Unwilling or unable, OPEC producers meeting on Sunday was likely to fail to remedy the shortages that are likely to keep crude prices aflame this winter.
Fearful of a premature end to one of the most prosperous periods in the cartel’s history, oil ministers in Vienna are expected to adjust production quotas only modestly higher.
Leading OPEC power Saudi Arabia has softened up fellow producers for more than the standard 500,000 barrels daily that would come anyway under an automatic cartel price mechanism.
Unless Riyadh is preparing to unveil a surprise, dealers can expect an addition of no more than 700,000-800,000 bpd, a three percent increment over limits now of 25.4 million.
“They have to raise supply by more than 500,000 bpd. The market needs a strong message,” said Mehdi Varzi of Dresdner Kleinwort Benson.
The Organisation of the Petroleum Exporting Countries is under severe pressure from consuming nations to do something, anything to ease fuel bills. Warnings come daily from the European Union, the United States or Japan that rising energy costs are stoking inflation. Some see recession around the corner.
But OPEC appears to have lost control over the price rally it sparked with production curbs two years ago. Crude prices now at a decade-high of more than $33 a barrel mean a winter of discontent for petroleum consumers looks unavoidable.
“It’s probably too late. I think it’s out of OPEC’s hands now. Prices are going to stay high this winter,” said Gary Ross, chief executive of leading U.S. energy consultancy PIRA. “OPEC has perpetuated this low inventory situation and now everyone’s panicking.”
Refiners perpetuate low inventories
OPEC already has lifted output twice this year, by a combined 2.4 million bpd, easing limits from two years ago. Emboldened by early success in lifting prices from a 22-year low of less than $10, the cartel argued it could micromanage markets into a soft landing.
But market observers say OPEC failed to open the spigots quickly enough this year, allowing growth in demand to empty worldwide stocks of crude and petroleum products.
Today, including supply from Iraq, not bound by a quota, the group is supplying as much as at any time since 1980 – some 29 million of the world’s production of 75 million barrels a day.
There is strong evidence that the oil industry, for sound commercial reasons, also has failed its customers. High prices, particularly in a market which values prompt oil at a premium, mean refiners prefer to keep inventories as low as possible – operating hand-to-mouth.
“There is a refinery bottleneck and if customers don’t want crude the Saudis can’t force-feed them,” said Ross.
Price discounting discounted
If OPEC were prepared to combine more supply at sharply discounted values – a highly unlikely prospect – then crude prices would slump. The last time that happened in 1986 prices fell through the floor. Saudi Arabia, the only OPEC nation with significant surplus capacity, would prefer $25 crude.
“If they want stable prices at $25 this winter they will have to oversupply the market with crude,” said Lawrence Eagles of brokers GNI. “At the moment the market doesn’t feel confident that OPEC will provide the oil in a timely fashion.”
Saudi Oil Minister Ali al-Naimi insists Riyadh already is doing its best to achieve that goal. In New York this week he said the kingdom already was leaking an extra 600,000 barrels a day. “There is absolutely no problem putting additional crude oil into the market,” said Naimi.
But he added the qualification that refiners had become more efficient and that the industry was comfortable with lower inventories. “Eventually a lot of this price is hype.”
If OPEC merely meets expectations this weekend, then finance ministries around the industrialised world will have more to say about oil prices this winter.
“With prices where they are we begin to flirt more with a global recession. We need more oil,” said Ross at PIRA. “But they can only put so much through the sausage machine.”
A history of haggling
Forty years ago, in an oil glut, American petroleum giant Standard Oil announced a cut in the posted price of its Middle East crude exports. For the producing countries, whose resources Standard and the other oil majors controlled, it was the last straw.
Representatives from Saudi Arabia, Iraq, Iran, Venezuela and Kuwait, the source of 80 percent of the world’s petroleum exports, met in Baghdad on September 10, 1960 to form the Organisation of the Petroleum Exporting Countries.
Internal rivalries, surplus supplies, U.S. import quotas and the oil majors’ tight grip on production left OPEC on the sidelines for much of its first decade.
“At the start OPEC was not even recognised by the oil companies,” remembers former Saudi oil minister Sheikh Zaki Yamani, still OPEC’s most famous face. “But things changed and soon they knew who we were.”
Now, during the latest oil shortage to punctuate OPEC’s feast-or-famine history, the cartel is reminding the world of an original objective – to make the West pay more for its crude. At $30 a barrel, oil prices in real terms are still some way short of the $70 peak OPEC engineered at the end of its 1970s heyday, in the aftermath of the 1979 Iranian revolution.
While most thought OPEC had long said goodbye to the days of confrontation, some in the cartel are enjoying the opportunity for an encore.
High prices and a high profile
A mixture of old-fashioned political posturing from Venezuela and the fear of provoking another price slump mean OPEC ministers who meet on Sunday are unlikely to do much to prevent a winter of discontent for oil consumers.
Venezuela, led by President Hugo Chavez, a former paratrooper, wants high prices and a high profile when it hosts a summit for cartel heads of state at the end of this month.
With a fuel price revolt in France and official complaints from the United States, the European Union and Japan ringing in his ears, Chavez appears to have got his way.
Though economists are fretting again that rocketing fuel costs could spark another 1970s-style recession, the world finds itself far better prepared to manage another OPEC crisis than in the seventies.
Vowing not to be caught out again, the West invested heavily in its own oil. The multinationals, sent packing by OPEC nationalisations, invented new technologies to slash the cost of finding crude and pumped oil from regions like the North Sea. Power generators in nations without oil turned nuclear and then increasingly to cleaner fuels like natural gas.
Shell chief executive Mark Moody-Stuart says new production technologies that mean most crude reserves are accessible at $12 a barrel or less will bring prices slumping sooner rather than later.
“When OPEC started cutting output in 1998 they were hoping for $18, then the target moved to $21, then to $25 and then $28. Now we’re at $30 they’re saying, this isn’t so bad after all. But it won’t last.”
North Sea production costs, the world’s first major deepwater province, have fallen from $25 a barrel at current prices to $10 and could drop by half again over the next decade.
“The technological cost of producing oil is steadily going down and as it goes down more and more potential oil is drawn in,” said Moody-Stuart.