Re: Oil Economics (was Iraq: the case for decisive action)

From: Mike Lorrey (mlorrey@yahoo.com)
Date: Wed Jan 29 2003 - 19:27:50 MST


--- "Robert J. Bradbury" <bradbury@aeiveos.com> wrote:
>
> On Tue, 28 Jan 2003, Mike Lorrey wrote:
>
> > --- Lee Corbin <lcorbin@tsoft.com> wrote:
> > > Mike Lorrey beautifully explains
> > >
> > > > Oil prices in a free Iraq world would be around $10/bbl.
> > > > They are currently around $30/bbl, partly due to the
> > > > restriction on Iraqi oil exports, partly on the Venezuelan
> > > > civil conflict (which can also be traced to left wing
> > > > organizations), and partly on global uncertainty over
> > > > future US actions in Iraq.
>
> Mike/Lee I simply cannot accept this premise (sorry).
>
> You have to assume that (a) the U.S. (or Europe) would
> act to pump-up-the volume with respect to Iraqi oil
> production (and there is no useful knowledge with
> respect to the degree they could do that given a
> decade of decay in the production capabilities) and
> that the (b) the Saudis (or other OPEC or even non-OPEC
> members) would not act in a way to offset the production
> increase that Iraq *might* be able to achieve.

If the Saudis offset production (keep in mind that Iraq has the second
largest reserves) in Iraq by reducing their own production, they will
stifle their ability to finance repression at home and terrorism abroad
(i.e. Palestine as well as al Qaeda). Their government might even fall
(a win win situation for us if a democratic Iraq is established).

Keep in mind that every time in the past, prior to the Gulf War, that
the Saudis attempted various ways of stifling production to keep prices
up, they failed, simply because there is more natural supply than there
is demand. All oil prices that exist and have existed since the late
1960's are not natural prices, they are the result of governments
attempting to restrict production below natural market stimulated
levels.

>
> The price of oil is subject to a complex "present value
> analysis" of both the countries producing it and the
> consumers. It comes down to a question of "do I gain
> more by pumping the oil or leaving it in the ground?".

This is ostensibly what it *should* be, but significant political
considerations come into play as well, as well as the fact that the
self interest of many oil producers is never congruent, especially in a
world where consumers have demonstrated and ability to utilize
technology to conserve energy and restrict consumption. Since the
mid-80's, oil producers have been fighting over a smaller and smaller
pie while their own constituencies have demanded more revinues, ergo
higher production rates.

>
> Yes, there are disruptions, e.g. Venezuela or perhaps
> pipelines being blown up (or not built due to political
> problems), etc. But you are living in a fantasy world
> if you think most oil producing nations are going to
> pump oil at $10/bbl). They *know* the supply will
> eventually decline. They are also in primarily state
> run companies that are not subject to the quarterly
> dictates of Wall Street. So their focus is on "how
> do I preserve my job?". And that is very dfferent
> in each political situation.

I don't suppose anybody recalls the rampant quota cheating done by ALL
oil producers whenever Saudi Arabia tried to corral those cats into
lockstep.

>
> So I would suggest that if you think every oil minister
> will continue to do exactly what they are doing now if
> Iraq bumps its production from say 2M to 4M BBL (these
> are hypothetical numbers which one would need to verify)
> then you are living in fantasy land.

I don't think so. Keep in mind that Venezuela is only producing about a
third of its pre-strike levels of 2 million bbls. Iraq is producing
less than a quarter of its capacity. Russia has brought previously
untapped reserves on line in the last year, so if Venezuela and Iraq
get straightened out, their combined production levels will bankrupt
Saudi Arabias ability to control prices. Saudis may be able to
stabilize oil prices because of their vast capacity and reserves, but
they would bankrupt themselves in the process.

If we bring ANWR on line in the same time frame, oil markets will no
longer be seller dominated.

=====
Mike Lorrey
"Live Free or Die, Death is not the Worst of Evils."
                                                     - Gen. John Stark
"Pacifists are Objectively Pro-Fascist." - George Orwell
"Treason doth never Prosper. What is the Reason?
For if it Prosper, none Dare call it Treason..." - Ovid

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