Sunday 15 October 200

This time the West can survive an oil embargo By Michael Field

THE inability of the Arab nations to mount an effective military response to what they perceive as Israeli aggression leaves them with their most obvious alternative: economic sanctions. In the next few days there will be calls by Arab radicals for oil production cuts to be used to force America to adopt a more even-handed approach to the Middle East.

At the time of the last full scale war with Israel, in 1973, Arab nations cut production. The Organisation of Petroleum Exporting Countries (Opec), which has several non-Arab members, took advantage of the situation to quadruple prices.

However, the international economic climate has changed fundamentally since then. In those days, the Arabs were in a strong market position. World demand was rising fast and they were the only countries with spare capacity.

Energy analysts said yesterday that supplies from the Middle East area appeared secure and that crude prices were unlikely, for the time being, to bounce much higher after Thursday's surge of almost $3 per barrel to $35.07 . Before the fighting in Israel, the price was hovering at about $30 per barrel. The markets settled back to $34 per barrel by close of day on Friday.

The big Arab gulf producers, Saudi Arabia, Abu Dhabi and Kuwait, will resist any pressure to cut back on supplies. These three states have spare capacity and, although they never say it publicly, they know that ultimately some of their vast reserves of oil will be left in the ground.

Economists - including Sheikh Yamani, the former Saudi oil minister - predict that oil demand will peak in 15 or 20 years, partly as a result of consumers becoming far more efficient in the way they use energy. They believe that alternative energy resources will mean that the world's oil reserves will never run out.

Saudi Arabia, Abu Dhabi and Kuwait are well aware that half of the increase in world demand in the past 15 years has been met by non-Arab and non-Opec forces. They will not want to do anything now that will encourage this trend. They cannot afford to appear to be unreliable suppliers and lose future market share.

The Saudi government's need to hold on to market share is increased by its debts - almost entirely domestic - which are equivalent to more than 100 per cent of the country's gross domestic product. In the past 10 years, it has become one of the world's most indebted governments.

In the present crisis, the Saudi and Gulf states governments will put as much diplomatic pressure as they can on the United States but they will not cut production. The only states in the region that might feel obliged to act are Iraq and the non-Arab Iran.

The Iranians care deeply about the future of Jerusalem, the third holiest city in the Muslim world, and feel obliged to help radical political movements. President Khatami and other moderates at the top of the government know that Iran has spare capacity and they want to develop the country's markets. They may, however, be forced to act against Iran's economic interests by militants within their own political establishment.

Iraq, a pariah even in the Middle East, could be expected to jump at the opportunity to ingratiate itself with radical Arab elements, even at the cost of its own shattered economy. As Opec's fourth-largest producer, it could cause upheaval in world markets. By halting its exports of crude, it could send prices soaring above $40 a barrel, oil experts say.

Any production cuts, or even threats of cuts, will push up prices on the international markets. But the amounts of oil traded here on short-term contracts represent a tiny proportion of world production. If oil companies replace some of the product that they sell with more expensive crude, they may have to raise prices - but, in percentage terms, the increases should not be anything like the rises we could see on the non-Opec markets.

Michael Field is the author of Inside the Arab World (John Murray)

http://www.telegraph.co.uk/et?ac=000579381554028&rtmo=lnHn7lwt&atmo=99999999&pg=/et/00/10/15/wmid715.html

-- Martin Thompson (mthom1927@aol.com), October 14, 2000

Answers

This seems to be nothing more than guesswork on what the Arabs might do.

-- Billiver (billiver@aol.com), October 15, 2000.