Friday, May 28, 2004

Oil and the war in Iraq

Many people opposed to the war in Iraq have believed from day one that this war is about oil. I am convinced that in a broad sense this is true, but I probably have a different spin than many people do.

Though securing access to oil was a major reason for the war, I don't believe that the Bush Administration was really trying to do a favor for the Exxon's of the world.

The "strategic" thinkers in the Bush Administration (which, of course, the boy idiot is not included in this group) know two things: 1) most of the oil reserves of the world are in the Middle East and specifically in Saudi Arabia. 2) Saudi Arabia is a powder keg which has already spawned Osama Bin Laden and Al Qaeda and could blow up like Iran did in 1979 without much provocation. They also know that high oil prices and uncertainty in supply is bad for business, bad for the US and World Economy, and bad for their re-election chances.

In invading Iraq and trying to install a puppet regime, Cheney and company were attempting to secure a secondary source of crude in the Middle East that could potentially take over Saudi's role as the swing oil producer in the world. These neocons don't really want to steal the oil, but they want the filling station open 24 hours and selling oil at a price they consider reasonable.

The recent run-up in the price of oil is, at least anecdotally, related to two things: 1) Increased demand for oil putting strains on available supplies, and 2) an premium due to increased supply risk from political instability and terror threats.

Is 40$ oil here to stay? Most major oil companies are not betting on these kinds of prices in their forecasts. Of course, the oil industry is a great herd of cows that moves in the same direction at the same time. One could have made lots of money betting contrary to major energy company price forecasts for the last 30 years.

Some other things to note, OPEC and Saudi Arabia specifically are producing close to as much oil now as they ever have historically. Is there more spare capacity as demand continues to grow and if there is some kind of supply disruption? I don't know, but I do know that there is less spare capacity now than in previous years.
For those reasons, I think the liklihood that oil will remain at or above $35/bbl is greater than the liklihood of it dropping below $20/bbl.

But then what the hell do I know.