The Oil in the Middle East

Just Musing – James L Bradley

March 30th, 2007

Just what if the oil fluctuations in the market-place are not a design of any
great set of masterminds, but an accident of nature and the world’s demand for
the black gold is non-stoppable? Just what if?
Although the world’s extraction of oil from within the earth has shifted a bit, we are
reminded almost of a daily basis how much cheaper it is to extract the liquid from beneath the
sands of Saudi Arabia – last figures I read it was still somewhere round $8.00 a barrel from
the ground and that they are still the top producers with Russia running second, and
Venezuela 8th. This cheap extraction means, in a sense, that most of world oil is still from the
Middle East, or other OPEC countries tied into that sect of ministers who sit behind closed
doors and decide how much oil will hit the industrial world
It has been estimated that any new discoveries of oil will not outpace the
increasing world demand, and since we now feel that this is a truth, it just might
be that the next crisis will not spin around an embargo like the one we faced in
the 70s – but an increase in production in their limited fashion. This would put
pressure on new finds to keep their “new” oil in line with the ease of production
of the old oil – the real problem being they’d have to accomplish this within a
time-frame where they still had crude to process.
The other problem surfaces that when they obtain this “volume” control
mechanism, and they have, it becomes more than just a political weapon it
becomes one of some serious leveraging – a small token of this emerged during
1978 when the Carter White House was attempting to solve the Middle East crisis
and one of his moves was to offer F-15 fighter jets in a package that included
Israel, Egypt and Saudi Arabia. As it happens members on the Hill really didn’t
want the sale to happen, and when the proposal went through the Senate Foreign
Relations Committee for approval, conveniently the Saudi Arabian oil minister
made a trip to the USA and was interviewed by the Washington Times – at that
time some people got the idea that he would eventually meet with the
administration and express his “hopes” that Saudi Arabia would be successful in
being able to purchase the planes.

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 Secretary of State Cyrus Vance denied that Sheikh Ahmed Zaki al-Yamani
used oil as a threat – the contention was the planes were bundled together and
this didn’t sit too well with the American Jewish Community, much less with
Israel. The Senate committee let the bill slide through the committee with a tie
vote, where it went to the full Senate and was approved as a package under a
close vote on May 15th – and on June 6th Saudi Arabia announces that OPEC has
voted not to increase the price of crude for the remainder of the year, and maybe
even into the next year. The U.S. Energy Department removes the price ceiling
that had on the price of gasoline. You tell me what went on in the Carter White
House.
In the late 70s early 80s this cartel imposed on themselves production control,
which by itself is just good business after all you don’t want to over produce and
price the market too low, and as early as 1976 the industrial west had been
warned by the Saudis that they needed strong incentives to produce more oil.
And now today we have a brand-new player in the oil for politics game, Iran.
As of yet we haven’t experienced the finesse that the Saudi’s have developed
over the years, being a little more rebel about their motives. Maybe they don’t
need this “finesse”, as they are number “four” on the oil production list, but keep
in mind they also threaten the Strait of Hormuz, where at least 17 million barrels
of crude slip through everyday – at $65 per barrel that’s about $1.1billion per day
(about $33.6 billion per month – 20% of total world oil production). That is a
primary concern, and with the suppressed political world around them, the main
population of Iran doesn’t quite understand the consequence in destroying the
industrial world – they already live in a world were “worldly conveniences” are
limited and their beliefs centered around a ruling gang of fanatical mullahs.
Their taking of the British marines is a mystery to West, the news a surprise to
even China who in January imported more crude from Iran than from anyone else,
importing 2.1 million tons (about 15.4 million barrels) – who had joined the list
last week of imposing actions on Iran along with Russian with their continued
insistence on arming their nation with nuclear capabilities.
Although China considers it an important energy source, it feels less
threatened by its loss of oil because of the fierce international competition for
their fast growing demand for oil.

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 "Iran is an important energy sources for China, because of the Middle Eastern nation's rich
deposits and China's rising demand," said Xia Yishan, senior research fellow at the China
Institute of International Studies in Beijing. "But it won't be the most important one, because
of the investment risk and the fierce competition among countries for Iran's energy resources."
It is believed in some circles that Iran was attempting to influence the vote by the UN
Security Council that passed a resolution on Saturday last (March 27th, 2007) that imposed
restrictions on Iran – these in reaction to their to non-cooperation with the UN nuclear
watchdog to allow International Inspectors greater access to their “key” underground site for
enriching uranium at “Natanz” in central Iran. This plant is an industrial-scale plant to make
enriched uranium. As of today, the UN is considering another resolution in dealing with the
seizure of the 15 marines, as a response to their proposed actions Iran’s chief international
negotiator “suggested” the captives “might” be put on trial.
With regard to China and their own oil development, US Congressman Democrat Tom
Lantos, 12th Congressional District-California, said in January that the United States should
impose sanctions on the “China National Offshore Oil Corporation”, the nation’s third-biggest
oil company, because of its US $16 billion oil and gas agreement with Iran.
This action by Iran has driven the price of oil up, as expected it would – where we now
live in a world that is driven into a “trading frenzy” over any perceived future disruptions of
their precious oil supply. Light crude closed today at $66.03 on the NY Mercantile Exchange,
still below the high it reached at $78.40 in mid-July, 2006.
Today vs. 30-years ago, the overall economy seems to be able to withstand the sudden
hikes in the sudden spikes in oil prices. Whether this a psychological result of past
fluctuations in the changes of oil pricing, or where the public has become immune to the fear
of having absolutely no fuel, like the panic of the 70s, or the public has become immune to
the supposed threats from the oil cartel and understand they need to market their product to
survive as much as we need it to survive.
As for the stopping of the supply completely, the Presidents and CEOs feed the possibility
of a “dead-supply” with sustained regularity – making their predictions of doom and remind
the press that if this happened we would again have the panic of the 70s, naturally this drives
up the price of the “spot-market” – its only sales and marketing.

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 James Cordier, president of Liberty Trading Group in Tampa, Florida speculates that the
present crisis with Iran has the potential of adding another $4 to $5 a barrel on the market, and
a “disruption” in the Strait of Hormuz would add an equal amount.
Overall it can be admitted that “unexpected” gyrations of oil prices upset the delicate
“equilibrium” of the modern economy, which regardless of where you are from, you realize
that the economy doesn’t depend on the rise or fall of the prices of Microsoft’s price on their
newly released whatever, but it is oil. Long-term increases of decreases (which I don’t think
we’ll see anytime in the near future, that is unless we discover another 500 billion barrels
under downtown Houston), whereas the increases depress economic growth for a number of
reasons – especially in the travel industry which effects 85% of the industrial United States, to
include the airlines, building the planes, being able to purchase a ticket, buy a vehicle to get to
the airport and on and on – the spiral down might effect some sooner than others, but
eventually it touches most of us, and this general depression is not limited to the United
States.
Items that never really affect the everyday consumer on the street, but in reality do affect
them, is the disturbance of the “balance of payments” between the sellers and the oil
importers – everyone screams about the high profits of companies like Exxon, but in no
certain defense of their “huge” profits somewhere along the line I hope they are banking these
profits in case of another huge shakeup in world oil prices.
Adding to the problems created by rising oil prices (market dislocations in big words) are
further impacted by government regulations, known to have rigidity, that arbitrarily expose
some groups to the full impact of the higher prices, while in “some” cases cushioning the
effect on others. This erupted and hit the public eyes when in 1979 the teamsters and
independent truckers staged violent strikes, an action that further penalized the citizens of the
United States. This was America’s first full-scale energy riot turning the town of Levittown,
Pennsylvania into a mess, born out of frustration with governmental regulation and not the
OPEC pricing practice – and today the situation experienced in the United States could/would
more than likely manifest itself across other parts of the world.

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 American isn’t the only country today that has had an increase of oil demand, a prime
example is China1 (in 2006 China consumed 6.9 million barrels a day) and India2 – and even
the little imperial city of Dubai, where today approximately 5 million cars per day motor
across the city, their latest estimate is that by 2020 at least 20 million will shuttle across the
growing city. They, like LA in the 50s/70s have massive highway project under construction.
The bigger worry in the USA is the increasing demand for fuel in other country’s, take
China for instance where it last noted accurate figures demonstrate a 30-35% increase in
demand between 2002/2003, and since then has only increased with the same amount of
growth to be experienced in India. When their demand exceeds our demand, then the oil
producing nations will bend to the wishes of their biggest customer, which will not be the
good old-USA. Now this doesn’t mean you have to go out and run up and down the highway
burning gasoline, or turn up your thermostat, but keep in mind that eventually they will
surpass us – and this will definitely increase the price of oil. It is the basic law of supply and
demand.
As for the supply of world oil in being sustainable, I don’t think so. The estimates for a
long run expectation of the depletion of world supply bounces all over the page, some
predicted we should have reached our peak of oil in 2005, while others still maintain it might
begin to decline in or around 2035. These dates are noted as when the “reserve” will no
longer sustain the “demand”. To say that the cost will “surge” is a small statement, if you
think they’re high now – go to the gas station in your 4-ton SUV in 2035.
This will not only effect our driving habits, what about the plastics industry who provides
[75 million tons a year in US] about 95% of packaging today – then we lean back on paper,
and then you have the greenies screaming about trees.
As for the United States we produce around 7.5 billions barrels a day in oil, and use about
21 billion barrels day, we have to import the difference ranging anywhere from 14 billion to
15 billions barrels a day. Keep in mind that each barrel contains about 19.5 gallons of
gasoline.

1
The number of vehicles on Beijing’s traffic-choked roads has surpassed two million, meaning there is one car-owner for every four
residents in the capital. The number of vehicles in Beijing rose from 2,300 in 1979 to one million in 1997.
2
The passenger vehicle sales in India crossed the one million mark in 2005. This segment grows at 10-15% annually. Around 85% of
the cars sold in India are financed as against the global average of 70%. In neighboring China, only 15-20% vehicles are financed.
There are only three cars in India for 1000 people as compared to the other extreme 500 cars for 1000 people in the United States.
Goldman Sachs has predicted that India will have the maximum number of cars on the planet by 2050 overtaking the United States.

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 On March 23rd of this year our production was 5.2 billion barrels from the ground and our
crude input to our refineries was 14.96 billion. Our crude oil imports for that day were 9.6
billion barrels – finished gasoline for motor vehicles was 210 million gallons.
Our “Strategic Petroleum Reserve” for that day was 689 million barrels, its total capacity
is 727 million barrels, or at 94% of current capacity, of approximately 33 days of consumable
supply.
The United States GAO (Government Accountability Office) issued a report on Thursday
(29th-March) that the U.S. is totally unprepared to face an oil supply crisis, and warned that
our lack of planning for the decline of world oil reserves. Who is?
No matter how you slice the pie, we’re in for a rough ride when it comes to oil and our
dependence for the survival of our economy. I don’t see any substitute worth talking about
coming down the pike anytime soon…even if we are to insulate our homes, take the bus, or
grow wings we’re still behind the 8-ball when it comes to oil. We’re in for the ride of our
lifetime – every last one of us!

And this?
http://money.excite.com/jsp/nw/nwdt_rt_top.jsp?news_id=ap-d8o6hhlo1&

Get Real

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