The Organization of Petroleum Exporting Countries will define itself this weekend - again. Its decision about mission will be even more important in the long run than what it decides to do about oil production.
Since assuming the role of the world's marginal supplier of crude oil, the group has cycled into and out of several hazy concepts of itself - none of them ever well-defined or precisely executed.
Through the 1970s and early 1980s, the group tried to be a price manager, using production limits to enforce price targets. That strategy failed.
Then, after the market collapse of 1986, OPEC came around to a strategy of calibrating production to demand estimates. But that strategy has failed, too. Because of that failure, the market now cycles through extremes that hurt everyone except traders savvy enough to profit from them.
Part of the reason for OPEC's failure as a market-balancer is that the group doesn't make a production decision until it's certain about demand. This makes its production responses painfully tardy. While it waits for certainty about physical quantities difficult to measure, traders who know how to interpret forward price patterns anticipate its responses and trade paper barrels in ways that make the physical supply changes inappropriate, when they finally occur. Hence the market's wild swings through price extremes unsustainable at both the low and high ends.
In response, OPEC now talks about managing price within a band. From the group's perspective, there are two problems with this strategy. One is how to determine what the high and low boundaries of the band should be. The other is the same old problem of trying to manage price with large, slow production changes in a market increasingly able to anticipate them and discount their financial effects.
Of course, the market needs a mechanism for adjusting physical supply to physical consumption. And OPEC, for reasons of nature and politics, is that mechanism. But the slow way the group works makes it difficult for many members to make money except in times, such as the present, when supply is the market's main constraint. Those times are relatively rare.
OPEC's methods will always be cumbersome. The intramural tensions of a diverse group make this so.
But the group would be more responsive than it is now if it learned to look at price less as something to be managed and more as a reflection of conditions in the physical market. That would require that members now loath to do so-Saudi Arabia foremost among them-begin trading significant portions of their crude and allow spot markets to develop as they should in the Persian Gulf.
By aggravating market gyrations, the muddle long characteristic of OPEC behavior has become costly to everyone in the physical market-OPEC members most of all.
If OPEC continues to define itself as the enforcer of price targets or bands, or as the supplier of last resort in a market it views in strictly physical terms, the muddle will continue. And so will instability of a very large and very important market.
