Stratfor
The real reasons for high oil prices
Stratfor
An oil trader at the New York Mercantile Exchange purchased a barrel of oil at a price above $US100 for the first time ever on January 2. In inflation-indexed terms the all-time record for crude oil was set in 1979 – at approximately $US110 a barrel in today’s dollars.
At Stratfor we have not commented on the high price of oil in some time, mostly because there has been little to say. While we believe that the peak oil theory – the idea that there is a only a finite amount of crude, so eventually production will peak and then fall – is correct, we do not believe such a peak will occur any time soon. Less than one-quarter of the world’s surface has been explored for petroleum to date, and advances in deepwater drilling and exploiting non-conventional crudes, such as oil sands, in just the past decade have been mind-numbing. True, the costs of extracting that crude – and the large capital costs behind cutting edge technologies – may well go up, but even here familiarity and economies of scale argue for the opposite.
We see much of the price increases of recent years as geopolitical in origin – specifically in light of the idea of increased risk. There are few places in the world that produce oil that have not suffered bouts of instability of late. Nigeria has seen massive attacks on its infrastructure; Venezuela has crippled its national energy firm for political reasons; Osama bin Laden has rallied against Saudi Arabia and the other petro-economies of the Persian Gulf; Iraq is enmeshed in a civil war; and Iran has threatened war with the United states – and has been threatened with war in return. Add it together and it is small wonder that oil traders can't see straight, much less function.
But all of this froth in the market is likely to die down in the months ahead.
The disruptions in Nigeria in 2006 and 2007 were all about determining who would become the next president (and thus gain control over the oil). That contest is now over and many of the forces who were disrupting crude flows have succeeded in getting into the new inner circle. No one in Nigeria now has a vested interest in seriously disrupting output.
Venezuela has seen its oil output drop by roughly a million barrels per day since Hugo Chavez became president a decade ago. While this decline is not over, it is no longer a surprise, and Venezuela’s relative importance to the global energy picture is now roughly half of what it was ten years ago. There are few surprises that Chavez can throw at energy markets that do not also threaten his hold on power.
While the apex leadership of al Qaeda – the same people who planned the September 11 attacks – are still dangerous people, their operational capabilities are largely sequestered in the Afghan-Pakistan border region. The Arab states of the Persian Gulf are more tightly aligned to the United States than ever, and their security forces are more than capable of preventing small scale attacks by local militants intent on harming oil exports.
Ultimately the Iraq conflict will burn until Washington and Tehran have a meeting of the minds. The November US National Intelligence Estimate, which asserted that Iran lacks a nuclear weapons programme, was a gesture of good faith from the United States to Iran, one that has sparked a series of public talks over the future of Iraq. Such a detente would bleed away – in fact, is bleeding away – much of the violence within Iraq. A calmer Iraq is one that can finally invest in energy infrastructure, and an Iran that is on better terms with the United States is one that is not pumping in the shadow of a war scare.
All in all, this suggests that not only is the January 2 price point about to become viewed as aberrantly high, but that we could soon experience price drops that have not been seen since the days immediately after the September 11 attacks. (Most people forget that the September 11 attacks made people fear that a global recession was imminent – that fear pushed oil prices down, not up.)
A price rationalisation does not equal a price plunge. Stratfor sees no reason for a massive reduction in global demand, simply that geopolitical risks in major oil producers are unwinding, not intensifying. And here too there is an exception. The Russians have every reason to push hard to re-establish supremacy in their near region. Never forget that despite Russia’s problems and weaknesses, they are also the world’s second largest oil producer. If push came to shove, even though they know it could well hurt them as badly as anyone, the Russians have the ability to cause a world of hurt.