Weekly Offshore Rig Review: OPEC’s Big Flex

…One of the key realizations that comes out of this look at climbing oil prices is that OPEC can do very little to stop, or even slow, rising oil prices. In fact, when prices reached all-time highs in 2006, OPEC officially did nothing at all (although its individual member nations were very much involved in generating the tensions that drove those new records).

Even in times of crisis, particularly in the aftermath of the 2005 hurricanes, OPEC was essentially helpless to affect the rising oil prices around the globe. Saudi Arabia’s offers to pump all available crude to meet demand and cover for damaged infrastructure in the US GOM helped to soothe nerves. However, the organization ultimately made only modest increases in production that in and of themselves had little impact on prices.


What is also apparent is that OPEC nations quickly grew used to the increased price levels and became ready to defend price levels that just a few years earlier had seemed unsustainable. For instance, when the average NYMEX crude price dipped $3 (almost 10%) between August and September 2003, OPEC was quick to announce output cuts of nearly 1 million bpd. In February 2004, OPEC announced a further 1 million bpd cut even though oil prices had risen each of the previous four months and had been well above the $28 price threshold for more than two months (more about the price band below).

Useless Price Band

As part of its response to the oil price collapse of 1997-98, OPEC took steps to create clear guidelines for when production adjustments should be made in order to try to offset changes in the market. At its March 2000 meeting, OPEC set up a price band mechanism, triggered by the OPEC basket price. According to the price band mechanism, OPEC basket prices above $28 per barrel for 20 consecutive trading days would result in production increases. Prices below $22 per barrel for 10 consecutive trading days would result in production decreases in order to maintain prices within the band. This adjustment was originally automatic, but OPEC members changed this so that they could make production adjustments at their discretion.

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