Interesting and intriguing are the ways in the energy world. Not long ago, many among us vividly remember, Saudi Arabia was often referred to, especially by the pundits in the West, as the ‘swing producer’ of the global crude market. Not any more! A new swing producer seems now to be emerging on the scene.
The Saudi role as the swing producer in the 1970s and 1980s generated heated debate, both domestically as well as in far-flung foreign lands. Firm positions were taken up by the sides, the protagonists as well as the antagonists. Some today say and perhaps with some hindsight that I am not privy to, that the debate ultimately led to some major changes, both in person and in policy. Heads rolled, some emphasize.
As new blood was inducted to have a fresher look at some of the aspects of the long term impacts of the policy, a new approach was adopted to this entire issue. Market share became the buzz word among the Saudi energy managers, and perhaps rightly so. With its growing financial needs, Saudi Arabia needed money and thus could not have afforded an eroding market share of its virtual single product economy then.
What followed is now history. Crude prices experienced turbulence of the highest order — almost on a roller coaster ride — yet Riyadh, the OPEC heavyweight remained glued to the idea of holding on to its market share. Riyadh could have sustained that.
After all, the Kingdom owed its current affluence to oil riches. It needed markets to make money and meet its growing financial obligations and expectations of a booming generation. Increasing capacity and hence its market share was perhaps the only way to sustain its growing economy.
Thus despite some analysts still talking in terms of Saudi Arabia adopting for itself, rather stealthily now, the role of a swing producer so as to balance the markets — if absolutely required — the Kingdom now publicly professes of discarding for itself the self-carved role of a swing producer. Riyadh simply can’t afford to do that, analysts here in Dhahran, the virtual global energy capital, concede today.
History now appears to be repeating now, though in a different mould. Wittingly or unwittingly, Iraq now appears to be taking up the role of ‘swing producer.’
“Iraq seems to be the new swing producer in OPEC,” says John Kingston, global director of oil at Platts. “While Iraq’s geological upside is enormous, the infrastructure of the industry remains threadbare, and it is obviously an easy target of insurgency. At this point, it’s difficult to imagine a jump of several hundred thousand barrels per day of output, but it’s not that difficult to imagine a decline of that magnitude,” Kingston argues.
And he had reasons for that. A recovery in Iraqi volumes boosted OPEC production by 240,000 barrels per day (bpd) to 29.92 million bpd in February from 29.68 million in January this year, a Platts survey of OPEC and oil industry officials showed earlier this month.
The biggest single increase in the total OPEC production for the month was boosted by Iraq, whose overall supply rose to 1.79 million bpd from 1.53 million bpd in January. And the role of Baghdad, as the new, emerging swing producer, becomes all the more apparent, when one views it from the angle that excluding Iraq, the total output from the remaining 10 OPEC members dipped by 20,000 bpd to 28.13 million bpd over the month. This was despite production increments, though much smaller in quantum when compared to the boost from Iraq, from three other countries. These included Libya, Saudi Arabia and the UAE having contributed of this reported rise in production in February over January.
The latest estimates show that the OPEC – 10 today is producing just 130,000 bpd in excess of their current output ceiling of 28 million bpd, rolled over in its last ministerial moot in Vienna. A glance at the individual production levels of the OPEC 10 is hence sufficient to generate some concerns in some quarters. While several members such as Saudi Arabia, Kuwait and the UAE are producing comfortably above the assigned quotas, Iran, Venezuela and Indonesia seem to be finding it hard to meet their production output quotas and are producing below that level.
Interestingly Iran is often regarded as a hawk within OPEC clamoring for tightening the global crude markets. Yet there seems pure calculation behind that. With a reportedly high depletion rate in some of its producing fields and experiencing difficulty in selling Soroush/Nowrouz crude, Iran has not managed to produce its 4.11 million bpd quota, ever since it came into effect in July 2005.
And in this perspective, contrary to its potential, Baghdad currently plays only a marginal role in the global oil markets, for obvious reasons. Yet its role in the industry cannot be marginalized for ever. The war-torn country today sits on 11 percent of the worldwide proven oil reserves of 1,050 billion barrels. This enhances its potential long term significance for international oil supplies. Experts believe Iraq’s share of oil reserves might even be higher. If potential reserves are to be included, and if at least some of the US projections and forecasts about Iraq are to be believed, Baghdad could boast of holding as much as 432 billion barrels.
The role of a swing producer may thus befit Baghdad this new stature.
And until the moment Iraq could get over the insurgency and the currently ongoing civil war, if at all, it would be forced to continue to play the role of a swing producer, though reluctantly. Uncle Sam definitely did not plan it this way!