Oil's Well . . .
STELZER, IRWIN M.
Oil's Well . . . Even at $35 a barrel, the economy will probably be fine. BY IRWIN M. STELZER GEORGE W. BUSH thinks the biggest danger to his second term comes from John Kerry, but it may come...
...OPEC members are famous for cheating on quotas when high prices make it attractive to do so...
...With forecasts for growth ranging from 3.5 percent to 5 percent, we will probably never know what might have been had prices stayed within OPEC's stated range...
...The producers, upset that their shrinking dollars don't go as far in Harrods and the south of France as they once did, have clearly, if covertly, raised their price target...
...To decide whether that nervousness is well founded, it is necessary, first, to guess whether OPEC can indeed keep prices up by cutting output, and whether nonmember producers will step up production to fill the gap...
...Witness the fact that Russia's exports to China are now being shipped by train, pending the construction of a pipeline...
...Fortunately, prices in the $33-$35 range do not inevitably mean a screeching halt to the recovery...
...The market shows that there is an excess supply that worries everybody," Libya's Abdulhafid Mahmoud Zlitni told the press, suggesting that his country's admirable new restraint in the production of weapons of mass destruction will extend—less admirably, from Western consumers' point of view—to restraint in the production of crude oil...
...His political team worries that last week's decision by the OPEC oil cartel to cut output, in order to keep oil prices up, will kill off the economic recovery...
...At the same time, the best guess is that demand for crude will not, as OPEC claims, fall sharply in the spring...
...That is the goal...
...No one knows for sure what Vladimir Putin's plans are, other than to make certain that his nation's oiligarchs don't become effective political rivals...
...that consumers continue to snap up gas-guzzling SUVs, suggesting that they feel they can afford higher prices for gasoline...
...Even though prices are now around $32-$33, OPEC's 11 oil ministers worry that the 1 to 2 million barrels per day they are producing in excess of their 24.5 million barrel per day quota will, come the spring thaw, cause a precipitous drop...
...Some analysts are guessing that $35 oil will cut about one-half of a percentage point off the GDP growth rate...
...Not only is it proving more difficult than anticipated to get Iraqi oil back onto world markets in significant amounts, but Iraq has made it clear that it plans to return to OPEC as the good cartelist it once was...
...So the White House abandoned its usual policy of not reacting negatively to just about anything the oil cartel does by issuing a statement appealing for restraint: "It is our hope that producers do not take actions that undermine the American economy and American workers, and American consumers for that matter...
...And Philip Verleger, a longtime student of oil markets now making his home at the Institute for International Economics, thinks that is optimistic: He sees $40 oil in our near-term future...
...All of which has the White House worried that its forecast, released last week, that the economy will create some 2.6 million jobs this year, might prove to be wishful thinking...
...Phil Flynn, a senior market analyst at Alaron Trading, expects prices to hit $34 in the spring...
...The service sector is growing at the fastest pace since we started keeping records in 1997, the manufacturing sector is also on the upswing, construction spending is at an all-time high, and the economy added at least 112,000 new jobs last month...
...And the U.S...
...It is, instead, the threat to the continuity of Middle Eastern supplies from terrorists and fanatics who will be emboldened to create chaos in Saudi Arabia, Kuwait, and other countries if we fail to achieve our goals in Iraq...
...They are likely to face spikes in gasoline prices during the summer driving season, in good part because new environmental regulations will reduce refinery output and drive up the cost of converting crude oil into gasoline by mandating greater use of corn-based ethanol as a gasoline additive...
...We know, too, that Russia's ability to keep its fiscal position in good shape is mightily helped by high oil prices, reducing its incentive to upset the OPEC applecart...
...But before we push the panic button, we should keep in mind that the recovery has been gathering strength even though oil prices have remained high...
...Sheikh Ahmad al-Fahd al-Sabah, Kuwait's oil minister (you remember Kuwait, the country we rescued from Saddam Hussein), seems to have carried the day with his proposal that production be cut sharply, first by eliminating output in excess of quotas, and beginning on April 1, by reducing production quotas by an additional million barrels per day...
...Which brings us to the possibility that non-OPEC members will fill the gap—and inevitably to guesses as to how Russia, which now produces almost as much oil as Saudi Arabia, will behave...
...And more than a few businessmen fear that the nascent economic recovery will be strangled at birth by the rapacity of OPEC's cartelists...
...The longer-term supply picture may be even worse...
...But hardly a reason for gloom...
...True, the International Energy Agency is predicting such a drop...
...And analysts at the White House tell me that African sources can't be counted on as "reliable...
...Nor can we look to Iraq for relief on the supply side of the demand-supply equation...
...They can't forget what Dan Yergin, head of Cambridge Research Associates, keeps telling television audiences: Every recession since the 1970s has been associated with high energy prices...
...Last week, Alan Greenspan used his semiannual report to Congress to reiterate his view that the absence of inflationary pressures allows the Fed to be "patient" before raising interest rates, adding relaxed monetary policy to the more-than-relaxed fiscal policy...
...Or that OPEC's revenue from international sales rose from $199 billion in 2002 to $247 billion last year, a jump of 25 percent...
...BY IRWIN M. STELZER GEORGE W. BUSH thinks the biggest danger to his second term comes from John Kerry, but it may come from $35 oil...
...and that there are powerful forces operating to keep the recovery rolling...
...So we can file with other Saudi promises the statement made by Saudi oil minister Ali Naimi at the Davos World Economic Forum: "In OPEC in general and Saudi Arabia in particular we would like to see prices between $22 and $28, as near as possible to $25, and to stay there...
...The cartel met in Algiers last week, worried that warm weather in the next few months would curtail demand for oil and bring down its price...
...Perhaps...
...Fiscal policy is loose to the point of irresponsibility, as the president opts for guns, butter, tax cuts, prescription drugs, and Mars...
...ident a Castro-sound-alike who has decimated his country's industry by meddling in the management of the state-owned oil company, needs but is unlikely to attract massive foreign investment...
...Some experts now say that Saudi Arabia's ability to step up production has been overstated, and that its ability to dampen prices by turning on the spigot has declined sharply...
...That's why production now exceeds quotas by 1 to 2 million barrels per day...
...So it doesn't seem wise to count on Russia to step up output sufficiently to ease price pressures on Western consumers...
...already are well above what OPEC claims to be its target range of $22-$28 per barrel...
...No sense blaming OPEC for the pandering of Washington politicians to Iowa corn farmers...
...But it has been wrong before...
...For Bushies, that is what passes for sharp criticism of the Saudis and their OPEC partners...
...But we do know that Russian oil is relatively expensive to produce, and that costly additions to infrastructure (ports, pipelines) are needed if output is to be increased significantly...
...That doesn't mean we should be indifferent as between $25 and $35 oil—cheaper is obviously better, especially for the motorist-consumers who have been fueling the economic recovery...
...Combine that picture of relatively constrained supply and growing demand, and it would seem imprudent in the extreme to assume that the end of the cold snap will bring a collapse in oil prices, especially since the summer driving season is not far off...
...Now that the Bush administration has abandoned plans to create a competitive private-sector oil industry in Iraq, and has opted instead for a state-owned monopoly of the sort that has brought stagnation and massive unemployment to other Arab producing countries, Iraqi cooperation with its fellow, state-owned producers is assured...
...So America's real oil problem is not the price the cartel is currently able to extract...
...China's omnivorous appetite for oil continues unabated: Demand grew by 33 percent last year, which surprised most forecasters...
...Consumer confidence remains high and spending remains strong, driving retail sales in January to 5.8 percent above year-earlier levels...
...that more fuel-using industries rely on natural gas, the price of which has been falling, than on oil...
...So it is unlikely that all of the agreed cuts will be realized...
...Businesses that have delayed investments are loosening their purse strings as profits exceed expectations, and corporate demand for bank loans is rising for the first time in four years...
...Never mind that prices have risen about 15 percent this year, and Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD and director of economic policy studies at the Hudson Institute...
...Venezuela, its presNo one knowsfor sure what Vladimir Putin's plans are, other than to make certain that his nation's oiligarchs don't become political rivals...
...But with inventories at a 29-year low, OPEC members are likely to keep output close enough to agreed levels to keep supplies tight...
...recovery should drive demand here up, although not by as much as before the first oil embargo, after which America partially delinked oil demand from economic growth...
...Wood Mackenzie, the respected oil consultancy, says that the North Sea is no longer a profitable area in which to look for new oil...
Vol. 9 • February 2004 • No. 23
