Special Report

Oil, Money, and Power

As OPEC gets set to meet again, an update on all the barrels it has in its court.

By 11.14.07

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Two years ago a single British pound was equal to $1.75 US. Today the rate is about $2.05 US to the pound sterling. The difference is about 16%. This depreciation has been charged with being a major culprit in the rise in the price of oil. Basic arithmetic quickly shows that there is little relativity between the 16% fall of the dollar and the nearly 100% rise in the cost of a barrel of oil, which has risen in the same time period from around $50 a barrel to close to $100 before falling back to $90. There are many more factors involved in the price rise; the story gets quite complicated.

The OPEC nations other than Saudi Arabia are hesitant or straight out unwilling to increase oil production. The non-OPEC countries have limited ability to do so due to dwindling reserves, restricted exploitation and /or high investment requirements. Russia is one of the countries that fall into that group. This is the thumbnail sketch of the estimates of the International Energy Association, the Western monitoring agency that tracks these matters.

The IEA has been quoted as calculating that $22,000 billion ($22 trillion) will have to be invested in all aspects of the global energy infrastructure in the next 23 years simply " to replace capacity going out of service and meeting growing demand." That figure goes up another 10% when alternative actions to curb greenhouse gas emissions are included. These numbers create a perspective on the expected massive investment required in the next couple of decades in the overall energy sector.

These daunting figures and calculations, however, are only part of the complications of the energy supply story, where Chinese and Indian oil consumption stands out as the prime source of pressure on the market. These two countries alone make up about 70% of the current increased demand, a fact that the Saudi oil minister, Ali Naimi, has downplayed as a problem. He has indicated Saudi Arabia will have a 500,000 barrel per day increased productive capacity coming on line by the end of this year or the beginning of the next at the latest. Minister Naimi appears to imply this countervailing downward pressure on the crude oil market will be all that's needed. The market will be the judge.

Ali Naimi indicated that any increased shortfall could be made up by the fact that the Kingdom's current potential production capacity is 11.3 million barrels a day while it is now actually producing only 9 million barrels a day. Furthermore, the Saudi oil czar added that the excessive oil prices are basically the result of speculators and hedge funds driving prices far above what the true market should be.

Meanwhile the Saudis, OPEC, and all the other oil producers are experiencing massive profits cut into only by that 16% drop in dollar value on which petroleum pricing is calculated.

And now for some more interesting figures: Non-OPEC producers are expected to peak and plateau in oil production by around 2015 at about 52 million barrels a day. This places OPEC in the driver's seat for what has been modestly estimated as 100 million barrels a day global demand in the next 25 years, and more rigorously figured at 116 million and 118 million barrels a day by the IEA and the U.S. Government projections, respectively.

As OPEC now supplies only 43% of worldwide oil production, a simple calculation shows that cartel in a couple of decades will be supplying close to 56% of the world's requirements. No wonder Mr. Ahmadinejad and Mr. Chavez have such optimistic views of their nations' future leverage.

The OPEC countries have created sovereign wealth funds. These now exercise their proprietary muscle throughout the Western financial world as well as use their increased purchasing power to manipulate their own and developing nations' internal economies and security.

The financial facts leap out: Whatever the underlying factors, the U.S. Energy Information Administration projects OPEC revenues created by output increases and strong prices will reach $762 billion per annum by 2008. The agency has figured that already this year there has been a revenue increase five times what it was ten years ago, and the out-years portend continued growth. The leaders of Iran and Venezuela are well aware of these projections, as are their radical Islamic counterparts seeking to overthrow the oil producing monarchies of the Gulf. The dangers are obvious.

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About the Author
George H. Wittman writes a weekly column on international affairs for The American Spectator online. He was the founding chairman of the National Institute for Public Policy.