Thursday, August 05, 2004

The irrelevance of OPEC = the end of OPEC?
The world's largest oil producers intervened on Wednesday to try to cool oil prices, as Opec reassured customers it could raise output and Saudi Arabia, its biggest member, turned on the taps at two new fields ahead of schedule.

However, the effort did little to reverse the recent sharp rise in oil prices, which set new records in both the US and European key benchmark crude futures on Wednesday. Prices declined only slightly following the announcements from Opec and Saudi Arabia, suggesting that the oil cartel's ability to influence oil markets has been undermined.

Purnomo Yusgiantoro, the Indonesian holder of Opec's rotating presidency, said the oil cartel had spare production capacity of between 1m and 1.5m barrels a day. Most of this idle capacity lies in Saudi Arabia, which announced it had started production at two new fields three months earlier than planned.

However, Opec's spare capacity accounts for less than 2 per cent of current global production, and provides only a small cushion against possible supply disruptions due to terrorist activity in the Middle East, or from the Kremlin's battle with Yukos, Mikhail Khodorkovsky's Russian oil company. . . .

"I think prices might be overdone, and we could see prices come back, but only by about $2 at the most," said Christopher Bellow, an oil trader at Pru-Bache in London.
Now that Saudi Arabia itself has for all practical purposes gone to full production, the OPEC quotas are over. This is fine for the OPEC small-fry like Algeria or Venezuela which are getting rich off of high prices and full production. For the Saudis, however, it sure looks like a body blow to the entire idea of a cartel in oil. How do the Saudis expect to herd all their OPEC cats in mid-2005 when supply once again exceeds demand? Or perhaps all they can do is look to the short-term, please their G-7 masters and hope for the best?

And on a darker note, Jon Markman at MSN Money asks, "Is Saudi Arabia running out of oil?"
The Saudis are pumping, at most, 9 million barrels a day now and have boasted that they could pump as much as 15 million barrels a day for the next 50 years. Indeed, Saudi leaders promised that they would start pumping more a few weeks ago.

But since world oil production hasn�t increased any since those promises were made, economists and energy users have wondered whether Saudi Arabia has elected, for political reasons, not to fulfill its vow.

[Energy analyst and Council on Foreign Relations member Matthew] Simmons says it's worse than that: Much like the biggest problem in the Enron fiasco was that analysts always trusted Enron managers� declarations about the strength of its financial assets, he says that the world has always taken Saudi Arabia at its word for its oil assets. He now believes that it cannot be trusted.
The long-term debate is obviously animated and worth having. I'm more interested in the short-term, however, and that looks downright bleak.

Or perhaps one should say that this is exactly the kind of push we need to begin making a serious commitment in action, not simply rhetoric, to a post-oil economy?

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