OPEC vis-à-vis $100 per barrel
Walid Khadduri Al-Hayat - 24/02/08//
Crude oil prices were up again last week, reaching the $100 level, which it had attained at the beginning of the year despite the gradual decline to the $86 mark. Why are oil prices up again?
As usual, several factors are responsible for the change in the direction of prices in this case. First, there is the forced shutting down of almost one million barrels daily in Nigerian production as a result of political violence in the Delta region. There is also the ongoing dispute between Exxon Mobil and the state-run Petroleos de Venezuela (PDVSA) over Exxon's share at a heavy oil production project in the heavy oil-rich Orinoco province. The dispute also involved Exxon's resort to international courts to seize no less than $12 billion of PDVSA's assets outside Venezuela, as compensation for its losses resulting from the dispute and the unilateral termination of contract. Considering the ruling unfair, Caracas threatened to halt its oil exports of 1.5 million barrels daily to the United States.
Caracas, however, changed its mind and announced later that rather than halting its exports to the US, it would only stop its supplies to Exxon only which would account for the very limited supply of around 45,000 barrels daily. As talks are still ongoing between the two sides in an attempt to reach a conciliatory solution, Venezuela has stopped its exports neither to the US nor to Exxon.
The dispute between Exxon and Venezuela and the ensuing ruling that Exxon achieved from international courts constitute a dangerous precedent for oil-exporting nations with regards to the pressures that these companies can exert in the event of changes in the provisions of contracts signed in haste without substantial consideration as the case is today in a number of Arab oil countries. It is worth mentioning that during this period, Venezuela itself accepted a ruling by an arbitration commission over its dispute with Eni SpA and agreed to pay $700 million in compensation to the Italian energy company.
Prices are also up as a result of the statements made by Venezuelan and Iranian oil officials demanding a lower production ceiling by OPEC in its ministerial conference in Vienna on March 5th. In effect, these statements harmed those who issued them since it would be difficult for OPEC to announce a reduction in production with the price hovering around $100, that is, if it can be assumed that such a suggestion can win member consensus, which is highly doubtful and unrealistic given the current high prices.
What contributed to the rise in prices was the affirmation by some OPEC ministers last week that the organization will either maintain or cut the current production ceiling. Although such statements often reflect the opinions of these ministers and their states alone but not OPEC's views since the final decision comes out by consensus after the meetings, it is such attitudes that contribute to intensifying speculations and efforts to snap opportunities for making market gains.
Unlike the situation over the past four years when OPEC's decisions were made amidst unprecedented global economic growth, things are now different. The question remains, however: has the situation changed completely or only partially? In other words, will economic growth slow down in China and India as in the United States?
It is well-known that speculators take advantage of these transitional phases rich in surprises and fluctuations and resort to markets that assure them the highest possible profits in the shortest possible time. These days, as it is known, there are fears of continuous cutting of interest rates, let alone the decline of international stock markets and rising inflation rates, and all these factors encourage investment in oil and gold.
Oil prices have also risen to cross the psychological barrier of $100 as a result of the harsh weather conditions in the northern hemisphere. Markets are accustomed to this factor during winter and as far as OPEC is concerned, its impact is limited to the ability of international companies to secure the fuel needs for the season with the increases in demand for warming fuel and the need to store sufficient supplies of crude oil and petroleum products for the next few months. OPEC officials and ministers of member states announced that they will be keeping a watchful eye on the available commercial inventories till the end of the month, before making the appropriate decision over production ceiling.
OPEC, therefore, will not approve an increase in production as the US demands. I do not believe this is linked to a purely political cause because more importantly, the economics of the oil market does not support such a decision. In the event of increasing production, there is a real fear of sending the wrong message to the market and speculators, especially as we head toward the spring, when demand for oil declines anyway. Hence, any increase in production now could lead to a decline in prices and make it difficult to defend a reasonable price in the future. This is exactly what happened in 1998 when prices collapsed to below $10.
It is also difficult to imagine consensus within OPEC to cut production while prices stand at $100 because such a step could raise prices to unprecedented level for a very long time to come which in turn would burden consumers and reinforce incentives to find alternative forms of energy to replace oil. In such a case, and given the lack of effective alternatives, it is likely that OPEC ministers will maintain the current production rates to send the message that it is neither interested in flooding the markets or inducing an artificial supply shortage. Such has been OPEC's policy for a long time.
*Energy Expert
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