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OPEC looks for new mechanisms to sustain prices

MOSCOW. (Dr. Igor Tomberg for RIA Novosti)

OPEC, the international cartel of oil-exporting countries, is no longer afraid of falling oil prices, as was clear from the decision made at the organization’s summit in Vienna on March 15. The current quota for crude production – 25.8 million barrels per day – was left unchanged. OPEC is satisfied with the present prices – around $60 per barrel – and does not intend to take any serious steps to sustain them because global oil demand remains high.

The cartel members are optimistic about the future. According to an analytical report released by OPEC, although global economic growth will slow this year (GDP growth is forecast at 4.6% compared with 5.3% in 2006), global oil demand will be up 1.5%, or 1.3 million barrels a day. This is an increase of 0.1 percentage point over the previous forecast. Demand from developing countries has surged by over 500,000 barrels a day so far in the first quarter.

OPEC has been discussing the need to cut production since last September. After a record-breaking surge in August, when oil prices reached $78 per barrel, they fell by over $20 in September-October, and some of the OPEC members panicked. The cartel has cut its output, which stood at 28 million barrels a day, by a total of 1.7 million barrels since September. The latest reduction, of 500,000 barrels, came into force on February 1. As a result, oil prices exceeded $60 per barrel in early March, which is exactly what OPEC was after.

It should be noted that OPEC is usually very reluctant to cut production, primarily out of budget considerations – hence the low effectiveness of the cartel’s joint decisions on output reduction. According to the International Energy Agency, despite the announced reduction of 1.7 million barrels, the real decline has been just 1 million barrels a day. This could be resolved by returning to a system of hard quotas (at the Nigerian summit last December, OPEC supported soft quotas, which means that exporting countries cut production at their own discretion).

OPEC’s latest decision can be interpreted as an unwillingness on its part to address the controversial subject of output cuts when, as Ali Naimi, the Saudi Minister of Petroleum and Mineral Resources, put it, “prices are moving in a range that they are comfortable with.” On the other hand, the cartel has been acknowledging increasingly often that it has limited possibilities of influencing the volatility of global oil prices, let alone the exchange rate of the U.S. dollar. OPEC President Mohamed bin Dhaen al-Hamli said recently that the dependence on the value of the dollar is so high because it is the main currency of the oil market. In fact, research over the last several decades has shown that there is absolutely no direct connection between OPEC cuts and oil prices.

In addition, oil is no longer just a commodity, and the global market of oil securities (delivery guarantees, futures) has become the true oil market. These are traded, and pension accruals are invested in them – Western pension funds account for almost half of the global trade in oil securities. Experts say that the speculative factor accounts for $10-$15 of the current price of a barrel of oil.

Nonetheless, OPEC is not passively looking on as its position in setting the price of oil gets weaker. The organization is looking for new ways and mechanisms to increase oil-producing countries’ influence on the oil market. Now it is trying to make up for its unwillingness to cut production with a promise to boost oil refining. Its members’ investment in refining projects has already reached $100 billion, according to al-Hamli. This could prove a more effective strategy than production quotas. Indeed, the world actually has a shortage of petrochemicals, not of crude oil. A boost in refining capacities would allow the price of oil to reach a level acceptable to producing countries by increasing demand instead of reducing supply.

To be fair, OPEC’s weakening seems relative in the long term. Despite a lack of discipline, many of its members are really able to turn off their taps to prevent prices from falling. The IEA estimates that the cartel will account for the bulk of new fields developed over the next 10-15 years, while its share of global production will grow from the current 40% to 50% or even more.

Yet we should not disregard the significant amounts of oil produced by countries outside OPEC. The cartel’s ability to coordinate its interests with them will determine not only the real amount of oil on the market, but also the market’s “mental health,” because prices are often sent up or down by news reports.

In these circumstances, OPEC and Russia are bound by a common goal: to stabilize hydrocarbon prices on the global market. No one benefits from unacceptably high prices because they undermine the stability of the global economy and will eventually affect even oil-producing countries.

The Russian economy suffers from high oil prices as much as oil-importing countries. High prices for Russian oil have resulted in an influx of foreign currency into the country and an increase in the production cost of goods with a greater added value. At the same time, an abrupt decline in oil prices would also be bad for the Russian economy.

Obviously, it is in Russia’s and OPEC’s interests to keep oil prices within an agreed range. Oil prices must cover production costs and shield producers from major risks. But they should not have a negative effect on the development of the global economy. Among other things, they should allow for investment in the oil sector. All these problems can be resolved only if OPEC countries and independent producers combine their efforts. –0–

Igor Tomberg is a senior research fellow at the Energy Research Center of the Institute of World Economy and International Relations, the Russian Academy of Sciences.

The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti. –0–