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Inquiry and Analysis Series - No. 236


August 24, 2005 No.236

The ‘Super Spike’ in Oil Prices – Implications for the U.S. and Saudi Arabia
By Dr. Nimrod Raphaeli*.
The recent spike in prices at the pump has been "shock and awe" for the American driver – a situation occupying the front pages of major dailies and many minutes of airtime on television news programs. In one year, the price of oil has risen by 52 percent. Drivers who paid $25 to fill their tanks a year ago now pay $50 and more. No relief is in sight. OPEC members (Oil Producing and Exporting Countries) are already producing at full capacity, and OPEC's figures show that the 10 member countries, excluding Iraq, are currently producing 30,255 million barrels of crude oil daily. [1] With the exception of Saudi Arabia, none of the cartel members currently has surplus capacity. [2]

Given that global oil demand is projected to rise by 1.5 million b/d in the next two years, oil producers –both OPEC and non-OPEC members – will be hard pressed to meet the challenge. Meanwhile, neither the U.S. nor China, the two largest consumers of crude oil, is showing a diminishing need for this commodity.

Since the December 1998 collapse to under $10 per barrel – the lowest oil price since before the 1973 Arab oil embargo – oil prices have rebounded strongly. The OPEC "basket" price (a weighted average of Algerian Saharan Blend, Indonesia's Minas, Nigeria's Bonny Light, Saudi Arabia's Arabian Light, Dubai's Fateh, Venezuela's Tia Juana, and Mexico's Isthmus) averaged about $36 per barrel during 2004, nearly triple its 1998 level. [3]

More than half the world's oil reserves are in Saudi Arabia, Iran, Iraq, Kuwait and the United Arab Emirates. It is possible that Iraq has crude oil reserves equal to or higher than those of Saudi Arabia, but the Iraqi oil reserves have not been fully explored.

Price Projections – "Super Spike" in Oil Prices
Goldman Sachs, one of the major financial traders in the commodities sector, issued a research report on March 31, 2005 that warned that oil markets have entered a "super spike" period that could see 1970s-style price surges as high as $105 a barrel. For the immediate term, the research note raised the 2005 and 2006 New York Mercantile Exchange crude oil forecasts to $50 and $55 respectively, from $41 and $40. [4] Goldman Sachs analyst Arjun Murti added that the "super spike" will result in "a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower prices return." An official in the Arab Company for Petroleum Investments, a company jointly owned by 10 members of OPEC, has suggested that the price of crude oil in the next five years will be in the range of $45 and $50 per barrel. [5]

In a follow-up issued on August 18, Goldman Sachs stated its expectation that U.S. benchmark (West Texas Intermediate or WTI) oil prices will remain above $60 a barrel for the rest of the decade – a figure $15 higher than its previous estimate, set earlier this year. [6] It is significant that the commodity markets are also expecting the price to remain high. For example, WTI futures contracts are priced above $60 until June 2008. [7] Clearly, even the smallest interruption in the flow of oil in any of the oil producing countries, and especially in Saudi Arabia, could send shock waves into the oil market that would result in Goldman Sachs's forecast of a $105-per-barrel nightmare becoming reality. Indeed, interruption of supplies from any of the other major suppliers of crude oil to the United States – e.g., Mexico, Venezuela, Nigeria, United Arab Emirates or Angola – could have similar effects.

OPEC Oil Revenues
The Energy Information Agency of the U.S. Department of Energy estimates net oil export revenues for 2004 at $338 billion, up 39% from 2003 levels. For 2005 and 2006, OPEC net oil export revenues are forecast at $430 billion and $447 billion, respectively. But these figures reflect a price of oil at about $40 per barrel. If the recent spike in oil prices persists in a band of $50-$65 per barrel, OPEC revenues are likely to be much higher.

Implications for Saudi Arabia
For Saudi Arabia, the largest producer/exporter of crude oil, even as small a fluctuation in oil prices as one dollar per barrel translates into billions of dollars gained or lost. With exports approaching 9.4 million b/d, a one-dollar increase in price would translate into annualized revenue of $3.4 billion. For the U.S., which imports 10.5 million b/d, a one-dollar increase translates into $3,832 billion on an annualized basis.

To highlight the contrast, we have constructed the following table with two columns. The first column offers the projected range of oil revenues for Saudi Arabia between a low figure of $30 per barrel and a high of $70 per barrel, using a $5 price interval and assuming an export of 9.0 million b/d. The second column uses the same price forecasts for crude oil to calculate the cost for the U.S., based on current import of approximately 10.5 million b/d, a figure that suggests a stagnant level of import because of slower economic activities and/or conservation. Of course, these figures could change if Saudi Arabia exports more or less oil and if, in the unlikely event that the price of oil declines below $30 per barrel.

Table 1: Annual Oil Revenue Forecast for Saudi Arabia and Oil Cost Forecast for the U.S. (US$ billion)

Price per Barrel Oil Revenues
(Saudi Arabia) Cost of US Import
(Average of 10.5 million b/d)
$30 $98,550 $114,975
$35 $114,975 $134,137
$40 $131,400 $153,300
$45 $147,825 $172,462
$50 $164,250 $191,625
$55 $180,675 $210,787
$60 $197,100 $229,950
$65 $213,525 $249,112
$70 $229,950 $268,275

OPEC estimates Saudi Arabia's net oil export revenue for 2004 at $115.6 billion, and the forecast is for export revenues of $154.3 billion for 2005. Given the recent spike in oil prices, the total revenues are likely to be much higher. According to statistics from the Energy Information Agency (EIA), U.S. net oil import costs reached $94 billion in both 2001 and 2002, and $122 billion in 2003. For 2004, U.S. costs reached $166 billion, nearly four times 1998 levels. There are no available statistics for 2005, but the import costs in the U.S. will likely increase sizably over the 2004 figures.

Obviously, the net costs of crude oil imports reflect the sharp rise of crude oil prices. For the years 2002, 2003, and 2004, and for April 2005, the average cost of a barrel of crude oil imported from OPEC countries was $22.18, $25.36, $33.96 and $44.32, respectively. [8] Certainly, the cost for the first two months of the third quarter of 2005, namely July and August, is much higher, though numbers are not currently available.

To mitigate these numbers, the EIA maintains that in inflation-adjusted per-capita terms, the OPEC oil export revenues are below the peaks reached in the late 1970s and early 1980s. Accordingly, the per-capita oil revenues for all OPEC members are projected at $770 in 2005, or only about 43% of the $1,804 that was achieved, in real terms, in 1980. In other words, the price at the pump is lower in 2005 than it was in 1980.

This argument can be questioned on two grounds: First, it does not take into account the considerable population growth in the OPEC countries; in most, the population has doubled in the last 25 years, and oil export revenues on a per capita basis that does not account for this growth can be misleading. Second, the revenue estimates upon which the per capita income was calculated were based on lower crude oil prices; the increase in revenue will bring about a corresponding increase in the per capita income. Of course, the EIA's argument cannot take into account the psychological response of the consumer, who must, in a few months, adjust to a sharp increase in prices that had been stagnant or in a downward bias for 25 years.

The Implications for the U.S.

The U.S. imports approximately 10.5 million b/d. A fluctuation in oil price of one dollar translates into a little over $4 billion on an annualized basis. A spike of $30 per barrel, as has occurred during the past year, translates into $120 billion charged against the country's current accounts.

As an illustration of the enormity of the U.S.'s oil bill, U.S. agricultural exports to the entire world totaled about $61 billion for each of the two last full calendar years, 2003-2004. [9] In other words, the total proceeds from U.S. agricultural exports would cover just about 25% of the total cost of crude oil imports at the present rate of $60-65 a barrel.

To be fair, Saudi Arabia, or OPEC, cannot be held fully responsible for the "super spike" in the price of crude oil. As already stated, both OPEC and non-OPEC members are producing as much oil as is technically feasible. Even if more oil were available, there is no capacity to refine it. Refineries in the U. S. are operating at 98% capacity to meet demand; not a single new refinery has been constructed in the last 20 years.

Supply is not the only problem. Most experts would argue that the issue of oil price rests as much with the demand side of the equation as with the supply side. In the absence of a rational transportation policy that would divert resources from roads to mass transit systems on a grand scale and of appropriate fiscal measures that would curb the wasteful use of energy, an oil crunch crisis may not be long in coming.

Saudi Arabia accounts for the highest share of OPEC oil export revenues – 34% in 2004. OPEC estimates that the Saudi share of oil export revenue will likely increase to 35% in 2006. [10]

The recent Saudi oil revenue bonanza is a double-edged sword. On the one hand, it will help reduce the Saudi national debt, estimated at $175 billion. On the other hand, in a context in which there is a rapidly growing young population that suffers a high unemployment rate of anywhere between 13% and 20% – a rate which would be even higher if women were allowed to join the labor market – the revenue bonanza is likely to raise expectations for jobs and social services. Should these expectations not be met, these young people could become a destabilizing force in the Kingdom, which could drive oil prices even higher.

Rather than introduce a well-designed plan for creating new sources of employment, King Abdallah has announced that the salaries of all civilian employees, military personnel, and retirees will be increased by 15%, effective the coming month of Ramadan (October). [11] In the absence of proper budgetary procedures, it is not possible to determine the financial implications of these increases. Nor is it possible to assess how these increases would resolve the chronic unemployment problem.

In the meantime, the riches of the Saudi princes continue to grow. Precisely what percentage of oil revenues lines their pockets, however, remains one of the best kept secrets in the kingdom.

* Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program

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And it's only going to get worse. Fasten your seat belts and stay tuned for the macro-economic earthquakes.

THERE IS THIS NOTION IN SOME SOCIAL CIRCLES THAT THE US IS SILENTLY SITTING ON BILLIONS OF BARREL'S OF DOMESTIC OIL WITH THE INTENT TO USE ALL OPEC HAS TO SELL AND WHEN THEY (OR WE) EXAUST THEIR SUPPLIES AND OPEC ULTIMATLY COLLAPSE'S, THEN WE WILL FALL BACK ONTO THIS VAST DOMESTIC SUPPLY WE ARE ALLEDGEDLY SITTING ON. THIS IS JUST NOT THE TRUTH. DOMESTIC OIL PRODUCTION WENT INTO SERIOUS DECLINE IN 1972. MORE SHOCKINGLY IS THE SERIOUS DECLINE OF DOMESTIC RESERVES OF NATURAL GAS. MOST OF THE US POPULATION IS TOTALLY UNAWARE THAT HALF THE WORLDS ELECTRICAL PRODUCTION IS FROM NATURAL GAS FIRED POWER PLANTS. THAT IS 1/2 OF THE GLOBAL PRODUCTION OF ELECTRICAL ENERGY PRODUCED FROM NATURAL GAS AS THE FUEL. THAT WHICH MOST HOMES HERE IN THE US RELY UPON TO KEEP WARM AND FROM FREEZING TO DEATH IN THE WINTER. HERE IN THE US, WE CAN'T EXPAND OUR OWN ELECTRICAL PRODUCTION DOE TO A LACK OF ANY FURTHER FUEL SOURCES. I SUBMIT FOR CONSIDERATION THE RECENT PAST ROLLING BLACKOUTS THAT REGULARLY OCCURE DUE TO PEAK SUMMER DEMANDS THAT OFER TAX OUR CURRENT ELECTRICAL GENERATION ABILITY. IT'S NOT GOING TO GET BETTER, IM SORRY TO SAY.

SINCE THE END OF WW II, WE HAVE DEVELOPED A SOCIETY, A LIFESTYLE THAT IS NOTHING SHORT OF WASTEFULL, WITH RESPECT TO ENERGY USE. WE'VE DEVELOPED WHAT IS UNDENIABLY THE GREATEST EMPIRE THE WORLD HAS EVER KNOWN ON THE BASIS OF CHEAP AND PLENTIFULL FOSSIL FUEL. OUR ENTIRE INFASTRUCTURE, OUR ENTIRE MANUFACTURING BASE, EVERYTHING THAT WE CONSUME HAS SOME CONNECTION TO CHEAP AND PLENTIFULL FOSSIL FUEL.
WHAT IS WORSE HOWEVER IS THE ATTITUDE AND COMPLACENCY THAT HAS DEVELOPED IN THE MIND'S OF AMERICAN'S DURRING THESE PAST 60 YEARS.
GO ANYWHERE AND TAKE UP OBSERVATION. WHAT WILL YOU SEE? ENDLESS PARADES OF GAS GUZZLEING VEHICLES GOING ESSENTIALLY NO WHERE. I CAN ASSURE ANYONE READING THESE WORDS, THIS WASTFULLNESS HAS GOT TO CHANGE OR WE ALL ARE GOING TO SUFFER. MORE IMPORTANTLY, THE BASIC ATTITUDE THAT THERE IS ENDLESS GLOBAL SUPPLIES OF FOSSIL FUEL ON THE PLANET ISTHE FIRST STEP TOWARD POSITIVE CHANGE.

WELL I GOT A SHOCKING REVALATION FOR ANYONE READING THESE WORDS. THIS LIFESTYLE OF WASTE IS COMMING TO AN END! THE DAY OF PLENTIFULL AND CHEAP FOSSIL FUEL IS COMMING TO AN INCRIMENTAL END. TO THOSE READING THIS, ALLOW ME TO DIRECT YOU TO 911 BUSTERS WEB SITE. WHEN YOU PULL IT UP, SCROLL DOWN (TO THE NEAR BOTTOM) TILL YOU COME TO A LARGE MASTER LIST OF WMV STREAM VIDIEOS, LOOK FOR THE ONE CALLED *"THE END OF SURBURBIA"* CLICK ON THE BUTTON THAT SAYS "WMV" STREAM (WINDOWS MEDIA VIEWER) (THERE IS ALSO A QUICK TIME VIEWER OPTION) THESE ARE FREE PRESENTATIONS. SUBMITTED FOR THE MUTUAL BENIFIFICIAL GOOD TO SOCIETY. IVE WATCHED IT OVER N OVER. AFTERWARD, THINK ABOUT WHAT IS STATED. IT'S VERY VERY THOUGHT PROVOKING INDEED.

SO WHY ARE WE IN IRAQ? ACCORDING TO THE BUSH ADMINISTRATION, WE ARE THERE TO RID THE WORLD OF TYRANNY AND TO SPREAD FREEDOM AND DEMOCRACY. IF THIS IS TRUE, WHY HAVE WE IGNORED THE CONTINENT OF AFRICA WHERE THERE IS CERTAINLY GREATER NEED? THERE IS INDEED FERTIL
GROUND FOR FREEDOM AND DEMOCRACY NOT TO MENTION FOOD AND MEDICAL CARE AND SOME ECONOMIC ASSISTANCE. WHAT IS THE PRIMARY MISSING ELEMENT THERE? **OIL** BLACK GOLD!** TEXAS "T"**!!

GLOBAL OIL SUPPLIES INCLUDING NATURL GAS SUPPLIES ARE IN DECLINE AND THE BUSH ADMINISTRATION, ACTING UNDER THE DIRECTION OF THE DOCTRINE'S OF THE *PNAC* HAS GONE INTO IRAQ TO SEIZE, BY FORCE OF ARMS, THE LAST GLOBAL OIL RESERVE BEFORE THE EU DOES OR BEFORE CHINA DOES. WHAT EVER NATION OBTAINS ULTIMATE CONTROL OF THESE RESERVE'S, WILL IN FACT BE IN AN ECONOMIC ADVANTAGIOUS DOMINATING POSITION OF ANY OTHER NATION. DON'T THINK THIS IS SO? DO YOU REALLY BELEIVE THE
US MILLITARY FORCE THERE PRESENTLY IS TO BE WITHDRAWN IN A YEAR OR TWO? THEN ASK YOUR SENATOR WHY HALLIBURTON IS PRESENTLY CONSTRUCTING PERMANANT LARGE BASE'S OUT NEAR THE IRAQI OIL FIELDS. AND NOTE I DIDN'T SAY BASE, I SAID BASES! ASK YOUR REPRESENTITIVE'S WHY THIS IS HAPPENING. WHAT IS THEIR REAL INTENT WHILE THEY TALK ABOUT WITHDRAWING FROM IRAQ IF PERMANANT U S MILLITARY INSTALLATION'S ARE PRESENTLY UNDER CONSTRUCTION, BY HALLIBURTON. DOES THIS SOUND LIKE THEIR PLANNING ANY EVENTUAL WITHDRAW FROM IRAQ?
DOES THE BUSH ADMINISTRATION EVEN KNOW HOW TO TELL THE TRUTH ANYMORE? DID THEY EVER KNOW?

THE DOWNING STREET MEMO IS DOCUMENTARY EVIDENCE WHICH, WHEN ADDED TO THE PILE OF OTHER DOCUMENTARY EVIDENCE CLEARLY DEMONSTRATES BEYOND REASONABLE DOUBT THAT THE BUSH ADMINISTRATION INTENTIONALY DECIEVED THE US CONGRESS AND THE AMERICAN POPULATION TO GET AN ESTABLISHED MILLITARY PRESENSE IN IRAQ AND I SUBMIT THAT THE RATIONAL FOR THIS CONDUCT WAS FOR THE PURPOSE OF SEIZING CONTROL OF THE LAST OF WHAT IS CONSIDERED THE SUBSTANTIAL GLOBAL OIL RESERVE BEFORE SOME OTHER NATION GOT IN FIRST! LIKE CHINA.

BUT IN ORDER TO HAVE THE US POPULATION IN THE CORRECT MINDSET, TO BE SUPPORTIVE IN THE INITIAL STAGE, THE BUSH ADMINISTRATION NEEDED SOME SORT OF EVENT THAT RESULTED IN PROVIDING COVER FOR THE TRUE INTENT TO SEIZE THE OIL FIELDS, THAT EVENT WAS 911 MY FRIENDS. BY ESTABLISHING A FEAR LINK WITH IRAQ, TO THE EVENTS OF 911, SUPPORT FOR A LARGE SCALE MILLITARY OPERATION BECAME POSSIBLE. IT WASENT IMPORTANT YOU SEE IF THE RATIONAL EVENTUAL FELL APART BECAUSE ALL THAT WAS NEEDED WAS SUPPORT JUST TO GET IN THER. AS WE LEARNED FROM VIET NAM, THE HARD PART IS THE GETTING IN. ONCE YOUR ESTABLISHED, IT'S IMPOSSIBLE TO BE FORCED OUT BY THE AMERICAN POPULATION. IT'S LIKE A D DAY BEACH HEAD, IN THAT IT WAS THE INITIAL STAGE IN ESTABLISHING A BEACHHEAD THAT POSED THE GREATEST BURDEN.

I SUBMIT THAT THERE NOW EXISTS SUFFICIENT EVIDENCE, RELIVANT AND MATERIAL, THAT DEMONSTRATES BEYONG REASONABLE DOUBT THAT THERE WAS BUSH ADMINISTRATION PARTICIPATION IN THE EVENT'S OF 911. I SUBMIT FURTHER THAT THE 911 EVENT HAD THE PURPOSE OF INSTILING FEAR IN ALL OF THE AMERICAM POPULATION IN ORDER TO EXTRACT OUT OF THIS FEAR, THE EXCEPTENCE OF THEIR RATIONAL'S FOR ENTERING IRAQ! I ALSO SUBMIT THAT THE BASIC PRINCIPALS SURROUNDING THIS EVENT, THAT I HAVE OUTLINED HERE CAN BE FOUND WITHIN THE DOCTRINE OF THE PROJECT FOR A NEW AMERICAN CENTURY TO SUBSTANTIAT THAT THIS IS A TACTIC THEY THEMSELVE'S HAVE PUT A LABEL ON CALLED A "NEW PERL HARBOR" EVENT TO INSTILL FEAR IN THE AMERICAN POPULATION.THANK YOU.**HUMPHREY**

FOR REFERENCE AND REFERAL
1. 911BUSTERS (PEAK OIL PRODUCTION THE END OF SUBURBIA PRESENTATION)
2. THE PROJECT FOR A NEW AMERICAN CENTURY

.

AND I HOPE MY MSG GETS THROUGH!!!!TO A FEW AT LEAST!!

I didn't read it. That's my point-the message would be much more effective if it didn't look like it was being screamed at us.

OK Here is my last response to you sir, or madam. If you refused to read my post strictly on the basis to which you claim, then that is your loss. You can take what i said, and the manner in which i presented it(and yes i was shouting) for what it is worth. It certainly appears you are too focused on irrelivant matter to ever get through to you anyhow. What further can i say to the likes of you? Some things are so relivant to us all that it needs to be shouted to be heard.
**HUMPHREY**

congratulations.

YOU HEARD THAT DIDN'T YA?**HUMPHREY

WHO CARES!!!!
It is the information that counts.

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