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Cambodian Business Review

Can Cambodia Become A Producer? Is This The Year of Reckoning?

 

Goldman Sachs Group Inc. has, in a recent report, said that oil supplies would become "critically tight" this year. Analysts of the bank predict that oil prices could go even higher as spare production capacity and inventories are "effectively exhausted." So, why not increase production, from say, Saudi Arabia? Well, Goldman has also shared apprehension on the ability of Saudi Arabia to raise oil production in the face of eventual scarcity as it believes that Saudi Arabia won't be able to pump as much extra oil as many people believe. On a scary note, the scarcity could occur early in the year. First to the case of Saudi Arabia: It's no secret that Saudi Arabia, in a desperate attempt to hold on to power, is trying hard to win back its people. After all, the wave of massive protest for democracy did shake the Middle East. So what does it do? Take this: King Abdullah's has announced generous subsidies to construct 500,000 houses for the poor, a friendly mortgage law for the common man to buy property, finances for infrastructure, religious organizations, and for improving the education and health system, a pay rise for workers in the public sector, unemployment benefits, and more education allowance for students.

To be sure, it also helps that the country has massive reserves for all the spending, thanks to oil. In two packages, the first announced last February for $36 billion, and the second last March for $94 billion, the ruler is fighting to win back his people. Together, the $130 billion is equal to 30 percent of the kingdom's GDP, or revenues from oil export for eight months. All this, the IMF predicted, would help Saudi Arabia's GDP growth by 7.5% (Since revised to 6.5 per cent ). With 24.9 percent of the 1,000 billion barrels proven oil reserves of OPEC, the country has the largest oil reserves in the world and is also one of the largest producers of oil, next only to Russia. IEA holds that Saudi Arabia is capable of producing up to 12 million barrels of oil a day, compared to nine million barrels a day in May. Early last year with tensions ranging in Libya, the IEA's executive director, Nobuo Tanaka had said that Saudi Arabia could easily offset any shortfall in production from Libya. With such huge reserves, Saudi Arabia, along with Kuwait, and the UAE pressed for increase in production quotas. But, countries like Libya, Algeria, Venezuela, Ecuador, Iraq, Iran, were against the move. Consequently, no decision was reached and the production quotas remained unchanged. Of course, the last thing the Saudi government needs at this point is high inflation due to import of expensive food grain, offset by high transportation charges due to high oil prices.

Some indicators to gauge the extent of price fluctuation in recent times: The oil price hit $101.08 (Brent crude) a barrel last February, the highest since October 2008 (In June 2008, they were jogging around $147 a barrel). In June, 2011 they fell to $90 a barrel amid fears of supply disruption due to the closure of Suez canal and Egypt unrest. Hence, Saudi Arabia has, quite unilaterally, pledged to increase production, notwithstanding the OPEC decision. According to a Platt's survey, oil production from OPEC shot up by 530,000 barrels per day last June, at a total of 29.57 million barrels per day, compared to the 29.04 million b/d last May. And guess what? Saudi Arabia's production was up by 450,000 barrels per day to reach a total of 9.5 million b/d. Kuwait, UAE too have increased production, according to the survey. And don't forget most of this increase is just enough to meet the growing demand at home. Saudi Arabia, essentially, is putting more oil on the market to pay for generous welfare programs, basically "buying out" its population from joining in on the unrest that spread through other oil producing nations. This is unsustainable and will accelerate well depletion. At this point, no one knows the actual reserves of the country, which is dangerous in itself.

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