Finance ministers deeply rattled by oil situation

Oil dominates agenda at G7 meeting in Washington, DC; communiqué includes recommendation to conserve fuel

The finance ministers of the wealthiest countries have issued from the tenth G7 meeting in Washington, DC on October 2, 2004, a communiqué that among other things "reiterates the desirability of stability in oil markets and prices which are consistent with lasting global prosperity".

Under the Chairmanship of Mr. Gordon Brown, Chancellor of the Exchequer of the United Kingdom, The International Monetary and Financial Committee emphasizes in its communiqué that

in the coming months IMF surveillance should focus on a number of key issues, including: the impact of higher oil prices,.... To this end, it welcomes the decisions by oil-producing countries to continue to expand production and urges further measures to increase capacity, and calls on oil-consuming countries to take measures to promote energy sustainability and efficiency. The Committee also stresses the importance of dialogue between consumers and producers, and of further progress to improve oil market information and transparency.

Interesting. In apparent agreement with the editorial orientation of Deep Blade Journal, the ministers are suggesting that oil consuming countries -- read the USA (4x more consumption than anyone else) -- need to conserve fuel. Even though the language is mild, this is actually quite a strong statement considering the promotion of ravenous fuel consumption without even a hint of moderation seems to be part and parcel of American culture.

However, no direct statement on fuel conservation beyond the communiqué was evident in the reported remarks of US Treasury Secretary John Snow, who naturally touted the strength of the US economy. But he did caution that "we cannot rest on our laurels -- risks remain, notably from oil prices".

Furthermore, the last line I quoted from the communiqué is rich with meaning, particularly the word "transparency". BBC North American business correspondent Steve Evans reports in one, two written stories and an accompanying radio interview on The World Today for October 2; plus a TV segment, "Gordon Brown's efforts to bring down the price of oil" (click through video link),

The IMF has voiced strong concern at a Washington meeting about the dangers of rising oil prices to global prosperity. Ministers said that what they see as volatility in the oil market had increased the risk of derailing the economic recovery in the world economy...They also want what they call "transparency" in the market - by which they mean more accurate information about the true state of supply and demand.

In the radio report, heard on The World Today program, Evans says that ministers "don't know" what exactly is the source of the strain in the oil market. They "may have overestimated the supply of oil, they simply don't know how much oil is in the ground, and get-able". Also, the G7 wants to find out "how much speculation there is in the market". Hence the new "buzzword", transparency.

"All they know is something very odd has happened and they want to know what the reason is", reports Evans.

Speculation would follow directly from sudden realization that oil production rates are now hitting peak levels. Going forward, shortage might be a permanent feature of the oil market — that is the speculator's bet.

Price must begin to control demand in the face of constrained supply. The oil price has now doubled. Gordon Brown, maybe the successor to Tony Blair, is quoted as follows in the BBC radio report:

When the oil price doubles and that is a major change in the world economy, which is affecting growth, affecting jobs, affecting living standards. Then you look at what other temporary factors and there has been speculation, there has been the action in Iraq and uncertainty that arises from political events in the Middle East. But we are also looking at what are the medium-term and long-term forces at work. Clearly OPEC has not worked well, it has to work better. Clearly we need to have a more transparent approach to knowing what supplies, what reserves, and what are the plans for using the reserves both in the OPEC world and the non-OPEC world, and that's why we want these reports done. We also want to look at the long-term sustainability of our use of energy.

Wow. This concern on the part of the top world-level economic officials is highly notable. What currents underlie these developments? Let's turn to the very candid, very interesting energy investment banker Matthew Simmons for some detailed analysis of the most significant world oil producer -- Saudi Arabia -- and the effect of Saudi conditions on the entire world energy picture. Simmons is a powerful promoter of measures to improve transparency in world oil reserve and production data because figures normally used are seen as suspect. Remarks he gave that I quote below were recorded during a conference at the conservative Hudson Institute on July 9, 2004.

Of Saudi Arabia, Simmons says,

They're the only significant producer left in the world that have any spare capacity. That's the only thing you have to know to say forget about all the others, this is the really important deal. In my opinion, having studied thirty-five years on the oil markets, there is no other oil producer on earth that could even begin over time to replace a significant shortfall in Saudi Arabia's oil. So if in fact Saudi Arabia is at their peak production, then so is the world. So this is really basically a big issue.

On the transparency of production data, Simmons offers his opinion on a major source for this data:

The single best data we get on OPEC oil production, the first source of media, comes from a fabulous firm called Petrologistics in Geneva, Switzerland. In case none of you have ever been to the offices of Petrologistics — I haven't, I've just heard a lot about it — it's a one-man show over a grocery store in Geneva. Conrad Gerber. I think it's basically a scam. He's frontrunning for somebody [inaudible] because there is no way on earth that anybody could be over a grocery store in Geneva and say, "Saudi Arabia is now producing..." But the fact that everybody has been so clammed up on their own information, we've left the world held hostage to Conrad Gerber's [inaudible] eye ... is itself alarming.

Lack of trustworthiness in oil production data would seem to be a huge problem. News stories containing Petrologistics data, including some linked in Deep Blade, cannot always be trusted and must be used skeptically.

If true, Simmons assessment of the great Saudi Ghawar field is true cause for alarm:

The king of kings, Ghawar, the largest oil field in the history of the world, has accounted for between 60 and 65 percent of Saudi Arabia's output, so if anything went wrong with Ghawar then we have a problem with the world.

All but two of these key fields were discovered long ago and have been in production for a long period of time. They have all used intense water management to keep reservoir pressures high, so as the fields aged they postponed that natural depletion of using [inaudible] and then you go to a secondary cover. They were doing secondary and primary at the same time, and that created the illusion that basically this high productivity would go on forever. At some point, totally unannounced — because it always comes unannounced, there's no kind of early warning system this happens — the reservoir pressures on each of those fields will end. When those reservoir pressures end, it's unfortunately very similar to the human body as you finally start really going into very old age. When you slow down, the concept of "I'll get better next week" doesn't ever happen. You just continue to slow down.

In the news last Tuesday, the day oil hit $50 for the first time, was a story that quoted Saudi Arabia's Oil Minister Ali Naimi announcing that a sharp Saudi oil production increase "would come into effect in the next few weeks, using fields where production has just begun". Was this story released to help calm jittery markets but was lacking in substance?

Naimi said

The fields of Abu Safa and al-Qatif, which have just started production, will be used to increase the kingdom's production capacity in the coming few weeks to 11 million barrels per day.

Is the claim dubious? Here is what Simmons says about the "new" al-Qatif field:

What I also find interesting is to read in detail about their new projects that they have coming on. The biggest one is Qatif. That will be a very key test. It's coming onstream I think sometime — they say now maybe late July, early August. Qatif is not a new field. Qatif was actually discovered in 1945, so it's sandwiched between Abqaiq and Ghawar. But it's a field they could never get to produce.

Even in the '70s, when they're starting to worry about over-producing in Ghawar -- maybe we should find a way to rest this field but the market needs our oil? By 1977, they turned Qatif into a storage cavern for excess naptha [inaudible] refinery, on the knowledge that it might destroy the reservoir, but they didn't care. The average H2S [hydrogen sulfide] cut is basically about 10-20 percent -- H2S if you breath it, kills you instantly. This is a very complicated field. They think that they're going to be able to produce this field at 500,000 barrels a day for thirty years. I think watching this, if you can watch it with any quality information, will be one of the really telltale signs, because if this fails, everything they have behind it gets worse.

It would be extremely alarming it were true that the Saudis are inflating claims that these projects will be able to sufficiently increase and sustain their oil production capability at the level they now have announced to the world.

On the outlook for oil data transparency, Simmons must be very happy to see the concern of the finance ministers. This is what he said last July:

Can this reform happen, and then most importantly, is it too late? Well, I am fully aware that secrecy has been a mantra at OPEC for the last two decades, and it's sort of inbred in their culture, and I've had a number of people within OPEC say, "You know, I kind of individually think that what you're suggesting makes a lot of sense, but it just won't happen."

I said, "That actually is for the birds." We've done a lot more important things for society than just say, "Hey guys, it's time to basically — the trust me era is over."

I think if the stakeholders — and I think all of us in this room are stakeholders — if the stakeholders get serious about this and just politely say, "Guys, the old era is over — we need this data," there's nothing painful about this and everybody becomes a winner.

I think since Saudi Arabia has basically been such a champion of better energy transparency that they actually could move to the head of the class by taking the lead in this. And I would really hope that at some point they'd get over their annoyance of having someone even question the virility of their oil, and say, well, if it's true, then rather than send people around the world to do stuff like I showed you, just start producing this data. This is what my message to them has been. I said, if three or four years from now that data shows I'm wrong, I will be the most public advocate in the world saying I was totally wrong about my concerns — I'm delighted that I raised them, because I'm going to sleep better at night knowing we have that data.

The reason we need this data is basically that if the data confirms my supply worries are true, we need to get working on what I euphemistically call Plan B....[a lot of things] we should have started working on a decade ago.

Plan B is going to take a lot of time. Do we have the time? I'm not sure we do, but I know one thing — until we have this data, we're going to basically just fly until we hit a wall. When we hit a wall, it could be one of the most surprising things in the history of our lifetime.

Much work lies ahead. Transformation of our energy picture is on the horizon. High officials are beginning to realize the truth of this notion. Conservation is the key to ameliorating crisis. Officials from the US and UK now must promote this message with all the same vigor as the promotion used in the case for war on Saddam.

Meanwhile, in Iraq
Writing in The Daily Star for October 2, oil analyst Youssef M. Ibrahim describes the lamentable condition of the badly-mismanaged and under-fire Iraqi oil industry:

The American invasion has resulted in the loss of an average of 2 million barrels per day of Iraqi oil from world markets. That is a very high number indeed, with potentially tremendous, indeed catastrophic, consequences for the global economy.

As for the country's oil industry, once a proud sector with some 55,000 well trained and highly disciplined technocrats, the situation is catastrophic. Oil fields are deteriorating because of fires and accidents, and because of lack of maintenance and funding. Refineries that were totally looted in the first week of the war have yet to be repaired....

To date, of the $18 billion in so-called "reconstruction money" earmarked for Iraq by the U.S. Congress, less than $1 billion has been disbursed. While the American oil service company Halliburton has received large chunks of that funding, the money is not going to rehabilitating the oil sector. Instead Halliburton, and other private American contractors, are using the money to construct latrines, tent-cities or entertainment facilities for American soldiers.

The Iraqi oil situation has become a Catch-22, with dire consequences for the Iraqi and world economy. Oil and politics make a flammable cocktail. The real worry is that the Iraqi virus may move next door to other oil-producing countries, at a time when, basically, the world in running on empty.

Isn't it ironic? Bush and company takes Iraq and then over a period of months brags that "Iraqi oil production has reached more than two million barrels per day". In fact this continuing depressed level of Iraqi production is now beginning to punish a world economy thirsty for oil. The neoconservative plan to turn Iraq into a private American oil tank and "coaling station" for the US military is in dire straights. Sadly, this is the clearest evidence yet that Iraq and the world were both better off in the days when the tyrant Saddam held Iraq rather than the tyrant Bush and his band of puppets and thieves who now do. The Saddam-era Iraqi oil production level of 3.5 million barrels per day would look pretty good right now.

Hello, Mr. Bush, is anyone home?
We have an oil situation here and it is going to get worse. I am beginning to get a gut feeling that perhaps these problems will get much, much worse sooner than anyone expects. Deep Blade Journal calls for voluntary fuel conservation in order to take the edge off of the strain, now. But this is not something in the heart of the Bush Administration, as any suggestion that there is a problem is just something they can't confirm, even though anyone can see gasoline and heating oil prices rise before our own eyes.

We are grown-ups, President Bush. We can take it if you tell us the truth. Truth on this issue could even be a positive, not a negative, for your campaign. The future of the world is at stake. Mr. Bush, and you too, Mr. Kerry, please follow the G7 recommendation and ask people to conserve fuel.