OPEC Finds Few Options to Put a Lid on Oil Prices

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OPEC Finds Few Options to Put a Lid on Oil Prices

By JAD MOUAWAD – NYT
Published: September 13, 2004

PARIS, Sept. 12 – The Organization of the Petroleum Exporting Countries is preparing to meet in Vienna on Wednesday in an unfamiliar and uncomfortable mood: helplessness.

As recently as last summer, the cartel seemed to have the world oil market well in hand. It deftly responded to a series of supply shocks – a strike in Venezuela, ethnic clashes in Nigeria, attacks on foreign workers in Saudi Arabia, a war in Iraq – by meeting regularly and adjusting production frequently, keeping prices fairly stable.

Now, the picture is very different. Runaway demand in Asia, sustained violence in Iraq and speculative tumult in the oil markets have combined to push prices far above OPEC’s preferred range, and the cartel has been able to do little about it.

With crude oil setting a price record almost daily in August, the cartel tried to persuade the markets that it was working overtime to step up supply. But with most of its 11 members already pumping at full capacity, the promise had a hollow ring; traders shrugged, and crude prices climbed to within pennies of $50 a barrel in New York before slipping back into the mid-$40’s.

Crude oil fell on Friday to $42.81 a barrel in New York, its lowest level since August.

Though it has a third of the world’s oil production, half of oil exports and three-quarters of known reserves, OPEC is finding that its ability to influence prices has largely been exhausted, at least when it comes to holding them down.

“Prices are moving independently from whatever OPEC decides,” said Nordine Ait-Laoussine, a former Algerian oil minister and OPEC president. “OPEC can’t do anything more today.”

The cartel’s members are producing 30 million barrels a day, well beyond its formal ceiling of 26 million barrels and its highest total in 25 years. But it has not been enough to keep its benchmark price within its target range of $22 to $28 a barrel. (The group’s benchmark is an average of seven grades of oil that typically runs a few dollars below the most widely followed market price for light sweet crude.)

With most members producing all the oil they can, the oil ministers have few options to consider when they meet in Vienna.

“If you’re looking for actions to bring new oil on the market, it’s not going to be there,” said Robert Ebel, head of the energy program at the Center for Strategic and International Studies in Washington. “The markets are going to watch the meeting, yawn, and turn back to their computers.”

One proposal is to increase the target price range by $5, to an average of $30 a barrel. According to a Reuters report, Iran and Indonesia support the idea. But oil analysts say that it would send the wrong signal at a time when OPEC is committed to reducing prices and that there is no consensus about its advisability.

As OPEC’s largest producer and the only one with significant flexibility to pump more oil, Saudi Arabia has often acted as a pressure valve for global markets, shutting some wells when prices are low and increasing output when prices are high.

In recent months it has cranked up daily production by more than 2 million barrels a day, to 9.3 million barrels a day, the most since 1981, and the Saudi oil minister, Ali al-Naimi, has said that the country had another 1.3 million barrels a day of spare capacity it can open up if needed.

The Saudis’ actions helped pull prices in the futures markets down from the record high of $49.40 a barrel on the New York Mercantile Exchange during trading on Aug. 20. Even so, prices are up significantly for the year.

The International Energy Agency, a Paris-based adviser to oil-consuming nations that ordinarily is critical of OPEC’s oil supply management policies, offered an upbeat assessment in its monthly report on Thursday. The agency wrote that because of OPEC’s production increases, “today’s market is well supplied with crude.”

Most OPEC countries will reap record revenue this year because of the high prices. But the cartel does not want oil to cost too much, because of the concern that “prices that are too high could kill the golden goose,” said Brad Bourland, chief economist at Samba Financial Group in Riyadh, Saudi Arabia. Sustained high oil prices could prod consumers to conserve more and to step up use of substitutes like natural gas, coal or nuclear power, and they might damp economic growth, economists say.

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