By Mathew Maavak
The official selling price for Dubai crude has topped $65.22 per barrel, following Abu Dhabi National Oil Co.'s move to raise the price of its Murban variety by 35 cents to $68.85 per barrel. Both price hikes are retroactive for June.
Since Dubai crude is the mainstay of Korean imports, the effects are trickling in during a time when the government and private corporations are grappling with reduced consumer spending, an appreciating won, reduced exports, and a general economic slowdown.
And of course, soaring oil prices.
So far, the Korean economy has subtly soaked up rising fuel bills, but whether this can be prolonged indefinitely is left to question.
It was only three months ago when the government mulled the implementation of a "mandatory energy savings" plan. One drastic measure involved the proposed no-driving day each week for corporations and government institutions, and later private citizens, if conditions warranted it.
Large buildings were also targeted to moderate the use of air conditioners, throwing a hint at the kind of detailed planning involved.
These proposals were stonewalled by their own impracticality and the jitters they might induce within financial circles. Anyway, such plans cannot be implemented on a short notice without widespread energy cognizance among all segments of society.
The thin red line beyond which these measures take effect happens to be Dubai crude at $70 plus per barrel. That day seems to be nearing faster while contingency plans -- if any -- are deliberately delayed to avoid a panicked flight in the market.
Luck is not on the Korean side either. Come August, Japan and to a lesser extent China, will be in receipt of the high-quality Sokol crude from Russia's Far Eastern Sakhalin-1 wells.
According to a recent Reuters report, "Sakhalin-1 is the biggest new source of Pacific basin crude in over a decade," and it "will redraw the oil trading map in Asia, displacing Abu Dhabi crude in Japan and briefly freeing extra West African oil for U.S. buyers."
Sakhalin-1 -- due to pump about 250,000 barrels per day by this year end -- is operated by Exxon Mobil, Japanese consortium Sodeco and India's Natural Gas Corp. through a 30-30-20 stake ratio.
Sokol has an "API gravity of 37.9 and a sulphur content of 0.23 percent, making it a light sweet crude with a high yield of middle distillates and gasoline. It is very similar to the Sakhalin-2 Vityaz crude, but slightly lighter," according to another Reuters report.
This would be an ideal variety for Korean refineries in case the Dubai crude hits the ceiling, or in the event of a major conflict in the Middle East. Supplies, however, have been locked up and secured for the time being. It also takes some time-consuming technical tweaking to refine crude oil of a lower quality from somewhere else.
Japan's Sakhalin-1 investment has been shrewd and farsighted. It was originally aimed at whittling down Tokyo's dependency on Middle Eastern oil, which currently stands at a staggering 90 percent.
Analysts point out that the Sakhalin-1 windfall will only make a small overall impact in Japan. Yet, with serious tensions mounting in the Middle East on two fronts, Dubai crude's upper limits will be further strained. Apart from geopolitical tensions, there might be additional premiums charged on shipping firms.
Tehran has just been served a June 12 ultimatum over its nuclear enrichment program. This time the Western powers are backed with a tacit Chinese acquiescence. The armed standoff in the Gaza strip has not been factored in as a possible destabilizing factor in the global energy market. Israeli jets whizzed past Damascus only a week back, knowing full well that Tehran would rein in its Lebanese proxy, the Hezbollah, from firing Katyusha rockets into northern Israel.
At least for now.
But if Iran faces a little more than minor sanctions from June 12, this might change. The fighting in Gaza might flare up into low-level assaults on multiple fronts, including terrorist attacks on major oil installations.
Not for the first time, the Middle East is holding the entire world to ransom. This latest episode -- if one could find a starting point in this tangled mess -- began with one Israeli hostage.
Market forces though are too powerful to ignore, and there is every likelihood that Hamas would turn in the kidnapped Israeli soldier before the June 12 deadline, and in the process, free up diplomatic guns which can then be trained on Tehran.
But there are other actors waiting to fill in the vaccum and raise the terror premium on oil.
That contigency plans can be implemented overnight -- anywhere -- in such conditions almost defies the imagination.
Published in The Korea Herald on July 5, 2006
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