Lesson of Iraq: High Oil Prices May Not Be Temporary
By FLOYD NORRIS
By FLOYD NORRIS
DID George W. Bush rely too much on diplomacy when he planned the war in Iraq?
The diplomacy in question was not the effort to line up allies for the war, which ended with much of Europe on the sidelines and angry. Instead, it involved what initially appeared to be a diplomatic victory: the quiet promise obtained from Saudi Arabia to step up oil production if necessary to offset a temporary decline in Iraqi oil exports.
That strategy was a good one in the Iraq war run by the first President Bush. As Jeffrey R. Currie, the head of commodities research at Goldman Sachs in London, noted this week, the Saudis at the time were able to offset the temporary loss of exports from both Kuwait and Iraq. There was a brief spike in oil prices when that war began, but they retreated as rapidly as they climbed.
But this time the Saudis have not been able to come up with the oil. They claimed this week to have another 1.3 million barrels a day of available production, but there is widespread doubt they can produce that much now, or even after two new fields go online later this year.
Why not? The international energy business has been starved of major capital investment for two decades, since the price swoon of the early 1980's scared oil companies.
In the 1970's, oil and other commodities were hot, and there was overinvestment in them and in the infrastructure needed to get the commodities to market. ''We got a free ride in the 1980's and 1990's from investment in the 1970's,'' Mr. Currie said.
By the beginning of this decade, the excess capacity was dwindling. But the conviction persisted that high oil prices could never last for long. Even when spot prices did rise, the price of oil for delivery months or years later did not rise very much.
Then Sept. 11 temporarily depressed demand from one oil-consuming sector - the airline industry. That sent prices down and reinforced the belief that there was no real energy problem.
Most oil market commentary still makes it sound as if high prices are a passing phenomenon. Each spike is attributed to the threat of a loss of Iraqi exports, or possible Saudi instability, or Yukos's problems in Russia, even though what is happening there seems unlikely to affect oil production, just to change who profits from it.
But the markets are smelling something different. Oil to be delivered next year now fetches $39 a barrel, and oil to be delivered in 10 years costs almost $35.
The problem is not a lack of oil in the world. The problem is getting the oil to refineries and then to market. The large undeveloped resources are in West Africa, around the Caspian Sea and in Siberia. Two of those areas have issues of political stability and the third has severe weather.
The trend now, Mr. Currie said, is to ''have new oil produced in West Africa, shipped to Asia to be refined, and the product then shipped to North America.''
If he is right, many arguments in Washington have been irrelevant. It does not make much difference whether oil is pumped from the Arctic National Wildlife Refuge in Alaska because a shortage of oil is not the biggest problem. ''The real problem is the shortage of infrastructure to obtain and deliver the commodity,'' Mr. Currie said. ''That seemed to go completely unnoticed until the last six months.'' Neither Europe nor the United States shows any indication of willingness to build new refineries.
Mr. Currie says the oil industry invested about $100 billion a year in the 1990's, a figure that has grown to $150 billion but needs to rise to perhaps $250 billion. Until that investment bears fruit, the world faces both higher prices and the possibility that supply interruptions could have severe effects.
The reality is becoming clear because of Iraq, but Iraq was not the cause, and diplomacy will not make it go away.
The diplomacy in question was not the effort to line up allies for the war, which ended with much of Europe on the sidelines and angry. Instead, it involved what initially appeared to be a diplomatic victory: the quiet promise obtained from Saudi Arabia to step up oil production if necessary to offset a temporary decline in Iraqi oil exports.
That strategy was a good one in the Iraq war run by the first President Bush. As Jeffrey R. Currie, the head of commodities research at Goldman Sachs in London, noted this week, the Saudis at the time were able to offset the temporary loss of exports from both Kuwait and Iraq. There was a brief spike in oil prices when that war began, but they retreated as rapidly as they climbed.
But this time the Saudis have not been able to come up with the oil. They claimed this week to have another 1.3 million barrels a day of available production, but there is widespread doubt they can produce that much now, or even after two new fields go online later this year.
Why not? The international energy business has been starved of major capital investment for two decades, since the price swoon of the early 1980's scared oil companies.
In the 1970's, oil and other commodities were hot, and there was overinvestment in them and in the infrastructure needed to get the commodities to market. ''We got a free ride in the 1980's and 1990's from investment in the 1970's,'' Mr. Currie said.
By the beginning of this decade, the excess capacity was dwindling. But the conviction persisted that high oil prices could never last for long. Even when spot prices did rise, the price of oil for delivery months or years later did not rise very much.
Then Sept. 11 temporarily depressed demand from one oil-consuming sector - the airline industry. That sent prices down and reinforced the belief that there was no real energy problem.
Most oil market commentary still makes it sound as if high prices are a passing phenomenon. Each spike is attributed to the threat of a loss of Iraqi exports, or possible Saudi instability, or Yukos's problems in Russia, even though what is happening there seems unlikely to affect oil production, just to change who profits from it.
But the markets are smelling something different. Oil to be delivered next year now fetches $39 a barrel, and oil to be delivered in 10 years costs almost $35.
The problem is not a lack of oil in the world. The problem is getting the oil to refineries and then to market. The large undeveloped resources are in West Africa, around the Caspian Sea and in Siberia. Two of those areas have issues of political stability and the third has severe weather.
The trend now, Mr. Currie said, is to ''have new oil produced in West Africa, shipped to Asia to be refined, and the product then shipped to North America.''
If he is right, many arguments in Washington have been irrelevant. It does not make much difference whether oil is pumped from the Arctic National Wildlife Refuge in Alaska because a shortage of oil is not the biggest problem. ''The real problem is the shortage of infrastructure to obtain and deliver the commodity,'' Mr. Currie said. ''That seemed to go completely unnoticed until the last six months.'' Neither Europe nor the United States shows any indication of willingness to build new refineries.
Mr. Currie says the oil industry invested about $100 billion a year in the 1990's, a figure that has grown to $150 billion but needs to rise to perhaps $250 billion. Until that investment bears fruit, the world faces both higher prices and the possibility that supply interruptions could have severe effects.
The reality is becoming clear because of Iraq, but Iraq was not the cause, and diplomacy will not make it go away.
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