Security of demand, the rising concern of oil producers, links inevitably with security of supply, a worry of consumers. An official of the Organization of Petroleum Exporting Countries Secretariat repeated this verity of the oil trade at a press conference in Vienna last month. Consuming nations should heed the message. OPEC members should, too.
OPEC members, pointed out Mohamed Hamel, head of the Energy Studies Department, are investing more than $120 billion in at least 120 projects to boost crude oil production capacity in 2012 by 5 million b/d. They’re also investing more than $60 billion to raise refining capacity by more than 3 million b/d in the same period. Hamel said the investments show OPEC’s commitment to stability of oil supply. He’s right.
Demand uncertainty
As other OPEC officials have been doing lately, Hamel extended his analysis to demand uncertainty, that bane of investment planning. The global need for OPEC crude in 2020 could be as high as 41 million b/d or as low as 32 million b/d, he said. Ten years later the range could be 36-49 million b/d. Much of the uncertainty comes from efforts by consuming nations to displace imported oil with more-expensive alternatives.
OPEC might be wasting resources on production capacity the market won’t need, Hamel pointed out. Emergence of large amounts of unneeded capacity would suppress oil prices and the incomes of OPEC members. The diminished revenue would depress investment in future capacity. “All of this demonstrates the inseparability of security of demand and security of supply,” Hamel observed with unassailable logic.
But the two types of security are linked in other ways that shouldn’t escape OPEC’s notice.
In August, Bolivia began cutting gas exports under several contracts with buyers in Brazil and Argentina. It can’t meet all its delivery commitments because exploration and development have stalled. They’ve stalled because the government of President Evo Morales in May 2005 hiked taxes on production and a year later renationalized the oil and gas industry.
Bolivia does not belong to OPEC. But at every step of the evisceration of the industry that represents his pitiful country’s best hope for prosperity, Morales received counsel from Hugo Chavez, president of Venezuela, an OPEC founding member.
The Venezuelan strongman is of course evangelizing his socialist populism throughout Latin America, buying political support with cut-rate crude and chasing international capital away from Venezuelan oil and gas fields. Like Morales in Bolivia, Chavez is gutting his country’s oil and gas producing industry, which is of course much larger than Bolivia’s and takes longer to show the wear. His talk about raising Venezuelan production capacity to 5 million b/d by 2012, while foreign oil companies are leaving or slashing investments, is laughable. Even OPEC tacitly acknowledges with its latest quota assignment what everyone else knows: that Venezuela’s capacity to produce oil is far less than what the country claims to be producing.
The world’s oil buyers thus have reason to expect Venezuela to become as unreliable a supplier of oil as its vassal Bolivia has made itself with gas. Chavez does his best to confirm the suspicion with regular threats to suspend exports to the US, his biggest oil customer and favorite demon.
Unsavory faces
To the consuming world, the smirking Chavez has become one of many unsavory faces of oil. Another is Iranian President Mahmoud Ahmadenijad, who wants to obliterate Israel, seems to be developing nuclear weapons, and fronts for a regime notorious for supporting terrorism. When the rogue leaders of OPEC’s third and fifth-largest oil producers embrace, as they increasingly do, the consuming world, especially the US, sees more than insecurity of oil supply. It sees geopolitical menace suffused with petroleum.
This is one of several reasons why politics in the world’s largest oil-consuming country seethes with antagonism toward oil. If security of supply and security of demand are inseparable, as Hamel noted, so are insecurity of those market fundamentals. OPEC members truly committed to market stability can’t afford to ignore a marketing problem that’s aggravated at every opportunity by their least stable colleagues.
