The following is the text of an article by Mr Antonio Szabó, President, Stone Bond Corporation, Houston.
Oil price developments earlier this year prompted numerous industry sources and miscellaneous pundits to raise again the specter of the possibility of a third oil crisis. We have two disagreements with such speculation.
The first is that we are already in an oil crisis and the second is that the current crisis is not the third but the fifth oil crisis, or “shock” as some prefer to call it.
The oil crises typically referred to are those of 1973 (the Arab states’ embargo on the US and The Netherlands) and 1979 (rooted in the Iranian revolution and the Iran/Iraq War).
This is the “consumer centric” view of oil crises. To date we are not aware of anyone referring to the price crash of 1986 and the price crash of 1998/early-1999 as crises. However, viewed from the vantage point of the producing countries (OPEC or non-OPEC), these price crashes definitely qualify as crises.
So in a balanced world view, where consumers and producers search for genuine common ground, both the material deterioration of GNP growth in the industrialized countries (“high” prices) as well as grave budgetary difficulties in oil producing countries (“low” prices) should be viewed as crises.
The Short-Term Outlook:
According to our projections, world oil demand in 4Q00 should average some 78.0mn b/d. On the supply side, we forecast non-OPEC crude and NGL supplies of 48.50mn b/d and OPEC production of some 29.1mn b/d (with prices roughly at current levels), which would require an inventory draw of 0.3mn b/d in an already lean inventory environment.
Additionally, and very importantly, OPEC production of 29.1mn b/d is dangerously close to our estimates of total OPEC production crude capacity of some 31.0mn b/d. It is also important to note that should the winter be colder than our projected “normal” one, world oil demand will increase accordingly, requiring additional OPEC production or further de-stocking.
So over the short term, with the world economy continuing to expand at a rapid (albeit slowing) rate and OPEC capacity close to the limit, we are likely to remain in a crisis situation. As if these variables were not enough, there is serious conflict in the Middle East – another historical “crisis condition.”
Whenever there is a crisis in the Middle East, there is speculation that the “oil weapon” will be deployed. When the “oil weapon” is mentioned in industry circles or even in the fable-plagued world of US journalism, the image evoked is of greedy producers rubbing their hands at the prospect of “windfall profits.”
However, in recent years consumer countries have used oil to their political advantage, whether to propagate sanctions against producing countries or as a weapon in their campaign against the Former Soviet Union.
The fact is, the US Treasury Department’s 1983 report, reviewed by CIA Director Bill Casey and US Defense Secretary Casper Weinbeger, concluded that world oil prices had different impacts on the US and the Soviet Union. “Lower prices,” while “unambiguously good” for the US (“in effect like a tax cut”), were to have a devastating effect on the Soviet economy. The report went on to say that the optimum price is $20/B (probably in WTI terms).
By now, both producers and consumers should have learned enough to leave oil out of the “weapon” category. So one appropriate item on the agenda of upcoming consumer/producer dialogues would be the “de-weaponization” of oil issues by both parties.
The Medium Term:
Over the next five years, the current crisis situation is unlikely to improve significantly. Although, according to our projections, world oil demand is expected to decrease from 78.0mn b/d in 4Q00 to 77.8mn b/d, 76.0mn b/d, 77.2mn b/d in 1Q01, 2Q01 and 3Q01 respectively, these decreases do not seem significant enough to bring oil prices to much lower levels than those before the latest eruption of violence in the West Bank and Gaza.
In 4Q01, however, we expect OPEC production to reach 30.3mn b/d, only some 0.7mn b/d below OPEC’s current total crude capacity. Should there be at that time a shortfall in non-OPEC crude/NGLs or OPEC NGLs, the situation would become truly critical if global inventories remained low in a backward market.
Stagnating non-OPEC production does little to brighten the outlook. There is a close correlation between oil prices and upstream oil company investments. Oil prices peaked at close to $40/B in 1979 and oil companies’ upstream investment peaked at approximately $95bn in 1980.
Subsequently, we had an average price of about $22/B in 1996, while oil companies’ upstream investments reached some $70bn in 1998 after hitting a low of some $36bn in 1986.
Currently in spite of “high” oil prices, upstream investments by oil companies have barely reached the $50bn level and are unlikely to increase at a fast pace, since companies continue to prepare their E&P budgets on the basis of very conservative oil price estimates.
The internal challenges that oil companies face do not help; ExxonMobil is an extremely cost conscious entity, which is still trying to consolidate the merger. The same could be said of BP (Amoco/Arco) and now Chevron Texaco.
The OPEC Summit – A Multi-Polar World And The Chávez Factor:
During the OPEC Summit in Caracas on September 27-28, we received numerous calls from our friends in the trade press. The invariable question was: “What is going to happen with OPEC production?” The invariable reply was that discussing production levels was not the purpose of the summit.
The Declaration of The Second Heads of State Summit of OPEC made this abundantly clear.
Known as the “Caracas Declaration,” it contains 20 resolutions aimed at highlighting a variety of issues requiring solutions. These range from problems related to globalization and technological advances to concerns about the taxation of products in the major consuming countries and the “ecological disaster” of human poverty.
While it is obvious that the heads of state all agreed on the final text, President Chávez’s imprint on it is clearly visible and should perhaps be seen in the context of an interview with the oil advisor to the then president elect, Ali Rodriguez Araque, in MEES (14 December 1998).
Mr Rodriguez said that the new team would work “to strengthen and reunite OPEC member states, and if possible, to enlarge the organization. We will also endeavor to find consensus among OPEC member states.” The latter part of the comment was a relatively veiled allusion to the cavalier attitude, to put it mildly, that Mr Rodriguez’s predecessor, Erwin Arrieta, had towards OPEC.
President Chávez, however, has an even more ambitious agenda beyond the successful OPEC Heads of State Summit. His vision is one of a “multi-polar world” where one super power alone does not police or otherwise manage the affairs of the world.
In the consumer-producer dialogues that undoubtedly will follow the summit, the charismatic and energetic Mr Chávez intends to pursue the goal of a “multi-polar world”.
As a result of the current oil crisis and the renewed cohesion among OPEC member states, some non-OPEC parties are becoming interested in a new relationship between consumers and producers.
These initiatives are important and well timed, but one thing in particular should be clear to both sides as they wrestle with fluctuating oil demand and crude production capacity management: in order to achieve viable long-term objectives that serve the interests of both sides, many compromises must be made and collaboration must prevail over confrontation.
By Antonio M Szabó