Monday, September 13, 2004

I think we all know that the extant OPEC price band of $22-28/barrel is downright silly in the present environment. The price question for the cartel's meeting this week in Paris seems to be reality and economic self-interest battling against the animal spirits of the herd.
The Organization of the Petroleum Exporting Countries is preparing to meet in Vienna on Wednesday in an unfamiliar and uncomfortable mood: helplessness.

As recently as last summer, the cartel seemed to have the world oil market well in hand. It deftly responded to a series of supply shocks - a strike in Venezuela, ethnic clashes in Nigeria, attacks on foreign workers in Saudi Arabia, a war in Iraq - by meeting regularly and adjusting production frequently, keeping prices fairly stable.

Now, the picture is very different. Runaway demand in Asia, sustained violence in Iraq and speculative tumult in the oil markets have combined to push prices far above OPEC's preferred range, and the cartel has been able to do little about it. . . .

One proposal is to increase the target price range by $5, to an average of $30 a barrel. According to a Reuters report, Iran and Indonesia support the idea. But oil analysts say that it would send the wrong signal at a time when OPEC is committed to reducing prices and that there is no consensus about its advisability. . . .

Most OPEC countries will reap record revenue this year because of the high prices. But the cartel does not want oil to cost too much, because of the concern that "prices that are too high could kill the golden goose," said Brad Bourland, chief economist at Samba Financial Group in Riyadh, Saudi Arabia. Sustained high oil prices could prod consumers to conserve more and to step up use of substitutes like natural gas, coal or nuclear power, and they might damp economic growth, economists say.

There is another drawback, said Thierry Desmarest, the chief executive of Total, the French oil company. "Today's price level means there's no feeling of urgency within OPEC countries to invite foreign investors and add new production capacity," Mr. Desmarest said in a news conference in Paris on Wednesday. "But producing countries are worried about high prices. They remember that when it goes up too much, there's usually a drop that's not pleasant to live through."
It seems hard to believe that a formal revision of the price band up to $27-33/barrel would cause any serious shocks to the market beyond a very short-term (under one week) speculative panic. After all, we haven't seen NYMEX prices under $27/barrel since May 2003, and average monthly NYMEX prices haven't been under $27/barrel since November 2002, all without any appreciative affect on consumption. The slowing of the global economic recovery is probably linked to >$40/barrel oil, but a one-third price cut would be more than enough to remove energy as the cause of any downturn.

Is it the "wrong signal" to begin responding to reality? Well, maybe if you're serving in the Bush administration . . .


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