Why Does Washington Want OPEC to Increase Supplies Despite the Decline in Price?
Walid Khadduri Al-Hayat - 27/01/08//
Suddenly, without any introductions, global economic growth seems to have started sharp and rapid decline like a snowball that grows in size as it rolls down, wreaking havoc along the way. The decline started last fall over the sub-prime mortgage crisis in the US, a crisis that many mistook as local despite the fact that the real estate sector is the largest economic segment in the United States. It now turns out to be much worse than the Japanese real estate crisis at the end of last century whose aftereffects can still be seen in the Japanese economy. The widening impact of the current crisis is attributed to the diminishing loans supplied by major American and European banking institutions to corporations and property buyers, not to mention the enormous losses suffered by these institutions as a result of previously supplied loans that are now dubbed uncollectible.
Global banks gradually caught the American contagion, incurring preliminary losses of $200 billion. International stock markets followed, and crude oil prices followed the same path, dropping by more than 10% in January. Oil prices are likely to take a hit in the future with the ongoing economic slowdown in the US and its impacts on American and global demand for crude oil, especially as oil demand forecasts for 2008 are reviewed downwards on a daily basis. One of the credible forecasts expected the increase level to be less than one million barrels a day, an expectation that raises serious concerns since this level, if reality matches expectation, is too low and will pull prices down too sharply.
Amidst the decelerating US and global economies, Bush demanded that OPEC raise its production ceiling in its upcoming summit without openly setting the desired ceiling. The request was confirmed by US energy secretary Samuel Bodman during his visit to the Gulf states last week, still without announcing the desired increase in production. The American demand comes at a very unusual time as prices were already sliding before any of these statements were made and without the need for any political interference. The slide in prices is attributed to market elements dominated by the fear of a worsening and spreading economic slowdown. Interestingly, American officials have not linked highly oil prices to the current global economic crisis as if no relationship existed between high oil prices with this crisis. Nor did any prominent international economist link the slowdown in the US with high oil prices.
Too many questions come to mind regarding this American request, especially as it comes a little too late at time when oil prices are falling on their own in response to the global economic slowdown without the need for any overt or political pressures. Oil prices have already dropped over the fears of future economic developments, and last week, the impact of these fears exceeded the effects of shutting down the crude oil exporting ports in Mexico as a result of bad weather, the shutting down of major oil production sites in Nigeria following attacks by local militias, and the takeover of several South Oil Company sites by the Jundullah militia in Basra on Ashura Day.
So why the American request now?
As the case may be, Washington's request for increasing production is explained by the attempt to link the economic slowdown with the presidential campaign in the US, and the visits by American officials to Arab countries with the upcoming OPEC summit on the other hand. American officials are fully aware of the real causes for the rise in oil prices, and while they may not admit to it openly, they know that multiple external factors are involved such as speculations, the shortage in new refineries in their country, and political instabilities in producing nations, not to mention the growing demand for energy in some developing countries as a result of rising standards of living.
*Energy Expert
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