Congressional panel says OPEC manipulates oil prices

Nov. 6, 2006
The Organization of Petroleum Exporting Countries, whose members regularly call for stable oil markets, actually has been the greatest source of recent price volatility, a US congressional committee charged on Oct. 31.

The Organization of Petroleum Exporting Countries, whose members regularly call for stable oil markets, actually has been the greatest source of recent price volatility, a US congressional committee charged on Oct. 31.

“OPEC is anything but blameless in the oil price surge of the last 2 years. The cartel is the single greatest cause of market instability as it fans market fears with intermittent quota and output cuts to extend the price surge,” the Joint Economic Committee said in a research report.

It said OPEC has exploited worldwide oil demand growth, which has been driven largely by improving Asian economies since 2003. China’s crude oil consumption alone has increased by 1.76 million b/d in the last 3 years as of 2006’s second quarter, it indicated, citing the US Energy Information Administration data.

“In response, OPEC abandoned its price range of $22-28/bbl and allowed the price to nearly triple from the midpoint of the range it set in March 2000. The price increase has resulted in a cumulative increment to the cartel’s oil revenues of about $720 billion over 3 years,” JEC’s report said.

It said that as the price for OPEC’s crude decreased from a peak of $72.68/bbl on Aug. 8 to $55/bbl on Oct. 20, the cartel announced that it would cut output by 1.2 million b/d effective Nov. 1, with possible further reductions to follow.

“The market did not anticipate the price rise, but OPEC’s reaction to the increase clearly indicates its active support of higher prices,” the report said.

It said that OPEC had held back about 2 million b/d of production in December 2003 to protect the $22-28/bbl price band. “In the face of rising demand, OPEC activated its idle capacity sparingly and even cut output intermittently when the price began to recede,” the report continued.

Undeveloped reserves

The cartel eventually ran into capacity constraints and eventually suspended its quotas, according to JEC. But it also holds enormous oil reserves, which it keeps undeveloped, it added.

“In the entire Persian Gulf region, only about 2,000 exploration wells have been drilled since the inception of its activity, compared to more than 1 million in the United States. Saudi Arabia has just over 1,500 producing wells compared to more than 560,000 in the United States,” it said, citing figures from a 2006 book, The Age of Oil, by Leonard Maugeri.

The JEC said OPEC’s cost per barrel is about one third to one fifth of the price range it had set and one ninth to one eighteenth of the recent price peak. One of its earlier reports placed crude production costs at less than $5/bbl in the Persian Gulf and less than $9/bbl in the rest of the cartel.

“Thus, increased Asian oil demand had been met by OPEC’s manipulation of its short-run pumping capacity and scores of oil reserves kept locked away in the ground. While investment in capacity expansion is now under way, the cartel’s renewed decision to cut production when the price has barely fallen below $60[/bbl] demonstrates its intent to exploit the market further,” the congressional committee said.

The report estimated that in 2006, OPEC’s total oil revenues will approach $600 billion, up from $200 million/year before 2003.

“Even assuming that OPEC was surprised by increased Asian oil demand and initially hesitant to view the increase as permanent, the cartel has had plenty of time to exercise market leadership. Instead, OPEC refuses to endorse a long-term price band and seeks to extract as much revenue from the market as feasible,” it declared.

Rep. Jim Saxton (R-NJ) chairs JEC, with Sen. Robert F. Bennett (R-Utah) as vice-chair.