Opec Loses Control
By Adam Porter
22 March, 2005
Aljazeera
This
week Opec repeatedly assured the world they would pump more oil to bring
prices down.Yet immediately the 11-country group closed the doors on
its 135th conference in Isfahan, Iran, prices surged to new all-time
record highs. Almost as the ink dried on their latest statement, it
became out of date. Opec had agreed in the meeting to ratify a production
increase of 500,000 barrels per day (bpd) to take their collective output
to 27.5mbpd. This was only to make concrete the fact Opec members were
already producing this much. The organisation's president had admitted
that his members were quota-busting before the meeting to profit from
high prices.
In a revelatory
statement Opec President and Kuwaiti Oil Minister Shaikh Ahmad al-Fahd
al-Sabah said last week: "I think that now everybody is overproducing."Current
prices make it lucrative for everybody to hike production without the
need for a decision."Other oil ministers representing their countries
at Opec agreed. "Member countries are already producing over their
quotas," said the Algerian delegate Chakib Khalil.
"We are raising the ceiling of production because we are already
producing that amount," said Libya's Opec representative and Energy
Minister Fati Hamid bin Shatwan.So the meeting effectively approved
production that was already happening. The result was the market shook
with the realisation, previously reported by Aljazeera.net, that Opec
is no longer able to determine the price of oil."Yes, it is no
longer just the market saying Opec has no control over price, they are
now saying it themselves," says Frederic Lasserre analyst at Societe
Generale in Paris speaking to Aljazeera.net. "When the Saudi minister
says they cannot control pricing, you can see it. They have played their
latest card, now they can't do anything else."
Then, after the
meeting, Opec released a statement saying it would look at a second
500,000bpd increase. The meeting "authorised the Opec conference
president to approve an additional increase of 500,000 barrels per day,
(to 28mbpd) should oil prices remain at their current level, or increase
further between now and the next meeting of the conference in Vienna
scheduled for 7 June."
But by the time
the statement had been circulated, prices had already ballooned to a
record on the New York exchange hitting $56. Futures contracts for June
swelled to $57.30. By the next morning, prices had reached new records
of $57.03.What made the statement by Opec more confusing was that the
second potential increase of 500,000bpd would only be allowed "after
due consultation with other heads of Opec delegation. Opec will continue
to monitor the situation and respond to the needs of the market and
to take appropriate and prompt action, as and when the need arises".
Yet at the same
time, Shaikh al-Fahd al-Sabah seemed to say he thought 2005 was going
to be a year of very high prices. As the meeting finished, he told reporters
the third quarter of 2005 would "be at this level. Or like last
October when it was at record levels. That is why we are trying to decrease
prices now to stabilise the market."
Unfortunately, what
Opec thought would decrease prices and stabilise the market seemed to
have the opposite effect."It is not very reassuring for the market
to see the Saudis and Opec pumping at their full capacity," continues
Lasserre. "What they are going to do in the third and fourth quarters
of this year, when demand is expected to increase, no one can tell any
longer. "The market is worried that they will not be able to increase
production later in the year and that we will be short of any spare
capacity. If so, we will have major problems. The price will start flying."While
the market may be worried, many ordinary people are now asking how high
does the price have to go to have a serious economic impact.
"There is already an impact," says Lasserre. "You can
look at the US automotive market as an example, especially sales of
SUVs. "Consumers are turning to smaller engines, but that kind
of impact will take some time, say two or three years, to change. "If
you are looking only at the short term, we would estimate the price
would need to be somewhere in the $70 range in order to curtail demand;
for example, from emerging economies cutting back on imports."
One thing Lasserre
does not agree with is the growing band of analysts who are talking
of a peak in global oil production, commonly known as peak oil."Sure,
oil is a limited resource, so one day it will happen. But now we disagree
that this theory has anything to do with current price rises. "There
is plenty of oil to be produced. Plenty of reserves. What we have now,
is a bottleneck because of a lack of investment in the past. "The
capacity to produce oil is not enough. We need more wells, more refineries,
more pipelines. This has very little to do with peak oil, we need a
better infrastructure. It is an investment issue."
If so, then consumers around the world may soon be calling out for major
new investments from producer nations and oil majors, as high prices
start to bite. Small production increases from Opec cannot satisfy the
market, already looking at the third quarter of 2005 as a potential
major problem. But how much producers are prepared to invest is yet
to be seen.