Could the Organization of Petroleum Exporting Countries be stepping into a trap of its own making?
Just when oil markets were finally getting comfortable with the notion that OPEC will continue to defend a $25/bbl oil price (for a basket of OPEC marker crudes), the organization now is confronted with a proposal to boost that price. Technically, the proposal, floated by Venezuela, calls for raising the group's targeted price band of $22-28/bbl to $25-32/bbl. But in reality OPEC seems to have settled on the $25/bbl midpoint for the current price band; would it not follow that in practice OPEC would seek to defend a midpoint price of $28.50/bbl if the band were elevated?
And this comes on the heels of the group's Sept. 25 decision to cut production by 900,000 b/d in order to avoid a price collapse later. That decision was prompted by OPEC's recognition of the need to accommodate resurgent oil exports from Iraq and burgeoning new supplies from Russia and the Caspian region in 2004.
Yet now we have an OPEC founding member calling for defense of still-higher prices. And OPEC Pres. Abdullah al-Attiyah, while welcoming the arrival of OPEC's basket price at the upper threshold, said the group might talk about a new price band at its Dec. 4 ministerial meeting if Venezuela officially puts it on the agenda.
Non-OPEC participation?
Just to follow the logic train, one must assume that OPEC expects a major contribution from some of the biggest non-OPEC exporters to any production cuts needed to sustain oil prices at such lofty levels.
Both Al-Attiyah and Alí Rodríguez Araque, president of Venezuelan state oil company Petroleos de Venezuela SA, recently have pointed to the likelihood of non-OPEC cooperation. And a number of OPEC oil ministers currently are whistlestopping among such competitors as Mexico, Norway, and Russia to secure commitments to same.
But such efforts are designed to secure non-OPEC support in order to avoid a price collapse, not to engineer a higher price.
Why the need for a higher price now? And why believe non-OPEC will play along with an aggressive price posture?
Geopolitics, local politics
There are some political ramifications to the latest puzzle over oil production and prices that could shed some light.
Russia, hitherto hardnosed on the subject of production cuts, may have reason to change its mind—thanks to local politics. The Putin administration is locked in a battle of wills with giant new firm YukosSibneft because of the not-so-secret political ambitions of its chairman, Mikhail Khodorkovsky—who may soon become wealthier and more powerful should ExxonMobil Corp. or another supermajor buy a large stake in the Russian giant. Could Russian President Vladimir Putin seek to undermine that deal and his nemesis by marching in lockstep with OPEC?
For its sake, Venezuela might as well ask for a higher price band, because it's not likely to get significantly greater revenues anytime soon through increased production. There is widespread skepticism about the actual oil output volumes that Caracas is reporting, much less the country's ability to boost productive capacity in the near term.
And at the geopolitical level, Saudi Arabia may not wish to do the US any favors by keeping oil prices in the low-to-mid $20's/bbl. Merrill Lynch analyst Michael Rothman notes a growing tension between the US and Saudi Arabia as among the factors putting upward pressure on oil prices. He cites the recall of the US ambassador to Saudi Arabia, Robert Jordan, just before the Sept. 25 OPEC meeting and following earlier comments by Jordan on the issue of succession in the kingdom that were "unwelcome."
But is a higher price band likely? London-based Centre for Global Energy Studies sees the Venezuelan proposal as having little support within OPEC and deems that a good thing. Why?
"Higher prices have stimulated additional non-OPEC output and have restricted oil demand growth, squeezing OPEC's market share," CGES said in a recent report. "As long as prices continue to rise, this will continue, until the cost to economies that rely almost exclusively on oil revenues becomes too high."
It's been thought that OPEC learned that lesson in 1986. Then again, it was non-OPEC producers that were hit the hardest by that infamous market-share recapture. A true Machiavellian would see OPEC setting a trap, but not for itself.
