Hurricane Dean Backs OPEC

Crude oil prices fell to below $70 a barrel last week, registering their lowest level in two months, even though the hurricane season has begun in the western Atlantic and the Gulf of Mexico. However, this took place after American indicators pointed to a rise in the commercial reserve of oil in the US, and after the money of speculators and investors fled oil markets for international stock exchanges, to make up for the damage that they sustained.

Hurricane Dean led to a temporary cut-off in Mexico’s oil exports, after it hit the Yucatan Peninsula last week; the production of 2.65 million barrels a day of Mexican oil, or 80% of the country’s total of 3.2 million barrels a day, was involved. The Mexican authorities evacuated more than 18,000 workers and employees from sea facilities that were in the path of the hurricane, and production in some fields, such as the giant Cantrell oil field, was stopped as well.
Most of Mexico’s oil production is exported to the near-by US market, as is known. However, despite the emergency interruption in supplies to the US, prices continued to their gradual fall, which began three weeks earlier. This was thanks to the mortgage lending crisis in the US, especially since there was fear of its impact on future US economic growth, followed by demand for oil and other raw materials in the coming months. In fact, crude oil prices have dropped, up to the end of last week, by 12%, reaching $68 a barrel. The markets expect that the drop-off in Mexican petroleum will be offset by using some of the US commercial oil reserves.

We can observe that the magnitude of the interruption in Mexican oil production is approximately equal to the amount of Iranian petroleum exports, or about 2.5 million barrels a day. Thus, we can imagine the magnitude of an increase that might affect world oil prices if a political or military crisis breaks out with Iran, and Iranian oil exports are halted for a number of days. Mexico’s oil exports had a greater direct effect, due to their importance for the US market, and proximity to it, unlike Iranian petroleum, which is banned from import to the US by the American government.
Hurricane Dean appeared unexpectedly in the debate that has been underway for three years between OPEC ministers and officials with the International Atomic Energy Agency, with the beginning of the current rise in oil prices, about the true reasons behind the increase in prices. OPEC ministers have said repeatedly that their countries provide markets with enough supplies and there is no gap in crude oil production. They add that the problem lies in the lack of refineries in industrialized countries to refine crude oil. This deficiency in the industry’s infrastructure is the principal reason for the oil price of the last three years; meanwhile, there has been an unnatural rise in oil prices because of speculation and fear about political crises in the Middle East. Politicians and spokesmen for industrialized, consumer countries say that the principal reason behind the oil price rise is OPEC’s failure to increase production. Thus, a continuation in the fall of oil prices despite the hurricanes and the interruption in Mexican production is material proof of the soundness of OPEC’s explanation.

Dar Al Hayat