Political Factors

This model is built on resource criteria, which show that a few Middle East countries will have a critical control of the world supply within a few years. Exactly what constitutes effective control is hard to say, but the threshold for the last oil shocks was 30%, which seems a reasonable approximation. How these countries elect to use their control and what political pressures are brought to bear cannot of course be predicted from resource considerations.

Some key elements can however be identified

  1. The pivotal role of Iraq
  2. No one quite knows the origins of the Gulf War, although some hints are given by Schweizer in his book Victory. The net consequence, however, has been the removal of 2- 3 Mb/d from the market under the embargo, which OPEC failed to achieve by its quota system. This has been sufficient to maintain oil prices at a moderate level, which in turn has contributed to the survival of the Saudi, Iranian and a few other regimes that depend heavily on oil revenues. The embargo can also be relaxed if prices rise in a manner unacceptable to those enforcing the embargo. In effect, it makes Iraq the swing producer of last recourse. It is however a function that can be applied for only a few years, as Iraq's oil will be needed in full from about 2000 to meet the requirements of the demand scenarios.

  3. Financing the Swing Share
  4. Doubts have been expressed as to the willingness of the swing countries to invest in adding the capacity needed for them to discharge their swing role, given that the oil industry is almost exclusively in State hands and given that the State has many other demands on its precious oil revenues. While prices are low, they are ironically forced to produce to the maximum to meet their pressing demands for revenue, but once prices rise they will have greater room to maneuver. The investment could be forthcoming if they were willing to open their doors wide to the international oil companies, but that may be unacceptable in political terms, especially if rising prices reduce the need.

  5. Short term exports from Norway and the FSU
  6. Norway, which has about half the North Sea's remaining oil, exports a large proportion of its production because of its small population. Production will peak in 1999 under the model and then decline at a high depletion rate of about 8%, as is typical of offshore production. FSU exports have also been relatively strong because falling production has been exceeded by falling domestic demand. Any economic improvement there could radically change this situation. Both of these factors may serve to greatly increase the Swing control by about 2000.

  7. Instability, market and limited capacity
  8. The price of oil is today set by a very efficient forward market that is more a reflection of present trends than speculation or judgment about the future. There is today very little immediately available spare capacity anywhere. It follows that relatively minor interruptions in supply, or even threats of same, in any one of a number of countries subject to political or industrial strife can have a radical impact on the price of oil. Once prices rise for what ever short term reason, the trend may feed on itself as the suppliers have greater ability to curb production without crippling their revenue stream.. There are currently question marks about the nature of the Saudi succession as well as Iranian intentions in arming islands in the Gulf of Hormuz. A spark once kindled could easy lead to a bush fire.

Next section, Conclusions
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