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Vol. 232 No.3 |
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| PRAMOD KULKARNI, EDITOR |
Instability at Internet speed
Political upheaval in the Arab world is spreading like wildfire. Apparently enabled by Facebook and Twitter, the youth movement has toppled governments in Tunisia and Egypt relatively peacefully in a quick, domino sequence. In Libya, however, there is the threat of an extended civil war between the army units that defected against orders to fire on their own people and mercenaries brought in by Col. Moammar Gadhafi to augment his core supporters. As street protests take place in nearby Bahrain, Saudi Arabia has instituted $36 billion in pay increases, unemployment benefits and housing loans to forestall the spread of revolutionary fervor to the streets of Riyadh. Since the Middle East is the supplier of oil and gas to the world, the current turmoil will have both short-term and long-term consequences for our industry.
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Rising oil prices. Instability is anathema to oil markets. Crude oil prices, particularly for Brent, have gone up in response to each uprising in the Arab nations. While Brent crude comes from the North Sea, it is closer in composition to the oil from Saudi Arabia than West Texas Intermediate. As a result, Brent reacts more quickly to geopolitical events. In time, however, both Brent and WTI will experience upward pressure, with daily fluctuations in response to negative or positive news from the Middle East.
Evacuations and oil disruptions. As protests gained momentum, Western oil and gas companies reacted by evacuating families and administrative staff. British Gas, a leading producer in Tunisia, evacuated its nonessential staff, but kept production activities going using local staff. When protests began in Egypt, Statoil and BG evacuated staff and stopped selected drilling projects, but kept production steady at pre-protest levels. Apache continued to operate its production facilities, which are primarily located in the remote Western Desert.
The heightened violence in Libya, however, has added urgency to the evacuations from a country that appears to be on the verge of a bloody civil war. International companies and governments have been sending planes and ferries to move their employees and citizens out of the country. Shell, BP and Wintershall are in the process of evacuating expats and suspending operations. Eni has evacuated nonessential staff, but is keeping the production flowing for the time being.
Swing production. Libya’s production peaked at 3 million bopd in the 1960s and was about 1.6 million bopd in 2010, slightly above the OPEC quota of 1.47 million bopd. If this production is lost due to a civil war, it will surely have a significant negative impact on oil markets. In an effort to calm the jittery markets, Saudi Arabia’s oil minister, Ali al-Naimi, has promised to open taps to make up the difference. “OPEC is ready to meet any shortage in supply when it happens,” Naimi told a meeting of ministers of oil producing and consuming nations in Riyadh. About 85% of Libya’s oil exports go to Europe. After three to four weeks of startup operations, Saudi Arabia could produce up to 4–5 million bopd of its spare capacity.
Dutch disease. According to preliminary analyses, the protest movements in the Arab nations are fueled by high food prices and the lack of economic opportunities. One wonders how these dire needs will be met by a regime change, even if it is democratic in nature.
Many economists say that oil-rich countries in the Middle East are affected by an economic malady called the Dutch disease. The British magazine The Economist coined the term in 1977 to describe the slowdown in the Dutch manufacturing sector after the discovery of a major natural gas field in 1959. Essentially, the boom in oil production deprives the manufacturing sector of resources such as labor and capital investments. After the natural resource runs out, the manufacturing sector continues to lag due to the lack of steady investment.
Whether or not the Dutch disease is a factor in the Middle East, it is true economic activity in the oil-rich countries is not diversified. The general population is treated to food and economic subsidies that will be unsustainable if the oil income dries up. It will take decades of concerted economic discipline to create a free market economy with a thriving manufacturing and services sector that can provide viable employment opportunities.
Sharpening agendas. Instability in the Middle East has enabled a variety of parties to further their agendas. With pro-US nations reeling, Iran flexed its muscles by sending two of its warships through the Suez Canal. The New York Times columnist Thomas Friedman railed once more against US dependence on Mideast oil and called on the Obama administration to raise the gasoline tax and use the additional revenues to provide incentives for renewable sources. Of course, Friedman did not mention the restart of deepwater drilling in the Gulf of Mexico as an option to reduce oil imports.
The Mideast turmoil has caught almost everyone flat-footed. President Obama called the CIA chief on the carpet for being unaware of the impending unrest. One imagines Osama bin Laden having a similar conversation in a cave between Afghanistan and Pakistan with his intelligence chieftains. How the events will unfold and affect the oil and gas industry may continue to surprise and confound us all. 
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