The Commoditization of Oil
When was the last time you thought or worried about the price of aluminum? How about copper? Nickel? Lead? How about cattle, coffee, or cocoa? Wheat? Corn?
All of this stuff is important in our daily lives and in world commerce. But unless you are a commodities trader, their prices are not of much concern to you. One principal reason they are not is that they are plain and simple commodities. Their prices and markets are not politicized.
Thus the single greatest impact of America’s victory in Iraq will be the commoditization of oil and the end of its politicization.
To understand why, let’s begin with two basic facts:
1. Iraq has more oil than Saudi Arabia.
2. Iraq’s per-barrel extraction costs are much less than Saudi Arabia’s.
Iraq does not have, as so often repeated, the world’s “second-largest” reserves. It has the largest. There is a consensus between geologists that when Iraq’s untapped western fields are added in, its reserves will come in at between 400 to 600 billion barrels. Saudi has less than 300. Further, it costs around $1 to get Iraqi oil out of the ground. It costs up to $2.50 for Saudi oil.
Now add in George Bush’s determination to privatize Iraqi oil, to open up the exploitation of Iraqi oil fields to private investment as the quickest way to get foreign investment pouring into the country and oil exports pouring out of it. This will be coupled with GW’s telling Kuwaiti and Russian bill collectors that Saddam’s liabilities are “odious.” Baghdad is going to be Debt Forgiveness City
This is what enables Thamir Ghadhban, Iraq’s new Oil Minister, to predict Iraq will be back to its postwar production of three million barrels per day by this coming December.
But that is only the start. You can expect that production number to double within 24 months, or six million barrels per day by the end of 2005. How long it will take to double after that, to twelve million barrels per day, is a good guess, probably by 2010. Sort of a short-term Moore’s Law of Iraqi Oil Production.
This alone would be enough to commoditize oil, but then you have Iran. The “mullacracy” in Iran hasn’t much time left. The ayatollahs are engaging in desperate delaying tactics now, supporting Shiite radicalism in Iraq, and the Taliban resurgence in Afghanistan, to stave off being sandwiched between stable US-backed governments. Their desperation comes from the pure hatred most Iranians have for them (yes, hatred for the mullahs, not the US). It’s hard to see how the mullacracy will last much longer.
At the very least, the ayatollahs will have to relinquish their stranglehold on the government in Tehran, their support for Hezbollah and other terrorists, and their antipathy towards America. Once this happens, their weakness will be completely exposed, and they are swept into History’s Dustbin.
With a pro-US (or minimally a not anti-US) government in Tehran, not only does foreign investment flow into Iran and increased oil exports flow out, but all those huge amounts of Caspian oil cease being landlocked. Instead of having to build multi-billion dollar pipelines across Turkey, Central Asia, and China, Caspian oil can be plugged into existing Iranian pipelines and shipped out of Iranian sea ports like Bandar Abbas.
With so much oil available, OPEC’s ability to price-control it vanishes. This does not mean a price collapse. The needs of China and India alone are going to grow exponentially. But it does mean that oil is headed below $20 by the end of 2003, and on its way to what economists estimate its “true free market” price of $12 per barrel by the end of 2005.
It’s easy to see who the winners are in this — and the losers. Russia and Saudi Arabia are screwed.
Have you ever bought anything with a “Made in Russia” (other than Stoly) or “Made in Saudi Arabia” label on it? Both are one-export economies and have learned to produce little else of any value. Russia will scrape by selling natural gas to Europe, Sakhalin oil to Japan, eastern Siberian oil to China. But its stratospheric per-barrel production costs preclude oil from continuing to drive its economy — and stock market.
Pootie-poot, as GW calls Russia’s ruler, may figure out a way to politically survive, but that’s hard to see for the Saudi Royals. Here’s a Ripley moment: believe it or not, Saudi debt now exceeds 100% of its GDP, $170 billion. To service this debt requires selling eight million barrels of crude per day at over $20. QED: It won’t be long before the Saudis cannot service the debt they already have (not to mention the debt continues to grow).
To make the Saudi straits more dire: 20 years ago, Saudi per-capita income was $23,000 — now it’s $7,000; unemployment is above 30%; the majority of Saudis are functionally illiterate, as their education consists of Wahhabi (a Saudi Islamic sect) religious indoctrination and reciting the Koran; the Saudi culture has an abhorrence of manual labor, thus the country is physically run by imported labor. Let’s add one more: 15 million of the total population of 20 million is under 30, while the key Saudi rulers are in their 80s or late 70s.
The Saudi political future is the subject of another article. The relevance here is that the days of Saudi oil dominance are soon over. The day is soon coming when oil will just be another commodity, supplied and priced accordingly. It is a gift to the world of the geopolitical genius of George W. Bush.