Syed Rashid Husain
Wishes do not always turn true!
Despite all the doomsday projections, emanating from all around, oil producing Gulf Arab countries have achieved another “major, real feat.” In the wake of the Western clampdown on Iranian output, in the pursuit of their strategic political objectives, the Gulf Arab oil producers have succeeded in taming the oil market bull, underlining once again that they hold the key to global crude markets. And Saudi Arabia, pumping at a 30-year high of around 10 million barrels per day, continues to be the OPEC kingpin.
“Our countries have exerted major efforts to restore global oil market stability, a feat that has actually been achieved. Stability has been restored and oil prices returned to levels which are suitable to both the consuming and producing nations and to the global economy and its growth,” Oil Minister Ali Al-Naimi asserted during a meeting of Gulf Arab energy ministers in Riyadh last week.
And prices have fallen. They are back in the low 90s – and in the wake of weakening global economic fundamentals — it may go down even further. The bull has been tamed. A feat has been achieved.
And Riyadh has played, once again, the most significant and crucial role in the taming of the current bull, proving once again the very critical role it has to play in the stability of the global markets. It signified Riyadh’s sheer dominance of the crude markets — for it would not have been possible without it.
And this also belies the theory, put forward in the recent days by the likes of Heidi Rehman of Citigroup, that Riyadh is about to lose its clout on crude markets. Saudi Arabia, the world’s biggest crude exporter, risks becoming an oil importer in the next 20 years, a recent Citigroup Inc. report underlined. Other reports too continue assailing Saudi potential, emphasizing that the Saudi wells were drying up and its production was already past its peak.
That would be, simply, a catastrophe!
Irrespective of what the so-called pundits — with little insight into the dynamics of the Saudi crude production — continue insisting every now and then, the Saudi clout on the global crude markets is there to stay — at least for some more decades.
The Paris-based International Energy Agency — the OECD energy watchdog — too is neither oblivious of the fact nor contests it. In fact it seconds it.
In a report on Iraq’s oil output, it indirectly underlined that Saudi Arabia would continue to be the OPEC kingpin for at least some more decades to come. The report released last week says that Iraqi output could more than double by the end of the decade and by the 2030s it will be the world’s second-largest oil exporter after Saudi Arabia, conceding otherwise, in rather open terms, that even by 2030, Riyadh would still be the top crude producer. This picture is in sharp contrast from what the likes of Heidy Rehman are putting forward lately.
And in the meantime, despite many projections, Hugo Chavez of Venezuela too continues to be at the center stage. Chavez, the nemesis of Washington, now appears set to continue rolling out his populist policies, dubbed “XXI Century Socialism,” while controlling the largest oil reserves in the Western Hemisphere for another six years. Despite being the fourth largest crude supplier to the US, Chavez, who survived a Washington-engineered coup in 2002, has been a fierce US critic. He has managed to win popularity among the long-neglected poor for his strategy to use oil revenues to fund the country’s health and education sectors.
The question taking round these days is what would be the impact of his re-election on the crude world? President Hugo Chavez’s re-election last week means Venezuela’s state oil company PDVSA will remain highly politicized and will continue its discount supply deals with his socialist allies. Chavez is also expected to continue and possibly widen the politically driven oil-supply deals with ideological allies such as Cuba, Belarus, Iran, Syria and more than a dozen Central and South American countries.
Many in the West are looking at the development rather negatively, though political connotations could not be ruled out altogether. PDVSA produces almost 3 million barrels per day (bpd) and boasts the biggest crude reserves in the world.
In a note after his re-election, J.P. Morgan predicted that Chavez’s victory would likely further stifle foreign investment in Venezuela’s oil industry and cause production to fall (further) in coming years.
The investment bank said it expects Venezuelan oil supply to fall to 2.58 million barrels per day (bpd) next year, down from its estimate of 2.62 million bpd for 2012. By 2014, production is likely to fall to 2.52 million bpd, the bank said.
“The most important impact is on the mid-term outlook, as a Capriles victory might have brought much-needed investment to the industry,” wrote J.P. Morgan’s commodities analysts, led by Colin Fenton.
Wall Street’s forecasts though contrast with much higher production estimates from PDVSA, which has said it may add 100,000 bpd in output this year, and pump as much as 4 million bpd in 2014.
PDVSA’s outlook hinges on foreign investments. Following Chavez’s comfortable victory, his government will seek to push forward a raft of ambitious joint ventures with foreign partners in the huge Orinoco extra-heavy crude belt — one of the planet’s biggest, mostly untouched oil reserves. More Orinoco crude is central to the government’s hopes of increasing output.
Under Chavez, China has emerged a key source of funding, providing his administration with loans totaling $32 billion over the last few years. PDVSA is sending 430,000 bpd of crude and products to China in repayment. The importance of Beijing to Caracas’s finances is expected to increase under Chavez’s next government. His administration often says it wants to boost exports to China to 1 million bpd.
The new Chavez government is also expected to prioritize efforts to tap its offshore natural gas. Venezuela is among the world’s top 10 nations in gas reserves but has yet to begin any commercial gas production. Instead it imports supplies from neighboring Colombia.
And Chavez continues to dampen spirits in its immediate neighborhood!