At "Oil Prices, Oil Peaks, and the Gulf Crisis", a roundtable sponsored by The Nixon Center yesterday, three experts discussed the future of global oil markets, their implications for the United States and the current geopolitical situation in the Gulf. The panelists-all of PFC Energy, a leading industry consulting firm-included its Chairman and Founder J. Robinson West, the Manager of Market Intelligence Services David Kirsch and the Senior Director of Markets and Country Strategies Group Raad Alkadiri. Geoffrey Kemp, director of regional strategic programs at The Nixon Center, served as moderator.
Kemp started off the event by recalling a time when many worried about "the strategic consequences of falling oil prices" in the wake of the Asian Financial Crisis, when prices were around $10 a barrel. Today, he noted, the situation is "exactly the opposite." To get a "handle on the fundamentals", Kemp asked the panelists to distinguish short- and long-term "trends both in the oil industry and in the geopolitics of the various regions of the world, particularly the Gulf."
First to speak was West, who focused on the long-term picture and asserted that the current state of world oil markets is significantly "different than it was in the 70s and early 80s." After a large number of resource nationalizations in the 1960s and the formation of the Organization of the Petroleum Exporting Countries (OPEC) in 1961, West said, major oil companies were pushed out of "low cost areas" like Venezuela and the Middle East to places where extraction costs were higher; they were buoyed by high demand. But when global thirst for oil leveled off, prices crashed, leading to massive cuts. The end result of this "tectonic" shift was that "national oil companies now controlled over 80 percent of the resources."
While it is en vogue to say that global oil supplies will soon run dry, West maintained that "the world is not running out of oil. . . .The problem is the world is running out of oil production capacity." He argued that low or stagnant production in places like Mexico, Venezuela and Iran is due to domination by national oil monopolies, which are often "unwilling or unable to develop the resources themselves."
Yet another factor straining global markets is "enormous" growth in demand. In the United States, West said, "cheap land, cheap credit, cheap roads and cheap energy" have over the past 25 years spurred suburban sprawl. As a result, cars (and thus oil) are now a necessity for many in the country-and demand for gasoline has indeed been highly inelastic, even as prices rise to around three dollars a gallon.
West predicted that as the Chinese economy grows, so too will its demand for cars and gasoline, serving only to exacerbate the problem. Putting current world oil production at about 82 million barrels a day and placing world capacity at about 18 million barrels more, he wondered when demand would exceed this point. West mentioned two dates-five years from now, and 2020-but treated this scenario as inevitable, despairing over "the geopolitical ramifications." Indeed, while describing global warming as a serious problem, West argued that the impending supply-demand crisis is more urgent: "The fact of the matter is, there's a high probability that there's going to be a production crunch . . . before Bangladesh gets flooded." Questioning the will of leaders to make the tough choices required to solve these two issues, he spoke of a "massive wreck on the freeway" ahead.
The conversation then turned to shorter-term issues, as David Kirsch talked about the state of the market and pricing. Pronouncing "OPEC . . . once again relevant", he stated that the cartel of oil producers "just cannot produce" enough oil for a voracious market. This comes after the prospect of a glut led OPEC to lower production by 1.2 million barrels a day in October 2006, when the price fell to about $60 per barrel. This indicates "active market management" by OPEC-very tight control of production.
Like West, Kirsch said the structure of today's petroleum market was very different from past ones. Oil is now seen as an investment, he said, not just a physical commodity. Pension funds, hedge funds, and other players from the "paper markets" are now major factors. This has brought "a lot of stability" to the market and is making OPEC members less concerned with the supply and demand for physical oil and more interested in financial markets-West related a story of Abu Dhabi leaders more concerned with interest rates than oil prices.
Last to speak was Raad Alkadiri, who focused on the political and economic situation in the Gulf countries. He identified a "set of new dynamics" resulting from high oil prices at play in the Gulf Cooperation Council (GCC) states: Saudi Arabia, Qatar, the United Arab Emirates, Kuwait, Bahrain and Oman. For example, Riyadh now has the third-largest cash reserves in the world. North African countries have benefited as well: Algeria and Libya, formerly debtor nations, have surpluses of $17 to 20 billion and $15 billion, resulting in greater political and economic leverage for their governments.
Alkadiri also talked about the "happy story" of what GCC countries are doing with the cash. Many are pursuing "economic diversification" so they are less dependent on the energy sector, investing oil profits and tackling the "one key issue" in the region: job creation.
The picture is not entirely rosy, however: Alkadiri reported that clients are extremely worried about regional trouble spots. One is Iran, where a possible conflict could have a disastrous effect on the oil market. This led him to counsel against strengthening sanctions against Tehran, which he said would damage both the U.S. and Iranian economies. Kirsch agreed, saying that a war in the Gulf would likely lead to an average oil price of $150 per barrel and "trigger a global recession."
Another concern is Iraq. Alkadiri served with the British delegation to that country from 2003 to 2004, and his was a decidedly pessimistic view of the situation in Baghdad. Focusing on the debate over the division of hydrocarbon revenues, Alkadiri argued that the lack of political reconciliation and a "collapsing" central government in post-surge Iraq are the central issues. He called the parties "too parochial" to compromise; at one point he said factional leaders were "too well-protected" in Green Zone, allowing them to follow destructive policies at "no cost to themselves." As long as a settlement of differences is elusive, he said, investment in the energy sector will remain risky.
Asked about possible solutions for averting crisis in the question and answer session, West responded he only sees politicians who "haven't a clue" searching for "pain-free solutions"-and thus looking for ways to increase supply. He criticized current alternative energy research programs as wasteful. Ethanol's inefficiency, he said, made it more of a "vast agricultural subsidy program" than a genuine energy policy.
The other option is to reduce demand, West said, "but that involves pain"-and the United States has failed in this respect as well. The size of cars, for example, has only grown in recent years. This led West to make a sobering prediction: Only the "massive economic dislocation" caused by an oil shortage will induce American leaders to find alternatives to petroleum and make the tough choices necessary to curb demand.
Andrew E. Title is an apprentice editor at The National Interest.
