Oil in a Week (What Oil Price will OPEC Adopt?)
Walid Khadduri Al-Hayat - 08/09/08//
OPEC will hold its semi-annual ministerial meeting the day after tomorrow in Vienna amidst an atmosphere completely different from the one that prevailed earlier this year. Prices are now on a decline after having fallen from a record $147 to almost $110 over the past few weeks despite Hurricane Gustav and the Russian-Georgian war.
Although Gustav did not devastate the American oil facilities as Hurricane Katrina did in 2005 since it followed a different path, the impact of hurricanes is far from over. The US Department of Homeland Security announced that oil companies operating in the Gulf of Mexico have cut production by 96% as a result of the hurricane with three more hurricanes expected to follow Gustav's path and be as strong, namely Hana, Ike and Josephine.
On the other hand, while the Russian-Georgian war is over, it has left its marks on the international oil market. The first impact can be seen in the ongoing argument between Russia and the EU over the possibility that Moscow may reduce its oil and gas exports to Europe. Despite absolute Russian denial for any boycott against Europe, Europeans fear that Russia's oil exports may be diverted to supply Asian countries, especially China, through the common pipelines, or used to reinforce the domestic market in Russia, especially during winter, which would cut oil exports to the west for "purely commercial reasons," at least explicitly. Then there is the Iranian nuclear file and how it will be handled by Israel as well as by the US which will be headed by a new administration in a few months.
As usual, there are also the ongoing political problems among OPEC member states, especially the turbulences in Nigeria where rebel activity has escalated in the oil-rich Delta Niger, in addition to the kidnapping of foreign workers at oil companies and the sickness of Nigerian President Umaru Yar'Adua and its impact on the negotiations with the rebels. On top of this, Nigeria's oil production has dropped from almost 2.5 million barrels a day to almost 1.8 million.
While all these factors tend to push prices upwards rather than pull them downwards as the case is now, the reason behind the sliding prices lies in the contraction of the US economy and the decline in demand that accompanies it. Additionally, the recent significant appreciation of the US dollar has also contributed to declining oil prices according to many observers.
Still, despite this decline, oil prices are still very high, and this has forced a few member states to offer various forms of aid to friendly nations to help them reduce their imported oil bill. This is indeed what Iraq did with Jordan and Lebanon.
How will OPEC deal with declining prices given all these factors? Based on previous experience, it is known that OPEC faces its worst difficulties when prices deteriorate since this gives rise to the issue of commitment to concluded agreements. What makes matters worse particularly now, is the attempt of a few states to deal with the phenomenon of high prices. It must be noted that the current price hurts the economies of many developing nations. The bigger challenge facing OPEC ministers in their Vienna meeting will be setting the new price level they will be defending. Is it $100 per barrel as Iran and Venezuela demand, or $80? What means will be used to achieve and maintain this price level and what will the impacts of these two prices be on the economies of exporting nations?
The indicator of the final decision and desired price will depend on the production level adopted by OPEC. Will OPEC maintain the current quotas with emphasis on the need to commit to these quotas without increasing production, or will it cut or increase the previous production level? The decision will reflect the position of OPEC regarding the targeted price and this means that we have just entered a new price phase.
|
