I imagine a version of this chart has been keeping ministers awake at nights in Riyadh and the other Gulf Co-Operation Countries (GCC) in recent months. “How did we ever allow Canada to supply more oil than OPEC to the US?” they must be worrying. “What did we think we were doing?”
This might not be quite so critical if the GCC was able to defend itself militarily against its enemies. But Saudi Arabia, the main GCC country, has a population of just 27 million. The total population of the other GCC countries is just 23m. And they all remember very well what happened in 1990, when Iraq decided to invade GCC-member, Kuwait.
It wasn’t Nigeria, or Venezuela or Libya or another OPEC member that came to their rescue then. It was the USA, under the long-standing 1945 oil-for-defence deal agreed by President Roosevelt and King Saud. Roosevelt had needed Saudi oil to rebuild the US after World War II, and Saud needed someone to fight off his enemies.
Now, fast forward to today. Can one imagine President Obama and Congress putting US armies into a modern-day Operation Desert Shield/Desert Storm? Or UK Prime Minister Cameron rushing to persuade the President to do this?
Of course not. But Margaret Thatcher did this in August 1990, telling President Bush “This is no time to go wobbly”. And Congress agreed. Everyone knew the world economy depended on having friendly regimes in Riyadh and the GCC.
The second chart highlights the key message. Of course, it wasn’t OPEC’s fault that oil prices went back to record levels over the past decade, as I discussed on Tuesday. But they allowed it to continue. They could have increased supply post-2008, and collapsed the whole charade.
But sadly, it seemed easier to believe the investment bankers’ story that the world could live with $100/bbl oil – even though it had never done so before. And they forgot that high prices would also encourage new supply:
- The GCC countries had always been able to rely on a rising volume of oil exports to the US (purple line)
- But their volume began to dip from the 2.5mbd level after 2004, and now risks falling below 1.5mbd
- Over the same period, Canadian imports have risen steadily from just 1mbd in 1993 to 3.5mbd today (red)
- And Canadian volumes are continuing to rise, whilst GCC volumes fall
So what would happen today if the Caliphate or someone else decided to attack? After all, the GCC countries are immensely wealthy after a decade of high prices. Would the US, UK and other countries come to their rescue again?
The GCC countries have clearly woken up to this critical issue, that their position is extremely vulnerable without US support. This have suddenly begun to plan their own oil price strategy, independently of OPEC. Instead of agreeing to production cuts, Saudi Oil Minister Naimi has said that in future, “the market sets the price”.
Prices have so far fallen $40/bbl since I first argued in mid-August that a Great Unwinding was now underway. And there have been no production cutbacks around the world in response, or sudden jumps in demand.
So prices may well need to fall the same amount again, before GCC leaders can once again sleep easily in their beds at night.