Index

I. Oil as a Motive in a New World System

II. Oil and Power

III. Time to Amend Missed Opportunities

IV. Concerns in Russia

V. No Cooperation from the Core Areas... The Case of Saudi Arabia

-Roots of a Discord: Prince Abdulah, Created False Hopes

-The Political Scene: Democrats and Republicans Announce Middle East Policy

-Price Levels in a Scene Highly Influenced by Politics

VI. The Rule of Law is about to Break Down

Appendix 1

• President Bush Reflecting on His Own Personality

Appendix 2

· Kazakhstan

Appendix 3

· Venezuela Counts on 30 bn bl of Remaining Reserves

Caracas Plans Chart Collision Course with OPEC

Editor: Stuart Wilkinson

Director: Mazhar al Shereidah

This month’s issue of Petroanalysis tries to address this subject through some historical parallels, formulating the question of whether the world is not faced with a modern replay of “The Great Game” or the “First Afghan War”, according to H.W.C. Davis “The Great Game in Asia, 1800-1844”.

Or is it rather a repetition of what the (1840) European Powers (England, France, Russia, Austria and Prussia) considered as the “Eastern Crisis” or the “Eastern Question”?

On July 15^th, 1840, the London Conference of Ambassadors came to an agreement on the conditions for a settlement of the Eastern Question. England, Austria, Prussia, Russia and Turkey signed a convention, which decided the fate of the ruler of Egypt (France approved the agreement on October 8, 1840). Mohammed Ali and his domains (Syria, Palestine, Arabia, Sudan, Crete and Cilicia) were returned to the Turkish Sultan.

Mohammed Ali realized that he could not stand against the world’s biggest powers and accepted the terms of the ultimatum. He gave the order for the immediate evacuation of Syria and Palestine. He reduced his army to 18,000 men and was deprived of the right to appoint generals in his army and build warships. He acknowledged himself as the Ottoman Sultan’s vassal and pledged to pay a large tribute into the Sultan’s treasury.

These above mentioned details rather resemble the fate of Iraq in 1991 after its defeat by the Allied forces led by the US General Schwartzkopf.

If this assumption is right, then what is going on now is a kind of indispensable final touch to reshape that region. A reasonable transitional period of more than a decade has now brought about the suitable conditions for such a major historical and geoestrategic action: the control by the USA of oil both in the Gulf region and in the Caspian Sea.

I. Oil as a Motive in a New World System

As a candidate, George W. Bush was explicit on two related issues:

· The growing US dependence on imported oil.

· The commitment to upgrade US support to Israel.

Both questions had a direct negative impact on Middle Eastern OPEC Member Countries.

Once in the White House, George W. Bush practically abandoned all other priorities for any country and restricted his agenda to one that dedicated the nation’s attention to the subject of military superiority and prevalence, a war on terrorism, and a clear message to his people, as the undefeatable “race” that with its values, culture and civilisation has the moral responsibility to guide the rest of human kind to the New World Order, which his father failed to establish or to impose. What is yet more striking is that the "disbelieving Democrats" now fully endorse their President’s Doctrine under a generalised fear of being accused as anti-patriotic.

Hence, nationalism is the name of the game. At least this is what could be drawn from the multiple statements made by the most high-ranking figures in the present US Administration.

In order to explain why or how the First World War was ignited, school texts reiterate the assassination of the Austrian-Habsburg Crown Prince by an extreme nationalist Serb in Sarajevo as the main cause.

Perhaps soon in the future, most information obtained through the internet would coincide on the fact that the attack on the Twin Towers of the World Trade Center in New York, on September 11^th 2001, was the starting signal to establish a New World System through the accomplishment of a war in Iraq in order to achieve a “Regime Change”.

Commenting on the treaties (mainly the Treaty of Versailles of 1919) bringing the First World War to an end, Archibald Wavell (later Field Marshal Earl Wavell) wrote: “After ‘the war to end war’ they seem to have been pretty successful in Paris at making a ‘Peace to end Peace’”.

If that was true in the early years of the XX Century, there can be no doubt that since the fall of Communism and the URSS at the beginning of the 90s, there have been plenty of ethnic, religious, sectarian and other motivated wars mainly in Asia, Europe and Africa.

At present, sufficient indicators are available to consider that war in, or rather on, Iraq by the USA is inevitable. Its announced purpose is to bring peace, democracy and progress to the Middle East. In President Bush’s words, a democratic Iraq is to become a model for fellow Arab and Moslem states in that region and beyond. A democratic Palestine and a democratic Afghanistan would follow. But is what Mr. Bush believes feasible?

“A win is a win but the contentious victory of George W. Bush has created profound pressure on the US president elect to deal with the bitter divisions in the country before he confronts matters of policy. Mr. Bush could show that he is a man of moderation or indeed a compassionate conservative by putting some distance between himself and the extreme right of his party, which surely cannot interpret the slim Republican victory as a mandate for renewed radicalism. If Mr. Bush mishandles his first months in office, his legitimacy will be further undermined”. (Financial Times, 14^th Dec. 2000)

At that time, observers considered that Bush’s main policies and challenges were:

• Economy
• Education
• Foreign Policy
• Social Security

Here it is interesting to point to an early perception among OPEC members who rightly took notice of the "renewed radicalism" which was becoming obvious by the Republican victory, the rebirth of the extreme right of this party and the tendency shown by President elect George W. to join the ranks of compassionate Conservatives.

Perhaps that was more attributable to their acquired intuition formed through centuries of dealing with dominating foreign powers than the result of a systematic study of the potential effects of this new trend in the US foreign policy on their regimes, countries and their main if not their sole export item: oil.

Thus, although throughout the first two weeks of December 2000 and in spite of an 11 day suspension of Iraqi exports, prices tumbled by 20%. OPEC dared not do more than express anxiety, but failed to take measures to defend their interests as was expected from the “2^nd OPEC Summit” that was held in Caracas a couple of months earlier.

Anxious OPEC voices were talking openly of the need for production cuts, yet the declarations indicated less determination: “Saudi Arabia’s commitment to a price of about $25 is strong beyond doubt”, a Saudi official said on December 11^th ... “But it is still too early to take action to defend prices”.

UAE oil minister Obaid Saif al-Nasseri was not so reticent. “We are very much concerned about the price decline... If prices continue to be weak and stock levels high, it is logical to look at the production levels as well”, he said on December 12^th .

OPEC President and Venezuelan oil minister Alí Rodríguez said that cuts of up to 1 million b/d my have been necessary to support the price band, thus recognising early that his proposed mechanism was unable to bring stability to the market and the exporters.

Kuwait oil minister Sheikh Saud Nasser al-Sabah believed that more urgent action was necessary. “The question is why we are meeting on January 17^th before the ordinary meeting in March?” he said on December 14^th . “If prices continue to fall, then any decision is possible and all options are available”. (Energy Compass) December 15^th 2000.

Oil journals were at that time raising the issue of wealth transfer to oil exporting countries that are regarded as “obscenely rich” Arab Kings and Emirs: “High oil revenues are again pouring into the treasuries of the eight states in and around the Persian Gulf - a total of $170 billion this year, 75% more than last year”.

Yet shocked by their brush with financial ruin when oil was at prices as low as $7 a barrel in 1997-1999, Gulf governments were keeping budgets cautious and were quietly repairing the damage to their external financial positions.

Perhaps this new trend in American policy made some opportunities for other Member Countries - especially Venezuela, a country that does not share geography, history, religion or culture with its fellow Founding Member Countries: Saudi Arabia, Iraq, Iran and Kuwait. Possibly it was an appropriate indication to signal that breaking ranks with OPEC in Caracas was a desirable outcome from Washington’s new point of view.

Just the opposite, however, took place in Caracas. The relatively newly elected President Chávez was at that time convinced that solidarity within OPEC should prevail. Furthermore, his government made no secret of its sympathatic position towards Africans, Persians, Arabs and the Palestinians. On this particular issue his attitude has angered and irritated both the USA, Israel and Israel’s powerful lobby.

As mentioned earlier, from the very beginning Bush made it clear that among his list of priorities, oil ranks at the top - and perhaps the American President was right on that.

Separated from the rest of the world by two oceans, America has only 15% of the worlds proven reserves, while the Eastern Hemisphere has 85%. The position is aggravated by the fact that the USA alone consumes more than 26% of world’s total production.

II. Oil and Power

All real, potential or imaginary opponents and competitors of the USA are in the Eastern Hemisphere, namely: Europe, Russia, China, Japan, the Arabs and Islam.

Strategists in the USA systematically refuse to surrender their positions on their country’s oil vulnerability given the fact that oil reserves are plentiful, available and exploration replaces and adds new reserves

The fact that out of the worlds estimated conventional oil resources only 10-13% has been already produced is no remedy to their deep-rooted fears. And the President shares their vision. Are those fears meaningful and reasonable? Perhaps they are because out of the total “oil in place”, between 55-65% is unrecoverable. Thus total discovered conventional oil resources represent 18-22% of the oil in place (equivalent to 1.3-1.6 trillion bl), leaving other 0.5-0.7 trillion bl in the category of undiscovered conventional oil resources which equal 7-10% of oil in place.

The World’s Estimated Conventional Oil Resources

(Trillon bl) Non-OPEC % OPEC % Oil in place %

Source: ExxonMobil 2002

The question is how are these resources distributed? In a recent ExxonMobil presentation, there is the following interesting data...

The world has already produced and consumed 0.7-0.9 trillion bl:

Undiscovered conventional oil resources are located as follows:

%

In Non-OPEC areas 75

In OPEC countries 25

The most expensive phase in the oil industry is precisely exploration and development. Hence, OPEC’s competitive advantages are very large as oil is found there in huge fields most of which have undergone substantial and costly development efforts with existing infrastructure facilities and highly qualified human resources.

Since the mid-seventies, OPEC’s state oil monopolies had been spending intensively on their respective upstream activities thus making associations a highly appreciated objective of private super majors and other oil corporations. Nevertheless it should be also remembered that Middle Eastern people possess Biblical values and memories. They perfectly recall when in the mid-eighties, England changed its Stock Market laws in order to oblige the government of Kuwait to sell a substantial part of the BP shares package that it had legitimately acquired. England then considered that British Petroleum was of strategic importance for that nation and that the possession of over 20% of its shares by a foreign state endangered Britain’s national security. The Kuwaitis had to submit. They sold and incurred in considerable financial losses.

III. Time To Amend Missed Opportunities

As early as in June 1968, when the then Saudi oil minister Yamani first offered participation in the form of a “Catholic Marriage” between Aramco and the Saudi government, the four American Aramco partners rejected the idea for considering it then as an important landmark in commercial relations between the West and all the oil-producing nations. Such a goal would be harmful to the United States, they said.

“If you take everything away from the Americans they’ll lose interest” claimed Bob Brougham, the president of Aramco at that time.

That might be one important reason why just as all previous US presidents since Truman, President Bush found himself helpless with regard to the structural American dependence on imported oil from the Eastern Hemisphere. Perhaps in the past not much could have been done to change things. After all, just about a decade ago, Bipolarity was still a fact of life. But in the year 2001, the US had to find its way out of the “Energy Crisis” and Vice-President Dick Cheney on top of a task force embarked on the elaboration and presentation of what came to be known as the Bush Energy Plan. That was in early summer of 2001, made front pages and discussions between Republicans and Democrats were the order of the day confronting national security issues with environmental concerns.

Indeed no matter how much private companies would invest and how lawmakers at the US Congress could make things go smooth for the oil and gas industry, the Alaskan Wild Life Refuge is not thought to contain more than two billion oil equivalent barrels. A negligible figure if compared to discoveries in Saudi Arabia which in the eighties amounted to about 120 billion barrels.

The fact that America’s closest allies in the Gulf, Kuwait and Saudi Arabia, were not forthcoming to help President Bush out of his strategic dilemma, could have disappointed an impatient American President whose entourage considered the moment as the convenient one in order for Washington to establish its primacy over the rest of the world.

Yamani may rightly think today...

“If the Americans would have accepted what I offered them back in 1968, if radical Arabs had not attacked me for being a ‘traitor for trying to perpetuate foreign presence in Arab oil wealth through participation instead of a true nationalisation,’ then perhaps there would have been no disintegration of the international oil industry in the mid-seventies and there would have been no need to fight so many wars (in 1980, 1991 and 2001) in order to reintegrate the international oil industry. The United States Government and Congress would not be obsessed as they are now to secure oil supplies from the Middle East, and Arab and Muslim nations in that region could now be living peacefully without threats that endanger their very traditions, values, religion and even their physical existence.”

The world is very complex, and one must consider that oil, despite its great importance, is, at the end of the day, just one of the factors that determine the course of history.

If America with its manifest destiny is now to become what Great Britain used to be in the 18^th Century, as it conquered an empire that encircled the globe, is yet to be seen.

King George the Fifth ruled a quarter of the land surface of the planet. The British were most proud of their conquests in the storied East but yet stronger than pride it was that peoples and countries such as “Turkestan, Afghanistan, Transcaspia, Persia (were considered as) the pieces on a chessboard upon which is being played out a game for the dominion of the world” to quote the Viceroy of India, George Curzon.

Queen Victoria described it as “a question of Russian or British supremacy in the world”.

In that sense, one should at least consider the possibility that the United States is at present facing similar challenges in that very same region... whereby oil acquires greater importance as a highly strategic asset which if used against America's interests would harm the country’s actual supremacy and domination of the world. Now the danger is not seen as coming from a competing power, simply because there is none. The fear is now being identified as an internal, inherent force of the Muslim world against the USA, which claims to be the West.

Thus the historical mistrust that characterised Europe’s relations with the Muslim East is guiding the United States in its present struggle of reshaping the world’s balance of power. This perhaps explains why Europe prefers not to be seen as an active participant of the ongoing crusade. Russia, on the other hand, is reluctant and fearful of the possibility of yet more Muslim unrest on its borders and within its own territory.

IV. Concerns in Russia

Moscow considers Iraq to be a secular society, and needs Saudi Arabia to become less motivated by religious factors that effect the Muslim population in the Caucasus and Caspian regions.

So, on the question of regime change from the Russian point of view, if the secret and ultimate objective is to overthrow the Saudi regime, then this would be positive for Moscow... perhaps even if Iraq were to be sacrificed first. Rebel funding to Chechenia would lose a major source of Saudi support.

Russia has old and major concerns with the Saudis who were basically the Arab opponents to Egyptian President Nasser in his efforts to win the Soviet Bloc’s support for the Arab, African and Non-Aligned movement.

Thus, since the mid-fifties, the Saudi Government - with the significant encouragement from the US Administrations - engaged itself actively in wars against Russia, beginning in Yemen during the sixties and ending by Nasser’s defeat by Israel in June 1967. Riyadh continued its hostility towards Moscow in Afghanistan from 1979 where the Mujahideens were trained in Pakistan by the American CIA with Saudi petrodollars in order to defeat the Russian army.

Finally when President Gorbachov attempted to salvage the Socialist system through Perestroika, Saudi oil policy of regaining its market share applying the “netback” formula took prices to historical lows in summer 1986 and caused the definitive collapse of the Soviet economy due to its heavy dependence on oil revenues in foreign exchange.

The Saudis systematically helped the USA to establish its superiority over Russia, which became evident in 1989 - 1990

Here it is appropriate to consider that oil production both in the USA and in Russia began some 140 years ago. And after this long period we come to the following facts:

Oil and NGL Reserves and Production (Bn barrels)

Let us include some other major players in this “Modern Great Game”:

Source: The figures are based on US Geological Survey Data of 2001.

In terms of remaining and potential assets the Russian superiority is clear over the US.

America has exploited significantly more of its own oil than the Soviets had. In addition to this, the US imported huge amounts over the last 75 years or so from countries of the “Free World”. This by no means suggests that the US is running out of oil.

America favours the import of foreign oil because it is smarter to do so. First, because handling foreign oil is more lucrative. Second, because if American companies were not to get the job first, competing companies of other nationalities would do so. Third, because American oil is more expensive in today’s terms of cost and price. This oil will only be extracted when the economic rationale is there.

Oil, as well as coal and natural gas, will continue to be major energy sources in the future, and a significant cause of international conflict as well.

From the American oil giant’s point of view, there are two objectives to achieve in this “Post-Post-Cold War World” characterised by globalisation and American hegemony:

Oil that had remained out of their reach, or nationalized in the seventies should now be subjected to their control:

• Former Soviet Union
• State Monopolies in OPEC Countries

Together, these countries possess remaining reserves of around 750 Bn bl out of a world total of 959 Bn bl.

The following table shows the recent evolution in the FSU’s production which in itself indicates the promising prospects for major investments in the upstream which, for instance in American terms, are unthinkable.

Oil Production in the FSU (crude and NGL's) (1999 - 2003)

Production (mbpd)

Increment (mbpd)

Increment (%)

Sources: CGES 2002

Meanwhile in the upstream, the international oil industry is busy trying to allocate substantial investments, but this is not an easy task. The Caspian is a good example of this.

V. No Cooperation from the Core Area...The Case of Saudi Arabia

The most recent news shows that Saudi Arabia is unhappy with latest responses to its “Gas Initiative”, and sets year-end as deadline.

The response from Shell and International Oil Companies ( OICs ) for the three core ventures (CVs) of the Kingdom’s $25bn Gas Initiative involved in negotiating CV3, fell “below Saudi expectations”. The Saudis described Shell’s response as “very disappointing,” and added that the Shell-led consortium missed Riyadh’s point “that this is one package - take it or leave it.”

Here it is important to remember that the most expensive phase in the oil industry is precisely exploration and development. Hence, OPEC’s competitive advantages are very large as oil is found there in huge fields most of which have undergone substantial and costly development efforts with existing infrastructure facilities and highly qualified human resources. The Saudis hold the best competitive advantages.

Since the mid-seventies, OPEC’s state oil monopolies had been depending intensively on their respective upstream activities thus making associations a highly appreciated objective of private super majors and other oil corporations. The opening up, or “Apertura” as it was baptised by Venezuela, represents a formula of strategic importance to a country like the US, with the strategic mindset that had and still dominates the general political view. In Wall Street and in Washington people would have expected friends in the Gulf region who practise free market rules to apply similar liberal policies and give their permission to reenter into the giant fields.

The Saudi refusal to associate is most irritating in Washington.

Roots of a Discord: Prince Abdulah, Created False Hopes...

US companies had been thrown out of Saudi Arabia in the 1970s as Washington believed that low oil prices and widening Saudi budget deficits forced them to open the faucet. Both Kuwait and Iran were opening their fields, leading some to believe that the Saudis would follow suit, but it was not this way.

In 1998, Prince Abdulah traveled to Washington with the purpose of presenting business proposals to the energy companies, based on a low oil price scenario . He made an wide-open invitation for investment proposals in a the Saudi energy sector.

However, Saudi Arabia said one year later, in 1999, despite Washington’s pressure, that US energy companies wouldn’t be allowed back into the Kingdom’s oil business, at least not for now and not in the oil sector, because “Saudi Arabia is seeking investment in building its natural-gas use and its refining and marketing businesses, not oil”, said Oil Minister Ali Naimi at a conference celebrated in February 1999. At the same time, he added “Saudi Arabia produces only a fraction of its 261 billion barrels of proven oil reserves and we want a much broader utilization of gas, not oil”.

US Energy Secretary Bill Richardson traveled to Riyadh in February 1999 to persuade the Saudis to open up the country’s oil fields. He explained that US participation in the Saudi natural-gas sector may be a first step towards greater involvement. “It could signal the beginning of increased participation in the Saudi’s energy sector”. But he conceded he had hoped for better results. “Clearly the expectations were too high”, he said when leaving to return home. So, Saudi Arabia still denied entry to US oil firms. (1)

The Supreme Council for Petroleum and Mineral Affairs in Saudi Arabia has taken over the responsibilities of state-run Saudi Aramco under a royal decree, since October 17^th 2000. The supreme Council in the world’s biggest oil-producing nation would assume oil decision-making powers for oil and gas policies, which had been the exclusive domain of Aramco.

The council is chaired by the King, with Crown Prince Abdullah, Defense Minister Prince Sultan as his deputies, and has nine other members, including Foreign Minister Saud al-Faisal, Oil Minister Ali al-Naimi and Industry Minister Hashem Yamani. The creation of the Council was part of the government’s efforts to guarantee oil and economic stability, Saudi officials said at the time. (2)

Different expectations on oil prices levels and of the Middle East peace widened the difference between the US and the Saudis.

In August 2000, at the end of an OPEC meeting in Vienna, Saudi Arabian oil minister Ali Naimi said he would like to see crude oil prices stay between $20 and $25 a barrel. As the largest oil exporter and one with almost all of world’s unused production capacity, Saudi Arabia could have made it happen. Yet, oil in that moment was trading at well over $30 a barrel.

The resurgence in oil price appeared in August 2000, may owe much to the failure, in late July, of the Middle East peace talks at Camp David. The Saudis were signaling their displeasure at US pressure on the Palestinians to give up some of their claims on Jerusalem by refusing to increase oil production, which would lower the price of crude, industry officials and analysts said.

Saudi Crown Prince Abdullah had made clear his opposition to any plan that would deny Arab claims on East Jerusalem. The eastern part of the city is home to Islam’s third-holiest mosque following the two in Saudi Arabia under the custodianship of King Fahd. Indeed, Saudi Arabia and Egypt, two of the US’ closets allies in the region, said that East Jerusalem isn’t for the Palestinians to give away in negations because the holy sites there belong to all of the world’s Muslims.

Since the Camp David talks ended in statement, a planned oil-output increase for August hadn’t gone ahead. A US envoy delivered a letter from President Bill Clinton to Crown Prince Abdullah, in it, the US was widely believed to have requested that Saudi Arabia raise its oil output. The request appears to have received a cool response from the Saudis.

Washington, however, was becoming a very demanding customer. As it continued to press for Saudi action on oil, it was seeking Saudi backing on an even more sensitive issue: the fate of Jerusalem, the main sticking point in President Bill Clinton’s efforts to close a Middle East peace deal before leaving office. Saudi Arabia was as eager as the US for a Palestinian-Israeli peace settlement. But the rules of the country where Islam was born could not support US proposals which fall short of giving Palestinians full sovereignty over Muslim holy sites in the old city. (6)

Saudi Crown Prince Abdullah rebuked the US in his speech on October 21^st 2000, when he said that “the US, sponsor of the peace process, assumes particular responsibility in the collapse of the peace process. The sponsor is supposed to hold account those responsible for such collapse. After the positive spirit and commitment of the Arab side to the peace process, we expected the Israeli side to be dissuaded from, or at least reprimanded for its stubbornness and practices contrary to the principles laid out in the Madrid Conference and in the agreements reached with the Palestinians”. Prince Abdullah also took a hawkish stand on Jerusalem, and said that “East Jerusalem is an Arab-Islamic cause on which we accept no concession or bargaining. East Jerusalem is an integral part of the occupied Arab Islamic territories to which Security Council resolutions apply”. By Saudi standards these were unusually hard and uncompromising words (respectively), and they were some indication of the bitterness that the Arabs felt towards the US for pretending to be a neutral mediator while siding with the Israelis at every opportunity. That being said, Prince Abdullah’s remarks hardly mean that the alliance between Saudi Arabia and the US was in any immediate danger of foundering, but they did suggest that the nearer Prince Abdullah came to the throne, the less the Americans could take the Saudis for granted. (8)

Analysts said that Saudi concerns about anti-US feelings had made it increasingly sensitive for the Saudi government to appear to be bowing to other demands, such as increased production of oil. But they could also complicated Saudi-US policy towards Iraq, where Saudi Arabia cannot ignore the widespread feeling in the Arab world against sanctions. Saudi Arabia was also way ahead of the US in its policy toward Iran.

The Political Scene: Democrats and Republicans Announce Middle East Policy...

It was clear that the US elections had generated a competitive climate among the Democratic and Republican parties to get the Jewish voters, and Clinton’s politics were a reflection of it. American politics were guided to favor the Israeli position, thus angering not only the Palestinians but more importantly their Arab allies and above all Saudi Arabia. (9)

Both parties were threatening not only to recognize Israel’s annexation of Jerusalem if the Palestinians refused to do so, but also to block any attempt by the Palestinians to declare a state unilaterally. So it would seem that the Americans have at last abandoned any semblance of even-handedness in the peace process and are now openly throwing their weight behind Israel’s demands. (10)

The Republican Party considered that changes were necessary - the OPEC cartel drove up the oil prices. Iran continued to sponsor international terrorism, oppose the Arab-Israeli peace process, and pursue nuclear, biological, chemical, and missile capabilities with extensive foreign assistance. America’s closest allies expanded their political and economic relations with Iran. A Republican president will work to reverse these damaging trends. (11)

Price Levels in a Scene Highly Influenced by Politics...

That scene was highly influenced by political aspects: Middle East peace and the US elections produced a growing debate among industry analysts that worldwide crude production could slip into long-term or irreversible decline in a few years. However, others said that prices would to be high or stable in the same period.

Henry Groppe, a Houston energy consultant, collecting and analyzing field data for the past 45 years, has concluded that an irreversible decline in worldwide oil production could begin as soon as 2003. That is when Groppe believes rising OPEC production will no longer offset declines in non-OPEC production, which he said reached the peak sometime between 1998 and this year. “This can’t be turned around,” he asserted. Groppe projects current worldwide crude and associated liquids production of 68.5 mil b/d will fall to 64.9 mil b/d by 2010. He said OPEC production is expected to increase from 30.3 mil b/d to 35.3 mil b/d, while non-OPEC output likely will drop from 35.1 mil b/d to 24.6 mil b/d. Eastern European exports are expected to increase from 3.1 mil b/d to 5 mil b/d.

Matthew Simmons, a Houston investment banker specialized in energy issues, said that drilling rig and related equipment shortages could hasten worldwide production declines. For him, only “a handful of meaningful projects” are now under way in the some 40 countries that keep worldwide oil supplies intact, he said. “Do not look for a lot or growth in worldwide oil supply from new projects coming on stream. There are not enough projects for this to happen through at least 2005.”

VI. The Rule of Law is about to Break Down

The risk for Mr. Bush to proceed this way leads Michael J. Glennon, professor of international law at the Fletcher School of Law and Diplomacy at Tufts University, to discuss whether or not the rule of law is breaking down. (The New York Times, November 22^nd 2002)

“Why would the Security Council spend two months deciding whether to authorize the use of force if its decision were not binding? And “How can the Council’s decision bind Iraq but not the United States?”

Asked whether the United States was seeking explicit Security Council approval to attack Iraq, Secretary of State Colin Powell said: ‘The president has authority, as do other like-minded nations, just as we did in Kosovo’.

The Security Council never authorized use of force against Yugoslavia. Security Council approval being absent, the UN Charter prohibits the use of force except for self-defense. NATO, which led the Kosovo war, never seriously claimed a defensive rationale.

“Given the contradiction between the mandate of the charter and the prevailing American view on Iraq and Kosovo, what has happened to the law? When Robin Cook, the British foreign secretary, told Secretary of State Madeleine Albright that he had ‘problems with our lawyers’ over using force against Yugoslavia without Security Council approval, Albright responded, ‘Get new lawyers’. New lawyers would have pointed out that since 1945, dozens of member states have engaged in well over 100 inter-State conflicts that have killed millions of people. The United States is therefore correct: It would not be unlawful to attack Iraq, even without Security Council approval. Of course, it remains useful politically to act with the backing of the Security Council. But the charter was supposed to be about more than politics”.

Relations between oil consumers and producers seem to be improving at least when it comes to courtesy and symbolic acts.

OPEC Secretary-General Dr Alvaro Silva-Calderón described as a welcome development the visit on 14^th November of IEA Executive Director Robert Priddle to OPEC headquarters in Vienna, the first ever by a head of the IEA. The OPEC Secretary-General said the organisation had always held the conviction that oil market stability in the interests of both producers and consumers could only be attained through cooperation and understanding.

Dr Silva-Calderón and Mr Priddle gave a first-ever joint press briefing two months ago during the 17^th World Petroleum Congress in Rio de Janeiro, which signalled their commitment to establish cooperation between the two organisations.

Mr Priddle, who is retiring at year-end, said the purpose of his visit to OPEC was to participate in high-level talks, during which the two organisations could discuss potential future areas of cooperation:

1. We agree about the dominant place of fossil fuels in the foreseeable future of energy supply.

2. We agree on the need for economic realism about the place of renewable energy in that future: renewable energy has many virtues, but it also has costs, which must be squarely faced.

3. We agree that there are ample fossil fuel resources in the world to meet the demand we foresee.

4. We agree on the need for improved oil market statistics.

“So there are many issues on which we have a common position, as well as there being some issues on which we disagree,” observed Priddle, adding that among the differences are OPEC’s oil price band mechanism, management of the oil market and attitudes to taxation. However, Mr Priddle noted a fundamental change in the attitude of both sides.

“We were in confrontation in the 1970s, when oil had been used as a political weapon, for reasons which had nothing to do with the oil market. Today, we have a situation where oil producers recognised that they need the stability of demand which comes from consumer confidence in the continuity of oil supply, and consumers acknowledge the commitment of producers to maintaining that security of supply.”

The International Energy Agency (IEA), which controls huge inventories of oil for emergency use, has quietly prepared for the possibility of war in Iraq and a disruption in oil supplies from the Middle East.

“I could act very fast if we need to,” Priddle said. "From public, or government stocks, we could release as much as 12 million barrels a day in the first month," he said.

That is almost five times as much oil as the 2.45 million barrels a day Iraq produced in October and exceeds the combined current output of Saudi Arabia, Kuwait and the United Arab Emirates. Besides the 1.3 billion barrels held by governments, the IEA has access to 2.5 billion barrels of commercial inventories in the 26 most-industrialized countries that comprise its membership.

Mr. Priddle’s relations with OPEC, once fraught with difficulties, have improved so much in recent years that he could pick up the phone at any time and talk with key OPEC ministers, including Saudi Arabia's influential oil minister, Ali Naimi.

“We respect the [OPEC] producers,” Mr. Priddle said, approvingly noting their pledges to fill any supply gaps in the event of war in the Middle East. “But if necessary, we can make good the loss [in oil supply] ourselves.”

In closed-door meetings last month, the agency’s governing board finalized arrangements to release emergency oil supplies whenever the IEA’s executive director sees the need. That means the governing board doesn’t have to meet again, as it would normally, to respond to a supply disruption.

The IEA could easily cope with a supply disruption equaling the largest shortfall ever seen - the 5.6 million barrels a day lost between November 1978 and April 1979 during the Iranian revolution.

Now with such a comfortable position, IEA members don’t fear supply disruptions, and counting on plentiful production from the OPEC 10 prices are poised to settle below $20/b for OPEC crude basket in the 1^st Qtr of 2003.

According to “Global recovery still a year away, OECD predicts” by Eric Manner, writing in the International Herald Tribune:

“A broad global economic recovery will not take hold until ‘possibly well into 2003,’ the OECD forecast indicated, citing uncertainties over a possible war in Iraq and lingering effects of the technology bust. The OECD lowered the growth forecast for its 30 members, the largest industrial countries, to 1.5% this year and 2.2% next year. In its last forecast, published six months ago, the organization predicted growth of 1.8% this year and 3% in 2003. Its a big downward revision...” (Press Digest 22^nd November 2002)

This is why assuming prices for 2003 with optimism is a risky game.

Nigeria, for example has a draft budget for 2003, up from the $ 18/b assumption used for the 2002 budget. Government revenues for 2003 are forecast at $ 14 bn. Oil revenues for 2003 were estimated using the country’s current OPEC quota of 1.787 mn b/d.

The Saudis, however, are more cautions and are planing their 2003 budget on price of $ 17/b.

Nearly every news article speculating about the pace of world economic recovery includes the caveat “unless oil prices suddenly rise”. The International Monetary Fund (IMF) recently expressed the concern in these terms:

John Gault, economist and consultant, published recently the following insight:

“…the possibility of further sharp increases in oil prices arising from a deterioration in the Middle East security situation remains an important downside risk to the global outlook.”

Almost no one claims that oil prices triggered the economic stagnation experienced since mid-2000. Prices now have much less impact on the economic health of the industrialised world than in the past:

• The oil and energy intensities of industrialised economies have greatly diminished since the early 1970s. The OECD countries utilised 1.43 barrels of oil per $1,000 of GDP in 1970, compared with 0.74 barrel in 2000. The same group of industrialised countries utilised 2.82 barrels of oil equivalent (boe) of commercial energy in 1970, and only 1.69 boe in 2000.
• Many oil importing countries, especially European countries, have increased excise taxes on petroleum products, particularly gasoline. A substantial portion of these taxes is not ad valorem. Therefore the percentage impact on retail prices of any given change in crude oil prices will be muted.
• Oil prices in real terms are far below levels of the late-1970s and early-1980s. General price levels in the advanced economies approximately doubled between 1980 and 2001, so that the average price of Brent crude oil in 1980, $37.89/b, would correspond to a price of over $70/b today. Some of the adaptations to higher real energy prices made in the 1980s, will not need to be repeated even if oil prices were to increase from today’s levels.

Gasoline Automotive diesel

The direct impact on net trade oil prices balance of advanced countries:

Neither the two large oil price increases of 1973-74 and 1979-80 with their subsequent decelerations in world economic growth, nor the experience of the 1990-91 Gulf War, are adequate precedents for understanding the present situation.

One noticeable difference is that each previous slow-down began almost simultaneously with an oil price run-up, while the current deceleration commenced long after oil prices had risen. The lag in the US, the engine of economic expansion throughout the 1990s, was remarkable; economic growth continued for seven quarters after oil prices began to rise in March 1999. From the first quarter of 1999 to the second quarter of 2000 the price of crude oil more than doubled, but real GDP growth in the US continued to expand at a blistering pace.

According to IMF calculations, the projected nominal oil price increase from 1999 to 2001 of $11.10/b would shift an additional $96bn from the advanced countries to the oil exporters, but this amount would correspond to only 0.4% of the same countries’ combined GDP. This may be compared with the nominal oil price increase of $8.40/b from 1973 to 1974 and the consequent income transfer of $88bn, constituting 2.6% of GDP for the same group of advanced countries.

Over the long run the impact of oil prices on the industrialised economies has greatly diminished, but present weak economic circumstances magnify the ability of an oil price jump to trigger undesirable consequences.

OPEC’s production decisions in recent years have been highly compatible with the central banks’ focus on inflation.

At times when central banks have increased interest rates, OPEC has raised its production ceiling thereby moderating oil price increases and accommodating higher oil prices. OPEC has reduced its production ceiling only at times when central banks were lowering interest rates, indicating a slackening of (macro-economic) demand and a lessened concern about inflation in the industrialised economies. This is not to suggest that OPEC has consciously coordinated its policies with Western central banks, but rather that OPEC’s pursuit of oil price targets has not been entirely inconsistent with central banks’ broader objectives.

On the other hand, the first-round income transfer will have secondary multiplier effects on total demand in the oil importing countries. The IMF’s model suggested (at the end of 2000) that the overall impact of a permanent increase in oil price of $5/B would be to reduce real GDP in industrial countries by between 0.2% and 0.4% in each of the first four years following the price hike, with diminishing impact thereafter. The OECD’s somewhat different model predicts a smaller impact. The OECD model predicted in 1999 that an oil price increase of $10/b would reduce real GDP by 0.2% in the USA and Europe, and by 0.4% to 0.5% in Japan, during the initial years following the price “shock”.

If the ultimate impact of an oil price increase on the industrialised world has so greatly diminished, are the concerns about a future oil price hike, caused perhaps by supply interruptions related to an invasion of Iraq, justified? .

According to a study by John Gault, two areas of remaining concern may be considered:

• A “last straw” effect: under present circumstances, could the psychological effect of an oil price leap on consumers exaggerate the expected impact?

• Conflicting goals: under present circumstances, would monetary and/or fiscal authorities react to an oil price leap in a manner that worsens the expected impact?

Because the US was the driver of the world economy for such a long period prior to the current slump, and because the US has appeared to be leading, tentatively, the world recovery. A setback for the US at this time would be a setback for the entire world.

Present consumer behaviour is all the more remarkable because consumers’ wealth has shrunk due to stock market losses since the bursting of the technology bubble early in 2000. From a peak of $19 trillion in August 2000, the combined market value of all stocks listed on the three principal US exchanges fell to $12 trillion in September 2002, a loss of $7 trillion.

Such a dramatic decline in wealth “should” have brought about a retrenching by consumers. The IMF concluded that the decline in household spending in the US would be in the order of $0.03 to $0.05 per dollar of lost wealth, all other factors held constant. This would correspond to a retrenchment of $210bn to $350bn in US consumer spending on the assumption that all of the $7 trillion decline on US stock markets was borne by US households.

Such a retrenchment would dwarf the impact of a $10/b increase in oil prices (0.2% to 0.4% of GDP depending upon which macroeconomic model one prefers). Applied to a US GDP of about $10.4 trillion, a $10/b oil price jump would yield a decline in GDP of between $21bn and $42bn in the first two years and diminishing amounts thereafter, all other factors held constant. This is an order of magnitude smaller than the hypothetical wealth effect.

A new oil price jump, even if only temporary and even if oil futures markets remain in backwardation, could be viewed as a potential trigger. The blow to consumer confidence when hostilities in the Middle East begin is very likely to depress spending. If so, would it be fair to assign the resulting double-dip in the recession predominantly to oil prices?”

Indeed OPEC has already lost much of its credibility due to a persistent overproduction above its own agreed levels:

“OPEC 10 October Production Edges Higher, Now 2.73Mn b/d Over Ceiling”. Such FrontPage news doesn’t help OPEC to recover the role it used to have, for instance, in the year 2000.

Oil production by the OPEC 10 (without Iraq) rose by 60,000 b/d in October to 24.430mn b/d, which is 2.73mn b/d or 12.6% over the quota agreement which came into effect on 1st January. Total OPEC production rose 660,000 b/d to 26.85mn b/d in October from 26.19mn b/d in September. OPEC 10 production rose as increases by Algeria, Saudi Arabia and Venezuela more than erased the production decline in Iran and Kuwait.

The rationale behind increased production in recent months is threefold.

• OPEC members have been keen to compensate for earlier production cuts so that oil inventories, especially in the key Northern Hemisphere demand areas, could return to adequate levels ahead of the winter and potential military action against Iraq.

• Members have compensated for low Iraqi exports during the summer. The risk that OPEC producers over compensate and also that the organisation loses credibility in the process. Several OPEC members are also bolstering their case for an upwards adjustment to their individual quotas by demonstrating their increased production capacity in the physical market.

• Producers have taken advantage of relatively firm oil prices, still underpinned by concerns about a potential military conflict in Iraq despite price falls over recent weeks, to maximise revenues.

Going to their quotas: In Iran, October production was 3.5mn b/d comprising exports of 2.05mn b/d while deliveries to domestic refineries accounted for 1.45mn b/d. Venezuelan production, which includes crude oil, synthetic crude and de-stocking, rose to 3.2mn b/d in October.

OPEC’s quota violation makes things quite easy for the U.S - led International Energy Agency to neutralise possible supply shortages in war times. □

References:

(1) Liesman Steve (1999). “Saudi Arabia Still Denies Entry to US Oil Firms”. The Wall Street Journal, 8 February

(2) Platt’s Oilgram News (2000). “Saudi Council takes over from Aramco”, 17 October

(3)International Press Summary (2000). “Middle East peace process puts heat on petroleum price”. London, 1 September

(4) International Press Summary (2000). “Clinton says crude prices are too high”. London, 24 August

(5) International Press Summary (2000). “Saudis call for joint action over soaring oil price”. London, 31 August

(6) International Press Summary (2000). “Saudi find US a more demanding friend”. London, 1 September

(7) MEES (2000) “A Phase of Unilateral Decisions”, 30 October

(8)MEES (2000) “A Few Surprises”, 30 October

(9) MEES (2000) . “Clinton Resorts to Threats”. 7 August

(10)MEES (2000) . “Party Platform says Republican President would not tolerate OPEC price hikes”. 7 August

(11) MEES (2000) . “Republican Platform Party on The Middle East ”. 7 August

(12) International Press Summary (2000). “Cash-rich ExxonMobil sets cautious plan”. London, 2 August (13) International Press Summary (2000). “International firms keep E&P purse strings tight despite strong oil price”. London, 29 August

(14) Platt’s Oilgram News (2000). “Caspian line doesn’t have reserves: report”, 11 October

(15) PDV (UK) SA (2000) “US pressure on Kazakhs over oil pipeline proposal”.

(16) Platt’s Oilgram News (2000). “Think crude supplies are tight today: Just wait”, 17 October

Appendix 1

President Bush Reflects on His Own Personality

In his recent book “Bush at War”, Bob Woodward gives some details about both the personality and set of mind of the American President that allows to consider war as the sole and inevitable next action by the Bush Administration. (Washington Post Staff Writer, (November 19, 2002).

The interview took place Aug. 20, before the president adapted a more internationalist approach in the confrontation with Iraq.

"A president has got to be the calcium in the backbone. "If I weaken, the whole team weakens."

"But action - confident action that will yield positive results - provides kind of a slipstream into which reluctant nations and leaders can get behind and show themselves that there has been - you know, something positive has happened toward peace."

Bush described himself at various points as "fiery," "impatient," "a gut player" who liked to "provoke" people around him and someone who likes to talk - perhaps too much - in meetings. He admitted that first lady Laura Bush had told him to tone down the "tough guy" rhetoric on terrorism.

“If I'm doubtful, I can assure you there will be a lot of doubt." But it was his vision of the broad global role he says the United States must play that seemed to reflect a change in his thinking since the world - and his presidency - was transformed by the terrorist attacks of Sept. 11, 2001.

"At this moment in history, if there is a world problem, we're expected to deal with it," the president said. "It's the price of power. It is the price of where the United States stands. We will."

Did he ever explain what he was doing?. "Of course not," he said. "I'm the commander - see, I don't need to explain - I do not need to explain why I say things. That’s the interesting thing about being the president. Maybe somebody needs to explain to me why they say something, but I don't feel like I owe anybody an explanation."

But the media, he said, invariably had an effect on people. "I don’t read the editorial pages. I don’t - the hyperventilation that tends to take place over those cables, and every expert and every former colonel, and all that, is just background noise."

It was a very interesting lesson. I watched my stature grow the more that I had access to him."

'Tone It Down, Darling' Toward the end of the interview, Bush was joined by his wife.

"I didn't like the 'get them dead or alive,' " Laura Bush said. "Why?" the president asked. "I just didn’t," she said.

Why, the president persisted.

"It just didn't sound that appealing to me, really," she said. "I mean, I have - I just said, 'Tone it down, darling.' "

Bush admitted he hadn't toned it down. And, said Laura Bush, "Every once in a while, I had to say it again."

□

Appendix 2

Kazakhstan

ChevronTexaco, operator of Kazakstan’s giant Tengiz oilfield, announced on 14^th November the suspension of plans to expand the oilfield’s production capacity through the Second Generation projects. The company leads the TengizChevroil (TCO) consortium with 50% of the shares, while the remainder is held by ExxonMobil (25%), Kazakstan’s state-owned KazMunaigaz (20%) and LukArco (5%).

TCO suspendsed Tengiz expansion plans over financing dispute with Kazakh government -

ChevronTexaco said in a statement that “TCO partners have not yet been able to agree on a funding plan that would support TCO expansion plans while at the same time provide for the diverse financial needs of the partners.” The SG and SGI projects would require an investment of over $3bn over the next three years that would boost Tengiz production from its current rate of 270,000 b/d to around 440,000 b/d.

On the surface, the dispute is being made to look as if it is strictly a disagreement over financing, but the matter goes deeper in that ChevronTexaco, as the largest Western investor in Kazakhstan, has chosen to confront the Kazakh Government over what many Western investors see is an effort by Astana to change the rules and levy further financial obligations on foreign companies, as well as impose government controls over private operations. For example, the country’s new investment law calls for KazMunaiGaz to hold 50% in all new contracts, while the foreign partner would provide 100% of the investment.

It also remains to be seen how the TCO matter will impact on the development program for the giant offshore Kashagan oilfield, where test production is due to start in 2005, or with Kazakhstan’s plans to offer some 100 blocks in the northern Caspian. Foreign investors who sense a poor investment climate may not be so keen to participate despite indications that the area is a good prospect. This was one of the main reasons why BP opted out of the Kashagan consortium. Further disputes with other foreign partners could hardly bode well for Kazakstan’s plans to export as much as 2mn b/d by 2010 and 3mn b/d by 2015.

“The world’s six largest oil companies - ExxonMobil, BP, Royal Dutch/Shell, TotalFinaElf, ChevronTexaco and ENI are developing a long “tail” of inefficient oil and gas fields that are eating into management time.” The bottom 80 per cent of assets owned by the companies account for only 16-29 per cent of the total company value, signalling a need for rationalisation. (Financial Times 25^th November 2002).

□

Appendix 3

Venezuela Counts on 30 bn bl of Remaining Reserves

According to the US Geological Survey, Venezuela is part of a category of countries that count on remaining reserves that run from 22 to 32 Bn bl, namely:

It is worth nothing that this estimates Venezuelan undiscovered resources at 24 Bn bl.

The figures differ greatly from those published by PDVSA that put Venezuelan remaining reserves in around 78 Bn bl.

Perhaps this is due to different concepts used to establish categories whereby international classification takes into account only light and medium crudes, while Venezuelan authorities also include heavy and extra heavy crude in their statistics.

Note the following:

• Two Gulf countries constitute another category:

· Another two integrants of the Gulf make out another category:

• Then followed by:

• On top of all sits:

These figures give further insight to understand some geoestrategic objectives perused by a superpower when conditions are deemed to be adequate for action.

□

Caracas Plans Chart Collision Course with OPEC

Venezuelan plans to boost its dwindling oil production capacity to 5 million barrels per day by 2007 , opening up questions about the country’s future adherence to its OPEC quota, which is now less than half of that amount. To hit that ambitious target, state oil giant Petróleos de Venezuela (PDV) plans investments over the next few years of some $40 billion, the country’s energy Minister Rafael Ramírez said these week. Two thirds of that amount will come from the state company and private investors, and the rest from loans, Ramírez said.

Venezuela is the world’s fifth-largest oil exporter and one of the US four main crude suppliers. It exported some 1.553 million b/d to US in July, to become the top US supplier that month. But oil experts have repeatedly said that Venezuelan capacity to produce conventional oil has fallen by 400,000 b/d to 3 million b/d since 1999 when the country adopted strict adherence to its 2.479 million b/d OPEC quota .

This remains an obstacle to Venezuelan expansion plans. “The potential for lifting Venezuela’s production capacity is there”, a PDV source told EIG, “But while we have the OPEC ceiling, we will not be able to get there.”

(Energy Compass, October 11^th , 2002 p. 12)

□