Davis: OPEC must speed decisions to steady crude price

OPEC must modernize its decision making structure to overcome a pattern of delayed reactions to market changes and bring greater stability to crude prices in the longer term, a Shell International official said Tuesday.

LONDON�The Organization of Petroleum Exporting Countries (OPEC) must modernize its "decision making structure" to overcome a pattern of delayed reactions to market changes and bring greater stability to crude prices in the longer term, Shell International Ltd. Vice-Pres. for Global Business Environment Ged Davis said Tuesday.

Speaking at the Oil & Money conference, 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 to 12 months"�and medium term�5 to 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 price 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 bbl from April 1998. When prices stayed low, a further 1.355 million bbl were 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 bbl from their quotas," he continued. "The impact this time was immediate�prices began a steady climb."

With the price of crude oil now stubbornly hovering around the $32/bbl mark, said Davis, "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."

As oil company investment returns to non-OPEC regions and drives up supply through exploration and production, OPEC will continue to be the market's "most significant single actor," Davis said. He explained that non-OPEC supply will expand on the back of prices kept high�"$20/bbl or above"�by member states "almost entirely dependent" on oil revenue.

Unless OPEC changes its decision-making practices, this expansion will eventually undermine OPEC, as globalization separates those market participants which 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 the meet the challenges of stable prices," states 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."

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