The price of oil

Getting the jitters again Mar 24th 2003 From The Economist Global Agenda The price of oil jumped by more than a dollar a barrel after plunging to a four-month low during the first days of the war in Iraq. Traders are now worried that the conflict could last longer than they had expected. Sharp cuts in Nigerian production have also played a part AFTER the breathtaking pace of the opening days of the American-led military campaign in Iraq, the weekend brought a pause. And, on reflection, oil traders decided to mark up the price of oil. In the first two days of the campaign, the oil price had plunged to four-month lows of less than $27 a barrel (for West Texas crude) after almost reaching $38 a barrel earlier this month. In trading on Monday, the price of American crude jumped by more than a dollar to over $28 a barrel. The market was reflecting the apparent setbacks in the coalition campaign to secure Iraqi oilfields and to unseat Saddam Hussein. Another factor was the rise of ethnic tensions in Nigeria, one of the world’s largest oil pumpers, which has dramatically reduced production there. After the initial successes of American and British forces in Iraq, and confident statements that the key southern oilfields had been secured, more recent news has been disquieting for the oil markets. The strategic port city of Umm Qasr, which is vital for exports from southern Iraq, and which had been reported captured late last week, was still the scene of sniper attacks; and, on Monday morning, a defiant Saddam appeared on Iraqi television, praising “heroic resistance” at Umm Qasr. Together, these developments dampened widespread assumptions that the war would be won in a week, and that the oil price would then swiftly shake off its war premium—estimated to be up to $20 a barrel. In Nigeria, the usual daily oil production of 2.2m barrels per day (bpd) has fallen by 800,000 bpd, and exports, normally 1.9m bpd, have also plummeted. Chevron Texaco has closed its Escravos terminal, which handles 440,000 bpd, and has evacuated its export terminal. The disruption is worst in the West Niger Delta, where ethnic groups have long challenged the rights of international oil companies, and of the Nigerian state, to the vast oil riches of the region. However, Shell, the largest foreign investor in Nigeria, with capacity of 1m bpd, also reported that it was losing 50,000 bpd through illegal bunkering (tapping into oil pipelines) in the East Delta. The Nigerian disruption is a blow to oil importers in the West and in Asia, coming as it does while much of Iraq’s almost 2m bpd of exports has also been interrupted, and as Venezuelan supplies are getting back to normal after a devastating general strike. However, the Organisation of Oil Producing and Exporting Countries (OPEC), the oil-producers’ cartel, which had been pumping oil furiously in the run-up to the war in Iraq, has been trying to quell worries about supply squeezes. Against the backdrop of short-term concerns about the impact of war and ethnic squabbles, analysts are pondering the longer-term importance of Middle Eastern oil. While opponents of the war in Iraq routinely assert that it is motivated by concern about oil supply, the importance of Iraqi oil, and of Middle Eastern more generally, has diminished since the oil crises of the 1970s. Iraq under Saddam produces just 3% of world output of 77m bpd, despite having the world’s second-largest reserves. After a post-communist collapse in output, Russia has raised production by 25% in the past three years; the country is now the world’s second-biggest oil exporter. Moreover, only a handful of Middle Eastern countries, among them OPEC kingpin Saudi Arabia, have kept pace with technological change. Burgeoning demand, especially from big developing countries such as India and China, has spurred oil companies to make further investments in exploration technology that can be used to find oil in new areas. Such innovations are shifting the balance of power in oil reserves. All of these developments are encouraging for oil importers in the long term. However, oil investments take years to come fully on stream. Whatever the outcome of the war in Iraq, expect the Middle East to be the dominant source of oil for some years to come. Discussion Questions: (1)Do you expect oil prices to go up or down? >> If Saddam Hussein burns oilsfield, oil prices go up. (2)Do you expect the US to take control of oil production in case they win the war? (3)Do you think OPEC should continue its function in adjusting oil price? (4)Should we as a global society, continue developing technology to extract oil or to find other energy sources? >> Energy created by waste disposal