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INSIGHT

New Understanding of Oil

Aired March 15, 2002 - 17:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
(BEGIN VIDEO CLIP)

JONATHAN MANN, CNN ANCHOR (voice-over): The axis of oil. Powerful nations are shifting position, pressed by events, economics and their appetite for energy.

(END VIDEO CLIP)

(on camera): In Vienna, Friday, OPEC nations met and quickly agreed to try to keep the market for oil where it is. Official production quotas are not going to change.

But the oil market is changing, in part because relations between the world's largest consumers and producers, the United States, Russia and Saudi Arabia, are changing.

On our program today, reaching a new understanding on oil. First, though, a quick look at the hours headlines.

The United States envoy to the Middle East is optimistic that a cease fire can be reached after a first round of meetings with both sides.

Anthony Zinni met with Israeli and Palestinian officials Friday. He called the talks extremely positive.

The chief Palestinian negotiator outlined what is needed for an agreement.

(BEGIN VIDEO CLIP)

SAEB ERAKAT, CHIEF PALESTINIAN NEGOTIATOR: This must be a comprehensive package introduced, beginning with Tenet, going to Mitchell, and getting to the political process of ending the Israeli occupation.

This is reviving hope in the minds of Israelis and Palestinians above anything else, and I really hope that as soon as possible there will be a (UNINTELLIGIBLE). And as I said, we don't need to reinvent the wheel. We have all the ingredients. All we have to do now is to cooperate with Gen. Zinni in order to put the timeline and the mechanisms to eliminate these three elements.

(END VIDEO CLIP)

MANN: Ahead of Zinni's arrival, Israel withdrew from the city of Rammallah and other areas, but it remained elsewhere. The Palestinians are demanding a complete Israeli withdrawal from Palestinian territories.

Police in Yemen have taken a man into custody after he threw a grenade at the walls of the United States embassy compound in the capital, Sana'a. No one was hurt in the explosion and there was no damage. Yemeni officials say the man's family told them he was suffering from psychological problems.

The blast came just a day after United States Vice President Dick Cheney visited the capital, part of his 12-nation tour of the Middle East. On Friday, Cheney visited American sailors onboard the carrier USS John C. Stennis in the North Arabian Sea.

Hundreds of protestors clashed with police outside the European Union summit in Barcelona, Spain. Police used truncheons to beat them back, but no major injuries were reported. The protestors were upset over EU hopes of opening up Europe's economy and financial markets. A massive rally is set for Saturday.

European leaders are planning to increase the pressure on several African nations to denounce the reelection of Zimbabwe's president, Robert Mugabe. Mr. Mugabe was reelected last weekend in a disputed presidential contest. European Union officials say EU leaders meeting in Barcelona plan to issue a strong joint statement condemning the elections.

Observers from several African nations have said the poll was legitimate.

Thousands of Hindu Nationalists and religious leaders stages peaceful marches and a prayer ceremony in the Indian city of Ayodyha. There was a heavy police presence as Hindu leaders persuaded followers not to march on a controversial religious site.

The leaders performed a prayer ceremony nearby instead. They want to build a temple at the site of a 16th century mosque that was torn down by a mob a decade ago.

OPEC oil ministers spent the day in Vienna, but what may be the most important country at the meeting isn't a member. It's Russia, which pumps almost as much oil as any country in the world.

And as the OPEC ministers gathered to decide how best to manage the market, Russia was an official observer and a hovering presence. Russia wants and is taking an ever-bigger share of the market, and OPEC can't control that market unless it can find a way to cooperate with its competitor.

Friday, they may have pulled it off, for a few months, at least.

CNN's Charles Hodson is in Vienna and joins us now -- Charles.

CHARLES HODSON, CNN CORRESPONDENT: Yes, Jon, certainly it is important that Russia, along with Oman, Norway and Mexico, also nonmembers of OPEC, do play their bit.

I mean, certainly in terms of OPEC's own wishes, it doesn't want to be seen to be shouldering this burden entirely on its own, and as you rightly point out, Russia is now the world's second largest oil exporter, second only to Saudi Arabia. And it is very important, therefore, that Russia does at least look as if it's doing it;s bit.

But look as if it's doing it's bit is more or less all that will happen, because if you talk to people in the markets, they will tell you that Russia is all too happy to say yes, we'll agree with what OPEC wants us to do. We'll sign up to that deal and the moment they say they will do that, subject to formal governmental approval next week.

But the fact is that Russia doesn't really stick to its word. They're not blatant liars, but it's a leaky place. It's run by private oil companies. And it looks as if Russia effectively will be overproducing. Not what OPEC wants, but what OPEC has to put up with -- Jonathan.

MANN: Is there much concern there about OPEC losing its market share, whether to Russia or just in general in the world oil market?

HODSON: I don't think it's something which is upper most in the minds. I think a lot of the rhetoric that we hear from OPEC ministers has much more to do with price stability, and they stress actually price stability over and above a particular price.

But, yes, I think that there is -- nevertheless, the fact is that at some point OPEC has produced something like 40 percent of the world's oil supply. Now they have agreed on Friday to limit their production to 21.7 million barrels a day. Match that up against total world demand of something like 75 million barrels a day, and you realize that OPEC is currently only producing about 30 percent of the world's oil supply.

Now, clearly, if a recovery gets underway, demand increases, then OPEC decides to open the taps again, it will get up towards 35, 37 percent. But they have to live with the fact that they are slightly reducing in influence.

Also, on the broader economic front, because oil is relatively speaking less important in the world economy, demand for oil may be going up, but proportionally, if you look at a unit of output, for example, economists will tell you that the amount of oil that is needed to produce a unit of output in the developed world is actually decreasing, and this gives OPEC less leverage in the bigger picture -- Jonathan.

MANN: Just one quick word: were they talking much about Iraq there?

HODSON: Iraq is very much on people's minds. In fact, the whole general situation in the Middle East, and we're talking here about Israel and Palestinian areas as well, that is something that is very much on the minds of these ministers, many of whom, of course, are from Arab countries.

But in terms of the immediate impact of Iraq, price stability is something, that I mentioned, that OPEC is very, very keen on, and anything which is likely to effect that price stability, for example, a shutting off of Iraqi supply, whether the Iraqis do it themselves or it happens as a result of a United States-led attack on Iraq, say, that's a hypothesis, purely, by the way.

If that happens, then OPEC will step in and the Saudi Arabians have made it entirely clear that they will pump more, which they're in a position to do, should that happen -- Jonathan.

MANN: Charles Hodson -- thanks very much.

The price of oil has been going up for months because OPEC has tried to cap supply because the mammoth United States economy is picking up, and because there are fears about what might happen if, indeed, the United States does attack Iraq and other oil producers react.

Together, factors like that fuel talk and some anxiety in the oil industry.

Liam Halligan reports.

(BEGIN VIDEOTAPE)

LIAM HALLIGAN, CNN CORRESPONDENT: Here at London's International Petroleum Exchange, traders say the rise in pump prices is justified, seeing as all the prices have been nudging up for some months now.

But still, eyebrows are being raised at America's more hawkish line towards Iraq.

ROBERT LAUGHLIN, OIL TRADER: We've been concerned about, certainly, the attitude, perhaps, of the America's and George Bush in particular, in the last three to four weeks, and that started the movement of prices. But they've escalated in the last three to four days as we've been seeing, perhaps, the seriousness of the Americans and maybe one or two allies into a forcible movement into Iraq.

HALLIGAN: Oil makes the economic world go around, and all the markets are jittery because of the West's continued dependence on Middle Eastern oil.

Take America. The United States consumes an astonishing 22 million barrels per day. The European Union, meanwhile, guzzles 15 million barrels daily, and both those figures are growing.

In fact, the International Energy Agency says global oil demand is set to rise 55 percent by 2020 once you factor in demand from China and the other emerging markets.

Who says oil doesn't matter?

So where does all this oil come from? Saudi Arabia, of course, is the mother of all exporters, 7.3 million barrels a day. Iran, and crucially Iraq, are big players too. Iraq exports about 2.5 million barrels.

But then there's Russia, the reemerging giant of world oil. After big increases in recent months, Russia now exports 7.2 million barrels daily, almost as much as Saudi Arabia.

But the current focus is Iraq. All markets are dreading a repeat of scenes like these from the 1991 Gulf War. Iraq exports are important, but even more important is the Arab world's possible reaction to attacks against Saddam, albeit this time by George Bush, Jr.

Some experts even foresee oil sanctions against the West.

Saudi-led sanctions would spell 1970s style oil-driven economic disaster. But even if sanctions on the West don't happen, tension in the middle east does effect the Western and the British economy. If oil prices spike upwards and inflation rises, interest rates will go up too. Bad news for mortgage holders and the fragile global recovery.

JEREMY BATSTONE: The risk is one of inflationary pressure. Were we to see the oil prices rises and be sustained at higher levels, that would of course be inflationary, and would force the authorities on both sides of the Atlantic into some form of monetary response.

HALLIGAN: The interest rate rises?

BATSTONE: Interest rate rises, if necessary, to head off inflationary pressures.

HALLIGAN: Oil supply worries and their effects on inflation are one reason Mr. Bush and Blair have been wooing the Russians of late.

Since September 11th, Russia's oil sector, fueled by United States investment, has been pumping oil like there's no tomorrow.

So could a potential attack on Iraq also form parts of the West's energy strategy? Well, some say Iraq's decrepit oil sector is ripe for Western investment, but it won't happen until Saddam is out of the picture.

EUAN CRAIK: I think investment could happen very quickly. Russia's (UNINTELLIGIBLE) Oil, for example, has a massive pending project in Iraq. There are various non-United States and non-UK companies that have been negotiating similar deals in Iraq. None of this can happen while sanctions, U.N. sanctions, are still imposed on Iraq, and U.N. sanctions will clearly to be imposed on Iraq as long as Saddam Hussein is in power.

(END VIDEOTAPE)

MANN: ITN's Liam Halligan reporting.

After the break, more on Russia's reemergence. Stay with us.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

MANN (voice-over): Corrupted oil. When the Soviet Union collapsed, many of the vast oil interests were snapped up by Russian businessmen with connections in high places. They pocketed the profits and failed to reinvest. Aging, inefficient facilities went into further decline, as did production.

(END VIDEO CLIP)

(on camera): Welcome back.

Vladimir Putin was elected president with a pledge that he would stamp out corruption and cronyism and revive the economy.

Russia is now more stable and more attractive to investors, and its oil industry has a new lease on life.

Earlier, we talked about Russia's challenge in the market place with Julian Lee, who is the senior energy analyst for the Center for Global Energy studies.

(BEGIN VIDEOTAPE)

JULIAN LEE, CENTER FOR GLOBAL ENERGY STUDIES: Well, they're never going to replace the Middle East as the source of the bulk of the world's oil.

But by maybe 2010, we would expect the Caspian region to be producing somewhere between 4 or 5 million barrels a day, compared with the 1 million barrels it produces at the moment. And Russian production, depending on the level of oil prices, could be up from the current 7 million barrels a day to maybe as high as 9.

So we could see an extra 6 million barrels a day maybe coming out of the former Soviet Union.

That's equivalent to the production of another North Sea.

MANN: It would also, though, make Russia unequivocally the leading oil producer in the world, wouldn't it?

LEE: Well, that much would depend on what happens to Saudi Arabia's production in that intervening period.

At the moment, if one compares like with like, Saudi Arabia's production is somewhere around 10 percent higher than Russia's. But Saudi Arabia has a great deal of spare capacity. That if called upon to do so, the Kingdom could produce very quickly.

We have a situation where Saudi Arabia's production is limited by its OPEC quota, not by its ability to get oil out of the ground, whereas in Russia, the country is virtually producing as much as it can at the moment.

MANN: What do you think it plans to do for the future? Is it going to aggressively grow and try and get more market share?

LEE: Well, I think one of the things that we have to remember is that since the break up of the Soviet Union in the early 1990s, the Russian oil industry has come to resemble that in much of the Western world.

The industry now is dominated by a number of what are essentially privately owned companies, and these companies, like their counterparts in the West, pursue their own strategies, and those strategies differ from company to company.

So in that sense, there is no sort of outright Russian policy. But that having been said, many of the Russian companies are aggressively pursuing new opportunities. They want to increase their production. They want to compete with the big Western oil companies.

So I think that to the extent that they have funds available to invest, they will continue to try and boost their output capacity.

MANN: It's no secret that the United States has looked to the Middle East and to Saudi Arabia in particular as essentially a privileged source of its oil, a very certain, stable production center that it would return to over and over again. Do you get any sense that Russia might aspire to that kind of position?

LEE: Well, I think for the moment at least, geography rather works against that. There are size restrictions on the vessels that can be loaded at most of the Russian export ports at the moment that very often make it uneconomic to ship Russian oil across the Atlantic to the United States.

Now, there are plans to extend Russian pipelines all the way to the Mediterranean. That would allow Russian crude to be loaded into some of the very large crude carriers that regularly cross the Atlantic.

But even so, the volume of that oil is likely to be relatively small compared with what comes out of the Middle East. I personally don't expect Russia to replace Saudi Arabia as the biggest exporter to the United States.

MANN: Do you get a sense that the market is changing at all because of Russia?

LEE: Well, certainly Russia is having an impact. We have had a decade now in which Russian oil production has been falling. Domestic consumption in Russia has also been contracting, so the impact on Russia's exports has been more muted, but we have a fairly substantial increase in Russian oil exports at a time when production from the non-OPEC countries as a whole has been rising only very slowly.

So we are seeing, I think, Russia taking an increasing share of non- OPEC production, and this is one of the reasons why at the end of last year the OPEC countries were so keen to get Russia onboard in agreeing to make a cut in its exports. Because they were seeing Russia eat into their market share.

MANN: What happens if the United States really does attack Iraq? Does Russia become a much more important source of oil for Europe and the United States?

LEE: Well, I think the thing that we have to bear in mind is that countries like Russia, and indeed all of the non-OPEC countries, are producing oil at the moment just about at the limits of their capacity.

So if three were to be an attack on Iraq, and if we were overnight to lose Iraq's oil exports, which are currently running at something just under 2 million barrels a day, then the only place that that oil could come from in the short-term would be from the other members of OPEC (AUDIO GAP) Venezuela, Nigeria, and the north Africans.

So it's really there that we have to look for short-term oil to replace anything we lost from Iraq.

MANN: Julian Lee of the Center for Global Energy Studies. Thank you so much for talking with us.

LEE: It was my pleasure.

(END VIDEOTAPE)

MANN: Another break, and in a moment we'll talk about the Saudi Kingdom's long reign at the head of OPEC's table.

Stay with us.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

MANN (voice-over): Saudi Arabia has one quarter of all known oil reserves, more than any other place on the planet. It has a corresponding influence among oil producers, and it takes the long view when it comes to the industry: keep the market stable, the supply predictable, prices high, but not so high that consumers look elsewhere for their energy.

(END VIDEO CLIP)

(on camera): Welcome back.

Saudi Arabia has, for the most part, looked after American interests in the oil industry and the United States has looked out for its interests as a result.

How much will the war on terror or the war on Iraq change that?

Joining us now to talk about that is Vaman Zanoyan of the Petroleum Finance Company and Energy Advisory Firm.

Thanks so much for being with us.

Let me ask you first of all about how the Saudis have done it, their special position in the oil industry. Is it simply based on their good fortune and their good geology, or is it planning and politics and smarts as well?

VAMAN ZANOYAN, THE PETROLEUM FINANCE CO.: Well, it's definitely all of the above.

A very interesting comment here, based on the previous interview that you were having, is that Saudi Arabia's real importance, beyond just a commercial size that it has is its ability to maintain excess capacity at all times.

Like the previous speaker, Julian Lee, was saying, if there is a crisis in the world today, the only place that you will find substantial excess capacity would be mainly Saudi Arabia and some of its other OPEC member states. That's the strategic importance of Saudi Arabia, which I do not think even in the medium-term any of the other non-OPEC countries can take or can replace.

MANN: Excess capacity is another way of saying oil that Saudi Arabia doesn't sell, but could. Why don't they sell it? Why do they keep it as this strategic guarantee?

ZANOYAN: Well, first of all their own strategic importance, in a way, derives from their ability to supply the markets in a crunch.

So you will never see, I don't think, in a country which is largely driven by private oil companies like Russia, a situation where these companies would invest substantial amounts of money, build up production capacity, and then keep it idle for a rainy day.

Something like this can happen primarily in a country like Saudi Arabia and maybe a handful of other OPEC countries, but not in a country where the industry is run by the private sector. It doesn't make any sense.

MANN: Why did the House of Saudi build this excess capacity? Was it very pointedly to guarantee the security of the House of Saudi because of its relationship with the United States? Was it -- I'm trying to articulate this. Was it a pointed attempt to win favor and security from one particular market?

ZANOYAN: In a way, the capacity was being built over time, historically, to meet specific market demands. When Iraq invaded Kuwait, for example, we lost both Iraqi and Kuwaiti production for a while. The country that made up for that was Saudi Arabia, and in the process they did build a substantial amount of capacity in a very short period of time. They added to what they already had in order to meet that incremental demand in the market.

Now, since then, as demand subsides, they've cut their production in order to regulate the market or to kind of balance short-term supply and demand, which means they had to bring down their production, which means they had to create this excess capacity from the levels that they had.

MANN: Now, incredibly valuable if you're the president of the United States or if you're in the European Union and you want to be sure that there's going to be oil there in times of crisis. There has been a crisis -- September 11th. How much has changed between the United States and Saudi Arabia because of that?

ZANOYAN: September 11th, or immediately after September 11th, there was this huge media campaign, if you want, in the United States, which was very anti-Saudi in a sense, and every time I visited the Kingdom in those days I would see also a kind of similar campaign against the United States back there.

None of this was hitting at the very heart of this strategic relationship. I mean, the United States today does not have any alternative to Saudi Arabia in that excess capacity sense, another country on which we can rely.

But, it was a sense that Saudi's have not done enough to fight terrorism, and at the same time it was a sense from the Saudi side that, here we are, since '73, actually, where we've been the most reliable oil suppliers in the world, and now all of the sudden, why is our ability to supply the market being questioned the way it is.

I think what I saw in those first couple of months, at least, those first three months, let's say, right after September 11th, was a very serious level of disconnect between the way in which Washington was seeing realities in the region and the way in which Saudi Arabia was seeing realities in the region.

MANN: One key question now, we have just a moment left. We heard from Charles Hodson, OPEC saying that whatever happens with Iraq, supply will essentially be guaranteed. Do you think OPEC can do that if push comes to shove?

ZANOYAN: Of course. Of course. That's what OPEC has done in the last several years, every time Iraqi flows are interrupted for whatever reason, whether it be because of an impasse at the United Nations or whether it be a proactive decision on the part of Iraq, the balance has been made up by OPEC.

Right now, OPEC does have substantial excess capacity. In fact, these days, since OPEC has had several production cut backs, the excess capacity held within the organization goes beyond just that of Saudi Arabia. Many other countries have too.

So in this environment, where there is at least 5, probably 6 million barrels a day of excess capacity in OPEC, Iraqi disruption in and of itself is not something that the world needs to worry about too much.

MANN: Vaman Zanoyan of the Petroleum Finance Company. Thank you so much for talking with us.

ZANOYAN: Thank you.

MANN: Before we go, just a thought more about Iraq. There has been so much speculation about the effect of a United States military attack on the oil industry and on prices.

Iraq, as we heard, currently produces about 2 million barrels a day in exchange for humanitarian aid. The Iraqis themselves are saying that they will do everything they can to avert a crisis. Baghdad's deputy oil minister says that even in the event of military action, Iraq will defend itself, but it will keep pumping oil.

That's INSIGHT for this day. I'm Jonathan Mann. There's more news ahead.

END

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