Opec’s Decision is a Compromise amid Unclear Economic Conditions

During their regular bi-annual meeting in Vienna on 11 September, OPEC ministers adopted a Saudi proposal to increase the production by member states, beginning on 1 November, by 500,000 million barrels a day (with Saudi Arabia’s share rising to 8.9 million barrels a day, Iran’s to 3.8 million, and Kuwait and Venezuela’s to 2.5 million each).

The OPEC decision, based on the statement by Secretary General Abdullah al-Badri during a news conference after the meeting, represents a message to consumers that when it took the decision, the ministerial council took their point of view into consideration. This is the first increase in production in two years; industrial countries have requested such a move for a while, in order to rein in the continuing increase in the price of oil since 2004, when it reached record levels ($78.77 for Brent).
In fact, oil prices have recorded very high averages this week; prior to the meeting the price hit $78.23 a barrel, or a rise of 28% since the beginning of the year. The price of US light oil at the end of the week stood at $80.09 a barrel, due to the interruption in power supplies to Port Arthur, Texas following Hurricane Humberto, which was followed by the halt in operations at three refineries that process 842,000 barrels a day.

The OPEC decision to increase production was made before the winter, when demand for crude oil rises in industrial countries, increasing the demand on heating fuel in the Northern Hemisphere, and after about ten weeks of a constant reduction in the commercial oil reserve of the US. The decision aims at preserving the current price level and halting its rise to more than $80 a barrel. It was taken despite fears of a reduction in demand for crude oil next year, if the world economy is affected by the American mortgage crisis.

OPEC’s decision serves the short-term future, i.e. dealing with supply and demand during the winter, when crude oil prices rise. However, at the same time we can see that the organization has left itself room to change the decision in the future. This would take place by changing the level of supplies needed for after the winter, when demand drops, and in light of the probability of a drop-off in the world economy. The concluding statement of the OPEC meeting mentioned the intention to “move quickly” in the event of a collapse in the international economy, as many economists expect, and the resulting decrease in demand for crude oil. This was a clear reference to the experience of the failed Jakarta conference in the autumn of 1997, when oil prices collapsed and fell to less than $10 a barrel, as a result of the continuing production increase, despite the collapse of the world economy at the time. Since then, the specter of OPEC’s Jakarta conference has haunted the taking of a decision to increase production, especially in the event that the international economy hits a slump, as was the case during the period of Asian economic crises.

Dar Al Hayat