Hazy as ever

Written by Aresh Shirali | Updated: Apr 27 2008, 06:40am hrs
Oil is exceptional as a commodity. Not only because this natural source of energy has played such a central role in world history over the past century, which is what Dilip Hiros Blood of the Earth is about, but because this viscous black fluid yields plenty of fuel for thought as well. How vulnerable is the market economy to cartelization in a critical sector What are the limits of interventionism How and why does adherence to truth become a casualty of conflict Does anybody know whats really going on anyway

American analysts have long suspected that Saudi Arabias claim to 240 billion barrels of oil under the desert is dodgy for the simple reason that Opec production quotas, and thus relative state revenues within this oil cartel, are based on a consensual ratio of reserves, which is assumed to give the predominant producer both an incentive and ability to overstate its slush.

Yet, the grand falsification of recent times has proven to be Central Asias reserves. The region is found to hold just 40 billion barrels, one-sixth of the estimate touted in the early 1990s that drew drooling drillers to assorted former Soviet republics. This sweet little incentive game explains why pursed lips greeted Iraqs attempt last year to revise its figure upwards of 100 billion barrels. Brazils offshore discovery of an estimated 40 billion barrels is considered much more credible, though extraction expenses would be high. In sum, its still Opec all the way. Together, as Hiro lays bare the obvious, eight Gulf states have three-fifths of global petroleum reserves and will provide 84% of the worlds oil exports by 2020.

And no matter when oil output peaks, now that nearly half the earths 2.1 trillion barrels of oil has already been sucked out, Saudi Arabias swing producer status is safe. Nowadays, it produces just over 9.2 million barrels per day. This is less than Russias 10.1 million odd, but a sizeable chunk of global demand all the same (at about 86 million barrels per day this year). More importantly, the cornerstone of Saudi oil strategy owes some of its influence to superlow extraction costs. Uniquely, it can profitably alter output along a scale long enough to trace the vast variety of others cost-curves, and thus leverage flexibility to control the sectors dynamics.

Hiro has been a close observer of the Middle East for decades. With stacks of books to his credit, including some that offer historical perspectives, his writing assumes significance for the geopolitical context of the narrative. As refresher reading on oil, it serves a clear purpose, though it is unmistakably Hiros very own take, quirks et al. It harks back to a deal of the late 1980s between Bahrain and a firm called Spectrum-7, for instance, that has little current relevance other than to highlight Arab-American business alliances of the time. This books thriller sequence is what precedes it, the twists and turns after the 1979 Iranian revolution. Hiro writes engagingly of the great Gulf rivalry, with Iraq caught in the crossfire, and the famous Opec implosion that reached a crescendo with the mid-1980s Saudi switch of strategy from revenue to marketshare maximisation. It stunned observers. Oil prices crashed almost overnight. Bereft of cost analysis, Hiros book reads unevenly here, but he narrates the aftershocks of this fascinating episode rather well. The next phase of the oil saga, of course, began in 1999.

Theres plenty in this book thats out of whack with my assessment of the energy sector. Hiro, for example, writes that India deregulated the whole of the oil sector in April 2002. On paper, India did. In practice, it did not. But then, thats the energy sector for you. Hazy as ever. The undertone of scepticism in Hiros overview of alternate energy is hard to miss. There have been bluffs galore, though nuclear energy is being accorded rarefied respect by the market as a relatively realistic case; yellowcake uranium prices have risen eightfold since 2001. Extra supplies from deactivated war-heads could contain this inflation, but uncertainty reigns. At the end, nuclear energy is a question of risk mitigation, and Hiro has an interesting Finnish idea to offer on this.

Soaring oil prices suffuse the airwaves. Meanwhile, even though these numbers expressed in dollars are no longer as indicative as they once were, given the decline in global perceptions of the US currencys stability and the resultant scrutiny the US Federal Reserve has come under. At the other extreme, the Afghanis claim to pervasive power even within Afghanistan falters on the ease of its manipulation. The dollar is not so easily drubbed. But with financial markets in turmoil, everyone no longer takes Americas word for it.