[PEN-L:17608] Re: Not good

Mark Jones mark.jones at tiscali.co.uk
Mon Sep 24 12:12:43 MDT 2001


At 24/09/2001 14:09, Tom Walker wrote:

>I don't really mind when Doug riffs a cheap shot about gloating off one of
>my posts. I don't really mind when Doug doesn't respond to my substantive
>reply to his cheep shot. But when, after ignoring my reply, he fires off a
>cheap shot about catechism under the "not good" subject heading, it hurts my
>feelings.

I think that particular cheap shot was directed at me. Doug, a one time
self-professed marxist, now spends his time wondering aloud how leftwing
economists can help capitalism get over its latest downturn. He refers to
me as Rev Jones because of my alleged misanthropic apocalypticism. Over the
years I've argued there will be a serious economic and political crisis,
centring on the Middle East, arising out of a long term and fundamental
energy crisis. Doug has tended to disagree. I'm content to let events
decide who's right.

M King Hubbert and others argued that oil is highly finite, and
economically irreplaceable. Based on what I saw myself in the Soviet oil
industry, and on my contacts with people in various oil companies over the
years, I agreed. Doug (and others here) have various sorts of rejoinder
however. They argue that: (a) oil prices are historically low, so there is
no shortage; (b) we live in a New Economy characterised by the
virtualisation and dematerialisation of production, so oil is no longer as
important (energy and GDP have become allegedly "disengaged") and (c)
anyway, altho there's lots of oil, and it'll never run out, if it ever does
run out, then "human ingenuity" will solve all problems and find substitutes.

If these kinds of arguments are right, then in the coming slump, as in
previous downturns, oil prices like other commodity prices are likely to be
depressed. If the 'oil is peaking' argument is right, then sooner or later
a downturn will occur in which previous experience does not apply, and
despite falling demand, oil prices stay high. If and when this happens, the
consequences will be disastrous not only for finance and corporate
capitalism, but even more so for the hundreds of millions of people living
in peripheral states. In Latin America, Asia and Africa, high energy prices
have immediate and drastic effects on living standards.

The history of Opec is the history of an attempt at cartel-building in the
face of the logical contradiction that success inevitably brought about
recessions and slumps, thus undermining the Opec goal of high oil prices.
Since 1973, world capitalism, led by the great imperialist powers, above
all the USA, has systematically undercut Opec precisely this way: by
reducing demand, by a combination of efficiency increases (allegedly) and
by savage deflationary economic policies. Also, imperialism managed to
substantially jack-up non-Opec oil production, mostly by exploiting new
offshore oil plays like the North Sea.

We shall know for sure that those who believe that oil is finite and is
running out are correct, and the implacable optimists are wrong, if the
present economic crisis does produce a slump in demand for oil, BUT the
price of oil remains high and Opec for the first time achieves full and
final control over and cartelisation of, the market.Today even the FT (see
below) is arguing that possibly Opec's time has come, and that for the
first time we shall indeed have a slump in which oil prices remain high.

This is the precise indicator that world oil production may already have
peaked. If so, the future for capitalist economy is bleak indeed, since
oil, despite all the blather about the New Economy, is crucial to any
scenario which includes a resumption of economic growth (ie, accumulation).
Perhaps the most sinister thing in the FT article, for implacable optimists
like Doug Henwood, is the recent announcement by Shell that it is unable to
greatly increase future production. This suggests that those who argue that
the oil industry is now in rapid decline are probably right. If it is so,
and given the evident failure of human ingenuity a la New Economy to come
to the rescue of capitalism, it is hard to see what kind of generalised
economic upturn can possibly follow the present downturn. There is no
historical precedent for the present crisis, so whatever the
outcome--whether there is a new upwave of accumulation, or as I believe, a
chronic slump, worse than, deeper than, and more fraught with political
consequence than the 1930s--in either case it cannot be a simple replay of
any previous business cycle.

If production is peaking, why are oil prices low? Possibly because some
Opec states, primarily but not only Iraq, have deliberately kept production
up as a strategy to undermine non-Opec producers. There is evidence of this
happening.

  Middle Eastern oil is much cheaper to produce than non-Opec oil. Saudi
Arabia and Iraq (holders of the world's largest reserves) have
traditionally tried thru Opec to keep crude prices high, by controlling
production. These two countries are the "swing producers" of last resort.
Unlike all non-Opec countries, which have always produced to the maximum,
whatever the state of supply and demand, and however low the price they got
for their crude, Saudia Arabia and Iraq still have large reserves and still
have spare capacity. Almost alone, they can massively influence the market.

The Iraqi seizure of Kuwaiti oilfields in 1991 was an extreme form of
price-gouging. Subsequently, however, Iraq has adopted a different tactic.
Partly in response to Western sanctions, Iraq has developed
sanction-busting export capacity, and in 1998-99 Iraqi crude began to flood
into the world market, depressing prices to $10/bbl. There was a deep game
being played out, during which British and American bombing raids on Iraqi
oil infrastructure were designed to prevent embargoed Iraqi oil from
reaching the market; and the Iraqis went to great lengths to overcome these
difficulties, and to sell their oil at any price, in fact, the lower price
the better! The Iraqi calculation was that by flooding the market, and
depressing oil prices, the non-Opec oil industry would be severely
financially impacted, and so it proved. A simple tactic, but evidently too
smart for many economists, including some on this list, and even including
the Economist itself, which famously celebrated low oil prices as
indicative of the robustness and rude health of the capitalist world
market. In fact, what the Iraqis wanted to do, and largely did, was to
drive non-Opec exploration over an abyss. Western oil companies closed down
drilling operations, fired geologists and trimmed 'excess' production. This
brilliantly served the aims of Iraq and Opec generally--to remove
competitive non-Opec production from the market place. Inevitably, prices
have rebounded, but now the non-Opec production is no longer there, and
much of the technological and exploration base has gone too.

Does any of this matter? Only if you think that oil and natural gas are not
vitally important to capitalism. But they are: without these fossil fuels,
the system will die, and without growing and abundant energy supplies,
capitalism growth in any case will be chimerical.

Karl Marx agreed with Justus von Liebig, whose 'Law of the Minimum' says
this: whatever necessity is least abundantly available (relative to per
capita requirements) sets an economy's limits to growth. Soil fertility,
water and food supply, and the supply of critical raw materials like helium
or copper are sometimes mentioned. But the true determining last instance
of capitalist growth is what it always has been: the availability of free
energy.

As time passes the interconnectedness of events in the Balkans, Middle East
and Afghanistan are becoming clearer. Capitalist Europe and the US are
engaged in a huge campaign to remodel the geopolitical architecture of the
Middle East and the post-Soviet Central Asian space. They are doing this
for the same reason imperialism has always subjugated, partitioned and
repartitioned the colonial world: for the sake of plunder, for access to
raw materials, markets and above all, energy supplies.

  This campaign will surely fail. Attempting to achieve by force, by direct
military invasion, what the imperialist powers tried and failed to achieve
by other methods (and succeeded, in the case of the USSR, which collapsed
without the need to supplement economic and political pressure with
military force), is a sign of weakness and of desperation, not of
underlying strength. Capitalism, the whole imperialist system, has entered
a period of open crisis, and events have already run out of the control of
the imperialist powers.

Mark Jones


----------------------------------------------

Opec's dilemma (FT 24.09.01)
The cartel can ill afford to see recession knock oil prices far below
today's levels. But neither can it risk higher prices, which would offend
the US and its allies, writes David Buchan
Published: September 23 2001 20:14 | Last Updated: September 24 2001 04:41


Laurent Fabius, France's finance minister, declared on Friday that the
determining element of the shock that has hit the world is oil. "So far the
reaction has been measured," he said, implying that if the oil markets had
not panicked, the rest of the world had no reason to.
Yet Opec ministers gathering for a meeting of the cartel on Wednesday know
that this "measured" reaction of the oil markets is really the result of
two strongly opposing sentiments, more or less cancelling each other out.
The tension is between oil supplies as casualty (and sometimes engine) of
war and oil demand as barometer of declining economic activity. Opec is
comfortable with neither.
In the immediate aftermath of the terrorist attacks, the price of the
benchmark Brent crude rose by $4 a barrel to more than $31, on fears that
US military retaliation would hit Middle East oil supplies. Last week,
however, it slipped to around $26 on the belief that war would be confined
to Afghanistan - which has no oil - and therefore oil's problem was one of
collapsing demand.
The Gulf war 10 years ago demonstrated that the fear of war can have more
impact on the oil price than the reality of war. When Iraq occupied Kuwait
in August 1990 and in effect took both countries' oil off the world market,
anxiety about oil supply seemed well founded.
"People stockpiled oil, thinking the end of the world was coming," recalls
Leo Drollas, of the Centre for Global Energy Studies in London. "But once
the air attack on Iraq started and people realised how devastating it was .
. . the price collapsed. It dropped $4 the day after the bombing began and
never came back."
Mr Drollas believes the oil implications of the present situation are very
different, because it looks like being, unusually, "a Middle East crisis
without oil". He acknowledges that Osama bin Laden and his Taliban backers
can use, and have used, terrorism to equalise the US's advantage over them.
But he sees the US even more determined to prevail than it was in the Gulf
war.
Yet there is a wider context that is disquieting. Despite all the talk of
the need to reduce the output of the greenhouse gases that come from
burning fossil fuels, the world economy is still as dependent as ever on
oil. It provides 40 per cent of the world's primary energy and will still
do so in 2020, according to the International Energy Agency. Oil powers
travel and transport, heats houses and goes into plastics, chemicals,
fertilisers. And, despite the search for oil elsewhere over the past 30
years, some 53 per cent of the world's oil reserves still lie in the hands
of Middle East members of Opec.
This region's political instability has been the cause of the past three
oil shocks - the embargo imposed in 1973 by the Arabs on Israel and certain
of its western backers; the 1979-80 Iranian revolution, which sent prices
up to $40 a barrel; and the Gulf war.
To those who worry about a fourth oil shock - particularly in Asia where,
unlike the west, few governments have stockpiles - Ali al-Naimi, the oil
minister of Saudi Arabia has reassuring words. Opec is in the business of
stabilising the price of oil rather than using it as a political weapon, he
stressed last Friday, and would increase oil supplies to cover any shortfall.
"Saudi Arabia has always said, should there be any shortage of supply
anywhere, we will work to alleviate it," he said. In its role as swing Opec
producer, Saudi Arabia has frequently increased output to compensate for
periodic export stoppages by Opec's most errant member, Iraq. It has also
kept its anger at Israel's treatment of the Palestinians quite separate
from its oil policy.
No Saudi minister can, however, be wholly convincing on the issue of Middle
East stability while many of the suspects for the destruction of the World
Trade Center are alleged to have come from Saudi Arabia. And although
stability may remain Opec's aim, it is against an entirely new backdrop.
Opec's recent strategy has been to keep the average price of its crude oils
- which because of transport costs and lower quality trade generally fetch
a couple of dollars less than Brent - within a $22-$28 band. The strategy,
which has demanded three production cuts this year, has worked so well that
Opec has been emboldened into thinking it can micro-manage the market and
aim more precisely at $25 a barrel.
But evidence of recession is in Opec's face as well as everyone else's.
"Normally economic data signalling a downturn comes out piecemeal - this
time it came in a rush," notes Lawrence Eagles, an analyst with GNI, a
derivatives broker.
When Mr al-Naimi and Opec ministers meet in Vienna they may have to accept
stabilisation of the oil price at a lower level, at least for a while.
"What September 11 has changed is the price floor that Opec can defend - it
will be very hard for Opec to keep its basket at $25," says Raad Alkadiri,
an analyst at the Petroleum Finance Company in Washington.
Opec faces a new political constraint. When Spencer Abraham, the US energy
secretary, visited Opec's Vienna headquarters last weekend, he did not ask
for the cartel to increase output, but he did make clear that the US wanted
no further Opec oil removed from the market.
Opec members cannot risk offending Washington right now by being seen to
"defend high prices", claims Mr Alkadiri. He adds that many Opec
governments would find it politically easier to help US President George W.
Bush on the oil market than to co-operate openly with him in diplomatic and
intelligence action against Muslim or even Arab targets.
Yet Opec members have as much cause as they ever did to seek the price of
$25 a barrel. If lower oil prices do not rekindle economic activity and
thus oil consumption, many Opec governments will find themselves strapped
for cash next year. "Saudi Arabia needs $25 a barrel to balance its budget,
repay debts and keep up its capital expenditure programme," says Mr Drollas
of CGES.
Inside Opec, Riyadh is believed to have improved relations with Iran and
Venezuela by accepting the views of this hawkish pair on price.
Acquiescence in lower prices could therefore threaten Opec's cohesion.
Opec's influence on the oil market would be less if oil producers outside
the cartel had a greater share of the market. Financially, they have been
doing well, making record profits, ironically due to the almost altruistic
way that Opec props up the oil price by keeping some of its own production
off the market. That has led to an increase in non-Opec production. Led by
the former Soviet Union - Russia, Kazakhstan and Azerbaijan - this is
rising by, according to a Deutsche Bank study, 730,000 barrels a day this
year with a predicted increase of nearly 1m b/d next year.
But this increase has not been as fast as was predicted after nearly three
years of high prices. Royal Dutch/Shell rocked many observers, and its
share price, by last week scaling back the growth of its medium-term
production targets from 5 to 3 per cent a year. Aside from unexpected
slowness in gaining access to Opec countries, the Anglo- Dutch group cited
delays in deepwater projects off west Africa and faster-than-expected
declines in mature oil zones such as the North Sea. There is a suspicion
that other producers are experiencing the same problems.
This reinforces what every geologist knows - that the cheapest and most
plentiful oil lies under the Middle East sands. It may also advance the
return of Opec dominance. Non-Opec oil supplies are expected to plateau by
2010.
Opec's ample reserves will allow its production to overtake the output of
non-Opec countries, so that by 2020 the cartel will have a world market
share of 55 per cent, according to CGES. This underlines the importance for
Mr Bush of treading carefully over Middle East oilfields as he wages war
against terrorism.



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