IRAQ - Focusing On The Non-Oil Sector - Part 9 - Iraq/OPEC Relations.
OPEC will have a ministerial meeting in Doha, Qatar, on Oct. 19 to discuss cutting the group's crude oil production by 1m b/d. It will have to decide whether the cut should be made from current production levels of OPEC's 10 members - with Iraq excluded - or from OPEC's official production ceiling of 28m b/d.
For years, there was one word which would not pass President George W. Bush's lips in regard to Iraq, and that word is conventional crude oil. This is despite the fact that Iraq sits on the second largest reserves of conventional oil in the world, that Bush and his Vice President Dick Cheney are oilmen, and that Cheney himself had maps of Iraq's oilfields before the 2003 invasion. Indeed, invading US forces took over the oilfields first, and once US troops got to Baghdad they protected only the Oil Ministry. At his press conference on Oct. 11, Bush brought up the word three times as a reason for the US now to stay in Iraq.
Throughout the lead-up to the war and well after the fall of Baghdad, oil was the great unmentionable. But now Bush himself is mentioning it. On Oct. 11, Bush said: "We can't tolerate a new terrorist state in the heart of the Middle East, with large oil reserves that could be used to fund its radical ambitions, or used to inflict economic damage on the West... Extreme elements [in Iraq] want to control oil resources... They've got the capacity to use oil as an economic weapon". The Americans have suffered more than 2,745 US deaths and another 20,700 US injuries in Iraq, plus almost $300 billion.
What Bush was talking about was a Sunni caliphate to be revived in Iraq and to control the world under a Neo-Salafi ideology, which is that of 9/11 and Osama bin Laden. Next door, Iran, is ruled by a Ja'fari Shi'ite theocracy and thousands of mini-theocracies all having their own armies, intelligence, diplomacy, illegal ports, etc. Whereas the Neo-Salafi dream is to have an empire far more powerful than the Ottoman one which collapsed after World War I, one of the theocracies in Iran wants to destroy as well as rule the world; it believes the Hidden 12th Imam, a 12-year-old child who disappeared in Samarra' (north of Baghdad) in 941 AD called al-Mahdi, is returning to Earth.
According to this belief, the Mahdi will liberate Jerusalem and rule the world on the basis of justice as perceived by Ja'fari Shi'ism. For this reason, Iran must have atomic bombs. A US-led alliance is working on a counter-plan through Beirut and Baghdad (see news16-LebanonRegional-Oct16-06).
High crude oil prices since late 2002 have helped promoters of alternative fuels speed up their work. President Bush has vowed that the US will become 75% dependent on such alternatives by 2025. There are huge reserves of oil sands in the US which can be developed on a massive scale even if prices of conventional crude are below $25/barrel in today's US dollars (see Part 10 in ood5-IraqOPECalternativesNov4-06).
A crude oil output cut of 1m b/d by OPEC may pressure prices up, but the extent of the impact would depend on the nature of the cut. Some OPEC members, like Venezuela, have called for production to be cut by more than 1m b/d to stave off a further decline in oil prices, which have fallen more than 20% since hitting an all-time high of $78.40/b for WTI on July 14 and $78.64 for Brent in August.
Guy Caruso, head of the US Department of Energy's EIA, on Oct. 10 told a press conference: "If...[OPEC states] follow through and if a reduction is more than adequate, it could add a little bit to the [crude oil] price outlook" for the fourth quarter and beyond. It could have a small effect". Earlier on Oct. 10, the EIA estimated that the price of WTI would average $63.33/b in the fourth quarter. Caruso added: "It really depends on what the actual reduction in output would be".
If OPEC makes pro-rated cuts based on members' output quotas, the decrease in physical volumes would be smaller than the stated reduction because some states are already producing below quota. In its estimates, the EIA assumed that OPEC would curtail crude oil output by 500,000 b/d in the fourth quarter. Caruso noted that crude oil and oil product stocks were at healthy levels and could offset the effect of an OPEC output cut, adding: "It's true that crude and some product stocks are in reasonably good shape, so we do have a little bit of a cushion".
Gasoline prices in the US, by far the biggest energy market in the world, are down some 70 cents/gallon from their peak in August. According to a Gallup poll in the US done in September, 42% of respondents - and almost two-thirds of them registered Democrats - agreed with a statement that the Bush administration "deliberately manipulated the price of gasoline so that it would decrease before...[the Nov. 7 mid-term] elections". But 53% of those surveyed did not believe there had been any manipulation of prices.
US data out on Oct. 11 showed American crude oil stocks at 328.1m barrels on Sept. 29. Distillates, including diesel and heating oil, were put at 151.5m barrels, 19% above the five-year average. Already in September the call on OPEC crude was less than in the previous months. Saudi Aramco has kept crude oil supplies steady to its customers in Asia for November. But Saudi Aramco told some of its biggest customers on Oct. 9 it would lower November supplies by about 5%.
US Energy Department spokesman Craig Stevens on Oct. 12 said American Energy Secretary Samuel Bodman saw non-OPEC oil-producing states gaining market share if OPEC decided to cut output, adding: "Everyone recognises oil is a commodity, and as an oil producer makes a decision to reduce output, there may be another that will increase output". Iran's Governor to OPEC Hossein Kazempour Ardebili on Oct. 12 said non-OPEC oil producers such as Norway and Mexico should work with OPEC to stabilise oil prices and curb market volatility. Stevens reiterated that Bodman hoped OPEC did not cut output by 1m b/d, adding: "He (Bodman) believes the global economy is still strong".
While temperatures are expected to be warmer than normal this heating season, Bodman said he did not want to depend on a weather forecast to ensure that consumers had adequate heating supplies and prices. The US Energy Department expects that, if Saudi Arabia were to cut oil output, this would likely be heavy crude, which is harder for refiners to process. Stevens said: "[Saudi Petroleum & Mineral Resources Minister Ali al-] Naimi had told him (Bodman)that most of the excess capacity is heavy crude".
Gasoline prices could fall to as low as a $1.80/g in coming months, due to a global decline in demand for oil and an increase in fuel production. Joseph H. Petrowski, CEO of Gulf Oil in Chelsea, USA, on Oct. 12 said all the fundamentals pointed to falling gasoline prices in the short term - though he cautioned "things could change" quickly if there's a cold winter or if a major oil disruption occurs somewhere. "We're going lower the way things stand now", said Petrowski, who predicted last summer that gasoline prices would fall dramatically this autumn, though even he did not forecast below-$2/g retail prices.
A mini-gasoline-station war has broken out in Massachusetts in recent days, with retailers in the Revere and Malden areas competing to lower their prices below those of rivals. One Revere station was selling regular gasoline for $1.95/g, according to Bostongas.com. Motorists, who were pummelled this summer with $3-plus gasoline, have been lining up to fill their tanks. Some industry experts, such as legendary oilman Boone Pickens, have predicted that oil prices will head back up soon. But on Oct. 13 the working week ended in the US with the price of November WTI at $58.57/b on NYMEX.
The futures markets are in contango (prices for prompt delivery and front-month WTI are lower than those for the following months). On Oct. 13, NYMEX closed with December WTI at $60.30, January 2007 WTI at $61.69, December 2007 WTI at $66.72, January 2008 WTI at $66.87, and December 2012 WTI at $62.64.
Bodman said in a CNBC interview the US needed to develop alternative fuels. He stressed the government's faith in alternative energy, particularly ethanol. He touted alternative power sources, including wind, sun, clean coal, and nuclear energies, saying: "This country needs a diversity in types of fuels".
Bodman said the US should open up more exploration opportunities on the US continental shelf. He said Chevron's recent discovery of 3-15 billion barrels of potential oil reserves at the Gulf of Mexico's Jack field was "something we're all very pleased with". He added that the latest reports on how much oil would be recoverable from the field "tended to be on the optimistic side".
OPEC's 11 are a collection of states with divergent political and economic interests. As oil prices more than doubled over the past three years, OPEC members found it easy to agree on a common policy that brought them windfall revenue. But with prices now falling, that consensus is fraying. Iran and Venezuela have insisted on a ministerial meeting to endorse production cuts and make OPEC's announcement more credible to the oil markets. Others, like Kuwait and Algeria, have backed the proposal but disagree on how to apportion the cuts. Nigeria at first resisted calls for a special meeting to avoid overshadowing OPEC's next scheduled conference to be held in Abuja, the Nigerian capital, in December.
If the Doha meeting succeeds, this will be OPEC's first quota cut in two years. OPEC leader Saudi Arabia has remained conspicuously silent. The Saudis support a production cut but Riyadh wants this to be done discreetly, with mid-term US elections just weeks away. With bickering in the ranks and without clear leadership from Saudi Arabia, Paul Horsnell of Barclays Capital on Oct. 12 was quoted as saying: "The Kremlinology of OPEC is back". In the past two years, OPEC states have been steadily increasing their output to meet rising demand and to make up for unexpected shortages in global supplies. That has led OPEC to raise its total output above 30m b/d, the highest level in more than 25 years. Now, with supplies aplenty, inventories brimming and demand slowing, OPEC finds itself having to shift its focus to manage a declining price pattern. Some producers have been paring their output in recent months, but OPEC's 11 members including Iraq this week produced 29.9m b/d. Sadek Boussena, a former president of OPEC and a former energy minister of Algeria, says of OPEC: "They have had no training for nearly two years. It's like a football game. Right now, they are warming up for a friendly game. But if prices fall further, it might become vital for them to act".