Gary North's REALITY CHECK
Issue 53
September 7, 2000
E-Mail: ice@ballistic.com

OPEC'S REVENGE

On September 27-29, the heads of state of the OPEC
countries will meet for the first time in a quarter of a
century. For the first time, they will meet in the Western
hemisphere. Specifically, they will meet in Venezuela.

This is bad news for the West. The President of

Venezuela, Col. Hugo Chavez, is a disciple of Castro, a
self-declared social revolutionary, and a man so far to the
left that the United States government revoked his visa in
1994 after he was released from prison for having
participated in a failed coup attempt in 1992. The visa
was restored in 1998, after he was elected, but he has not
used it.

He now runs the country under a new constitution which
was approved by referendum. He has replaced the nation's
judges with his own appointees. He runs a tight ship.

Late last year through this year, he put restrictions
on any relief supplies from the U.S. being distributed in
response to the massive flooding, disease, and literal
starvation in Venezuela's rural areas. My church was
involved in relief efforts that he vetoed. We could not
get supplies into the country.

This man is a hard-core, vindictive leftist. He is
further to the left than any other elected official in the
Western hemisphere, other than Castro. But, unlike Castro,
he has clout: his nation exports 1.5 million barrels of oil
to the U.S. every day. It is our major supplier.

In the last 30 days, he made a personal tour of the
Middle East, meeting with the heads of state in Saudi
Arabia, Kuwait, Iran, and Iraq. He had to drive across the
border of Iraq from Iran, since the U.S. will not allow
planes to fly into the country. Saddam Hussein personally
drove him around Baghdad in his limo. After returning to
Iran, he flew to Indonesia.

What he got was assurance from the leaders that they
will personally show up at the OPEC meeting this month. If
they do, it will be a major show of force.

This information was published by Adrian Van Eck's
MONEY-FORECAST LETTER for September. He is forecasting a
move to $40 a barrel in 2001.

In a report issued last December, Steve Ellner made a
similar observation regarding OPEC. Nobody picked up on
it. After giving a favorable sketch of Chavez, in which
Chavez sounded amazingly like Castro, though Castro was
never mentioned, the author reported:

Of overriding importance is the key role

Chavez has begun to play in OPEC. In recent

years, Venezuela was notorious for scabbing on

OPEC by increasing oil exports. The Chavez

government's announcement early this year that it

would not attempt to recover the portion of the

U.S. market previously lost to Saudi Arabia

signaled a new policy of complying with

Venezuela's production quotas. In March [wrong:

September] of next year, Chavez hopes to host

OPEC's second summit of heads of states (the

first was held in 1975) in which non-OPEC oil

exporters will also participate. There Chavez is

expected to push for the proposal for OPEC to

reassume the role abandoned two decades ago of

setting prices in the form of establishing a

maximum-minimum range between which prices will

be allowed to oscillate.

In less than one year in office, Chavez has

diverged from the U.S. on a wide range of issues.

What he said in China on the last day of a visit

in October was more than just empty rhetoric: "We

have begun to put into practice an autonomous

foreign policy independent of any center of

power, and in this we resemble China." Chavez

went on to tell the Chinese that his end vision

was nothing less than a "multi-polar world."

When Chavez exhorted fellow rebels to lay

down their arms after intense fighting on

February 4, 1992, he declared, "Unfortunately,

the objectives we formulated have not been

achieved for now. The "for now" phrase has since

become legendary in Venezuela. It serves as a

reminder that Chavez is, above all, a strategist

with a keen sense of timing. . . .

http://www.neravt.com/left/ellner2.htm

OPEC supplies about a third of the world's oil. But
at the margin, they are the swing producers. They can
force the price up if they are willing to cut production.
Cartels tend to break down because of cheating, but the
price of oil has tripled since 1998. The trend is up.

Not many analysts seem worried. Statfor.com's site
has recently run a pair of articles that dismiss the threat
of higher oil prices, unless oil hits $40. Then it could
produce a shock similar to 1975, they estimate. The West
has become more efficient in terms of oil. From 1,400
barrels to produce $1 million (adjusted for inflation) in
goods and services in 1976, the U.S. has fallen to 800
barrels.

http://www.stratfor.com/MEAF/commentary/0008300143.htm

Stratfor assesses regions and countries in terms of
their vulnerability to an oil shock. Best off: Argentina;
next: U.S., Canada, Australia, United Kingdom; next:
Western Europe; next: Asia, especially Japan.

http://www.stratfor.com/MEAF/commentary/0008310235.htm

If this estimate is correct, then the U.S. dollar
would be initially stronger, because OPEC demands payments
in dollars. My recent assessment has been that the U.S.
dollar is close to its peak. But, if OPEC really does cut
back on oil production, then for a period, the U.S. dollar
could appreciate in relation to other currencies.

I had not thought it possible for OPEC to pull this
off until I read Van Eck's report. But Chavez is
determined to extract wealth from the U.S. and redistribute
it to the poor. He is an ideologue, and one with a
personal desire to get even with the U.S.

The richest OPEC countries have wasted billions on
wars (Iraq-Iran; Iraq-Kuwait) and welfare projects (Saudi
Arabia). They need the money. Even for oil exporting
nations, expenditures rise to meet income -- and then rise
some more. The lure of an OPEC price hike will be very
great.

Chavez's influence appears to be strong. If the heads
of state do show up in Venezuela, then they will be
demonstrating a degree of solidarity not seen during the
entire period of the booming U.S. stock market, 1982-2000.

It is legitimate to take a wait-and-see attitude.
Caution is wise for the next four weeks. But we may be on
the verge of a foreign policy/economic reversal that will
send a message to Western powers: energy is still a serious
business.

I like cheap energy, but I don't think today's cheap
energy can be sustained. I sent REALITY CHECK #46 (Feb.
27) on this topic. Here are selected extracts.

The increase in the price of oil in the

second half of 1999 was spectacular. Yet an

increase to about $30 was predicted in a July

report by Dr. Colin Campbell, who spoke to an

All-Party Committee of Britain's House of

Commons. He said it would take place in 2001 or

earlier. Much earlier, as it turned out.

This report appears, appropriately, on

www.hubbertpeak.com.

http://www.hubbertpeak.com/campbell/commons.htm

Hubbert is not a familiar name to most

people. . . . In 1974, he predicted that world

petroleum output would peak around 1995. His

forecast here was not quite so accurate, although

it has been reasonably close. . . .

In his presentation to the Commons

committee, Campbell outlined a theory of oil

reserves. He thinks that they are basically

fixed -- a matter of geology. Oilfields were

produced under rare circumstances. Modern

technology has advance considerably, letting us

identify these fields. "The world has now been

very thoroughly explored with the benefits of

this new understanding and the high resolution

seismic surveys. About 90% of the world's oil

endowment lies in just 30 major petroleum

systems. . . . All the promising areas have been

thoroughly explored." . . .

http://www.hubbertpeak.com/campbell/images/com10.gif

Yet the public is unconcerned. "The general

situation seems so obvious. Surely everyone can

see it staring them in the face. How can any

thinking person not be aware of it? How can

governments be obvious of the realities of

discovery and their implications?" . . .

But aren't there stable or increasing oil

reserves today? No. There is statistical

deception going on. Companies usually under-

report reserves when a new field is discovered.

So do OPEC countries, whose quotas are tied to

oil reserves. These reserve figures should be

backdated. If they were, this would have major

implications on the discovery charts. They would

be flattening.

http://www.hubbertpeak.com/campbell/images/com14.gif

Prudhoe Bay's depletion curve has been flat

since 1991. It will barely make the original

1977 estimate of 12.5 Gb, which was downgraded

officially to 9 Gb.

What we have experienced is a growth of

reporting, not a growth in oil reserves.

Today, half of the world's known oil

reserves are in five Middle East countries. They

hold the hammer. He thinks they will be using it

soon.

There is a discovery/production relationship

for newly discovered fields. Production peaks at

the halfway point. In the U.S.A.'s lower 48

states, discovery peaked in the 1930's and

production peaked in 1971. In the North Sea,

discovery peaked in 1980 and peak production

seems to have been reached.

The Middle East will have to make up any

deficit: the hammer. Campbell calls this "swing

share." Swing share rise to 38% in 1973, just

before the OPEC oil embargo. It fell to 18% in

1985 as a result of North Sea oil. Oil prices

fell. As of mid-1999, the Middle East's swing

share was back to 30%.

http://www.hubbertpeak.com/campbell/images/com20.gif

"This time it is set to continue to rise because

there are no new provinces ready to deliver fresh

production, save perhaps the Caspian and that

seems to be turning sour."

He thinks the swing share will hit 35% in

2001. "The Middle East countries will then have

the confidence to impose much higher prices,

realising that they have no competition. They

may even get such confidence sooner." Norway's

production is set to halve by 2006. Norway is

the world's second largest exporter. . . .

"I think prices might briefly soar to very

high levels. . . ." Also, "I think demand does

become elastic above about $30/b, reacting to

normal market forces, so higher prices may curb

demand."

The price reached $29/b before 2000 rolled over.

"But I expect that somehow a plateau of

production, however volatile, will unfold around

$30 a barrel. But the end of this plateau will

soon come into sight." He thinks it will hit in

2008, when swing share is 50% and Middle East

countries will be approaching their depletion

midpoint. . . .

The geology of oil points to increasing prices before
2010. But the geopolitics of oil could force that increase
even sooner -- maybe before the end of the year.

What I recommend is awareness -- and being out of the
stock market. The financial press has not picked up on any
of this yet. It's "good times for all" as far as the U.S.
financial press is concerned. This kind of story is off
the radar screen.

The world is run in terms of digits, but it runs on
oil. There is a real economy out there, underneath the
dance of the digits. It operates in terms of supply and
demand, but also in terms of politics, including the
politics of revenge.

We are an oil-importing nation. We are now funding
our prosperity by means of massive borrowing from
foreigners. For visual confirmation, see this chart from
FORBES:

http://www.forbes.com/forbes/00/0807/6604080chart1.htm

The effect of an oil price of $40 will be far-
reaching, but one of them will be to move foreign-owned
dollars out of U.S. investment U.S. instruments and into
oil-exporting nations' treasuries. Whether oil-exporting
nations will rush to buy U.S. debt is a real question.
Given the geopolitics of oil, I would bet against it.

***************

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