign companies in the kingdom. Iran has raised concerns in the west due to the intransparent nuclear programme and its constant threats to attack the Bushehr nuclear power plant expressed towards the USA and Israel. Fortunately, the situation in these two countries has not significantly influenced the price growth in the present crisis.
Iraq, on the other hand, has important psychological influence on the prices. Since 1990, sanctions were imposed upon Iraq which was actually excluded from the OPEC quota system. The Oil-For-Food Programme in 1996 enabled Iraq to export limited amounts of oil for humanitarian causes under the UNO control.
Before the American occupation of Iraq on 9 April 2003, the Iraqi opposition leaders in their five-year plan planned the export of 3 million barrels a day. According to that plan, Iraq would export 6 - 8 million barrels a day till 2010. However, those economic estimations were not realistic as the aggravation of the military and security situations due to strong resistance throughout the state was not envisaged. The Kirkuk-Cehan north pipeline (800,000 barrels/day) practically does not operate and is the constant target of attacks. Two south pipelines (2 million barrels/day) were also targets of sabotage. Thus the country exports at best one million barrels a day.
The analysts of the IFIMES International Institute are of the opinion that in the next two years we can not rely on the Iraqi oil due to the following reasons:
Uncertain military situation: the replacement of American occupational forces with the UNO or NATO forces has not become an alternative yet. As long as the American forces are present in the central Sunnite and south Shiite part of Iraq, resistance will continue and the oil infrastructure will be sabotaged.
Uncertain political situation in the state: The transitional government still has limited control of the whole territory of the state. With the coming elections in 2005 the political fight will increase and will probably not remain at the political level but be aggravated also with armed clashes among various fractions and party militias. We should not forget the unresolved status of the city of Kirkuk with 5% of world oil stock, which represents the object of desire for the Arabs, Kurds and Turkmen.
Due to a decade of sanctions and two devastating wars in 1991 and 2003, the dated Iraqi oil industry is not capable of continuing production of the desired volumes of oil. The experts of the IFIMES International Institute estimate that during the next 24 months it is not expected for Iraqi production to influence significantly the price but it can influence psychologically the traders as the object of speculation at the stock exchange in oil.
China has become the second largest oil importing state following the USA. Chinese economy has the fastest growth in the world which was 20% in 2003. From January till July 2004 China exported 2.49 million barrels a day which is 39.5% more than in 2003. Some oil exporting countries are already calculating the future Chinese consumption and according to some estimations it will exceed 12 million barrels a day till 2020. Kuwait is the major investor into Chinese oil companies and will construct two refineries in China. Today, the Chinese-Kuwait petrochemical co-investment exceeds 8 billion dollars. The major part of Chinese oil imports comes from Russia. It is the Russia's second largest giant »Yukos« that supplies the oil corporations »China National Petroleum Corp.« and »Sinopec Group«.
THE CRISIS OF AMERICAN OIL INDUSTRY
With almost 10 million barrels a day the USA definitely is the most import-dependent country in the world. American economy and politics are tightly related to this raw material and very quickly react to every crisis on the oil markets. Oil has been an important material for American elections for the past three decades. At the coming November elections, oil will surely be the main trump card of both presidential candidates. President Bush would like the price to fall to $ 25.30 per barrel before the elections. He relies on the assurance of the Saudi royal dynasty that the Saudis will influence the reduction of prices with excessive production. Saudi Arabia has already reacted to this crisis and announced an increase in production by 1.3 million barrels a day so that now it produces over 10.5 million barrels a day while its quota within OPEC is 8.6 million barrels a day. On the other hand, the democratic candidate John Kerry connected the war against terrorism and oil. In his opinion the state is at war with terrorism and terrorism is in the Middle East where there is the oil which is of essential importance for the national security. Senator Kerry will therefore regard oil as the main element of his election campaign. The second reason for the American oil crisis is the shortage of American refinery capacities. The Americans have not built any new refineries for the past 25 years since their traders import derivatives rather than crude oil.
The world stock exchanges, especially in America, react quickly to every change or crisis - whether political or military - in the world. Stock exchanges are ideal for the speculators who speculate not only in present contracts but also in contracts postponed for 2 months ahead. The USA have no real or effective instrument to soothe the situation at stock exchanges and markets. For the first time in history, President Bill Clinton interfered in a minor crisis in 2000 when the prices rocketed from merely 9 dollars to more than 30 dollars in 1999. In September 2000 he placed 30 million barrels on the market from the national strategic reserves. However, the President's action was utterly inefficient and even meant a violation of the law stipulating the use of reserves only when the national security is jeopardised. American oil companies misused the oil from strategic reserves for speculation purposes and later on agreed under the pressure of the Congress and the court in an out-of-court settlement to return the oil to the national reserves.
We should not forget the negative role of the International Energy Agency (IEA) in the formation of dark scenarios and psychosis on oil markets. In the period of 3 months it drastically changed its forecast three times. In its last analysis IEA forecasted the movement of production and consumption until 2030. Bearing in mind that the Agency has changed its forecasts three times in only 3 months it is questionable how realistic those analyses are for such a long period. The IFIMES International Institute is of the opinion that some IEA analysts support the stock exchange speculators and additionally hinder the calming of the situation on the world market.
THE ROLE OF OPEC
In the past the Organisation of Petroleum Exporting Countries (OPEC), which unites 11 oil exporting countries, had a much stronger influence on the world prices of crude oil. During the period of cold war the contrasts between the east and the west sometimes reflected also among the members. Today the main producers in this organisation, Saudi Arabia and Iran, closely co-operate with the other producers in the cartel. OPEC drew the bottom and top price limits between 18 and 25 dollars per barrel a few years ago. On the basis of a quota system OPEC should export 26.5 million barrels a day but in the present crisis it produces over 30 million barrels of oil a day. Although this organisation used to be accused by the west and the third world of increasing the price of oil, today they all share the opinion that it works in a constructive way and it has been recognised even by the major critic, the USA. American Vice President Dick Cheney said on 10 August 2004 that today they co-operate with OPEC and that they can not accuse it of causing the present crisis. He said that the present crisis stems from the situation in the American refineries which have insufficient capacities. Today OPEC closely co-operates with the producer countries outside the cartel, such as Oman, Mexico and Norway which have increased their production by 3 million barrels a day.
THE CRISIS OF RUSSIAN OIL INDUSTRY
The Russian Federation is the second largest exporter of oil following Saudi Arabia. The Russian export has been constantly oscillating. From 1987 to 1999 export halved from 519 million tons to 306 million tons a day. From 1999 to 2002 Russia increased its oil production to 421 million tons a day and its present export exceeds 9.3 million barrels a day. The analysts of the IFIMES International Institute believe that the increase of Russian import depends mainly on the Russian politics. The question is whether Kremlin will interfere in this industrial sector and whether the Russian oil industry will become the object of settlement among the Russian elite. Regrettably, the difficulties experienced by the Russian giant »Yukos« which exports 1.7 million barrels a day confirm those concerns.
The state of Russia interferes in all Russian oil companies through the Russian para-state oil company »Transneft«. In December 2003, Russian President Vladimir Putin said in his political speech that we should stop trading with the natural resources as if we were in a bazaar. The analysts have announced that Kremlin is going to nationalise some Russian companies due to political reasons. Those analyses were quite correct which is also clear from the difficulties experienced by »Yukos« which has to sell the majority of its assets to the Russian state or to the interested American companies in order to pay its tax arrears. The second problem of Russian export arises from the insufficient capacities of Russian pipelines. The development of pipelines is uncertain since the only pipeline concessionaire (para-state company »Transneft«) has no financial capabilities. Although »Transneft« has increased the capacities of the north (Baltic) pipeline linked to north Europe to 50 million tons per day, the Black Sea pipeline which is still the primary pipeline is not included in the development plan due to problems with the Bosphorus Strait. The realisation of the pipeline projects Murmansk - the Pacific in which the USA is interested and East Siberia - Asia in which Japan and China are interested has not been foreseen yet.
POLITICAL CRISIS IN VENEZUELA
The IFIMES International Institute believes that the situation in Venezuela will remain uncertain until President Hugo Chafez's term of office expires in December 2006. Venezuela is the fifth largest exporting country within OPEC. It exports more than 1.7 million barrels a day and can have a significant influence on the prices in the USA which exports 15% of oil from Venezuela.
The IFIMES International Institute points out that the price of oil has been increasing since the economic crisis in 1997-1998. The growth in the world economy, especially in America and Asia, has brought about an increase in the consumption of energy products including oil. All factors indicate that the demand for oil will continue to increase in this decade and that the classic methods of controlling the price of oil will not be efficient. The price of oil must be formed on the basis of the market model of supply and demand. The growth of oil price is also the reaction to the growth in the world trade. Thus the American economy has been reporting constant growth for five years. In the past, such growth led to an increase in production and a decrease in the need for labour force while the present (economic) growth has caused an increase in the need for labour force parallel to the growth in production. The question is whether the world economy is ready to survive the globalisation crises such as the oil crisis?