Print

Mail

wiki links

OPEC looses its grip on oil prices

Out of control * OPEC's surplus fell to about one billion barrels a day in the spring of 2004, from 4.6 million barrels a day in 2002 * The cartel has underinvested in its production capacity as global demand rises, especially in emerging markets such as China and India * Oil prices moved up slightly in Asian trading Wednesday, but remained below US$46 a barrel

OPEC spent years in the role of oil market stabilizer but its hands are tied as prices crest near all-time highs and its meeting next month is only likely to underscore the cartel's loss of clout, analysts say.

"They really can't do anything, they're producing effectively close to 100 percent capacity," said Bruce Evers, analyst at Investec Securities in London, referring to the OPEC meeting scheduled on Sept. 15 at the cartel's Vienna headquarters.

"I think all you will get is Saudi Arabia saying `we have plenty of spare capacity and we will be able to meet customers' demand,'" he said.

That tactic by the oil kingpin, he pointed out, has been tried already in recent weeks without much effect on the surge in oil prices, which almost hit US$50 a barrel in New York last week.

Oil prices moved up slightly in Asian trading Wednesday, but remained below US$46 a barrel with concerns about supply receding for now, dealers said.

New York's main contract, light sweet crude for October delivery, was US$0.14 higher at US$45.35 per barrel at 11:45am, from Tuesday's close of US$45.21 a barrel in New York.

It touched a morning high of US$45.45.

Evers questioned the willingness of Saudi Arabia to really implement emergency measures, technically risky for wells because they could subsequently prevent the recovery of a significant share of the oil underneath.

Meanwhile, Purnomo Yusgiantoro, the president of the 11-state Organization of Petroleum Exporting Countries, has conjured up the image of a powerful cartel response to the crisis.

"We hope for a significant solution to solve the rising oil prices" next month, he said.

Experts at the French Oil Institute (IFP), a specialized industrial research and development center, said that "in the current circumstances, the capacity of OPEC to rein in the high price of crude is weak."

The cartel's surplus capacities, which formerly conferred its role as the giant producer and market power despite the fact that OPEC produces only about 40 percent of the world's supply, have dwindled.

The surplus fell to about one billion barrels a day in the spring of 2004, from 4.6 million barrels a day in 2002, IFP noted.

As a result, the main regulatory tool at the cartel's disposal, its production quotas, have become virtually useless, and the decisions on their levels, which traditionally had shaped the price, have lost all significance, IFP said.

In fact, the members have systematically produced more than their quotas for months.

The London-based Centre for Global Energy Studies identified another problem: OPEC has underinvested in its production capacities for years, while demand, boosted by the economic recovery and the growth in emerging countries, notably China and India, has reached the boiling point.

"OPEC has refrained from adding to its capacity since 2000, disregarding market signals such as growing demand and rising prices," CGES said.

"They've completely underestimated the demand," said Invsetec's Evers. "Everything that could go wrong has gone wrong."

Evers said the cartel has never known such impotence, and is the prime reason for it.

OPEC, in its monthly report published last week, said its production was more than adequate to meet demand through 2005, but admitted that the currently high level of oil prices is encouraging speculation.

For Evers, OPEC is above all trying to absolve itself from responsibility in the situation by pinning the blame on underinvestment by oil companies.

"I think they realize now they have to invest heavily in additional capacity, but to get a lot of additional capacity, it's going to cost a lot of money and take time," he said.
This story has been viewed 4452 times.