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U.S. warned energy supplies at risk Standard & Poor’s report points to dangers of political, economic upheaval in Middle East and Latin America; says war with Iraq could do harm to struggling economy Gary Park PNA Canadian Correspondent
With the Middle East on the brink of even greater conflict and Latin America plunging deeper into economic chaos, President George W. Bush has received a sharp warning about the state of U.S. oil and natural gas supplies.
A new report by Standard & Poor’s, issued in mid-July, presented a litany of woes facing the world’s leading energy consumer.
The list, prepared by oil and gas equity analyst Tina Vital, pinpointed: Depletion of fast-maturing U.S. oil and gas reserves, restricted access to known low-cost reserves, either overseas or on domestic federal lands; trade restrictions, environmental obstacles and political and economic unrest in the Middle East and Latin America. Unrest kicks up prices S&P said current unrest in countries that hold some of the world’s largest oil and gas reserves has raised oil prices — with crude spot prices up 30 percent in the United States in the first half of 2002 and gas spot prices up by more than 16 percent.
As conflict between Israel and the Palestinians seems destined to drag on, S&P calculates that current global oil prices already reflect a “war premium” of $4 a barrel.
That pressure is being aggravated by Bush’s strong hints of military action to remove Iraq’s President Saddam Hussein.
S&P said the last thing the world’s economy needs, as it flirts with recovery or recession, is a surge in oil prices, triggered by a wider war in the Middle East.
To date, higher oil prices have had only a mild dampening effect on consumer demand, the S&P report said.
“Consumers would prefer prices below $20 per barrel, but the current mid-$20 per barrel range is not a major drag. It’s about what oil prices averaged in the mid-1990s.”
Energy is also a smaller factor in the economic equation, S&P said, estimating energy’s share of the average consumer’s budget is now about 4 percent compared with 8 percent 20 years ago.
Economic research firm DRI-WEFA has projected that a $10 per barrel rise in crude prices would increase consumer prices by 0.7 percent after two years and shrink real Gross Domestic Product by 0.5 percent, assuming short-term U.S. interest rates remained stable.
S&P said such an impact would be “significant, but not enough by itself to cause a recession. If the price of oil goes up to $50 per barrel or higher, however, the story becomes much more ominous.” Interest shifts to Russia As anxieties build around security of supplies from the Middle East, attention is shifting to former Soviet Union countries, with Russia itself being the only country other than Saudi Arabia capable of producing more than 7 million barrels per day.
The U.S. Energy Information Administration said Russia ranked eighth in the world last year with proven crude reserves of 48.6 billion barrels, about one-fifth of those in Saudi Arabia, but its proven natural gas reserves of 1,700 trillion cubic feet are eight times those of Saudi Arabia.
For now, Russian crude output is averaging 7.42 million barrels per day, up 8.3 percent from a year ago, reflecting greater efficiencies in the operations of Russian oil companies as they aggressively develop their reserves.
But S&P said that “aging equipment and poorly developed fields will ultimately make it difficult for Russia to develop its reserves” because of accelerating depletion rates and a deteriorating transportation infrastructure.
It said “huge sums of money” are needed to overcome Russia’s deficiencies, but investors are reluctant to participate because of a track record of business corruption. Venezuela headed for crisis Elsewhere, Venezuela is likely headed for “another crisis:” Economic and political instability combined with higher government royalties and preferential treatment for state-owned Petroleos de Venezuela will probably keep investment in that country’s oil sector “on the sidelines,” said S&P.
New laws introduced nine months ago have seen royalties on most new oil and gas projects soar to 30 percent from 16.7 percent and require PVDA to hold a majority interest in all joint ventures with foreign companies.
The outcome, S&P predicted, could be reduced investment in finding and developing new reserves in Venezuela’s mature industry.
The latest figures issued by the EIA for May showed Mexico has become the leading external source of crude supplies for the United States at 1.509 million barrels per day, 6.6 percent higher than April.
Saudi Arabia contributed 1.503 million bpd, a drop of 3.4 percent from the previous month, while Canada boosted its sales to 1.454 million bpd, compared with last year’s average of 1.297 million bpd.
Venezuela, notwithstanding its internal political difficulties, still exported 1.106 million bpd, a gain of 10 percent from April.
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