Political Crises and Price Rises

Recent price movements in international petroleum markets were primarily determined by political rather than economic factors. They had little to do with actual scarcity of crude oil.

There was a very short period of high volatility related to events in Venezuela, and a sustained oil price rise from around $18 per barrel (WTI) in December 2001 to $25 per barrel, or thereabouts, in the past three months, largely due to the Arab-Israeli conflict. It is important to distinguish these two different phenomena.

In Venezuela, the military coup which overthrew President Hugo Chavez, only for him to be reinstated, was about oil and the long-running struggle by the Venezuelan state to control Petroleos de Venezuela (PdVSA). The first event was President Chavez’ appointment of political allies on the board of the national oil corporation. This was sufficient to spark a widespread strike by workers and employees that significantly reduced oil output for a week. The market responded with a price rise.

The second event was the coup against President Chavez. This caused prices to fall. First, because the physical shortage resulting from the strike was expected to be over quickly. Secondly, the provisional government put in place after the removal of Chavez was quick to revoke the hydrocarbon law and to take measures that heralded a return to the apertura policy. The market, therefore, had good reasons to believe that Venezuela would soon opt out of its OPEC commitments and eventually flood the market with oil.

Then, President Chavez abruptly returned to power. The market responded by stabilising prices. The appointment of Dr Ali Rodriguez (the current OPEC Secretary General) as president of PdVSA, made an agreement with leaders of the political opposition, and re-established government control over the corporation. The strike ended and oil supplies resumed. There was no reason to bid prices up. On the other hand the return of President Chavez and the appointment of Ali Rodriguez mean that Venezuela is most likely to behave as a responsible OPEC member. There was no reason therefore to bid prices down.

The second phenomenon is the rise of oil prices to the level that obtained before the 11 September events. This is largely due to the impact of the Israeli-Palestinian conflict on market expectations.

The violent Israeli incursions in the West bank, following the US actions in Afghanistan and the prospects of a possible US military intervention in Iraq, are naturally eliciting the fears that one day oil supplies from one or another Middle Eastern source may be interrupted. Greater uncertainty now affects the security of supplies, a situation that will prevail for a long time ahead.

A supply interruption has already occurred. President Saddam Hussein decided to suspend oil exports for 30 days, or until Israel withdraws from Palestinian territories, and he called on other countries to do the same. The price impact of Iraq’s suspension of exports will not be very significant unless it is extended for further periods and other countries join in. Prices always tend to rise, however slightly, even if the large volume lost from one source is replaced with supplies from other countries. Changes in the supply pattern always cause some ‘overheating’.

There has been a studied ambiguity in the response of other Arab countries and Iran. Iraq’s decision to suspend exports was meant, among other things, to cause political embarrassment to neighbouring governments and induce them to take some action. This was clearly indicated by the Iraqi Oil Minister, Amer Rashid, who argued that ‘any increase in supply by OPEC to compensate for Iraqi crude will be seen as a stab in the back of the heroic Palestinian uprising’. An oil embargo, however, is a clumsy weapon, which cannot be aimed at the target without causing huge collateral damage.

Iran is a good example of the ambiguity. While the supreme leader Ayatollah Ali Khamanei and President Khatami have expressed support for an embargo to punish America, the Foreign Minister has repeatedly stressed that it would not act unilaterally. All the Muslim nations must join in before Iran will undertake such action.

Libya has a dilemma. While it has stated that it is in favour of an embargo and talked extensively about pricing oil in euros rather than in dollars, it is unlikely to risk its post-Lockerbie status. It has, after all, only just ceased to be a pariah state after decades in the cold. In addition, its preferred relationships lie across the Mediterranean, and it would risk potentially lucrative links with southern Europe and have very little impact on US policy.

The Saudi position is more complex. Sometime ago, the Foreign Minister, Prince Saud Al-Faisal ruled out the concept of an ‘Arab boycott’ but he has not addressed the issue of making up for a shortfall of Iraqi oil. However, since early March, the Oil Minister, Mr Ali Naimi has been saying repeatedly that Saudi Arabia will not allow an oil shortage to develop. More recently, the Western media has reported that Crown Prince Abdallah has mentioned oil during his visit with President Bush in Crawford. He reassured the US President that he had no intention of using the oil weapon, but detailed at the same time the considerable domestic political pressures on Saudi Arabia arising from the violent Israeli interventions in the West Bank, which could lead to undesirable outcomes.

Despite recent moves – the high level consultations between Saudi Arabia and the USA, the release of President Arafat from the humiliating and unforgivable confinement in office rooms in Ramallah, and signs that Iraq may agree to the return of weapon inspections – the Middle East situation still remains very unstable.

Peace negotiations between Israel and the Palestinian authority are yet to start. The gap between the two parties’ positions is very wide and the USA does not seem prepared to throw its full weight on the balance to secure an agreement.

Violent acts against Israelis and disproportionate retaliation are still likely to occur, albeit less frequently perhaps than in recent months. US military intervention in Iraq, so regularly and so emphatically threatened, will inaugurate a new violent episode in the Middle East with worrying consequences.

Frustration and anger at both Israel and the USA is at an unprecedented level in the Arab world. There are no longer any moderate Arabs in any social class today. The poor and the wealthy, the Western educated and the illiterate, the Muslim and the Christian are united in the same feelings. The outcomes of such a situation are impossible to predict. They may emerge very shortly, or induce slow, yet disturbing and unsettling developments in the very long run.

The only certainty today is that considerable political uncertainty will continue to cast its shadow on the petroleum market for months to come.

By: Robert Mabro

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Energy Policy , Energy Security , Oil

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