Analysis: Saudis key to blocking more limits on oil production

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Analysis: Saudis key to blocking more limits on oil production UPI, Fri 1 Dec 2000

The early consensus of global energy experts is a comforting one. Iraqi President Saddam Hussein's move to shut down Iraqi oil production is not likely to cause a crisis squeeze in world oil supplies and therefore is not likely to disastrously boost global oil prices. And given the behavior of the global markets and the oil producing nations, the experts appear to be quite right. There is only one problem, however. Saddam is unlikely to be basing his calculations on free market behavior models alone. He has always believed in somewhat more direct modes of intervention to try and boost oil prices to his -- and Iraq's -- benefit. The shutdown of Iraqi production is certainly a significant move in itself, and global markets within the first day of the news responded accordingly.

Iraq is the fourth largest oil-producing nation in the Organization of Petroleum Exporting Countries, coming after Saudi Arabia, Venezuela and Iran. Iraq alone produces 5 percent of all global oil exports, and its oil is of a very high quality. It has the second largest known reserves on earth after Saudi Arabia itself. But after the initial shock, confidence returned. Crude oil contracts for delivery in January fell 81 cents by Thursday evening on the New York Mercantile Exchange. And, as energy analysts have been quick to point out, the current state of the world oil market looks likely to be able to absorb the Iraqi move. This is in overwhelming part because Saudi Arabia over the past two months has made clear it is prepared to increase its oil production to keep global oil prices stable around the $30 a barrel level. That is still three times the almost record low price of around $10 a barrel of just over two years ago. Those prices threatened economic disaster -- and consequent political and social destabilization -- for Saudi Arabia. Therefore Crown Prince Abdullah ibn Abdulaziz, the Desert Kingdom's effective ruler, negotiated a production limiting agreement with neighboring Iran on the other side of the Arabian - or Persian - Gulf to boost prices. After more than a decade of non-stop tumbling prices, the free market gurus of unlimited cheap oil forever were quick to pontificate that Abdullah and the Iranians may as well have tried to rebuild the old Soviet Union. The days when the Organization of Petroleum Exporting Countries could dictate oil prices at will to the entire world were long past, they said. But the gurus were wrong. The Saudi-Iranian agreement held. And oil prices tripled in the next two years. Other major producers such as Venezuela, Russia and Iraq itself were only too happy to avail themselves of the resultant financial windfall. However, Crown Prince Abdullah's decision this fall to increase Saudi production to stabilize prices at the current level did not please Iraq - or far larger Russia and Iran. Russia and Iran both have large populations and rely almost totally on their energy exports to be able to subsidize food and domestic energy usage and to give relief to the widespread, endemic poverty in both nations. There has been growing concern in Russia that the economic recovery of the past two years is now running out of steam, given the failure so far of President Vladimir Putin and his team to jumpstart or restructure the crippled economy they inherited from President Boris Yeltsin. A further boost in global oil prices triggered by the Iraqi move would be welcome news to the Putin government. Iranian leaders are also openly unhappy over the Saudi decision to stabilize global prices at America's request in order to maintain global economic stability. The Iranians appear to calculate that Japan, other East Asian nations and the nations of the European Union are so massively dependent on their oil exports that Tehran will be able to sell to them as much as it wants at current world prices or higher. Alternately, the Iranians could cut special deals with some of these nations, as they have in the past, while leaving the United States, the long-despised "Great Satan" - to pay more at global market prices. Indeed, on the issue of seeing global oil prices rise again, the Iranians now appear to have more common ground with their old, bitter enemy Saddam than they do with the Saudis. Iran and Iraq both want to see oil prices rise well beyond the $30 a barrel level. Both countries have long chafed under the dual containment policies of the Clinton administration. Both of them fear they will face more aggressive policies from a new Republican administration if Texas Gov.George W. Bush is confirmed as the winner of the Nov. 7 U.S. presidential election. And both Iraq and Iran are oblivious - unlike the Saudis -- to the effect that steeper prices will have on global economic growth or the domestic U.S. economy. Saddam is in a hurry to boost oil prices because he is still determined -- in his own lifetime -- to make Iraq the dominant power of the Middle East and the Arab World. He is believed to have had an operation for cancer -- apparently successfully -- in the past year. But he is no longer young and he is certainly in a hurry. The Iranians want oil prices to soar for the opposite reason. They are not in a hurry and they are taking the long view. But their long-term oil reserves are far less impressive than those of Iraq, or Saudi Arabia. They want prices to stay high so that they can squeeze high oil revenues out of their increasingly limited reserves to feed, educate and employ their large and fast growing population of 80 million for as long as possible. Only the Saudis now stand in the way of the joint determination of Iraq, Iran and Russia, supported by Venezuela, to further limit oil production and boost global energy costs. Therefore, the conclusion that market forces will be able to limit the impact of the Iraqi halt in production is a far from certain one. --

http://www.arabworldnews.com/?action=display&article=4661992&template=arabworld/headlines.txt&index=recent

-- Martin Thompson (mthom1927@aol.com), December 01, 2000


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