Chakib Khelil Extends Double-Talk on Oil Prices
It’s hard to fathom OPEC president Chakib Khelil’s (previous article) duplicitous and outrageous statements about the oil markets. On the one hand, OPEC is a cartel benefiting from prices that have roughly doubled in the past year. But if you believe their rhetoric, they’re suffering from a chronic lack of money to invest in production, (yeah, right) and they’re fretting about the threat of people switching to alternative fuels. (Fat chance in the near-term–global biofuel production is less than 5 percent). In addition to the typical scapegoats of a weak dollar (partially to blame) and speculation (slightly to blame), Khelil now has added "bioethanol production" as a culprit in the oil-price runup.
"I believe that 60 percent of the rise is due to the fall in the exchange rate of the dollar and to geopolitical problems, and 40 percent to the intrusion of bioethanol [emphasis added] on the market," he said.
"I can affirm that all the (OPEC) countries are in favour of new explorations (of oil reserves), but the fact is that the embargo imposed by Libya has prevented any increase of investment in that country, just as the current embargo on Iran is stopping anyone investing there," Khelil said.
"The United States is threatening severe economic sanctions against any group which dares invest in Iran. Similarly, the war in Iraq is why investment there is weak. No OPEC country can invest in embargoed countries."
Where to start. Any amount of bioethanol production is blended with gasoline or diesel, and therefore reduces demand for oil. In Brazil, ethanol displaces fully 40% of automotive gasoline. Anyone with the most basic economic sense knows that as ethanol production increases worldwide, demand for oil will fall and therefore prices. Yet Khelil suggests the opposite.
Now onto the weak dollar. Yes, the dollar has fallen about 25% against the Euro since 2004. But that’s nowhere near enough to account for an oil price doubling.
Libyan embargo? GW Bush ended it in 2004:
US President Bush on Monday formally ended the broad U.S. trade embargo on Libya to reward it for giving up weapons of mass destruction but left in place some U.S. terrorism-related sanctions.
The president’s action is partly symbolic because it simply makes permanent his April decision to suspend most commercial sanctions and allow U.S. firms to invest in Libya and buy its oil for the first time since 1986.
But the moves, which take effect on Tuesday, will also end remaining restrictions on U.S.-Libyan aviation and the State Department said they will unblock about $1.3 billion in frozen Libyan and other assets — steps Bush did not take in April.
Iraq? Contracts were awarded June 30, 2008 to four oil companies, with backup offers from over 40 others.
The Iraqi government’s stated goal in inviting back the major companies is to increase oil production by half a million barrels per day by attracting modern technology and expertise to oil fields now desperately short of both. The revenue would be used for reconstruction, although the Iraqi government has had trouble spending the oil revenues it now has, in part because of bureaucratic inefficiency.
For the American government, increasing output in Iraq, as elsewhere, serves the foreign policy goal of increasing oil production globally to alleviate the exceptionally tight supply that is a cause of soaring prices.
So what is actually going on here? Here’s my scenario:
OPEC is scared to death about their production beginning to fall. In particular, countries such as Saudi Arabia who have long refused to disclose reserve and production figures for their fields may be much closer to decline than they are willing to admit. This concern is based on the work of Matthew Simmons, who claims in his 2005 book Twilight in the Desert that Saudi’s Ghawar field is at or very near it’s peak of production. Only time will tell.
But as much as they could be hurt by falling production, they seem to be even more worried about falling demand. This concern is hard to fathom, especially with the huge rises in consumption from China and India, where many people are getting affordable automobiles for the first time.
But check out Khelil’s blatant threat to consuming nations made just last week:
OPEC president Chakib Khelil said Tuesday the oil cartel was concerned about future demand, underlining that the cartel is in no mood to pump more crude to cool record prices.
"The concern we have is about the security of demand," Khelil, who is also Algeria’s energy minister, told delegates at industry event the World Petroleum Congress in Madrid.
He said there were "big uncertainties" about making huge investments in infrastructure to increase output from the 13 OPEC member countries, which currently pump about 40 percent of world oil.
"I don’t think anyone questions that we have enough resources; the issue is if we are able to supply it to the market," he said.
OPEC’s uncertainty about future demand arises from increased investment in alternative sources of energy, the impact of energy conservation, falling economic growth and the stepped-up search for non-OPEC oil reserves.
Each of these factors could slow demand for oil from Organization of Petroleum Exporting Countries and the cartel needs to see "a credibility of future demand," Khelil said.
So let’s get this straight: They’re getting double the money they used to get for the same product, but now they’re saying "don’t conserve too much, or invest too much in alternatives, or we won’t be able to keep supplying you." In other words, "better keep using the drug no matter what the price, or we might cut you off entirely." It’s also great how they gloss over the threat of falling production: "no one questions that we have enough resources" but if they don’t make it to market, it will be the fault of consumers. Nice switcheroo.
Most consumers don’t hear about these kinds of statements, but it does affect market psychology. It’s clear the only long-term solution to high oil prices is to stop using the stuff, and the sooner the better.
Khelil’s goal is to intimidate the market just enough to delay government policy–and to intimidate consumers–long enough so that OPEC garners the absolute maximum profits on its way down the oil production curve.
But since consuming nations have waited far too long to shift their policies away from oil, that eventuality means greater economic hardship as we are forced to pay a fortune for oil to continue business as usual, at the same time as completing a massive energy transition which will take a minimum of 15-20 years to be fully realized.
With the world at or near the peak of production and future declines all but inevitable, and with world population (and therefore oil demand) at an all-time high, any guess what the peak of oil prices will be in the next 20 years? Matthew Simmons has a standing wager for an average price of $200/barrel by 2010. But there’s no guarantee it will even stop there. If supply continues to tighten, we could see $400-$500/barrel oil ($15/gallon gasoline) before this is over, which would transform the world as we know it in a very bad way. Most westerners alive today have never lived through that kind of scarcity, economic hardship, and even rationing. The only thing standing between us and that nightmare scenario is an immediate and massive ramp-up in production of alternatives such as cellulose (non-food-based) ethanol and biocrude derived from algae. On that front, we’ve barely even started.
To have a moderating effect on oil prices, biofuel production would have to first offset any future petroleum production declines. Even with substantial demand destruction, (of nearly all recreational and non-essential uses) we still must grow and ship food, clothing, and medicine. There’s a lot of room for economic downturn and suffering in this scenario. Delaying the energy transition by believing the putrid nonsense coming out of Khelil’s mouth can only make that situation worse.