If you are an oil trader, the daily jiggles in the price of oil are of interest: if you guess right, it’s champagne and caviar; if you bet wrong, it’s beer and potato chips. But if you are a policy maker trying to make sense of oil markets so that you can plan your nation’s energy security, or an airline executive trying to compute just how large a premium you should pay for a more fuel efficient engine, you need some basis for a longer-run view.
That is now less easy to come by than it was a few months ago. Earlier this month the political balance of power in OPEC, the 12-member cartel of oil producers, shifted. Whatever else consuming countries think of Saudi Arabia and its role as the principal funder of Wahabi ideology and associated terrorism, they rely on the Saudis to pump more oil when prices rise to levels that threaten the prosperity of industrialized nations. One international oil industry executive tells me that the perception that the Saudis are able to cap prices keeps them off the list of regimes marked for change. He adds that the Saudis wildly overstate their ability to step up output so that consumer countries, and especially the United States, will continue to support a regime as odious as others marked by the U.S. for regime change.
The problem for consuming countries is that Saudi Arabia no longer calls the tune to which other OPEC members dance. At the regular OPEC meeting earlier in the month, Ali Nami, the Saudi oil minister, called for stepped-up output to roll back crude prices lest the sputtering U.S. and European economies be tipped into recession. This was partially in response to an International Energy Agency estimate that there will be “a clear need” for more oil to meet demands later in the year.
What has always been a routine vote in support of Nami turned into a humiliating defeat. The current OPEC president, Iran’s Mohammad Aliabadi, put together a bloc of seven countries to turn down the Saudi proposal and vote to have the cartel hold production at current levels. With Libya’s 1.7 million barrels per day no longer on the market, and rising domestic demand in producing countries reducing volumes available for export, an output freeze would mean tight supplies, and further price rises.
Unless, of course, Saudi Arabia prefers not to toe the cartel line while sulking in its tents, and instead ignores its fellow-producers’ decision. Which is what it plans to do. Nothing new in that: most members routinely produce more than their quotas. What is new is a shift in power from the Saudis to Iran. Iran’s Big Satan is Saudi Arabia’s ally and protector, Iran’s Persians have contempt for Saudi’s Arabs, Iran’s Shias and the Kingdom’s Sunnis detest each other, and the Saudis and Iranians are rivals for influence in the region. In effect, power in OPEC has passed from a country that needs the U.S. and has substantial investments in Western countries, to a nation that has no reason to want to cut prices to shore up Western economies, and good reason to want to cause another recession.
Worse still, the population in the oil producing areas of Saudi Arabia is largely Shia, whereas the Saudi ruling family is Sunni, and these two groups are not exemplars of religious tolerance. With the region in turmoil during what is hopefully called the Arab Spring, the Shia population in the kingdom is more restless than ever.
All of this is bad news for consuming countries, which have made matters worse by taking direct aim at their own feet, and pulling the trigger. Experts in the nuclear industry tell me that the damage inflicted on Japan’s Fukushima Daiichi nuclear plant was caused by the tsunami, not the earthquake. Nevertheless, German chancellor Angela Merkel has agreed to phase out her country’s nuclear plants, despite the low probability of a tsunami hitting Germany. Politicians around the world are attempting to restrict the development of shale gas reserves, available in enormous quantities, because of fears of environmental damage.
In America, President Obama is so devoted to preventing the development of domestic fossil fuel resources that he is willing to risk high unemployment rates to keep a lid on drilling for oil and gas, and allow his environmental regulators to propose regulations that paralyze potential investors in coal-based energy facilities. Meanwhile, the leader of his majority in the Senate, Harry Reid of Nevada, is enabling the president to keep his campaign promise to prevent the opening of the Yucca Mountain storage facility for nuclear waste (located in Nevada), without which key utility executives say they will not build the new nuclear power plants that will be needed if there is a massive switch to electric vehicles. On the off chance that Reid cannot hold off use of the storage facility, the president can count on his chairman of the Nuclear Regulatory Commission, Gregory Jaczko, to prevent the opening of the storage facility. Jaczko has been accused by Hubert Bell, inspector general of the NRC, of “strategically” withholding information from colleagues that might persuade them to vote to activate Yucca Mountain. And if you think there is some hope for a policy that would efficiently constrain oil consumption, think again: no politician with a long lease on a Washington apartment or house will consider raising taxes on gasoline or carbon emissions, either of which would induce consumers to use less oil.
So a situation that was dangerous for America and energy importing countries is now more dangerous. A denuclearized Japan will have to increase energy imports. So will China and other Asian nations as their increasingly affluent consumers move from pedal power to reliance on automobiles. At some point, Germany’s reliance on France’s nuclear plants for electricity and on its own renewables industry will prove inadequate to meet its needs, leaving natural gas from Russia its principal option. If Saudi Arabia is indeed unable to increase output as much as it claims, the world will have to look to its largest producer for increased supplies—that’s Russia.
So much for the minor problems. The most important problem is that there is no substitute fuel available in the foreseeable future to replace reliance on oil for transportation purposes. That means dependence on regimes in countries that are unstable or hostile, or both. How long that will last will be determined by politicians in countries responsive to democratic pressures from consumers demanding low prices, and regimes that see oil as a weapon rather than an ordinary commodity, and to green lobbyists.
But for now, things are looking up. Or may be. Goldman Sachs is advising its clients that oil prices are headed down. This “substantial correction” will take prices all the way down to a bit above $100 per barrel for Brent crude. That warrants a muted cheer at best from consumers.
And you thought the fiscal deficit is our only problem!