Opec needs strategy to avoid sharp price falls

www.gulf-news.com Manama |By Dr. Mohammed Al Asoomi | 26-01-2003

During the last few weeks the world's oil markets were influenced by many factors in play in opposite directions prompting Opec to intervene to curb rising crude prices and keeping them within the agreed range of $22-$28 per barrel.

Oil prices have been soaring since the end of the summer coinciding with the rising tensions caused by the American threats to wage war against Iraq.

However, action by Opec members who raised their production quotas contributed to curbing the price increase until the protests mounted against the elected President of Venezuela, hence reducing the country's oil exports and pushing oil prices to their highest levels in about 20 years.

Every time when oil prices rise or production levels fall, the Opec countries' oil ministers turn into glittering stars whose photographs and statements are carried by the world's newspapers, TV networks and other media.

Last week, the Opec ministers emerged with broad smiles after deciding to increase the Organisation's output by 1.5 million barrels daily to curb the soaring crude prices and to prevent any further rises, with Opec achieving a partial success in this regard.

Once again the saying that "Opec is a tea bag that only works in boiling water" is proved true. This means that Opec does not move except in crisis situations.

It should be noted that Opec usually succeeds in curbing the crude price increases but its intervention becomes less effective in the case of falling oil prices. In such event, it has to make great efforts to restore balance to the world's oil market by attempting to stop breaches and to cut output.

Owing to such moves dictated by the requirements and changes in the world's oil markets, rather than the strategies of oil producing and exporting countries, oil has lost a substantial part of its dominant share of the global balance of energy during the last two decades and such share is continuously being eroded.

I think that the two principal factors that contributed to crude price rise and linked to conditions of Venezuela and Iraq, both are Opec members, will soon cease to have any effect.

The Venezuelan oil production will return to normal during the next few weeks and the Iraqi situation is likely to be resolved during the first quarter of this year, as Iraq has a huge production capacity that will have a remarkable impact upon the supply and demand situation in the world markets.

While Opec's task last week was easy when the Organisation adopted a unanimous decision to make large output increases, its next task that will follow the resolution of the Iraqi issue will be much more difficult and complicated.

Once the Iraqi question is resolved, prices will start to fall. In addition, Iraq will resume production at its full available capacity to get the oil revenues that will enable it to overcome the economic consequences arising from its crisis with the U.S., and to rebuild its devastated economy.

Some of the other Opec members who quickly agreed at the recent meeting to raise oil output will be hesitant before showing any willingness to cut production once more to restore the required balance for the world's oil markets.

This often repeated picture of rises and falls in production and price levels take place from time to time in Opec, hence there is an obvious need for a business strategy that would enable it to avoid the sharp price falls arising from events beyond its control.

Such strategy should ensure for it reasons for success in building more diversified economies that are less dependent upon the exhaustible oil wealth since the modern sectors of information technology, communications and related service are capital intensive industries with such capital readily available to Opec members thanks to their enormous oil revenues.

The writer is a GCC-based economist.      

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