A rising chorus of Western politicians has called for further production increases from oil exporting nations, notably the Organization of Petroleum Exporting Countries, as OPEC itself retrenched its option to cut output in anticipation of a spring supply glut.
UK Energy Minister Helen Liddell, speaking at the International Energy Forum (IEF) in Riyadh, Saudi Arabia, last week said, "The only way to lower oil prices in a safe and sustainable way is to rebuild oil stocks, and that means increasing supply. But the only people who can make those decisions are the leaders of the major oil-producing countries."
The UK energy minister's views reaffirmed comments made late the week before by US Energy Sec. Bill Richardson, who last week reportedly asked representatives of the European Union to impress upon producers that crude prices had to come down.
In London to speak at the Oil & Money conference, Richardson challenged the thinking of OPEC ministers who support consideration of cuts to OPEC output next year. "We believe that cuts to production would not be healthy for the international economy," he said. "Clearly, production cuts would not be very wise."
Richardson favors an oil price of $20-25/bbl. OPEC would prefer a price of $22-28/bbl.
Meanwhile, a Royal Dutch/Shell Group official has criticized OPEC for taking too long to respond to market fluctuations and thus contributing to oil price volatility.
Saudi stance
Saudi Arabia's Minister of Petroleum and Mineral Resources Ali al-Naimi said that IEF delegates had agreed on the necessity of having "transparency and stability in the oil market to serve the interests of consumers and producers and to stem fluctuations in prices."
The Saudi minister emphasized that sufficient energy supplies to meet rising demand and to create a "proper relationship among the concerned parties" must be secured, particularly with regard to the financial, investment, and environmental aspects of the industry.
Al-Naimi denied that industrialized countries had placed pressure on producers to increase output, but he added that there is "a desire on the side of producing countries to raise production, so as to meet increasing demand."
Liddell said that market transparency is a goal shared by "many oil producers and consumers," but with a view to lowering oil prices.
"Better data and understanding of each other's data are essential to an efficient market," she said. "Consumers, producers, and developing countries in particular will all benefit from lower oil prices vital to global economic growth and stability."
Cuts still on table
The specter of cuts in OPEC's collective output, first seen at the organization's meeting in Vienna on Nov. 12 (OGJ, Nov. 20, 2000, p. 38), was raised anew by Qatari Minister of Energy and Industry Abdullah Bin Hamad Al-Attiyah at the Riyadh conference.
Al-Attiyah restated his belief that the 11 member nations of OPEC would decide in January whether to cut production in an attempt to ward off a "drastic drop" in crude prices.
Al-Attiyah said he expects "the second quarter of next year to witness a price drop that may reach lower than $22/bbl," a price which, in keeping with OPEC's so-called price band mechanism, would trigger a cutback in the organization's total output. He said the decision in Vienna not to implement another production increase was due to the fact that there is a surplus of more than 2 million b/d of crude in the market.
Richardson critique
Richardson earlier this month had criticized OPEC for considering production cuts in order to prevent an oil price collapse in the spring. Richardson, speaking at the Oil & Money conference, said the 11 OPEC nations had acted responsibly to "address the imbalance and volatility in [crude oil] prices" this year through four production increases.
"Two years ago, the price of [a barrel of] oil was $10, and that was too low; $34 is too high. There has to be a medium dictated by market prices," he said. "To become complacent and say it is going to be $30 and should be $30, I think, is wrong."
He contends that an oil price of $20-25/bbl is a "price that is good for both producer and consumer."
Richardson stressed world production should be maintained in order to replenish depleted crude oil stocks. Reductions in OPEC output, he added, would be a "manipulation" of the market.
However, Richardson noted that another drawdown from the US Strategic Petroleum Reserve was still possible. He said the US is reviewing the impact of the first 30 million bbl release.
"It moderated prices a bit, it helped home heating oil supply, it sent a signal that the US has an energy policy based on market principles, and that the president will act to help consumers," he said. "It certainly galvanized a lot of international support for our position."
Shell comments
OPEC must modernize its "decision-making structure" to overcome a pattern of delayed reactions to market changes and thus bring greater stability to crude prices in the longer term, Shell International Ltd. Vice-Pres. for Global Business Environment Ged Davis said at the Oil & Money conference on Nov. 14.
Davis, who heads a "scenario unit" at Shell, said OPEC's slow-rolling administrative mechanisms top the list of factors currently raising the odds of further volatility in the oil market in both the short term-"the next 6-12 months"-and medium term-5-10 years.
"We are living in an age in which markets are moving in hours, minutes, or seconds," said Davis. "OPEC, formed in an earlier age, makes its decisions in months. Implementing those decisions can take even longer. There is a basis mismatch."
He pointed to OPEC's jerky pattern of response to "sharply fluctuating" oil prices of the last few years as recent evidence of a growing problem.
"In November 1997 [as prices were declining], OPEC moved its production quotas up for the first time in 4 years," explained Davis. "Unsurprisingly, prices then declined rapidly. Within 4 months, OPEC held another meeting and partially reversed the November decision, cutting 1.3 million b/d in April 1998. When prices stayed low, a further 1.355 million b/d was cut in late June. Prices flattened toward the end of the year, then began to rise in the first months of 1999.
"In late March, OPEC acted again, cutting a further 1.7 million [b/d] from their quotas," he continued. "The impact this time was immediate-prices began a steady climb."
Citing oil prices hovering over $30/bbl, Davis noted, "The pattern we can observe is clear: pressure on the accelerator, followed by strong braking," demonstrating the belief that the oil price can be "managed" in the medium term.
Davis describes OPEC's first decision to raise production, coinciding with the collapse of the Asian financial sector, as "unfortunately timed." But he said the organization is accountable for future crude market instability wrought by seven quota adjustments-three reductions and four hikes-over 2 years.
"The attempt to smooth this management out through automatic price triggers was interesting," he added, "but doomed to fall to internal pressures. Similarly, last weekend's attempts to jawbone the market are likely to only have limited impact."
OPEC will continue to be the market's "most significant single actor," Davis said, even as oil company investment returns to non-OPEC exploration and production and thus expands supply outside OPEC.
But unless OPEC changes its decision-making practices, this expansion will eventually undermine OPEC, as globalization separates those market participants that are "flexible and able to adapt quickly" from those that are not.
"The central issue for OPEC may no longer be just whether it can maintain cohesion but rather its capacity for transformation to meet the challenges of stable prices," said Davis. "Instead of trying to set unsustainably high short-term prices, it could be more beneficial to play an influencing role in setting a more stable pricing environment."
