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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2759

Plummeting Oil Price: the near- prophetic words of Sheikh Yamani

Hemantha Abeywardena writes from London…

The price of oil is plummeting and it has lost its value almost by 50% of what it was a year ago, without a trace of an immediate reversal, despite the never-ending volatility in the Middle East, which used to push the price up in the past.

Those who think otherwise, while ignoring the strong facts that slowly contributed to the catastrophic culmination, are simply burying their heads in the sand, in the desert or elsewhere, in the hope of an onset of good old days by a miracle.

Up until November last year, investors, economists, and experts had been forecasting a healthy growth in the oil industry – and a steady increase in price too – based on mathematical models, over-optimistic growth charts of emerging economies and of course, matching rhetoric of the corresponding political circles.

Who on earth forecast a steep decline in oil price, let alone more than 50% drop in price, this time last year? I can’t think of anyone. Nor can anyone from our readership, I assume.

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There was someone, however, who foresaw what we see now almost 15 years ago. Surprisingly, he was an Arab; a powerful oil minster too. It was Sheikh Yamani, the former Saudi oil minister who predicted a cataclysmic crash in the price of oil, in an interview in June, 2000, with Gyles Brandreth, a Member of Parliament in Britain, who was a columnist for the Telegraph newspaper too.

In the unprecedented interview, Sheikh Yamani said that within a few decades, vast reserves of oil would lie unwanted and “oil age” will come to an end.

Then, Sheikh Yamani, a Harvard-educated law graduate, went on elaborating what he really meant: "Thirty years from now there will be a huge amount of oil - and no buyers. Oil will be left in the ground,” said Sheik Yamani before going poetic to take Mr Brandreth, who by then may have been shell-shocked by the revelation, to the metaphorical zenith of his blunt prophesy: “The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil."

Of course, Sheikh Yamani, who was the Saudi oil minister from 1962 to 1986, and then the head of an energy consultancy, knew much more than we do about the oil sector, its reserves, how it functioned, headwinds and above all, undercurrents, which were more or less closely guarded. After all, he was instrumental in maintaining a moderate policy during his reign as the most powerful man in the industry, having survived a kidnapping ordeal, King Fahd’s wrath over disagreements and even defying royal orders when they were not acceptable to him.

His prophesy, however, did not catch on, despite being associated with once most powerful man in the sector; nor did it dampen the ambitions of global oil sector and happy investors to slow them down or stop them from investing in the industry.

It didn’t take thirty years to see where the sector appears to be heading – much earlier than the time frame given by Sheik Yamani.

When the price of oil suddenly plummeted in January, this year, no economic expert could account for the steep drop – and that of gold too. The vacuum left behind by the experts didn’t stay that way for long; it was quickly filled in by a long list of conspiracy theories.

The conspiracy theorists got some credibility due to the fact that Saudi Arabia, the world’s largest oil producers, refused to cut down on the production in order to push up the price. Having buoyed by the development, they said that the US and OPEC, especially Saudi Arabia, were hatching a plot to punish Russia over its aggression in Ukraine, by stopping the former from cashing in on high oil and gas prices to bolster its coffers.

As things turned out earlier this year, this particular analysis was just red-herring. On the contrary, the reluctance to cut down on the output has actually stemmed from the cold rivalry between the two ‘allies’, Saudi Arabia vs US. In fact, Saudis were simply trying to make the shale industry irrelevant, its would-be rivals in the oil sector – shale oil producers in the US, the new comers.

This is how I see the funny side of the ‘cold war’ between the two supposedly strong ‘allies’!

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Having realized that the shale oil producers spend a lot of money in extracting it, Saudis hoped that a drop in oil price below a certain value would push the former to the wall. As far as Saudis – and the rest of OPEC too – were concerned, unfortunately, they overlooked one vital fact in this miscalculation – the American ingenuity.

Not only did the American shale industry halve the cost by 50%, but also plans to reduce it further by 30% in the coming months, while delivering a massive blow to the thinking of the OPEC. In certain areas of the US, the shale drillers have cut down on the time taken for a well from 61 days to just 16 days, in a classic case of enhancing efficiency.

To make matters worse, the US is now in a position to call the shots if the price of oil goes wildly high; it will simply flood the market with shale oil, as it is in possession of enough of it, to do it in the event of an unacceptable price rise.

With this massive miscalculation in inducing an artificial price crash by OPEC, over $ 200bn investments in the sector by major oil and gas companies have been ditched, in addition to thousands of job losses across the globe in many sectors that are closely related to the oil industry.

Moreover, the Gulf nations, having suddenly been awakened by a rude shock, see their reserves depleting by the day in the attempts to keep generous welfare programmes rolling, before their own unrest sets in. Apart from Norway, Kuwait and Abu Dhabi, the other members of the OPEC must maintain the oil price at more than $100 to balance the budget in 2015. As of today, it is just above $47.

If this trend continues, it is pretty bad for the developing nations in the long run as well. At present, for instance, millions of workers from the South Asia are making a living in the Gulf nations and it goes without saying that their contribution to the economies in the region as a whole. In addition, even in the advanced economies, especially the defence sectors and financial sectors, will suffer if the fortunes of the Middle East started eroding slowly.

The fact that no one could explain the steep fall in oil price in November last year, shows another disturbing trend – our obsession with charts and analyses and inevitable costly consequences. The investors, by instinct or otherwise, must have come to know, what we know now, a year ago – the slowing down of the Chinese economy and its corresponding impact on the demand of oil.

The recent fall in gold price further confirms that the unexpected fall in price of both commodities last year was neither accidental nor seasonal. They were forewarning signs of something unpleasant to come, which was hidden from us by the cloaks of endless number crunching - that impresses many, but not all.

In this context, we can only hope that Sheikh Yamani, 85, who successfully predicted the fate of oil industry, may come up with a similar prophesy, a pleasant one this time, to minimize, if not counter, the impact of the impending disaster, as he has plenty of time on his hand in his well-earned retirement.

- Asian Tribune -

Plummeting Oil Price: the near- prophetic words of Sheikh Yamani
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