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Date: Fri, 6 Oct 2000 09:12:00 -0700 (PDT)
From: watch@csis.org
Subject: CSIS Watch October 6, 2000 Number 235
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This message contains the latest issue of the CSIS Watch, focusing on Energy 
Trends and Geopolitics.

For further information, contact the CSIS Director of Studies Office at 
202-887-0200, or reply to this e-mail.
*********************************************

Energy Trends and Geopolitics.

The OPEC heads-of-state summit should be appraised on three different levels, 
according to Luis Giusti, CSIS senior adviser. Despite speculation that 
decisions about the market would be forthcoming, nothing was bound to happen 
because the operational agenda will be dealt with in the organization's 
meeting in November. At the institutional level, the summit was undoubtedly a 
success for OPEC, as it clearly reinforced the spirit of the organization by 
strengthening the union among member countries. Additionally, at the 
political level the meeting provided a platform for Venezuelan president Hugo 
Chavez to deliver what has become his "north-south" position and message. It 
is important to keep in mind, though, that Saudi Arabia's dominance and 
leadership will continue, by virtue of its high production capacity, and we 
can expect continuity in its pragmatic approach toward the market and the 
price of oil. As a result, Chavez's speeches should be viewed in perspective 
and not overplayed.

As for the United States' release of 30 million barrels of oil from the 
Strategic Petroleum Reserve (SPR), Giusti says that the move has clearly 
provoked an immediate reaction in the desired direction, with oil prices 
falling some $5 per barrel. In tapping the SPR at this moment, the U.S. 
action denotes a mode of cooperation and not confrontation. OPEC countries 
have already increased production significantly, and they have repeatedly 
sent the message that they have done their part and somebody else has to do 
something to bring down prices. The move comes too late, however, to bring 
any relief to the winter's tight oil heating situation: aside from the fact 
that the U.S. refining network is operating at practically full capacity, the 
oil released will not be refined before December, and, as a result, the 
refined products will not start reaching the market before January. But the 
move does have an effect on the price of oil, which is the root of the 
problem. As for the Heating Oil Strategic Reserve currently being accrued, 
its small size (2 million barrels) can have only a modest impact on prices. 
Moreover, its triggering mechanism is not yet clear.

Robert Ebel, director of the CSIS Energy Program, thinks the United States 
should not touch the reserve. Domestic oil producers are finally turning a 
profit and will be unhappy as crude oil prices fall. Moreover, just-in-time 
philosophies of operation keep stocks low, meaning the inventories simply 
will not be there if demand rises sharply this winter despite the release of 
reserves. Ebel suggests that New England take steps to diversify the kinds of 
fuel consumed during the winter.

According to Ebel, the reserve withdraw is playing to the psychological part 
of the market more than anything else. After the announcement of the reserve 
withdraw, prices began to drop without a single new drop of oil entering the 
marketplace. What will happen next August when it is time to replenish the 
reserve, wonders Ebel.

Moreover, U.S. refineries are already operating at 95%-96% capacity daily. To 
make room in the refineries for the reserve oil, the United States will have 
to give up some of the oil it imports. This crowding out of imports will 
bring down prices elsewhere, notes Ebel. The United States is therefore 
subsidizing foreign consumers. Ebel says the United States should have 
coordinated the reserve withdraw with other countries if it truly wanted to 
have a global impact on prices.

Turning to Iraq, the high price of oil contributes to the erosion of the 
sanctions in place. Iraqi oil now plays a key role in global supplies and 
prices. This gives the Iraqi regime increased leverage, says Charles Duelfer, 
a visiting fellow in the CSIS Middle East Program.

While Iraq is unlikely to actually halt its oil exports, the potential to do 
so provides Iraq with a "deterrent force" of some significance. Iraq made 
modest reductions in output earlier this year when the UN sanctions committee 
delayed approval of funding for oil infrastructure repairs. The Iraqi regime 
has a great appreciation of power-whether through weapons of mass destruction 
or through oil. Iraq can be expected to take every opportunity to increase 
its production capacity as circumstances permit, perhaps with an ultimate 
goal of displacing Saudi Arabia as OPEC's dominant player.

 - Watch 235.doc