Sunday, November 30, 2008

OPEC's Consultations in Cairo

Randa Takieddine

Does the average citizen know why oil prices reached $147 a barrel a few months ago and then dropped to $70, then $60, then $45 a barrel, or how low they will go? When oil prices were at high levels, consumers in the big industrial countries blamed OPEC, unaware of the responsibility of speculators, who played a fundamental role in seeing prices rise to levels unfavorable for the consumer and the producer alike.

Today, the price of oil has dropped to levels that threaten investments in huge projects in the energy and alternative energy sectors. How can the average citizen understand what happened? How can we justify this rapid drop, and what is the role of the global financial crisis? Does this mean that the price drop will not cease? How will OPEC countries limit the slide?

It is clear that when the price of an oil barrel hit $147 during the summer, it was neither justified nor understood. There was oil in sufficient quantities and OPEC countries did not cut supplies; they have always upped their production, to reassure markets and affirm that the rise in oil prices was caused by investors and speculators in American markets, who shifted from speculation in currency markets - with the depreciating dollar - to oil. Oil prices did not reflect market factors, i.e. supply and demand. For balance prevailed in the markets back then with no shortage whatsoever. However, when the international financial crisis began, and big financial institutions like Lehman Brothers and others in the US collapsed, the speculation stopped, and traders in the markets stopped work because of the bankruptcies and lack of liquidity, after everything that had happened in the US.

Today, no one knows how long the financial crisis will last, or the countries that will be exposed to it the most. The leading state and biggest market in the world, the US, forms the basis for the answer. The financial crisis and disasters started there then spilled over to Europe. There is also a question about how the crisis will impact big countries such as China, India or others. The financial crisis has begun to affect the demand for oil, whose price has begun to drop. OPEC countries, in line with this drop-off, have begun to reduce their production, to avoid a surplus. In Vienna, OPEC took the decision to reduce production by 1.5 million barrels as of last November 1st. Today, producing states like Iran, Venezuela and Libya call for an extraordinary conference to be convened prior to the Oran meeting in Algeria on 17 December. OPEC producers have decided to hold consultations in Cairo on Saturday after the conference of Arab Oil Producing and Exporting Countries (AOPEC). However, the date of the consultative meeting does not permit a precise evaluation of the level of production during November and whether there was actual adherence to the drop in production. However, the meeting will be an opportunity to hold consultations about what should be done to confront a further slide in oil prices.

The question is: can OPEC states halt the slide in prices and retain the organization's unity and solidarity when oil prices rise? In difficult economic times, i.e. when oil prices fall, OPEC states often shift blame to the biggest producer, Saudi Arabia, which has a history of adhering to decisions to reduce production. Meanwhile, other countries call for cutting off production but usually do not adhere to such decisions. From the numbers that have begun to appear, there are non-adhering countries, like Iran and Libya and others, and they are in the forefront of those demanding a reduction, as well as extraordinary and emergency OPEC conferences to confront the situation. Will disputes resurface among OPEC member states and prompt prices to drop further, as happened in the past? Or on the contrary, will the member states, in light of the looming danger, respect the set quotas and show responsibility as the organization has over the past 20 years? There is hope that OPEC member states will be able to overcome the lack of trust, the disputes and the conflicts in order to blame others; there is hope that they will show solidarity so that the price of oil does not drop so low that it has a negative impact on all producing countries and on industrial projects in oil countries. Will the Egypt consultative session produce a decisive resolution by OPEC on Saturday? It is unclear, especially since convening on this date will mean that not all members have a clear picture of each state's implementation of the decision to cut production taken in Vienna.

©2003 Media Communications Group مجموعة الاتصالات الإعلامية

Comment: Take note-the price of oil is averaging $51/barrel as of today. In the USA the price of regular gasoline is $1.97 in California, near $1.31 in parts of Colorado. We have fallen off over $90/barrel in less than 7 months. The supply of oil has not changed, the output has not changed, the refining capacity or ability has not changed. What has changed? Market speculation due to the economic "crisis" is a reason. now match this outcome with the motivation to expand our energy independence strategies in America. How soon do we forget-it takes leadership to see beyond this temporary blip in energy costs. We will hear that it is no longer "cost efficient" to develop other oil resources (offshore, deep water,Alaska)-we already have heard from the Saudis-they think $75-80/barrel is a fair price. Has anyone asked "how did you arrive at this figure-is it what you need to fund all of your "projects" around the world? The ME oil producers are caught in quite a dilemma-decrease production in order to increase the price and suffer near term income drop. They have also extended themselves financially and NEED the West and China/India to keep gulping oil. Governmental policies are based upon oil supply and price-we have them in a quandary and if we have leadership we can shift the tide of unbalanced policy decisions due to oil. It is time now to make our move away from foreign energy-the events, situations and people who lead us to believe we must do so still exist in our world. we have but a temporary respite-let us not misuse this opportunity!

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