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Oil in a Week – Oil Prices in the Wake of OPEC's Meeting
Published in AL HAYAT on 25 - 06 - 2011

Oil price forecasts have changed. While it was thought likely that prices would see a big increase following the failure of OPEC members to agree on increasing their output, or even issuing a joint communiqué, we now find that prices have begun to instead gradually fall, since the end of said meeting. This is mainly due to economic problems and the failure to find a solution to the debt crises across both sides of the Atlantic. On the one hand, there is the Greek sovereign debt crisis, and the failure of the Eurozone finance ministers to reach a solution to the crisis so far. And on the other hand, there are the implications of the pessimistic economic data released in the United States, especially in regard to growing unemployment which now is a source of concern for the Democratic Party, due to the negative effects this may have on the presidential election campaign next year.
The period following OPEC's failure to reach an agreement reflects a multitude of non-interrelated features: For instance, there were several repeated statements issued by the International Energy Agency (IEA) warning against the negative impact of high oil prices on the world economy. The most recent of such statements was given by IEA Chief Economist Fatih Birol last week, wherein he said that high oil prices have slowed down U.S. economic recovery, and elaborated on how high prices have started to adversely affect economic growth in China and India. In addition, there seems to be a new trend in these statements, as they have been restating the IEA's concerns regarding shortages in crude oil supplies in the markets.
But in spite of such repeated warnings by the IEA, the agency continues to fail to specify the price level which in effect harms the world economy. The IEA's entire discourse maintains that current prices are too high, and this begs the following question: What is the actual price range at which damage is done to the world economy? There is no clear or persuasive figure at the economic level in regard to this specific price range. Needless to say, this ‘negative' price must be known to OPEC itself, because a contracted global economy would in turn reduce demand for oil, which naturally is not in the interest of OPEC member states. True, the IEA's 2011 Medium Term Report mentions that “Oil prices around $100/bbl are weighing down on an already-fragile macroeconomic and financial situation in the OECD [and] pressuring national budgets in the non-OECD [developing nations]”. But this reference to ‘high' prices was made in passing, and cannot be considered an official level for the price that would hurt the world economy.
Meanwhile, the debate regarding supply shortages and increased prices has taken on a different dimension in the United States, including President Obama's decision to tap into the country's crude oil strategic reserves. It is worth mentioning that the usage of these oil reserves, according to the laws in force, is permissible in cases of shortages or disruptions in oil supplies to the United States only; the reserves may thus not be tapped into in the event of increased prices. However, as gasoline prices in the United States reached about four dollars per gallon (they recently fell to about 3.6 dollars per gallon), this raised the possibility of tapping into strategic reserves.
High gasoline prices, despite the presence of adequate commercial crude and gasoline inventories, have prompted many congressmen to raise questions and demand the federal agencies concerned to investigate into the matter: Are high prices the result of the lack of restrictions on speculation, or are they the result of deliberate manipulation and misrepresentation of numbers and data by certain companies? In fact, Sen. John Rockefeller's request is the latest proposal in the series of similar motions by Congressmen and Senators to get to the bottom of this issue. At the same time, and for the first time, French President Nicolas Sarkozy asked the G20 Summit to include in its agenda discussions of ‘effective' measures to regulate oil and agricultural products markets, at the next summit due to take place in November in Cannes, France. He also called for the enactment of laws that are similar to the regulations governing financial markets, including a law that would impose a ceiling on speculation in the futures markets.
This begs another question: Why has there been a progressive fall in prices? In truth, many factors have helped put pressure on prices following OPEC's meeting on the eighth of June: First of all, there is the Greek sovereign debt crisis, and the refusal of European ministers to bail out Greece before the latter adopt the necessary laws that allow it to raise the required funds to meet its debts and dues. Another factor involves the difficulties that are still plaguing the U.S. economy, especially the high levels of unemployment. Further, these two economic factors have in turn influenced economic growth rates in two of the world's biggest economies, causing a contraction in demand for oil in these two major regions, or at least have negatively influenced demand growth there. Of equal relevance as well is Saudi Arabia's announcement that it is willing to increase its output to balance supply and demand in the market, despite the failure of OPEC's ministerial council to adopt a collective decision with regards to this issue. It is thus predicted that Saudi output will gradually increase from about 8.8 mb/d to about 10 mb/d. And despite this increase, Saudi Arabia will have a surplus production capacity of 2.3 mb/d. However, the fact that Saudi Arabia will shoulder the responsibility for balance in the markets means that it will once again be the swing producer, a role that was uncomfortably played by Saudi Arabia in 1988, as it places the responsibility for balance in the markets, whether production rises or falls, on the shoulders of Saudi Arabia alone.
Therefore, we can safely say that the means, by which the American and European economic weaknesses will be addressed, will have a dramatic impact on the levels of the demand for oil, and subsequently on oil prices.
*. Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)


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