Oil markets are in turmoil. Despite all the efforts of Saudi Arabia, it seems the prices are not going to come down in the immediate future. When the invasion of Iraq was being planned — and executed — it was felt by some in Washington and perhaps elsewhere also in the Western world that world’s largest economy would no longer be dependent on oil supplies from an instable, erratic and “undemocratic” region. The invasion of Iraq, they felt, would not only reduce their dependence on countries in the region but it would also provide them with direct leverage on a country which has the second highest proven oil reserves in the world — Iraq.
However, the strategy, pursued despite open warnings from all the responsible states in the region, is extracting a price of its own. An Australian economics professor, Warwick McKibbin, co-authored a study on the economic implications of the war on Iraq. The study was made and presented before hostilities commenced. The study considered a long war with higher oil prices of around $40 a barrel. It then concluded that even a short conflict could have a broad economic cost of $173 billion in 2003, rising to $1.04 trillion by 2010, while a longer, bogged-down war could cost $237 billion in 2003, rising to $3.57 trillion by 2010.
The fact that the Iraqi situation is yet to be resolved tends to present an above average level of risk regarding the situation in the Middle East and thus one is paying more for crude oil. A senior analyst with Moody’s Investors Service said, “There is always the worry that the problems could spread in a manner than eventually disrupts shipments of crude from the Middle East and the Gulf. In turn, that could drive energy prices up to levels that could materially curb economic activity worldwide,” the analysts added. And in sharp contrast to that, Saudi Arabia has been trying to appease market sentiments. In order to stabilize the markets, the Saudi oil minister has called on fellow OPEC members to raise oil output by 2.3 to 2.5 million barrels per day, when it meets in Beirut on June 3. This is even higher than the much discussed about 2 million barrel output increment proposal. The minister said that Riyadh was now pumping 9.1 million barrels per day (against its output quota of 7.63 million barrels per day) to satisfy demands from its customers, and is ready to boost output to 10.5 million bpd in June, if required.
“When asked if the Kingdom were concerned with oil prices over $30 a barrel, he said: “No one is concerned by $30 or $35 a barrel. Now the market is hoping for $35, because it is concerned about $50 a barrel.”
OPEC President Purnomo Yusgiantoro despite admitting the fact that the oil producers’ group was “deeply concerned about the continuing rise of oil prices in recent weeks” clarified that these are not because of OPEC’s fault nor inadequate supplies could be blamed for it.
And Saudi Arabia is seeking to stabilize the markets by increasing the supplies even at the cost of nauseating some of its fellow members within the OPEC. There is a definite opposition to the Saudi proposal of increasing the output. Libya and Venezuela have openly expressed they would oppose the Saudi proposal when it comes up for discussion in Beirut on June 3. A senior OPEC delegate from a third country that opposes the Saudi move told a news agency: “I feel there’s going to be a lot of resistance to the Saudi idea in Beirut. The fear is that when prices start going down, it won’t be $1 or $2, it will be $10 (a barrel).”
