BUSINESS

Scare not scarcity behind soaring oil prices

OIL SECURITY: A general view of an oil installation in Saudi Arabia's northeastern Gulf port of Jubail. In 2003, the kingdom spent as much as $5.5 billion on oil installation security and the budget goes up every year. — Photo: AFP

OIL SECURITY: A general view of an oil installation in Saudi Arabia's northeastern Gulf port of Jubail. In 2003, the kingdom spent as much as $5.5 billion on oil installation security and the budget goes up every year. — Photo: AFP  

Most of the price increase can be attributed to the `scare' factor, leading to apprehensions of `scarcity'.

GLOBAL OIL prices seem to be resolutely northward bound — and at a brisk pace. Oil-importing countries around the world are watching helplessly and with deep concern. For India which imports almost three out of every four barrels of crude it consumes, the price increase could not have come at a worse time.

Having aligned the domestic market prices of most petroproducts to global market trends, the Government has an onerous task — of keeping inflation in check and ensuring affordable fuel for millions of middle-class automobile owners whom the slender public transport system can hardly service. It is considering cutting duties on petroproducts to cushion consumers, an option that is not painless.

What is causing the relentless upward spiral in crude prices? The current rather tight demand-supply situation has rendered prices rather sensitive to even minor variations in demand.

But more than actual variations in demand, the apprehension of a potential drop in supply has been driving up crude prices. In a nutshell, most of the price increase can be attributed to the `scare' factor, leading to apprehensions of `scarcity'.

Crucial Saudi role

The scare stems from a series of terrorist attacks on critical oil infrastructure in Saudi Arabia and Iraq in the past few months. Saudi Arabia is the queen bee in the OPEC cartel accounting for a third of the latter's output.

It is also the only `swing producer' — one with spare capacity to increase or decrease output in response to market signals. In fact, Saudi Arabia alone, among oil producers, has the ability to cause global oil price swings. Therefore, any attacks on Saudi oil installations can cause tremors in global oil markets.

In the first seven months of 2004 alone there have been six attacks on oil installations in Saudi Arabia. On May 29 this year, extremists attacking Al Khobar, the heart of the world's largest oil installation went on a 25 hour rampage through the compound, killing 22 persons and creating panic. The attack was targeted at expatriates working on Saudi oilfields. In June, Al Qaeda terrorists kidnapped an employee of a multinational company and gunned down another, both U.S. nationals. On May 1, gunmen killed six people in an attack in the Red Sea city of Yanbu. In a suicide car-bomb attack against a government building on April 21, ten people were killed and 150 people were wounded. While all those killed were not oil industry workers, the oil markets have reason to feel jittery.

There are as many as 3,400 western staff employed in Saudi Arabia's oil industry alone and the jihadis have made it abundantly clear that they want them out. The Ras Tanura export terminal alone handles 4.5 million barrels of crude every day. A single attack on this site could have disastrous consequences for the global oil markets.

So far, Saudi security forces have shown themselves to be rather inadequate to deal with the threats. In 2003, the kingdom spent as much as $5.5 billion on oil installation security and the budget goes up every year. Jane's Intelligence Review reports that at any time there are upto 30,000 guards protecting the kingdom's oil infrastructure. Hi-tech surveillance equipment has been installed in every oil facility. There are more than 4000 tankers entering and leaving the ports of Saudi Arabia and these are escorted by Saudi naval vessels with F-15 aircraft providing aerial cover. Yet, terrorists have been able to infiltrate the security net and shoot their way through, exposing glaring chinks in the system. Despite the fact that these attacks did not result in loss of even a single drop of oil, the terrorists seem to have achieved their objective of creating panic in the markets.

The scare factor is not confined to Saudi Arabia. Last year there were as many as 35 major and minor attacks on oil installations in Iraq. In April this year, a suicide attack knocked out two of Iraq's largest terminals severely jeopardising its capacity to return to pre-war levels of oil export. The damaged al-Basra terminal accounts for 85 per cent of Iraq's crude exports. In the southern holy city of Najaf where a pitched battle is raging between the Shiite Muslim radical leader Moqtada Sadr and the occupation forces, threats of damage to Iraq's southern oilfields sent world crude prices soaring. In fact, from August 10, Iraq's Southern Oil Company stopped pumping owing to fear of damage to pipelines, even as prices hover precariously close to the $45 a barrel mark. The southern oilfields are the only source of Iraqi crude exports as an attack on a pipeline artery to Turkey stopped deliveries from the main northern oilfields last week. Analysts estimate that terror premium alone could be around $10 a barrel in the prevailing price. If there is a disruption in oil supplies because of terrorist attacks, the only producer which can pitch in is Russia. But the confrontation between the Russian government and Yukos, the country's largest oil exporter has fanned apprehensions that the company may not be able to take up the slack in supply. The Russian government renewed a freeze on the shares of Yukos's main Siberian oil unit, reviving concern that its assets will be seized to settle a $3.4 billion tax bill.

Do oil importers, therefore, brace themselves for a shock similar to that of 1973? As of now, despite the firm trend, crude prices are nowhere near the levels reached in 1973, although they have levelled with 1990 prices. The price will have to cross $56 a barrel at today's prices to reach the 1973 crisis levels. Oil industry analysts are not yet betting that it will not. Everything depends on how effectively terrorist threats to Saudi oil infrastructure are handled. Having placed all their barrels in one basket — the Mideast Gulf — energy-importers can only hope and pray that good sense and hefty security budgets will prevail.

Sudha Mahalingam

(Senior Fellow, Institute for Defence Studies and Analyses)

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