Saturday, January 21, 2006

Some Facts in an Era of Spin

The spin from the White House and its supporters is that the United States is doing very well and the president knows what he's doing.

Yesterday, the stock market dropped more than 200 points and the price of oil, after drifting down to $58 a barrel has suddenly gone back up to $68 a barrel; one week of economic bad news is not necessarily a trend but there are things to consider. Let me stay with the oil prices for this post.

The rise in oil prices is attributed to problems with Nigeria and Iran. An added issue, though not mentioned as often, is that we are no longer drawing off our reserves or off the loans given to us by the Europeans and Japanese in the aftermath of Hurricane Katrina. Also little noticed is that the United States is still producing less oil than it was last year at this time, and, not counting the loans given to us, we are also importing more oil than we were early last year. I'm no expert in these things but it would be reasonable to surmise that after a high of $70 a barrel after Hurricane Katrina, the downward drift in oil prices we have seen for the last few months, as a result of using the strategic reserves and utilizing the loans given us, has finally stopped and might, in an environment free of political crises, lead anyway to a slow increase in prices.

Now Iran is the main reason we have seen a sharp price hike in the last two weeks. The possibility of military action against Iran is in the air and the possibility that Iranian oil might be cut due to sanctions or due to military action or due to Iran turning off its supply in retaliation for any military strike is causing the prices to go up.

And then we see articles like this by Raymond J. Learsy:
The New York Times, always happy to be supportive of the oilpatch/ OPEC mantra of impending shortage and disaster underpinning ever higher prices, pontificated in its "Energy Impasse" editorial the day before "Today's global market is so tight, there is little spare capacity left....There's no shock absorber left...That leaves us with zero options when it comes to leverage against these oil producers."

What the Times and the press generally overlooked telling us was as follows. Iran produces some 4 million barrels a day of which 2.6 million are exported. The Nigerian production loss is approximately 200,000 barrels a day, a shut down that in all likelihood will be shortlived. Assuming a worst case scenario, that Iran stops all exports for a year and Nigerian production is similarly impacted the loss of supply to the world market would be a billion barrels of oil.

At this very moment, according to the International Energy Agency (the I.E.A.) stock levels held by I.E.A. members alone are at 4.1 BILLION BARRELS OIL. Of these 1.4 billion are held in strategic government reserves and the balance are held commercially. The United States alone holds 700 million in its Strategic Petroleum Reserve whereas our commercial reserves today approach 318 million barrels, some 30 million barrels greater than a year ago.

Mr. Learsy then goes on to suggest that the United States and its allies should call Iran's bluff and dare it to turn off it oil. But there are a few things to consider:

1. The world's oil producers are having trouble meeting demand. The rapidly growing economies of India and China must be factored in but it's also important to remember that without India's and China's booming economies, oil demand generally rises most years.

2. A drop of 1.0 million barrels a day of US oil production was sufficient to push oil to $70/barrel and gasoline to $3.00/gallon. What will a drop of 2.6 million barrels a day in world production do to the price of oil?

3. Can the United States rule out oil producers dropping production out of sympathy for Iran? Depending on the amount involved, this could greatly aggravate the world economy.

4. Mr. Learsy points out a potential reserve of 4.1 billion barrels. That sounds like a lot but it isn't. Now he's talking about using the reserve to supplement production from elsewhere but a realistic way to look at these things is to ask how long that reserve would last if it was the only source available. If the United States were the only user of that reserve, it would last about 150 days. If the whole world were using that reserve, including us, it would last a little more than 37 days. Notice that Mr Learsy says we have 30 million more barrels in commercial stocks than we did last year; 30 million barrels of oil is what the US uses in a day and a half.

5. If we were to dip into a reserve during a confrontation with Iran where the oil was cut off or dramatically reduced, there's an added problem. Each day our own reserves grow smaller, the more vulnerable our economy becomes. The damage from Hurricane Katrina would have hit our economy much harder if we did not have our own reserves to draw on as well as the reserves of Europe and Japan. A reserve is like insurance; it is in a sense a guarantor of our economic strength. At the end of the day, a reserve needs to be replenished and even if we are successful in our confrontation with Iran, the cost of replenishing that reserve will be great.

6. These kinds of oil scenarios depend on everything going as planned. But already we see signs of trouble in Nigeria. We see Russia willing to use oil as a weapon. We even see Russia unable to handle severe cold weather which in recent days has hampered its oil production. Iraq's oil production is still erratic. And it's possible we'll face yet another hurricane season this year like the one we saw in 2005. And we still have a president without a viable long-term energy policy and in the last year we have clearly been seeing the result of lacking such a policy.

7. And before people get too gung ho about dealing with Iran in a heavy-handed manner, it's essential to remember who is running Washington: the gang that can't shoot straight.

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