Mike Sumrow
Drilling Editor
SAN ANTONIO, Sept. 27 -- Calls for oil importing countries—particularly the US—to reduce their dependence on Middle East oil by securing their supplies elsewhere or by switching to other fuels don't jibe with reality, a top industry analyst told the International Association of Drilling Contractors annual meeting today.
"We have to be realistic. There are just certain basic realities, and even if we could change those realities here in the US, we're in a global market," said Amy Myers Jaffe, senior energy advisor and project coordinator for energy research at Rice University's Baker Institute for Public Policy, Houston.
With international markets driving energy prices globally, Jaffe added, "Even if you just look at the percentage of oil that comes from countries that the US State Department calls 'countries of concern,' you're talking about . . . 10% of the market." She highlighted the point by showing a slide listing Iran, Iraq, Syria, Sudan, and Libya, with 8 million bo/d of combined exports.
Middle East
She explained that the discussion about diversifying oil supply must be tempered by the fact the Middle East currently contributes 30% of global production and Saudi Arabia alone contributes 10%.
Referring to discussions in the media about the possibility of Russia replacing Saudi Arabia as the world's dominant producer, Jaffe explained that consuming countries should not view raw production numbers from both countries equally.
From a financial and geological vantage point, She said, "Saudi Arabia is in a unique position that no other country in the world is in. They can, in a 1-3 month period, replace the exports of any other single country in the world. There's no other country that's even close to having the capacity to do that."
Despite criticism the Saudis may have received in recent months, Jaffe explained that the reality is that Saudi Arabia has been a steadfast ally of the oil-consuming developed nations for 3 decades in terms of managing oil markets, filling a critical role where there has been no substitute.
She reinforced the point by showing a graph of current crude exports by country, highlighting the significant difference in the volumes exported by Saudi Arabia, which was first on the graph, followed by Russia that was a distant second at about half of the volumes.
Jaffe explained that the terrorist attacks of Sept. 11, 2001, in addition to creating a greater push for the US Congress to pass an energy bill, have left the general American population with a negative attitude toward certain Middle East countries. This in turn is reflected in the US political dialogue and even influence US options for an energy policy.
Referring to the US public's perception of Saudi Arabia, Jaffe said, "It's going to be a difficult balancing act for those in the senior reaches of (the US) government to understand the importance of this country on a geopolitical level and manage the populists' estimates against this country and make it work in a constructive fashion."
Russia
The Russia-US relationship has developed along a strategic overlap that neither side had predicted or recognized. Jaffe said, "Probably there are some structural reasons why it will stay this way."
Russia and the US have a lot at stake in maintaining international security and peace in countries that border Russia. Jaffe explained that the Taliban government in Afghanistan was a major challenge for Russia in the region, and in this new post-Taliban era, Russia and the US are on the same page on the issue.
She said, "Because it was such a critical issue for both countries, we can now sit down and talk about where US oil companies will participate side by side with Russian companies or talk about the role of (the North Atlantic Treaty Organization) in Europe as a stabilizing force."
Long-term trends
Jaffe said, "China is going to increasingly be an oil importer. They will build their ties in the Persian Gulf and also to Libya and the (other) African countries. That is going to dramatically change how we perceive China."
She pointed out that trade and Asian issues had influenced the relationship between China and the US in the past. China will increasingly have more of a global outlook, affecting its foreign policy, which in turn will affect Beijing's relationship with the US.
Jaffe explained that from the perspective of being a net oil importer, China will have many of the same issues and concerns of the US, which could include the need for a stable Middle East and stable and safe shipping sea lanes.
There are a lot of positives, but there are also a lot of concerns over the development of bilateral relationships between China and the "countries of concern," Jaffe noted. The possibility of exchanges of oil for military hardware could arise. "It's going to be something you'll read about more and more in the newspapers," she said.
Jaffe believes that the promise of oil exports from South America will "dry up" because of problems with security issues, failure of the International Monetary Fund economic model, difficulties in organizing the energy business in the region, and investment risk. And as a result, she said, "Africa is going to become an increasingly important oil source for the US and Europe."
Mutual dependence
Jaffe makes the case that producing and exporting countries are mutually dependent on each other and, despite political differences that arise, nothing will likely change the codependency.
She makes the point by citing statistics about the US consumer's contribution to the global oil trade and the strength of the Organization of Petroleum Exporting Countries. During 1991-2000, US crude imports growth contributed to 33% of the increase in global oil trade. During the same period, US oil imports growth accounted for almost 56% of OPEC's output increase.
Jaffe makes the case that for either side to lose the market for crude or the source of that crude would create a serious hardship.
