Oil Habits Die Hard

Juan Cole over at Informed Comment takes on the Iraq is all about oil theme from a different perspective and hits the nail on the head – bad policy, an illegal war, and a complete clusterf??k since the war begain, have contributed to increasing the US – and the world’s – dependence on Saudi Arabian oil.

Aside from oil shut in due to political instability in regions such as Iraq, Saudi Arabia remains the sole swing producer that can quickly open the taps.

Unfortunately for oil product consumers everywhere, the incremental oil available is not the light sweet crude that most refiners want to see, so even more barrels per day is not a guarantee of lower or even stable prices.

Also the overall mix of of OPEC originated oil is getting heavier and more sour:

June 15: At present the API gravity for the new Basket is heavier, at 32.7º compared to 34.6 º for the previous basket of seven crudes. In addition, the sulphur content of the new Reference Basket is more sour at 1.77%, compared to the previous basket of 1.44%. (OPEC)

Iraq has significant oil reserves and could be a swing producer at least in the short term, if only it were stable. The sad reality is this: if Saddam Hussein were still there, world oil prices would be lower today, perhaps by as much as 30 – 50% lower. Why? Supply and demand count for more than any implied terror premium that may exist.

Pre-war, Iraq – even under UN sanctions – was exporting more oil on a more reliable basis and was increasing production steadily after 1996 to a high near 2.6M bbl/d, the highest level since Gulf War I when Hussein attacked Kuwait.

Now, Iraq now imports gasoline thanks to the war on terrah, where before it was self sufficient. Iraq exports less oil now than it did before sanctions, down to approximately 1.6M bbl/d at present. Its a volatile situation with attacks on oil pipelines and facilities being routine there.

To put this in context, for a world which is already running on the knife edge of supply and demand, taking more than 1 percent of world production off-line indefinitely is why we have $60+ oil today.

Today the Bush administration can’t even be certain that its investment in Iraq, likely to topple over 1 trillion dollars by the end of the decade, will ever be recouped. Some Iraqi oil fields apparantly were managed very badly, perhaps permanently damaging their long-term viability. Iraq may not be able to ever regain its peak oil production of 3M bbl/day.

Its easy to make a case for increased reliance on Saudi oil, when the protagonists tell you its true. Today, noted an article in the NY Times via the International Herald Tribune:

Thaw reflects reality: U.S. relies on Saudi oil August 6 2005: “There has been a realization in Washington that we need the Saudis,” said Jean-François Seznec, a professor at Columbia University’s Middle East Institute.

“The tone has improved tremendously,” he said. “We cannot be enemies with everybody. We need their oil desperately.”

“The Saudis are in a great position today,” he added. “They can play the United States against other buyers, like China. And why wouldn’t they?”

Indeed.