What are the factors driving up the price of oil? Some cite fundamentals, others over-active speculation,
The Present Saudi Pumping Surge is a Key Element of the US & EU Iran Sanctions Strategy
It is certain that the Iran confrontation will only intensify as the mid-summer sanctions deadline approaches. By July, Washington and the EU hope to significantly curtail Iran’s ability to export oil. In this situation, it is perhaps surprising that prices have not gone higher.
This past week, the normally understated Economist, while noting the Saudis’ extraordinary efforts to pump excess capacity, nevertheless warned that the Iran crisis could trigger a worst-ever oil shock:
The cushion of spare supply is thin. Oil stocks in rich countries are at a five-year low. The extent of OPEC’s spare capacity is uncertain. Saudi Arabia is pumping some 10m b/d, a near-record high (see chart 1). And there is the threat of far bigger supply disruptions if Iran were ever to carry out its threat to close the Strait of Hormuz, …. Even a temporary closure would imply a disruption to dwarf any previous oil shock.
As for Riyadh, their recent activity demonstrates that they are not about to allow the new Iran-sanctions regime to fail due to any oil shock or faltering domestic support by U.S. or European publics upset about high gasoline prices–not if they can help it. And, so they are pumping all they can pump.
If this were the 1980′s or 1990′s, the effect would have been much more profound. There were periods back then when the Saudi’s had 40% spare capacity available to dump on the market as the world’s oil-price “swing state.” But, alas, today the Saudi spare capacity fraction is lower, and their share of global production is also lower. So, we shall see.
Consider that, after Saudi Arabia, Iran is OPEC’s second largest exporter (though Iraq is pushing to challenge Iran-see Reuters here ). As the Administration has asserted from the beginning, they intend to shut down Iranian exports “carefully”–carefully enough not to cause any spikes in oil prices, especially considering the fragility of the economic recovery. This is, of course, not an easy task–and the Iranians are naturally disinclined to help with the process. It matters little if the Iranians could actually shut down the Straights of Hormuz for very long, just threatening to do so has had a major impact.
I wrote at length in two earlier posts [here and here] about China’s angst at these sanctions, about its wanting to be taken care of if they have to stop buying Iranian oil. And the Saudi’s are indeed working with D.C. to take care of China and other major importers of Iranian crude, so as to get them on board. In fact, this has gone so well that President Obama publicly thanked Beijing for supporting the sanctions.
From Preventing Shortages to Regulating Price
During this past week, the Saudis declared that they are now not only acting to prevent market shortages, but, as Minster Naimi declared, to keep prices down. On Monday 19Mar12, Javier Blas in the FT noted:
In Kuwait last week, Ali Naimi, Saudi oil minister, said the kingdom remained “poised to make good any shortfalls – perceived or real – in crude oil supply”. The promise to offset “perceived” shortages goes beyond previous statements by Saudi officials pledging only to make up for actual disruptions in the market.
So too, the authoritative industry-insider journal, Petroleum Intelligence Weekly (PIW), pointed to Saudi efforts, under the headline,“Saudis Seek to Calm Market Supply Fears”:
With consumer concerns growing over the economic risks posed by high oil prices, Opec kingpin Saudi Arabia has been at pains to make two points absolutely clear — that global supply is meeting and most likely exceeding demand, and that there should be no doubts over the kingdom’s stated capacity of 12.5 million b/d. On this basis, and notwithstanding geopolitical anxieties and the impact of speculation, fundamentals simply do not justify current prices, Saudi Oil Minister Ali Naimi said. (PIW Mar 26, 2012)
The level of global excess production capacity (which is essentially all in Saudi Arabia nowadays) is probably the most actively watched factoid in the futures market. It directly signals ability to meet future demand. And, so it is that the Saudi’s are making extraordinary technical efforts to allay fears of insufficient surplus capacity (and to reclaim their former market prowess):
Saudi Arabia is taking steps to calm the oil market, boosting exports, filling up strategic oil stocks overseas and tapping oilfields to expand production capacity. … Riyadh is also restarting fields that were shut down three decades ago, in an effort to maintain a big cushion of spare production capacity. The moves to boost production capacity are not a response to short-term oil prices, but part of a longer-term strategy to maintain a large buffer of spare production capacity, officials said. (ibid., J. Blas, FT.)
Let’s step back and be clear about what is going on here: It seems to me that the Saudis’ methodically executed oil-sector moves in recent weeks are aimed at assisting the Obama Administration and Brussels to bring “devastating sanctions” upon Iran.
(And, I should note in passing that, from a purely geostrategic point of view, recent Saudi oil moves–which I will describe further–are proving to be infinitely more nuanced and effective than all the Israeli threats and hyperbole about unilaterally bombing Tehran’s nuclear sites–especially considering the regional conflict that might provoke–all in all a “strategy” that has only created headaches for the Administration and the Europeans.)
This all shows that the now-six-decades-old “special relationship,” begun by FDR and King Saud, is still alive and well. Whatever the implications for today’s Arab democracy movements, it is the Iran confrontation–and Saudi cooperation–that are presently front and center on Washington and Brussels’ agenda.
Direct Saudi Assistance to the U.S. Domestic Market
The Saudis have an even more direct idea of how to keep American consumers on board Iran sanctions:
The Saudi measures include a sharp boost in exports to the US for April and May. Vela, the shipping arm of the state-owned Saudi Aramco, has hired the largest number of supertankers in years to move oil from the Gulf to the US. (ibid, Javier Blas, FT,)
Riyadh may or may not like to see President Obama reelected in the coming elections, but they certainly want the Administration to not lose public support for Iran sanctions because of high domestic oil prices.
Can Negotiations Prevent a Conflict?
One final point: Any geostrategic project that has gotten to the degree as has the present confrontation with Iran, does not simply fizzle away. The Obama administration has already expended the majority of its diplomatic capital on this issue for three-plus years; it has come to affect energy relations with China, Europe, India, and Japan; it is risking the security of the global oil market and, with it, the struggling economic recoveries in the U.S. and Europe. Indeed, any such project historically by a Great Power has not generally fizzled away.
It is difficult to imagine how a major turning point will not be reached sooner or later, probably in some months, in this confrontation with Iran. Simply put, too much has been invested and too much is being risked to imagine the superpower now reversing course, unless another major international security crisis (or political-economic crisis) diverts its attention and resources.
If there is to be a negotiated settlement of this crisis, we will have to see evidence of significant movement soon–which does not preclude a simultaneous intensification of the confrontation. To this end, it is necessary to imagine what a mutually acceptable accord might look like, including how it would be mutually verified. Is there any such possible negotiated solution? And, one wonders how the Saudis and Israeli’s would react if Washington and Tehran reached a “grand bargain” of some type.
If one cannot even imagine the elements of such an accord, and, from what I can tell, very few can, then the implications are very serious indeed.