The raising of oil prices in 1973 and the subsequent Arab oil
embargo in reaction to the Arab/Israeli War threw the oil market
into its first crisis and a worldwide recession. Since then
matters have been kept in hand by a willingness generally of OPEC
oil producers to adhere to their self-regulated production
structure. Now 35 years later the oil cartel that found its
manipulative strength during the earlier crisis finds itself
seriously divided over a production ceiling to control the price.
The entire issue rests on the fact that the various producers
have substantially different requirements for the
dollar-denominated income generated by their sales of crude oil.
In general terms the key factor is the amount of this hard
currency that is needed to balance their respective external
accounts.
The Russians have been careful not to announce their break-even
figure, but it’s broadly conceded to be approximately $70 per
barrel. With oil futures regularly at or around $50 per barrel in
New York, the Moscow government accountants have had to go back
to their computers.
The Russian “boffins” have to justify the extensive claims of PM
Vladimir Putin that his government is going ahead with plans to
increase defense spending and at the same time add new tax cuts.
Russian business experts and the Moscow stock markets themselves
have not shown a willingness to accept Putin’s economic
interpretations.
Russia’s fellow anti-American partners, Iran and Venezuela, are
in a similar position of facing a massive gap in their external
account balance. Venezuela needed to average $91 per barrel for
‘08 and that goes up to $102.7 in 2010. Iran is better off in ‘08
at $57.3 per barrel as against $83.3 in the next two years. These
figures must be judged against the projections of both the
Deutsche Bank and the Chinese National Offshore Oil Corporation,
which have warned that the price of oil could fall below $40 per
barrel in the beginning of 2009.
Even if the OPEC members can agree this week on a lower
production rate in order to put a brake on the falling prices,
there is no reason to believe this agreement will hold. In the
past those who are now screaming loudest for production controls,
such as the Iranians and Venezuelans, were the very same ones who
were maneuvering privately on the gray and black market to get
around their own positions.
The Nigerians have been quite open about refusing to cut
production. Their oil minister announced in no uncertain terms
that it was definitely not in his country’s budgetary interest to
take a chance on reducing their potential for earning foreign
capital through oil export reductions. While it might be that the
minister doesn’t trust the market to equalize in terms of
production and price, it is also a possibility he is strictly
negotiating, Lagos-style.
Interestingly the UAE, Algeria, Qatar, and most likely Libya can
balance their external accounts next year if world prices stay
modestly below $50 per barrel. The Saudis appear able to break
even, and Iraq, still unable to reach its pre-war production
goals, effectively has an exemption as it is in the process of
economic recovery.
The 1970s oil embargo woke up the world to the inherent power of
the oil producers. Today’s worldwide recession has now forcefully
reminded those same producers that their income is completely
vulnerable to the state of the economics of the rest of the
world, and that the entire field of raw materials trade is
equally affected. It is a lesson in the interrelationship and
interdependence of the various players in the global economy,
which has long been argued but now is being played out
mercilessly.
In spite of the doom and gloom in the oil world, Dubai last week
held the debut of, yet again, another super lavish hostelry. Film
stars and moguls of all types were jetted in to attend the
opening of the Atlantis, partly owned by one Sol Kerzner.
Unfortunately for Sol and his Dubai government partners, Citibank
has stated (and it should know about such things) that Dubai is
the most vulnerable economy in the Gulf. With a debt that reaches
above 100% of its GDP, this mini-state still retains its
exuberant belief in itself in spite of the realities of the world
economy. The answer is to wish them mazel tov, followed
by a strongly stated inshallah!
