After the $147-Barrel Bubble (Part II)
How are oil prices linked to political reform?
- Saudi Arabia — busy enjoying the political windfalls associated with 4.5 million barrels a day of excess capacity — is unlikely to invest much further until it can be sure of strong demand
- Iran and Venezuela will be more than happy to see the oil price go back up. Tehran will not want international sanctions to undermine its nuclear program, while Caracas will push to maintain its 'revolution.'
- International oil companies are now only currently able to vie for around 10-15% of global reserves due to the world's largest fields residing in a handful of states.
Market fundamentals may not yet be fully aligned for another sustained oil price rise — but at the very least, consumers should not doubt that politics, as much as price, will continue to dictate the market.
As for price, international oil company (IOC) investment is expected to drop by around 15-20% in 2009 due to volatility and credit constraints.
This could halve the expected growth in oil production capacity over the next five years. Weak investment in maintenance of existing sites could also see supply-side depletion rates speed up. But price can only ever explain so much, given that IOCs have always had to take the financial plunge over long project cycles in years gone by. The real problem is, thus, political.
IOCs are now only currently able to vie for around 10-15% of global reserves due to the world’s largest fields residing in a handful of states. In the Middle East, national oil companies (NOCs) now control no less than 95% of reserves.
Far from opening new doors for IOC investment, price spreads have not only made major Western oil companies more cautious, but have hastened desire for “security of supply” in Asian giants on the one hand — and “demand security” from indigenous producers on the other.
Political linkages take priority over price and indeed risk in such investments, not least as China has been busy using the economic downturn as a perfect opportunity to invest in major resource acquisition. It has drawn on its $2 trillion in foreign reserves to turn financial capital into strategic presence.
The result of China’s move has helped shore up disastrous current account balances in Russia, Iran and Venezuela. Yet it has also further diminished the pool of accessible oil reserves for IOCs to tap by gaining concessions in key reforming states such as Brazil and building closer linkages with energy giants such as Saudi Arabia.
This is not to say that NOCs will be adverse to making profits or putting more oil on international markets at times of their choosing — but security of supply and political control of resources will be the cardinal rules of the game rather than enhancing international markets.
Whether or not NOCs will eventually become as adept as IOCs at getting oil out of the ground is beside the point. Without major rollback of political risk all around, upstream supply will inevitably struggle to keep pace with demand.
The blunt reality is that having weathered the political storms from 2008-2009, “repealing political risk” remains a highly unlikely move for producer states to make.
Saudi Arabia — busy enjoying the political windfalls associated with 4.5 million barrels a day of excess capacity — is unlikely to invest much further until it can be sure of strong demand. Iran and Venezuela will be more than happy to see the oil price go back up. Tehran will not want international sanctions to undermine its nuclear program, while Caracas will push to maintain its “revolution.”
Russia will need high oil prices to retain its seat at the BRIC table. And the fiscal health and political fortunes of all other major producers remains deeply intertwined with a high benchmark price — most notably in Nigeria, Iraq, Angola, Algeria and Bolivia.
GCC states can only stand above the political fray of fluctuating oil prices for so long, while production in key Asian states such as Indonesia will continue to take a back seat.
Thus, while oil producers may not have been political winners in 2008 and 2009, they have proved to be survivors. Upstream investment hardly ranks as a top priority for those still grappling with tight budgets. Instead, the name of the game is to leave oil in the ground today in order to make more tomorrow while continuing to rein in supply to maintain high prices (albeit largely at GCC expense).
The upshot is that consumers could face another price crunch in the coming years as investment lags and demand rises. Some producers will no doubt see this as a “strategic victory.”
Yet unless they have learned the lesson of 2008-2009 — on the need to diversify their economic bases beyond narrow resource wealth — once the next bubble bursts, they will no doubt need to dash for political survival once more.
Editor’s Note: Read Part I here.