Spike then slump: chaotic crude hits Middle East

'There is no master plan - no economic plan - for really improving the region.'

oil great 88 248 (photo credit: )
oil great 88 248
(photo credit: )
As oil prices roller-coastered from record highs near $150 per barrel a year ago down to $35, many pointed fingers at traditional scapegoats OPEC and the oil sheikhs long synonymous with the group. The reasoning was that the 12-member bloc - source of more than 30 percent of the world's oil - was to blame for the spike, then doubly culpable as it struggled to engineer a rebound as prices fell during the start of the worst global recession in decades. For the Organization of the Petroleum Exporting Countries, and its key Mideast members, however, it was a question of economic survival. The price drop stunted sharp growth in Arab sheikhdoms such as the United Arab Emirates, rattled deeply entrenched political systems in places like Kuwait and Iran, and endangered security and reconstruction efforts in war-ravaged Iraq. Across the region, the petrodollar-fueled subsidy programs that serve as placebos for often disgruntled people in the politically volatile region were in jeopardy. But even as oil prices staged a modest rebound - the fruit of OPEC's rare moment of unity and quota compliance - it is unclear whether the producer group has come away from the year's turbulence any the wiser. That uncertainty carries sweeping implications for both the region and the world. "OPEC never learns from the past," Fadhil Chalabi, an economist at the London-based Centre for Global Energy Studies, said in comments echoed by numerous other experts. "They just don't look to the future." OPEC's total revenue from petroleum exports climbed to slightly over $1 trillion in 2008, more than five times their 2002 levels, according to the group's latest Annual Statistical Bulletin. From the splashy man-made islands of boomtown Dubai to Iranian President Mahmoud Ahmadinejad's penchant for costly populist projects, oil's run-up in 2007 and 2008 allowed many Mideast nations to fill their coffers and go on lavish spending sprees. The boom, however, quickly turned to bust as a global economic meltdown lowered energy demand, battered regional stock markets and real estate and dried up the easy credit of earlier years. The price collapse in the second half of 2008 - which wiped out some four years of gains in just five months - "was a sobering thing for OPEC," said Fadel Gheit, chief economist at Oppenheimer & Co. "These guys were spending money like it grew on trees." For the most part, "they were the typical nouveau riche people who go and spend money on stupid things," he said. OPEC scrambled to formulate a response, initiating a rapid-fire series of supply reductions aimed at cutting production by 4.2 million barrels from September levels. The bloc's members largely adhered to the new output quotas - a break from the past when stated policy was routinely undercut by the vastly different priorities of the group's diverse members. The cuts brought prices to within shouting distance of the $70 to $75 level that OPEC kingpin Saudi Arabia and other members say is needed to fund new exploration and production - something demanded by both the West and developing nations like China to maintain future supply. At the same time, the group's efforts to explain the need for a higher price, while also shifting the blame for the volatility in the market to speculators, appears to be resonating outside its borders. "There is greater recognition [by consumer nations] that producers need some kind of market security and stability," said Catherine Hunter, an OPEC expert with the IHS Global Insight consultancy in London. "That's helped the producer side in terms of not being constantly criticized for wanting higher prices." Western leaders have begun to seize upon the speculation theme. French President Nicolas Sarkozy and British Prime Minister Gordon Brown, in a joint letter published recently in The Wall Street Journal, called for stricter market oversight. US market regulators, at the same time, called for more transparency in how oil is traded - a point reiterated by Treasury Secretary Timothy Geithner as he met with Saudi and UAE officials during his Mideast trip last week. Even so, OPEC's victories may be fleeting. Some wonder if the group can remain unified once demand starts to picks up. "OPEC will act only when they're under pressure... when they're really up against the wall," said Olivier Jakob of energy analysis firm Petromatrix. Sticking together becomes easier, he added, "when you've got lower oil prices." Cheating on quotas becomes more likely as the members look to offset deficits and placate restless citizens by substituting cash for democracy - particularly in much of the Middle East where autocracy is the norm. Saudi Arabia, for its part, has grappled with some problems tied to the global meltdown. But the kingdom, OPEC's de facto leader, has been among the most fiscally prudent of the group's Arab Gulf members. "If anything, the volatility in prices between 2008-2009 has reinforced Saudi Arabia's conviction... about the importance of building [cash] reserves that are liquid," said John Sfakianakis, chief economist at SABB, the HSBC Holdings PLC affiliate formerly known as Saudi British Bank. Others have not been as lucky, and unrest in those countries could reverberate as loudly outside the region as within it. "There is no master plan - no economic plan - for really improving the region," said Oppenheimer's Gheit. "With that [plan], the dividend would be peace with their neighbors, democracy. But this is something they like to skirt and sweep under the rug." Iraq, which holds the world's third-largest proven reserves, faces a major budget crunch at a time when its young government is trying to rebuild after six years of war. Many also question if Iraq's fledgling army can guarantee security, especially if squabbling over oil revenues and financial strains re-ignites the sectarian fighting that almost pushed Iraq to civil war in 2007. In neighboring Iran - where oil provides 80% of the government's foreign revenue - economic woes were a key issue in the run-up to the now contested June 12 elections. Kuwait, a key US ally almost entirely reliant on oil revenue, has seen its cabinet resign twice so far this year over parliamentary complaints of mismanagement. These kinds of internal problems are what have weakened OPEC before. They have also made it increasingly unlikely, in the eyes of some analysts, that its Mideast members will secure any diversified long-term benefit from their key resource if they fail to plan and look toward the post-oil world, even if that is still decades away. OPEC needs "to view oil as finite," said Gheit. "You cannot have a welfare state forever - something has to take over." But what the bloc's members seem to keep forgetting, he said, is that "the Stone Age didn't end because the world ran out of stones, but because there were viable alternatives."