Record Oil Prices… Facts and Reasons
Walid Khadduri Al-Hayat - 03/12/07//
The ministerial council of OPEC will convene in Abu Dhabi in a few days' time. On the agenda, according to statements by a number of ministers prior to the meeting, is the possibility of increasing production to reduce price levels from the record rates they have recently set, exceeding $90 a barrel and approaching $100, compared to less than $80 a barrel during the last ministerial meeting, in Vienna at the beginning of September.
This was when the council approved a production increase of 500,000 barrels a day, beginning on the first of November, in addition to unofficial increases that secondary sources that monitor production by OPEC states estimated at 1 million barrels a day more than what was agreed to.
But of course, these increases in production did not rein in prices. Turkish threats to invade northern Iraq caused prices to rise to record levels. As in the case in such situations, industrial countries continued to complain that OPEC's production increase was insufficient to halt the rise, but without determining the desired increase, despite the studies and statistics available from the International Energy Agency.
This information poses important questions regarding the international petroleum industry. If OPEC states took the initiative to increase production in September, and the price rose by $20 since that time and continued to fluctuate between $90 and $100 a barrel for six consecutive weeks, especially after Turkish threats to invade northern Iraq, what can OPEC do at the Abu Dhabi meeting to calm fears in markets about the possibility of a scarcity in supplies, and thus prevent prices from crossing the psychological border of $100? - in the event that this was the actual reason behind the price jumping to record levels.
We always assume, without getting into the technical details, that OPEC states can continue for month after month to produce at their maximum level without reducing production at some points to carry out the necessary maintenance works on facilities. This is of course unrealistic since oil facilities, like other factories, require maintenance works at specific times, which means a temporary halt of production from some fields for certain periods of time. This is what's actually taking place in Abu Dhabi right now. Likewise, we assume that the international oil industry can continue day after day, and year after year, without breakdowns or problems. This is also unrealistic, as we saw last week with the explosion and fire at pipelines in Minnesota, which suspended crude oil flows from Canada, the biggest exporter of crude oil to the US.
At the Middle East and Asia Energy Summit in Singapore last week, the current head of OPEC's ministerial council, the UAE Energy Minister Mohammed al-Hamili, affirmed the readiness of his country and the rest of the Gulf OPEC members to increase production of crude oil. He said, "There is no need to be a skeptic about this. We are prepared to raise production when asked, and as we always have."
al-Hamili supported his statements with information and statistics from OPEC. He said that "in the medium-term, OPEC's production capacity increase is underpinned by over 120 projects in the upstream sector, with a total cumulative cost estimated to exceed $150 billion dollars by 2012. These projects when completed are expected to add over 5 million barrels a day to current production capacity levels, as well as expand refinery capacity, and these include the UAE's project to build and expand refineries to refine oil in South Korea and Pakistan."
The minister of petroleum and mineral resources from Saudi Arabia, Ali Nuaymi, told the same conference that "international oil supplies are sufficient," and affirmed that there were no market factors that justified a price increase; he said the ministerial council meeting in Abu Dhabi next week would study the issue in all of its aspects before taking a decision.
We believe it's necessary, after years of random accusations made against OPEC countries, which proved on the ground that they were able to shoulder all of their responsibilities to secure the necessary supplies to world markets, especially during periods of crisis, that the time has come to pose questions about the role of other factors and what can be done so that these factors do not produce continued turbulence in the market.
One of the most important factors is the world financial market, whose influence on the international economy has grown, particularly in petroleum markets and more so than any other sector at present. On this front we must see wider transparency and the application of more precise systems in the important New York and London markets. There is also the issue of dealing with difficult laws and regimes, which have obstructed the building of the required refinery capacity in western countries, as if the oil era had ended long ago and as if there was no need for new refineries in western industrialized states to meet the growing demand for fuel there, while of course taking into consideration suitable environmental conditions.
Officials in OPEC states have raised these issues for a long time. But until now, they have been posed defensively, especially recently, with the increase in supporters of the idea of "peak oil," which some promote whenever these is a round of price increases.
These economic issues, which of course have a political dimension, should be on the agenda of official economic conferences between consumers and producers, but only after the required preparation, since they will mean a large-scale intellectual battle by producing states with western countries. Each party is defending its own interests - and they are considerable, important and strategic interests.
*Dr Walid Khadduri is an expert in energy affairs
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