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USELESS PETRODOLLARS

THE TURN OF THE CENTURY: FIRST VICTIMS

UNDER THE THREAT OF EMBARGO

THREE BASIC REASONS FOR THIS CHANGE

SCENARIO FOR OPEC's DOWNFALL













Victor Feller

ARABIAN OIL: Crisis Scenario for 2009-2020

How strong are OPEC's positions on the world oil market? PETROLEUM presents a polemical article by Victor Feller, in which the author argues that the cartel's days of power are numbered, and that the West will be free of its current dependence on Arab oil within the first decade of the new century.

USELESS PETRODOLLARS

One of the West's main fears in the 1970s was the possibility of Arab money buying up the best companies, prestigious properties and a significant part of the Western political elite. Somehow, though, Arab riches, though they remain formidable and continue to increase in dollar value, are nevertheless imperceptibly but rather rapidly losing their leverage in international politics and the world economy. On a purely emotional level, one can compare $150B (the approximate annual revenue of Arab countries from oil) in the mid-1970s, when that amount would buy ten of the world's leading companies, with $150B in 1999 — when it was enough to buy only the 25th largest of the world's corporations.

Over the course of three decades of excessive revenue gathering, not one of the oil-exporting Arab countries has managed to establish an effective economy outside the oil industry. This refers both to the stable, pro-Western countries and the so-called "experimental" ones, such as Libya, Algeria and Iraq. The same can be said of Iran, which in 979 became a fundamentalist, Shiite state. So, we can draw the conclusion that in the 1990s, the Arab world is back where it started in the 1960s. Its global political influence and even its ability to influence the world oil market are considerably reduced. The Arab world did not achieve strategic positions in the modern world economy or international politics.

Today, it is busy disposing of $120-200 billion (around 0.3% to 0.5% of world GDP) in monopolistic excess profits. This money that is spent on mosques, assistance programs, Islamic cultural centers, water supply systems, artificial oases, oil refineries, pipelines, tankers, port facilities, petrochemical plants, snares in Western companies, sophisticated armaments, harems, Rolls-Royces and private planes. The spending is uncoordinated, often has no tangible effect (it is said that in the 1970s, tens of millions of dollars in cash belonging to one Emir were simply eaten by mice) and, in the strategic sense, generates nothing that is sustain-able in the future.

THE TURN OF THE CENRUTY: FIRST VICTIMS

Thus, what are the results of the 50-year epic of Arab oil? Where are the Arab world and Arab oil going in the 21st century? How serious is the assumption that this epic will run its course by the end of the first decade of the 21st century? Imagine a situation in which Arab oil reserves had not proved to be so large or so inexpensive to bring to market. How would that have changed the world economy and international politics?

It's dead certain that oil nevertheless would have become the basis of the world economy, but not in the 1950s. Rather, it would have happened later, in the 1960s, in the same way it became the basis of the American economy back in the 1920s - 1940s, before the appearance of inexpensive Arab oil, on the basis domestic, relatively expensive oil. Simultaneously, alternative energy sources would have developed at accelerated rates. Coal would have remained the king of energy sources through the early 1970s, while the nuclear energy industry would have overcome the resistance of ecologists sometime during the 1980s or 1990s, and its current share in world energy consumption would be significantly higher. Similarly,

  

natural gas consumption would be much higher than it is today. Ultimately, the revolution in alternative sources of energy, including fuel elements, would have come earlier, possibly at the beginning of this century. Inexpensive Arab oil merely changed the industry's priorities in the period from the 1950s to the 1990s, making the industrial countries slaves to oil, but could not have had an essential impact on the rate of growth of either science and technology or the world economy.

 

UNDER THE THREAT OF EMBARGO

Now, the West regrets these $120-200 billion per year in earnings for the Arabs, and in the coming years will try to deprive them of this subsidy. The main political and economic criterion of the West for neutralizing the Arab oil factor will now be the ability of the Western economy to function in a condition of complete (or nearly complete) embargo of the Middle East.

To achieve this goal, the West will use a number of natural economic conditions. The first is the rather high price of oil in recent years, but political will, in conditions of a clearly visible confrontation between the Western and Arab worlds will consciously promote this movement, which is developing in the following way.

           

Current worldwide oil consumption totals 75-77M barrels per day (bpd). It is expected that consumption should reach 93-97M bpd by the year 2010 and 115M bpd by the year 2020. Meanwhile, oil shortages in the USA, Canada, Europe, Japan and Korea are estimated currently at about 25M bpd. Exports from Arab countries and Iraq amount to 14M bpd, while all OPEC members, including ostracized Iran, export 26M bpd. In other words, OPEC exports satisfy the oil requirements of Western countries.

Objectively the West can't get by without Arab-Iraqi oil and Middle Eastern oil in general. Imagine that the West, under extreme circumstances, or, more precisely, in case of an embargo on oil deliveries from Arab oil exporters, attempts to redirect oil exports from Indonesia, Latin America, Nigeria, Russia, Kazakhstan and North Africa, as well as from North Europe and Canada. It would still need another 9- 12M bpd, or 25% of its needs.

In other words, in case of a direct confrontation between the Arab world and the West, the West cannot satisfy its energy needs by purely political means, even more so by economic redistribution measures. Arab-European and Arab-American relations will be threatened by this danger for most of the first decade of the 21st century. However, by the end of this decade, in our opinion, the economic independence of Western countries from Arab oil will be practically complete.

THREE BASIC REASONS FOR THIS CHANGE

Instead of the expected 95M bpd, oil consumption in 2010 will barely exceed 90M bpd. The reason is in the accelerated growth of natural and liquefied gas consumption, as well as the conversion of about 20% of automobiles in the industrialized countries to gas-based fuel. In addition, around 5% of automobiles in these countries will use alternative energy sources. What's important is that these changes will effect primarily the industrially developed economies, thus strengthening their energy independence.

In the first decade of the 21st century, the Caspian region will become one of the world's largest exporters of oil, with volumes exceeding 7M bpd in 2010. Other oil exporting regions will likewise increase volumes by 7M bpd. Production of oil in the USA and Great Britain will increase slightly (by 0.7-l.0M bpd).

           

"This means that practically the entire increase in oil consumption during the first decade of the 21st century (14-16M bpd) will be covered by increased imports from non-OPEC countries and increased production in the main consumer countries. The advanced economies will significantly reduce purchases of Arab oil by switching to Caspian and other non-OPEC sources. In turn, Arab exports will shift to China, India, Africa and Arab oil-importing countries.

SCENARIO FOR OPEC's DOWNFALL

OPEC's assumed responsibility for the stability of high oil prices on the world market will face a serious challenge in the next decade, one which OPEC is not likely to meet. In trying to achieve this goal, in 2009-2009 OPEC will be forced to concede a significant share of the world market to competitors. Meanwhile, the need for petrodollars and the ability to increase exports will grow in Indonesia, Venezuela and Nigeria, as well as in Iran, Libya and Algeria, countries which have completed their social experiments and are suffering more and more from a lack of investments. By the end of the decade, each of the above-mentioned OPEC members will be ready to increase oil exports by 4-5M bpd. Within 3-4 years, taken together, they can increase exports by 8-10M bpd, i.e. almost a 100% increase. They will no longer be frightened by a 70% reduction in prices; they will be more interested in gross revenues than price levels.

One can assume that Nigeria, Venezuela, Indonesia and the countries of Caspian basin will be the first to demand and receive from the Arab countries an increased quota. Later, Iran will try to achieve this goal. After a similar ultimatum from Algeria and Libya, OPEC will basically dissolve itself.

Intensive discussions in 2007-2009 will reveal a contradiction between the old and new principles of export quotas. It is not excluded that densely populated Iran, Indonesia and Nigeria will demand consideration of a "per capita" principle in addition to the "historical" and "reserve volumes" criteria. Such a principle, how-ever, will not help sparsely populated Algeria and especially Libya. Therefore, using the support of EU agencies, with which they will have integrated more closely by that time, they will simply withdraw from OPEC, and increase exports to Europe by 1.5M bpd in 2010. In this case, OPEC will cease to exist.

The concrete reasons for OPEC's defeat will be: a deliberate policy of the West directed at diversification of its energy supply; the obstinacy of OPEC members in maintaining inflated prices; an actual reduction of oil revenues earned by Arab countries coupled with inevitable increases in domestic spending; an increase in natural gas consumption; and the appearance of alternative sources of energy, including fuel elements.

Since 1993 Victor Feller has been manager of the "Rost-Fund" investment fund, which in 1995-96 became one of the largest privatization funds in Kazakhstan. Since 1999 Feller has been engaged in leading a Russian research center, developing historiological theory and forecasting.