Thursday, April 15, 2010

OPEC Willing to Let Oil Prices Climb: They are the market maker!

Posted by Michael Hoven
Oil prices have moved above OPEC's preferred range, but the cartel has no plans to raise output. (image:

Not long ago the oil minister of Saudi Arabia, Ali al-Naimi, proclaimed that the price of crude oil was “perfect” between $70 and $80 a barrel. But as prices have crept above $80 a barrel, hitting an 18-month high of $87.09 on April 6, OPEC has made no sign that it plans to increase output to combat rising prices. Now OPEC representatives have indicated they would be content with prices at $90, $95, or even $100 a barrel.

The price range of $70–$80 seemed perfect because it offered profit for producers without pushing the price for gasoline, heating oil, or diesel so high that it curbed consumer demand and stunted economic growth. Many authoritative analysts of the oil industry—most recently the International Energy Agency (IEA)—have warned that oil prices above $80 could start cutting into the consumer spending that’s expected to lift the global economy out of recession. “Ultimately, things might turn messy for producers if $80-$100 is merely seen as the new $60-$80,” said the IEA. If OPEC recognized that in December, why don’t they recognize it now?

According to the head of Libya’s National Oil Corporation, Shokri Ghanem, the push above $80 a barrel may only be a fluke, reported Reuters. When asked about the current oil price, Ghanem said, “What we are seeing in the market is a kind of fluctuation that we cannot build a policy on.” Reuters cited other unnamed OPEC representatives as saying that $90 or $95 per barrel might be the price trigger for OPEC to consider formally increasing oil production.

The oil minister of Kuwait, Sheikh Ahmed al-Abdullah al-Sabah, named a different price at which OPEC would take action: $100 a barrel. He added that current oil prices were not interfering with economy recovery, and that Kuwait was pleased with the current price level, Bloomberg reported.

In recent months OPEC has at times sounded like a consumer advocate, railing against speculation for artificially inflating oil prices and vowing to fight price volatility. The group has even looked the other way as members violate production quotas and add supply to an already oversupplied oil market. However, OPEC’s inaction as oil prices move further away from perfect seems to confirm suspicions that OPEC can’t resist the pull of higher profit margins, even if they run counter to the cartel’s long-term interests.

Reuters points out that OPEC has a history of naming price targets and then doing nothing as prices soar. In 2004, OPEC stated a target of $22 to $28 a barrel, but declined to raise output as prices moved higher. In 2009, crude oil at $50 per barrel satisfied OPEC, which didn’t want to stifle any economic recovery, but now OPEC members say oil may have to reach double that price before quotas are raised. And even if the price of crude oil does hit $100 per barrel, OPEC may decide that it’s comfortable with that price, too—or prices that climb even higher.

No comments:

Post a Comment