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Is Oil Against World Economy?

By Elie Habalian Dumat

At the beginning of June 2008 , the price of oil looked unstoppable, going toward figures that until recently were unimaginable. The situation had reached such a level of sensitivity that just the fact that an investment bank like Morgan Stanley forecasted on June 06, 2008 that the oil price would reach $150 a barrel in a month time was enough to produce an increase of more than $10 in a few hours.

THE STOCK MARKET BUBBLE

As it weren't enough with the dynamics that led the bullish crude in his career; leading spokesmen from several countries and major international institutions, as well as transnational corporations were contributing with their statements to push the price even more toward a stock market bubble. Such a bubble began to take shape as soon as the psychological barrier of $100 per barrel was overcome early this year.

While the U.S. economy was deepening its difficulties and dragging in this dynamics other economic areas, the price of oil kept rising. Contributing to this phenomenon were the stock market investors, who fearing a crash similar to 1987, flooded the market for commodities, particularly oil.

OIL DEEPENS THE CRISIS

Faced with what seemed a third oil shock since the end of 2007, an acute housing crisis in the United States and a financial crisis crossing the Pacific and the Atlantic toward Asia and Europe, a feeling of anguish was seizing the spirit of many peoples and countries . Because of high fuel costs , we began to see strikes and protests in different parts of the world (Chile …). It also triggered amazing demonstrations of the poorest (Haiti…) against the excessive increasing in food prices as a result of, among other factors, the impact of a sharp increase in oil prices. In June 2008 some countries like Pakistan had to notify to their suppliers of their inability to pay the oil bill.

The worsening situation to both developed and developing countries , coupled with the irresponsibility of some heads of State (Hugo Chavez…), leading representatives of international organizations (Shakib Khalil…) and transnational corporations (Alexei Miller…) who were speaking about a price of $150, $200, $250, $300 and $400 a barrel, ended up with a global clamor about the urgent need to stop this “madness".

THE JEDDAH's MEETING

Such a clamor was not in vain. Ki ng Abdoullah of Saudi Arabia “surprisingly” convened at a meeting on global energy. With the gathering of the main producing and consuming countries, seven international agencies, the major oil companies and several important investment enterprises, the meeting took place on June 22, 2008 in the city of Jeddah .

In their explanatory memorandum for the meeting, the Saudis described the escalation of oil prices as unjustified and expressed concern about its impact on the health of the global economy and its political implications. On these bases, the King invited key players involved in the global energy problem in order to assess the causes of the oil market's abnormal behavior, and also to specify the measures that needed to be taken in order to avert it.

In addition to the successful measures contained in the communiqué of Jeddah's meeting, the most important messages sent by the main protagonists of that event were as follows: F irstly, Saudi Arabia, representing the exporting countries; Great Britain, representing the major consuming countries, and China, representing the emerging consumers; together with other political, financial and energy factors, are unwilling to allow an abnormal oil market which could lead the world economy to a precipice. Secondly , before the depletion of the Global Energy Order in effect since 1974 , Jeddah's event marks the beginning of a New One, with new actors, new technologies, new fuels and new demanding ecological requirements.

JEDDAH MESSAGE RECIPIENTS

The main recipient of Jeddah's message was the international community, which received the event 's news with some relief . It was interpreted as an answer to their cries, albeit seemingly timid. The message was also received with hope . That is: At last someone seems to be willing to face this dangerous situation.

As for the other recipients, investors from all major markets in the world and the vast majority of oil exporting countries, both belligerents (Putin, Ahmadinejad, Chavez…) and moderate ( Qatar, Kuwait, Oman…), received the message with an attitude somehow in between total silence and low profile protest . The U.S. Treasury Secretary Henry Paulson emerged as usual in defense of financial investors. His statement ruled out any impact of speculators on the oil market, adding that the increase in oil prices was only a matter of supply and demand. With regard to non-belligerent exporting countries like Qatar and Kuwait , the consensus was to be prepared to increase production if the market required it.

BELLIGERENTS AGAINST JEDDAH

The attitude of the belligerent exporting countries was somewhat different. The number one of the National Oil Corporation of Libya , Shukri Ghanem, upset with the Saudis, said that his government, instead of increasing, would be thinking of reducing production. The Algerian oil minister and current President of OPEC Shakib Khalil, unable to conceal his irritation during and after Jeddah's meeting, said that the oil price could reach $ 400 per barrel . However, a month later he changed his mind, describing the current price as abnormal, and predicting its drop to $80. The Venezuelan Ali Rodriguez Araque, a former Secretary General of OPEC, just after the event, said that oil prices would continue to rise.

As for Russia , no senior Cabinet Member reacted, but it was Alexei Miller, the Chairman of the giant Russian Gasprom, who declared on July 3, 2008 that he expected oil prices to reach $250 per barrel soon.

Although Rafael Ramirez, actual Venezuelan Minister of Energy and Petroleum, had initially been instructed in not to attending the meeting, he received a counter order later and asked to play a discreet role in there. Instead of talking about the price, he criticized the Saudis in a low-profile manner . He argued a violation of the OPEC's rule by the member countries as any increase or decrease in the OPEC production has to be taken within the Conference of the Organization.

HUGO CHAVEZ, AS USUAL

Hugo Chavez, one of the main recipients of Jeddah's message, preferred not to react against the Saudis. He inhibited himself of accusing the Saudis of running over OPEC and having another energy agenda, since they hosted a global energy meeting outside the Organization. A month later, he slid out saying that Jeddah's meeting had shown that increases in oil prices were not the OPEC's fault. Chavez chose not to be boisterous with King Abdoullah, since he is aware that there is a compromising hypothesis rising in the atmosphere according to which a group of OPEC and non-OPEC oil-exporting countries, a mong other important players, are engaged in an extra-OPEC agenda. Such an agenda is primarily characterized by the lack of transparency in handling oil information and statistics such as crude oil production and so on . This irregularity was criticized in Jeddah's meeting ( item three of the communiqué) as one of the causes of the global oil market's current erratic behavior.

OIL DOWNWARDS

During the following three weeks after the Jeddah's meeting ; there was a whole resistance dynamics of the major energy and financial players affected by the meeting´s resolutions . In addition to the exporting countries and the transnational oil capital, there were the stock market investors who acquired oil at prices above $100 per barrel expecting them to reach $200, $250, $300 or $400 per barrel , as it had been promised by the President of Venezuela, the President of OPEC and the Chairman of Gasprom.

In spite of all messages issued by the "new riders" of Wall Street in favor of high prices, and despite the resistance of the Oil Horsemen of the Apocalypse (Putin, Ahmadinejad, Chavez, Shakib Khalil… .), prices began to fall sharply. This was caused for a drop in oil demand due to the recession in the United States and other economic areas. In other words, the power of recession against the ambitious although obscure goals of the Oil Horsemen of the Apocalypse is by far greater than any pressure coming from the oil consuming countries.

OIL HAS AN EYE ON THE ECONOMY

By observing the interaction between oil prices and The Dow Jones Index during the past four weeks, one can say that, firstly, after the initial $20 sharp fall in oil price, the decline rate has decreased, and secondly, that those who are behind the oil market, have a permanent eye on the world economy . That is: every time Wall Street shows some improvement even for a few hours, an invisible force pushes the price back to higher levels, even some 50 cents, or one dollar. In other words, in the near to the medium term the economic recession (whose first phase, according to many analysts, is not yet complete and still some are to come) will do its job with both the oil price and the Horsemen who ride it . Definitively, the price will take a level compatible to a new equilibrium situation that the global economy will reach after going through painful structural changes .

In this new equilibrium situation, the oil price level needs to ensure efficient economic performance while, simultaneously, it allows the entry of new fuels, especially non-polluting fuels, into the energy market .

BAD NEWS FOR SOME HORSEMEN

Bad news for all those who had made big plans with the highest oil prices never seen. Plans to win billions of dollars at the expense of the hunger and misery of hundreds of millions of poor people in the world, as a result of the unbearable prices of food and transport, impacted by a twofold increase of the oil price in less than a year. Plans to bring down the entire Western Civilization and, in instead, to offer the Cuban "sea of happiness" to the humankind. Plans for Russia to regain the hegemonic power once owned by the Soviet Union . Plans for Iran to be prepared for the well-armed "Great Holy War" in the Middle East , ( although, at the end of the days, it is very likely to end up just like the collapse of the Shah order, without firing a shot).

CHAVEZ, THE THIRD OIL HORSEMAN OF THE APOCALYPSE

Hugo Chavez, the third in the ranking of Oil Horsemen of the Apocalypse (Putin is the first; Ahmadinejad, the second) also made "colossal" plans. With millions and millions of dollars, travelling by land or by flying briefcases , Chavez has hegemonic plans for Bolivia, Ecuador, Nicaragua, Dominican Republic, Honduras, Jamaica, El Salvador and several Caribbean islands. He also has plans for Argentina , Peru , Chile , Guyana and Colombia . He tried to go so far as to asking Colombia to kneel before him, but instead he was humiliated. Nevertheless, nothing seems to stop him. The oil revenues have done a “big” job on Chavez's head, as a result of which he has developed counter-hegemonic policies against Mexico , Brazil and even the United States .

These delusions of grandeur of the third oil Horsemen of the Apocalypse did not take into account the restructuring capacity of the global economy, nor Jeddah's meeting .

CHAVEZ WITHOUT A HALF OF HIS OIL REVENUES

For Chavez, the fall in oil prices to rational levels would imply the loss of half of “his” oil revenues. This scenario could be extremely serious for the "21 st Century Oil Socialism” and the "Great Latin American-Caribbean Bolivarian Revolution" . Chavez's political, economic and social dynamics would enter into a crisis. He would lack the resources required to import goods and services in a country with serious production problems, on the basis of an official exchange rate which currently is 35% cheaper than the free market dollar. He would lack resources to continue subsidizing the “so-called” social production enterprises, as well as the vast majority of unproductive cooperatives. The free market exchange rate would rise to those levels of the second half of 2007 when it reached more than three times the official exchange rate. The compulsive purchases of guns, aircrafts and submarines would suffer a serious blow.

The bad news for Chavez is that the new energy dynamics is emerging in the midst of a U.S. and, thus, global recession which will take a bit to end up.

The "Tropical” and the other Horsemen, should have to invent new maneuvers to change the direction that the oil business seems to have taken after Jeddah .

Elie Habalian Dumat is a former Venezuela's governor for OPEC (2003). Petroleumworld does not necessarily share these views.

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Petroleumworld News 08/16/08

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