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January 22, 2002

The Oil Outlook for 2002

By News Analysis

Amid growing tensions, 2002 brings renewed uncertainty about oil prices.

The world entered 2002 amid renewed uncertainty about oil supplies, prices and the possible impact of a threatened new Middle East conflict over global energy supplies.

Oil markets posted lower prices ahead of the New Year, as traders and analysts studied the OPEC (news - web sites) oil cartel's decision Dec. 28 to cut its members' output by 1.5 million barrels per day in an effort to prop up sinking prices.

At a time when Americans' demand for heating oil usually rises, while gasoline and other refined product demands tend to remain steady, the price of crude oil dropped by between 40 and 50 cents a barrel, to about $20.

European oil analysts say the market has now factored in the Organization of Petroleum Exporting Countries' Dec. 28 cuts. "What we are checking out now," said one, "is how toughly members like Nigeria will enforce the cuts.

One European oil brokerage firm, GNI in London, predicted that poor compliance might mean actual cuts of as little as 1 million bpd, based on past experience.

Some analysts believe that Middle East political turmoil, including possible U.S. military action against Iraq, could threaten new supply and price crises.

For American consumers and motorists, past Middle East political shocks have translated into sharp hikes and dips in gasoline, kerosene, diesel and heating oil prices.

The Bush administration and Congress are struggling to meet the challenges of 2002 with new energy legislation, as the authoritative oil journal Middle East Economic Survey reported before Christmas.

Last August, the House of Representatives passed a bill authorizing drilling in Alaska's Arctic National Wildlife Refuge (news - web sites) and granting $33 billion in tax breaks for the U.S. energy industry over 10 years.

However, Senate Democrats, with their one-vote edge, have in mind a bill calling for energy-saving measures and development of renewable energy sources.

The Bush administration and congressional Republicans prefer further reliance on oil, gas, coal and nuclear power. They want authorization to drill in the Alaska refuge, still opposed by Democrats.

Final resolution is unlikely before the Senate opens debate on energy in February 2002.

Oil Producers Take Action

In the short term, OPEC has planned to shore up limp and falling oil prices by cutting output by 1.5 million barrels per day. At a meeting in Cairo on Dec. 28, the cartel said the reduction would last for six months beginning Jan. 1.

The 11 members of the OPEC control more than one-third of the global oil supply. The cartel said it finalized the decision after reviewing statements from non-OPEC oil producers Angola, Mexico, Norway, Oman and Russia pledging reductions of 462,500 barrels per day.

The global economic slowdown and consequent dip in demand has pushed oil prices down from its peak of nearly $30 a barrel in February 2001.

The Sept. 11 terror attacks sharpened the decline. Japan, the United States and some European countries, such as Germany, dipped into recession.

Developments in the Persian Gulf and Arabian areas, where about 70 percent of the West's oil comes from, are also being shadowed by anticipated military and political upheavals in 2002.

One New York broker, quoted by London's Financial Times , said a Christmas flurry in the Gulf — when U.S. warships stopped and searched an Iranian-registered tanker suspected of smuggling embargoed oil from Iraq — helped to harden prices in December.

U.S. diplomats say reports of Bush administration plans to overthrow Iraq's President Saddam Hussein (news - web sites) have the State Department worried.

Secretary Colin Powell (news - web sites) and some of his aides, these diplomats say, are reluctant to anger oil-producing Arab states that fear domestic repercussions from such an attack. The United States imports a greater share of its oil from the Middle East — including oil from Iraq, purchased through middleman traders — than back in the 1970s.

In 1973, following the October 1973 Arab-Israeli war, Saudi Arabia declared an embargo on the United States and the Netherlands for supporting Israel. It led OPEC in a production cut. The oil market's response was a fourfold rise in prices.

History Irrelevant

The State Department argues that Americans will not support a new Middle Eastern war that endangers their lifestyle, including their unwillingness to give up gas-guzzling sports utility vehicles.

Analysts inside and outside the Pentagon (news - web sites) and other U.S. government departments argue the opposite.

The United States, as Ben Zycher, a senior economist at the RAND Corp. think tank in Santa Monica, Calif., wrote in an internal Defense Department memo, should not let oil concerns deter it from chasing down Osama bin Laden (news - web sites)'s Yemeni or Saudi connections, or widening the war to states like Iraq if necessary.

Analysts like Zycher argue that any oil shocks are likely to be short-lived and that the United States will never be cut off from foreign oil supplies — as it was not even during the drastic production cuts and price increases of the 1970s.

They add that it was domestic policy, not the Mideast turbulence, which led to gas station lines. President Richard Nixon's administration decided in August 1971 to impose price controls on oil.

It justified the measure, Zycher recalls, by telling Americans it was trying to wean them from dependence on Arab oil, so forcing consumers to share the Nixon admninistration's own fears about oil dependence.

 

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