Inflating the Cost of Oil -- A New Factor in State Sponsorship of Terrorism?

Producing oil in some Arab states is almost as effortless as it was for Jed Clampett of Beverly Hills fame. In Saudi Arabia the “lifting cost,” or the cost to bring a barrel of oil to the surface, is $2.00. Yes, two dollars per barrel.

Lifting cost for other countries is not that much higher than in Saudi Arabia. In 2006, the average cost in Africa was $4 per barrel, in the U.S. $6.83, in Canada $8.30.

There are also “finding costs” for exploration and development of oil fields – about $5.26 per barrel in the Middle East to as much as $63.71 for U.S. offshore oil. Add to that taxes, transportation and refining costs. Nevertheless, the markup on the black gold is remarkable. As of this writing, the price of crude oil dropped to some $90 per barrel. In July, oil prices hit $147.

Saudi Arabia produces some 9,600,000 barrels of oil a day. Do the math: at $90 per barrel, the oil sheikhs and princes earn almost $900,000,000 (spelling it out, that’s nine hundred million dollars) a day. Iran’s Ahmadinejad and his Ayatollah masters produce 4,000,000 barrels a day, earning $360 million dollars. Hugo Chavez in Venezuela milks his black cash cow to the tune of $215 million dollars a day. Putin’s Russia – not a member of the Organization of Oil Producing States (OPEC), but cooperating with the cartel – produced about the same as Saudi Arabia -- 9,700,000 barrels per day – or close to $900,000,000 a day.

Pipelines and shipping routes may emerge as the new targets for international terrorists.

With the American deployment of troops in Iraq and Afghanistan easily costing $1 billion a day, it is no surprise to see why a wealthy and resurgent Russia feels that it can challenge the West today in Georgia, the eastern Mediterranean, the Arctic floor and in its support for Iran.

If that’s not a big enough reason for the United States to cut down on fuel imports, here’s another one. Cutting the cost of oil could directly bring down the Ahmadinejad regime.

The vast riches now flowing into the oil producers coffers are certainly lining the pockets of local leaders and oligarchs. But in some cases, the oil producers are undertaking ambitious and costly development programs and acquisition of new weaponry. Currently the income from oil usually exceeds the expenditures, but each country has a “break-even” point. If the oil income drops, the economic stability of the regime starts to rock.

A recent interview by a senior official in the International Monetary Fund (IMF) illustrates that point. Saudi Arabia requires crude prices to remain above $49 a barrel to avoid a fiscal deficit, Mohsin Khan, director of Middle East and Central Asia branch at the IMF, explained. Saudi Arabia depends on oil and gas sales for 90 percent of its export income, he said. “Saudi Arabia’s break-even price is the highest among the Gulf Co-operation Council countries because they are spending on a lot of projects right now, and oil money is used to fund these projects,” Khan said.

Other Arab countries in the Gulf have much lower break-even points, according to the IMF official: “The United Arab Emirates (UAE) will have a fiscal balance at an oil price of $23; if it goes below they would run a deficit. For Qatar, the break-even price is $24 a barrel,” Khan said. Kuwait’s break-even price is $33 a barrel.

Iran’s break-even point, however, is significantly higher. “Iran’s break-even price is $90 a barrel,” Khan said. “If prices dip below $90 a barrel, and we have seen it touch $89, then they would have to tighten their public expenditure policy, and probably cut subsidies, which would be an issue for the government there – the public would not be content,” he said.

Short and simple: if the price of oil drops below $90 per barrel, the Iranian regime is in fiscal trouble.

This week some November futures dropped to $83, the lowest in a year.

If Saudi Arabia, Iraq, Qatar, the UAE, and Kuwait feel threatened by Ahmadinejad it is in their existential interest to bring down the price of oil into the $60-80 dollar range. How? Also short and simple: increase production. These Arab oil producers are heavy investors in the U.S. economy. They are also suffering by the shocks hitting the U.S. markets, and they should be interested in restoring health to the economy.

OPEC, however, facing the downturn in western economies, is considering cutting oil production to keep the price high.

In today’s possible return of the Cold War, Iran, Russia and Venezuela are all interested in chipping away at the United States’ economic stability and have no interest in letting the price of oil drop below their “break-even” points. Just how far will these countries press on the oil supply pressure points to keep the price high?

Forty percent of the world’s petroleum travels through the 180 km-long Straits of Hormuz, effectively controlled by Iran. Every time Ahmadinejad or his commanders rattle their sabers or threaten to mine the straits, the price of oil rockets skyward. Bad news and even rumors make the price jump. A report this week – later proven false -- that a U.S. military aircraft heading to Afghanistan was forced to land in Iran after violating the country's airspace caused prices to jump above $93 a barrel.

Meanwhile, a pipeline through the UAE that would bypass the Straits of Hormuz won’t be ready for at least a year, and one wonders if it won’t be the target of terrorists to keep it from opening. A recent terrorist explosion in Turkey damaged the Baku-Tbilisi-Ceyhan (BTC) pipeline and shut it down for a month. During the Russian blitz of Georgia last month British Petroleum closed the BTC out of fear of serious damage.

Pipelines and shipping routes may emerge as the new targets for international terrorists. They are relatively easy targets, and the skittish oil markets will react in ways that further hurt Western economies. It comes down to the well-known question: Cui bono? Who gains?

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Putin: "I Love the Smell of Cordite and Crude Oil in the Morning"Oil Pipeline to the West Is Shut in Georgia and Turkey

Russia's Vladimir Putin would personally like to tighten the noose around Georgian President Mikhail Saakashvili and hang him from a lightpost on Rustaveli Boulevard in Tbilisi. The former KGB agent loathes the man and the vibrant, pro-American democratic regime that began to flourish on Russia's southwestern border. [See the author's "Georgia on My Mind," November 2007]

There's no doubt that Putin is dedicated to undermining Saakashvili's government, one that seeks to join NATO and that provided -- until last week -- the third largest contingent of troops to the American coalition in Iraq. Frankly, some analysts thought that Georgia's pro-American policies would lead to Moslem terrorist attacks from al Qaeda or Chechyan bombers. Not enough attention, however, was paid to the champion of a resurgent new Soviet-like hegemony, Vladimir Putin, who may have just wrangled a treacherous diplomatic agreement that effectively gives him control of Georgia.

But pay attention to Putin's energy designs, as well. He's not only the new Russian czar; he's the energy czar. His aggressive foreign policy is buoyed by Russia's oil exports. High oil prices helps him; competition, particularly from new oil fields in nearby former Soviet vassal states, hurts him. And the new oil pipelines that go around Russia also deny him royalties.

One of the most demonstrative efforts to circumvent Russia was the construction of the 1,100-mile long Baku-Tbilisi-Ceyhan (BTC) pipeline, which began pumping oil in 2005 from Azerbaijan to a Turkish port on the Mediterranean Sea via Georgia. The BTC has a capacity of 1.2 million barrels of crude oil a day, with much of the oil destined for Europe, the United States and even the Far East (shipped to Israel's port of Ashkelon from where it can be pumped to Eilat and oil tankers).

As explained in a New York Times analysis today, "American policy makers hoped that diverting oil around Russia would keep the country from reasserting control over Central Asia and its enormous oil and gas wealth and would provide a safer alternative to Moscow’s control over export routes that it had inherited from Soviet days."

Not now. Georgian news reports claimed that Russian aircraft tried to hit the pipeline. Whether they did or not, British Petroleum, the pipeline's operators, shut down the oil pipeline and a gas pipeline that pass through Georgia out of fear of the hostilities.

Strange that last week an explosion in Turkey also shut down the BTC at that point. According to Turkish press accounts, "The BTC pipeline explosion took place late Tuesday in a pump at a section near the eastern town of Refahiye, in Erzincan province. The Kurdistan Workers Party (PKK) claimed responsibility for the blast."

Maybe not so strange. Think KGB.

Recommended reading:

1. Yesterday's analysis buried in the Washington Post's business section, Russia's Strike Shows the Power of the Pipeline by Steven Pearlstein. "It was surely not lost on Russia's bully in chief, Vladimir Putin, that the oil giant BP decided to shut down the pipeline that runs through parts of Georgia controlled by Russian troops. Indeed, that was one of the aims of the cross-border incursion," Pearlstein wrote.

2. The New York Times analysis Conflict Narrows Oil Options for West by Jad Mouawad. "Some analysts believe the armed conflict between Russia and Georgia is rooted not only in historical enmity, but also an outgrowth of Russia’s fears that Georgia, with its pro-Western bent, could prove to be a lasting competitor for energy exports," wrote Mouawad. 'Russians treasured the fact they had a monopoly on oil and gas pipelines from Central Asia, as it gave them considerable clout,' said Marshall I. Goldman, a senior scholar for Russian studies at Harvard... By agreeing to having an oil pipeline, Georgia made itself more vulnerable.'”

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