Confusion evident in blast at OPEC about production

Nov. 13, 2006
It has long been a mystery how the US Congress can so consistently wander astray on oil and gas.

It has long been a mystery how the US Congress can so consistently wander astray on oil and gas. Now we know. Guidance on the subject comes from the Joint Economic Committee.

On the question of oil price volatility, the JEC has produced a culprit: the Organization of Petroleum Exporting Countries.

Yes, it’s OPEC’s fault that the price of crude spurted to $70/bbl this year. The group, JEC says, could have defended its long-gone $22-28/bbl price band after Asian demand spurted and supply fell for one reason after another. But it didn’t.

“If OPEC had announced continued support of the $22 to $28 price range in recent years and taken vigorous action to increase oil output and oil pumping capacity, then the unexpected shift in demand would not have raised the price by as much or for as long,” says a new JEC research report. “Knowledge that the supplier with the largest crude oil reserves would raise its production rate to accommodate incremental demand would have reduced precautionary buying in the spot market and hedging activity in the futures market.”

Instead, OPEC was “opportunistic.” The group’s recent attempt to trim output proves it. Or so the JEC says.

Nonsense. The idea that OPEC could have increased production appreciably any time after 2002 is ludicrous. Prices have been high not because OPEC wouldn’t boost output but because it couldn’t. Although major OPEC producers are in fact adding capacity, the ability to raise output at will remains precariously low.

Prices are falling now partly because several years of production at maximum practical rates have refilled inventories. But storage has limits. Production beyond immediate needs of a market in which demand growth is slowing soon will have nowhere to go. In effect, the market is rebuilding its defenses against supply emergencies: first inventories, soon spare production capacity. The JEC should be cheering.

Instead, it alleges manipulation and conspiracy and faults producers for earning money by doing what global consumers needed them to do. Unbelievable.

The JEC’s aspersions won’t hurt OPEC. But the misapprehension they betray gives anyone interested in energy policy reason to worry.

(Online Nov. 3, 2006; author’s e-mail: [email protected])