Oil Wars

In recent posts I have hammered away at the notion that Chavez either has no development plan at all or at the very least is taking his sweet time in implementing whatever plan there is.

In the meantime Venezuela is living off its oil bonanza, wasting tonnes of money, and is extremely vulnerable to any significant and long term decline in oil prices.

From Chavez's behaviour he seems to think high oil prices are here to stay.

As he may find out the hard way over the next few years that is not necessarily the case.

Oil prices could be driven down over the next few years and the reason can be summed up in one word:

IRAQ

With major western oil companies locked out of most countries with large reserves and OPEC therefore having a strangle hold on increasing production the U.S. has looked to Iraq to provide access to it oil and push down prices by ignoring OPEC quotas and ramping up production.

In the 1990s the U.S. hoped that Venezuela, who had allowed its oil industry to fall under the control of pro-U.S. right wing elements, would bust OPEC by maximizing production and driving down prices. That strategy almost worked, except that Chavez then got elected and deep sixed that strategy.

Plan B was then Iraq, the invasion of which should have given the U.S. complete control over Iraq's oil.

Of course, it is well known that the U.S. went to war in Iraq largely to control its oil reserves. Even dimwits like Alan Greenspan have understood that. And the Wall Street Journal touted the Iraq war as the United States best anti-OPEC action in its editorial pages.

Oil may not have been the only reason for the U.S. invasion, but it was certainly a big one. With up to 115 billion barrels of light sweet oil Iraq has the possibility to become the second largest producer of low cost, high quality oil in the world after Saudi Arabia. And given that Iraq's oil is of such high quality (ie, easily refinable) and easily accessible (ie, it is on land) Iraq could potentially ramp up production very quickly.

Yet to date Plan B has not worked out either. Iraq's production has been stymied by virtue of Iraqi's resisting the U.S. occupation and not being easily subjugated. The fact that the Iraqi resistance has put up such a valiant and effective resistance is probably as responsible as anything for today's high oil prices.

Yet that the Iraqi resistance is both legitimate and effective by no means guarantees that it will win. Many insurgencies throughout history have failed. And given that the Iraqis are up against the worlds one military superpower it both amazing and testament to the Iraqi's valor that they have yet to be defeated.

However, over the past six months the military situation in Iraq seems to have turned in the United States favor. While there are ebbs and flows to any war and this one is far from decided it does appear that the United States may finally be prevailing. U.S. casualties are down, the Iraqi military has been built up to some extent, the civil war in Iraq seems to have run its course, and segments of Iraqi society that formerly resisted seem to have either been bought off or beaten down.

So while a U.S. victory is not assured it has to be considered a real possibility.

What does that mean for the oil industry and Venezuela? Simple. The Iraqi oil industry may start ramping up production dramatically over the next few years and working to undermine prices.

In fact, we are already seeing the first signs of this. Witness this report from last week:

Securing its oil pipeline, Iraq can increase production and exports

BAGHDAD, June 13 (UPI) -- More of Iraq's oil has seen the light of day and exports have realized post-invasion records as measures to stem attacks and other interference have proved successful along the key northern pipeline system.

Some who used to target the pipeline -- especially on the link from Baiji north through hot Sunni Arab insurgent territory and to Turkey -- are now paid to protect it, though long-term success is far from guaranteed.

"The export pipeline was under attack constantly last year this time," Oil Minister Hussain Shahristani told United Press International during an interview in his Baghdad office.

"Since then, with the awakening of the tribes in the region, we have recruited some young men from these tribes into our Oil Protection Force, and they've been doing a very good job defending those pipelines," he said. "We have really eliminated all the attacks, and that's why we've been able to export more."

The yearlong effort comes just in time: Iraqi oil exports passed the 2 million barrels per day average last month as oil continued climbing to record prices.

Overall oil production averaged 2.55 million bpd in May, "and we'll keep on adding to it toward the end of the year," Shahristani said. "We are planning to reach 2.8 (million) to 2.9 million bpd."

In other words, Iraq intends to add another 4 to 5 hundred thousand barrels to world markets this year alone. This may not sound like much but in fact it is huge. Oil is a commodity with a HIGHLY inelastic price cure (meaning very small changes in supply or demand cause very large price fluctuations). While this may not drive down prices that much their increasing production on this scale in future years may.

And they are planning to do just that as today's New York Times outlined:

Deals With Iraq Are Set to Bring Oil Giants Back

BAGHDAD — Four Western oil companies are in the final stages of negotiations this month on contracts that will return them to Iraq, 36 years after losing their oil concession to nationalization as Saddam Hussein rose to power.

U.S. Blames Shiite Leader for Deadly Baghdad Blast (June 19, 2008) Exxon Mobil, Shell, Total and BP — the original partners in the Iraq Petroleum Company — along with Chevron and a number of smaller oil companies, are in talks with Iraq’s Oil Ministry for no-bid contracts to service Iraq’s largest fields, according to ministry officials, oil company officials and an American diplomat.

The deals, expected to be announced on June 30, will lay the foundation for the first commercial work for the major companies in Iraq since the American invasion, and open a new and potentially lucrative country for their operations.

The no-bid contracts are unusual for the industry, and the offers prevailed over others by more than 40 companies, including companies in Russia, China and India.

Got to love those no-bid contracts!!! And what no French companies are getting in on the spoils? I guess the U.S. puppets, under orders from you know who, are following the "no troops, no oil" philosophy.

For an industry being frozen out of new ventures in the world’s dominant oil-producing countries, from Russia to Venezuela, Iraq offers a rare and prized opportunity.

While enriched by $140 per barrel oil, the oil majors are also struggling to replace their reserves as ever more of the world’s oil patch becomes off limits. Governments in countries like Bolivia and Venezuela are nationalizing their oil industries or seeking a larger share of the record profits for their national budgets. Russia and Kazakhstan have forced the major companies to renegotiate contracts.

The Iraqi government’s stated goal in inviting back the major companies is to increase oil production by half a million barrels per day by attracting modern technology and expertise to oil fields now desperately short of both. The revenue would be used for reconstruction, although the Iraqi government has had trouble spending the oil revenues it now has, in part because of bureaucratic inefficiency.

For the American government, increasing output in Iraq, as elsewhere, serves the foreign policy goal of increasing oil production globally to alleviate the exceptionally tight supply that is a cause of soaring prices.

This pretty much sums it up - the U.S. can bring down oil prices, make a bunch of money for itself, and cut Venezuela, Russia and Iran down to size all in one fell swoop by winning in Iraq and asserting control over its hard won prize - Iraq's oil.

And make no mistake, after thousands of its soldiers being killed and hundred of billions of dollars spent the U.S. WILL control Iraq's oil. No way are some worthless puppets going to be allowed to control it.

David Fyfe, a Middle East analyst at the International Energy Agency, a Paris-based group that monitors oil production for the developed countries, said he believed that Iraq’s output could increase to about 3 million barrels a day from its current 2.5 million, though it would probably take longer than the six months the Oil Ministry estimated.

Mr. Fyfe’s organization estimated that repair work on existing fields could bring Iraq’s output up to roughly four million barrels per day within several years. After new fields are tapped, Iraq is expected to reach a plateau of about six million barrels per day, Mr. Fyfe said, which could suppress current world oil prices.

Yup, 6 million barrels per day of oil is the stated goal and it would "suppress" oil prices. Are you paying attention, Chavez?

In an interview with Newsweek last fall, the former chief executive of Exxon, Lee Raymond, praised Iraq’s potential as an oil-producing country and added that Exxon was in a position to know. “There is an enormous amount of oil in Iraq,” Mr. Raymond said. “We were part of the consortium, the four companies that were there when Saddam Hussein threw us out, and we basically had the whole country.”

And maybe, just maybe, if the Iraqi people lose this fight Exxon will have the whole country again.

If that happens, it won't be just the Iraqis who lose. Countries like Venezuela who make virtually all their money off of oil will also feel the effects in a dramatic way.

If this isn't a reason for Chavez to get his head out of his ass and start fixing his economy and come up with a serious development plan I don't know what is. His good fortune can't last forever, and it may be running out faster than many currently think.
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