Volatility in oil-producing nations threatens world energy markets

Volatility caused by political instability is a "serious threat" to world energy prices, warned David Goldwyn, president of Goldwyn International Strategies, and for that reason, diplomacy, trade and the creative intervention of the international financial institutions is urgently needed to bring long-term stability to the markets.
In testimony October 21 before the Senate Subcommittee on International Economic Policy, Export and Trade Promotion, Goldwyn said "prices are volatile because too many producers are unstable.
"You look back 30 years... and ask what caused the greatest price spikes. It was not embargoes. It's internal unrest! It's war! It's strikes! You know -- the Iranian revolution, the Iran-Iraq War, the two Persian Gulf wars, the Venezuelan strike and recent strikes in Nigeria."

Goldwyn warned the lawmakers, who were holding hearings to assess US energy policy worldwide, that present US government policies focused on energy security do not fully address the current threats.
"Our old system was one of deterrence. We built up big reserves [by which we could] deter an embargo. That worked pretty well but," he warned, "we can't deter today's threats. We can't defeat them by military force and, since the threats to the stability of the producers are largely internal, their problems can still become our problems if they stop producing.”
"The risks, just to make clear what they are, are that... (energy producing nations) will either fail to fulfil their production potential, so in 10 years they won't be there if we need them, or that we will suffer supply dislocations, or both. Either scenario, whichever way it happens," he warned, "increases the volatility of the price of energy, damages the US economy, and leaves us more dependent on Middle East oil."

Goldwyn first focused on Latin America, which he characterized as being "more important than Africa right now in terms of how much oil it provides to the United States." But "other than Trinidad and Tobago, there are no bright spots in Latin America right now," he said.
Latin America, Mexico and the Caribbean, currently account for 10.5 mm bpd of global oil production. If Canada is added, 52 % of US crude oil imports and 54 % of US petroleum product imports come from the Western hemisphere. Africa is currently producing in excess of 8 mm bpd of oil and now supplies the United States with about 12 % of its oil import requirements.

Venezuela and Mexico are that region's most important suppliers. "But," Goldwyn said, "They and the entire region are in pretty deep trouble. Mexico is still deadlocked over the desirability of foreign investment, particularly in the energy sector, and as a nation, Mexico is de-industrializing. It doesn't have the energy to compete for manufacturing with other developing countries. And if Mexico has economic problems, we (the US) have economic problems, and we have other kinds of problems as well.”
"Venezuela is recovering from a crippling strike and is undergoing a major reorganization of the national oil company. The national government is trying the best it can, I believe, to muster the capital and management that PdVSA [Petroleos de Venezuela] needs, but it is very unclear if they will succeed."

Other countries in the region also have problems, according to Goldwyn. Colombia is still plagued with a guerrilla war and terrorism while Bolivia has just seen a reform-minded president resign over a gas pipeline that would have provided United States with LNG.
Turning to Africa, Goldwyn said the continent could supply as much as 25 % of all US oil in the next decade but he warned that "energy security that relies on Africa is going to depend on the United States and other interested parties promoting political development in those countries, or they will not be the countries we want them to be a decade from now."

He called internal unrest a "serious threat" to the ability of all oil-producing African nations to maintain investments and exports.
"The case of Nigeria is well documented. The unrest in the Delta remains unresolved... and there has been sabotage, hostage-taking, major strikes and work stoppages. Eight hundred thousand barrels of oil [were] off the market last March, adding pressure to already high oil prices, and production is still not yet back to former levels today."
There's also "organized theft" of quite a lot of oil, he charged.

The oil industry in Angola, he explained, has benefited from isolation, but he charged that the industry has not isolated or insulated itself from adverse factors such as corruption, starvation, underdevelopment or repression of political opposition movements. Touching on the continent's new producers, he said, the long-term output of Chad, Equatorial Guinea and Sao Tome remain uncertain.
"They're going to have a large ramp-up in oil revenues and that will soon make these countries immune to any kind of influence, including positive influence. So," he said, "we have a window right now to address these issues of transparency in development. If we address them, then I think we have a chance to make progress. If we don't, they'll be faced with either coups or unrest or sanctions, depending on what kind of behaviour ensues."

Outlining priorities, Goldwyn said, "It's a lot more important that the governments of those three nations respect their own people than that they supply us with oil. But if we do nothing now, they may fail to do either one. The threats to each of these nations are different but poor governance is at the root of all of them." Additionally, he lamented, all oil-producing nations have "failed to address poverty, failed to invest in development, and they've allowed the non-oil sector to atrophy."
National oil companies, he told the lawmakers, have also become so big they have become immune to reform.
"When we're talking governmental reform, we're probably talking to the enemy a lot of the time. And as a result, all of our major suppliers are underperforming as producers and face continued instability."

To ward off these negative scenarios, Goldwyn suggested that the United States should re-engage diplomatically to press oil-producing governments to be fully transparent in their operations.
He warned, however, "We can't do it alone. This has to be multilateral," and he citing the G-7 [the seven leading industrial countries: US, Germany, Japan, France, UK, Canada, Italy] as the best potential vehicle for progress. An environment must be created that makes it worthwhile for African governments, who are frankly now benefiting from ... corruption, to want to reform. There's got to be something in it for them."

One solution Goldwyn suggested is a "debt-for-transparency" initiative, through which the international community could offer debt relief to nations like Angola and Nigeria, in exchange for enforceable commitments to be transparent about their public finances if they commit to a verifiable development plan. The need for infrastructure for development must also be addressed, he said.
"The World Bank has been moving away from investment in infrastructure. But I think it ought to be the carrot" of incentive held out as a prize for implementing reforms. You want a pipeline, electric power, telecommunications? Well, we'll help you get bank financing but you must commit to transparency, you must commit to a plan of development," he told the lawmakers, paraphrasing his approach to making progress.
Conditional trade finance is another option, he said. "We did pretty well getting all countries to say, there have to be environmental standards in order to finance some of our projects if you want our trade finance. We can apply the same principles to transparency."