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28/07/2006 | Perception and Reality in the Oil Market

Stratfor Staff

There is fighting in the Middle East, so oil will go through the roof. Right?

 

Wrong.

On July 11, the day before Hezbollah captured two Israeli soldiers, Nymex crude oil was $74.16 a barrel. On July 27, it is at $74.50. Not exactly a raging panic, eh?

But prices are indeed volatile and have gyrated by about 10 percent in either direction since the conflict started. Unfortunately, such volatility is part and parcel of today's world. Currently there is a war premium, a terrorism premium, a Venezuela premium, a Russia premium, an Iran premium and a Nigeria premium. Geopolitical risk is high and rising, and whenever some bit of news pops out about this or that crisis, the markets obediently freak out.

But once all that noise is filtered out, the bottom line is that though oil remains a largely indispensable commodity, the United States -- and the world as a whole -- is far less dependent on it.

First let us dispel a widely accepted myth -- that the Israel-Hezbollah conflict involves oil in some way. The fear comes in three forms. First, that this region produces oil; ergo war in the region is bad. Second, that the conflict could trigger a political crisis like the Iranian Revolution and the Iran-Iraq war did in 1980, and exports would plummet. Third, that irate Arabs would try to punish the West by cutting off exports to certain states, as happened in the 1973 oil embargo.

All three are ridiculous. Israel, Lebanon and Syria consume and export combined only about 500,000 barrels per day (bpd) of crude out of a global market of some 85 million bpd. Collectively the three are small fry, and if they vanished from the earth the net impact on the oil markets would be negligible. Additionally, nearly all of the Sunni Muslim oil powers such as Algeria, Saudi Arabia and Qatar not only blame Hezbollah for the conflict, but also are allied with the United States. They are not about to tinker with oil policy.

Second, even if an embargo or other crisis were in the making, the effects would not be nearly as damning as in times gone by. Americans have more money in their pockets than they did 25 years ago. Adjusted for inflation, the U.S. economy was worth $6 trillion at the time of the 1980-1981 oil shock -- in the 25 years since, gross domestic product (GDP) has doubled to $12.5 trillion. Per capita income is closing in on $42,000. Americans are simply more financially resilient and robust than they once were.

Third, though oil is at all-time highs in relative terms, once one adjusts for inflation, it is actually lower in real terms. Adjusted for inflation, the price of a barrel of crude in the aftermath of the Iranian revolution was about $90. Simply put, your "average" American almost has an extra $20,000 to spend, while energy prices are actually lower in real terms.

Finally, Americans are more efficient despite the inexplicable popularity of sport utility vehicles. In the United States, the steady shift from an industrial to a technocratic economy has dramatically reduced energy needs in terms of the amount of economic activity generated. It takes a great deal of energy to smelt steel, less to turn steel into components, far less still to assemble those components into an automobile, and hardly anything to design the vehicle in the first place. U.S. oil demand has only increased by about 15 percent since 1980, while the economy has roughly doubled.

Put another way, the U.S. economy today is not only nearly twice as oil efficient in terms of economic output per unit of energy consumed, but for it to be affected in a manner similar to the 1980 crisis -- for the proportion of income spent on crude oil to be the same as it was then -- a barrel of crude would need to go to at least $180. A similar picture is true on a global scale. In 1973 roughly 8 percent of global GDP went to energy purchases; even with all of the hikes in the past three years, that number is now only about 3 percent.

This does not mean exposure is nil or that conservation is a lousy idea -- just that this war (and the oil markets) need to be viewed with some perspective. The Lebanese conflict is not going to trigger any sort of global supply problems. A conflict with Iran, however ...

WORLD TRADE ORGANIZATION: World Trade Organization Director-General Pascal Lamy on July 25 declared the most recent round of trade talks among the United States, European Union, Australia, Japan, Brazil and India a failure. The six entities had been attempting to reinvigorate the Doha Round of talks, which have stalled over efforts to liberalize agricultural trade. The round has been foundering for the past three years, with talks repeatedly delayed and the scope of the round repeatedly curtailed. At this point it is extremely unlikely that the Doha Round will be completed in any form.

CHINA: Typhoon Kaemi made landfall in China's Fujian region July 25, bringing more than 20 inches of rain to an area that had been drenched by Typhoon Bilis two weeks earlier. Widespread flooding from Bilis has affected the Jiangxi, Hugei, Anhui, Chongquing and Hunan regions and resulted in the evacuation of more than 3 million people. Kaemi is expected to produce similar results.

RUSSIA: Creditors of Russian oil major Yukos voted to liquidate the firm July 24 in order to pay off the company's debts, mostly comprising back tax charges. Court-appointed manager Eduard Rebgun declared that the firm's $18.2 billion in debt exceeded the government estimate of Yukos' assets of $17.7 billion, thus necessitating the firm's liquidation. The few Yukos executives who had not already resigned, fled the country or been arrested assert the firm is worth at least $37 billion, despite three years of government efforts to whittle away at its assets. The next step will be an auction of Yukos' remaining assets. Previous auctions featured shell companies underbidding for the assets and then funneling them to government firms. Rosneft and Gazprom -- state-run firms both -- will be the biggest beneficiaries of Yukos' final dismemberment.

RUSSIA: Russian tax authorities have frozen the bank accounts of the Caspian Pipeline Consortium's (CPC) Russian unit and presented the consortium with a claim for $174.7 million supposedly owed to Russian state pipeline monopoly Transneft. The CPC line connects the Tengiz superfield in Kazakhstan to the Russian port of Novorossiysk on the Black Sea. The CPC pipeline is the only major oil pipeline in Russia currently not controlled by Transneft, so the firm has consistently worked to use Russian law and its Kremlin contacts to hobble the project and, if possible, take it over outright. Russia holds a 24 percent interest in the pipeline, Kazakhstan 19 percent, Chevron 15 percent, LUKoil 12.5 percent and the government of Oman 7 percent.

INDIA: The Association of Southeast Asian Nations (ASEAN) put free trade talks with India on hold because of India's unwillingness to open its markets, Malaysian Trade and Industry Minister Rafidah Aziz said July 25. India has insisted on excluding some 850 goods, which account for approximately 30 percent of Southeast Asia's exports to India, from the trade agreement. A spokesman for India's Commerce and Industry Ministry insisted July 25 that the ASEAN talks are still on and it will submit fresh proposals soon.

NIGERIA: International oil major Royal Dutch/Shell declared force majeure on cargos of Bonny Light crude oil originating in Nigeria on July 26. A combination of accidents and sabotage related to ongoing disputes over the future of the Nigerian political system has caused the firm to suspend some 653,000 barrels per day of production.

Stratfor (Estados Unidos)

 



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