Opec is Anxious about the Repercussions of Oil Price Jumps
Walid Khadduri Al-Hayat - 23/10/07//
Crude oil prices rose furiously last week and recorded record levels, above and beyond the older $84 a barrel mark. Prices rose by 10% between the 8th of this month, when oil prices in the New York market hit $79, and the 20th, when prices hit a record $88.20; the price rose again, to $89 a barrel, after the Turkish Parliament approved the government's bill to grant it the right to use military force against Iraqi Kurdistan. The price then jumped to $90 a barrel.
The principal reason for this new wave of price increases can be attributed to the Turkish threats of invading northern Iraq, in addition to the anxiety by consumer countries about a drop in reserves and the lack of opportunity for compensating for such losses, not to mention the weak US dollar.
It's interesting to note that Iraqi oil exports via Turkey have been limited and intermittent since the invasion of Iraq in 2003, and do not exceed an average of 230,000 barrels a day, of which a big portion is marketed in Turkey itself. However, the state of fear that dominates markets regarding the new tension in the Middle East, especially since it represents a new threat to Iraq and a possible expansion of violent acts in the future within Turkey, has prompted speculators to invest widely in the oil market in order to reap a quick profit from this wave of price increases.
The markets' fear of the Turkish threat goes beyond the invasion of Iraq and an interruption of Kirkuk's oil supplies. The fear lies in the opening of a new front in the Middle East, especially with the expansion of Turkey's regional role in transporting oil and gas via the new pipeline system from the Caspian Sea, Iraq and Iran, and, in the future, from Egypt, via the Arab gas line via Turkey to Europe.
The fear also lies in the possible future expansion of Turkish military activities, as the PKK (Kurdistan Workers' Party) can destroy this pipelines and oil installations, cutting supplies of gas or oil.
Crude oil prices rose by about 70% this year and, as it has become clear since 2004, there is a new oil era characterized by a rise in prices due to a constant increase in demand, without a negative impact, until now, on the types and rates of consumption. This period has also been distinguished by unstable conditions in Iraq, due to the occupation, not to mention western threats regarding the Iran nuclear crisis.
However, the current confrontation also reveals the failure of the US to restrain the crisis and armed conflict between two strategic allies in the Middle East: Turkey and Iraqi Kurdistan. This in turn reflects the level of weakness that Washington's policy in the Middle East has arrived at in general, due to the pressure of the Iraqi war. There are economic dangers that will result from another military confrontation in the unstable Middle East, but this time, between the west and Iran, with an impact on oil prices. The confrontation with Turkey (a non-oil state) has led to this rise in prices, so what level will they reach if a military strike is launched against Iran?
OPEC has expressed its dissatisfaction with the constant rise in prices. On the 16th of the month, the organization's secretary general, Abdullah al-Badri, said he believed that this most mostly the result of speculation in markets, and said that "while the organization does not favor oil prices at this level, it strongly believes that fundamentals are not supporting current high prices. What is pushing prices up are seasonable repair works on refineries, political turmoil in the Middle East, and fluctuations in the dollar." He added, "the organization aims at and works for restoring balance to world markets, in the interest of consumers and producers. As part of our efforts to balance market supply and demand, we decided in September to increase production by 500,000 barrels a day, beginning on the 1st of November. In fact, members states are now preparing for this production increase."
As for the talk of a shortfall in the commercial reserve in western industrial countries, since it is a main reason behind the unbelievable price rise, al-Badri said, "the reserve level is above its average for the last five years. There is enough oil for western industrial countries for 53.50 days."
A reason for the anxiety of OPEC is the impact of these high prices on the interests of consumers, particularly in third world countries, the future impact on world demand for oil, and the increase in investment in alternative sources of energy and the likelihood of obtaining a wider share of the energy market, at the expense of oil.
These record high prices come at a difficult time for OPEC. The future of the world economy is in the balance. The chairman of the US Federal Reserve, Ben Bernanke, warned of the likely dangers in the coming period and until the beginning of 2008. During a lecture last week at the New York Economic Club, he said that the US real estate market, the country's biggest sector, would slow down and have negative repercussions for other sectors in the US, and international repercussions. The chairman of Caterpillar, the biggest US construction equipment firm, said the current real estate crisis in the US was the worst since the end of the World War II. New debts have accumulated for American commercial banks to the tune of $280 billion because of this crisis.
The Fed chairman's expectations are like a yellow light for OPEC states, warning them against taking new measures to increase production. Any increase over what markets currently need, and in light of pessimistic scenarios about the future of the world economy, and the likelihood of a fall in demand for oil, could lead to a price collapse of unprecedented levels. Increasing these fears is that speculators in markets will flee quickly from investing in oil since the fear that the price rise has reached its limit. This shift in investments will increase the rate of the price collapse and it will be difficult to control this movement or see the price rise again. Speculators will resort, in such a case, to investing in other goods, which they will believe will bring them quick and high profits. At the same time, however, the continuing rise in prices at their incredible current rate, will harm, in the end, OPEC countries, and increase pressure on them by consuming countries to take new decisions to boost production. This will then increase the sensitivity and critical nature of the current situation for OPEC members, especially prior to the 13th conference of OPEC states, which will be held in Riyadh at mid-November, or the ministerial conference scheduled for December in Abu Dhabi.
Dr Walid Khadduri is an expert in energy affairs
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