LOOK WHO'S LOOKING AHEAD IN THE OIL MARKET

In a welcome display of foresight, the Organization of Petroleum Exporting Countries refused this month to approve another increase in production of crude oil. And some of its members drew a misguided rebuke from the US secretary of energy for suggesting that production cuts might be in order next year.

In a welcome display of foresight, the Organization of Petroleum Exporting Countries refused this month to approve another increase in production of crude oil. And some of its members drew a misguided rebuke from the US secretary of energy for suggesting that production cuts might be in order next year.

In a statement issued at the end of its extraordinary meeting Nov. 12-13 in Vienna, the exporters' group noted that it had sanctioned four increases in production this year totaling 3.7 million b/d. It acted in response to oil prices exceeding $30/bbl.

The latest production hike came at the end of October and amounted to 500,000 b/d. It followed an 800,000 b/d increase approved at an OPEC meeting Sept. 10-11.

The group's stated goal, adopted early this year, is stability of the composite price of its benchmark crudes-the OPEC basket-in the range of $22-28/bbl.

Although meeting that goal won't be easy, the effort repudiates antique presumptions still expressed in the consuming world that OPEC wants only to push prices to maximum levels.

A more valid criticism of OPEC is that it responds too slowly to swings in oil demand. It tends to wait for certainty in the physical market, which always comes slowly. Swiftly responsive paper markets preempt its supply manipulations, which then aggravate whatever market imbalances necessitated the adjustment.

For that reason, the group's early-November refusal to raise production again, even though prices remain high, both makes sense and represents healthy anticipation.

The Nov. 13 statement noted that, in addition to its members' production hikes, nonmembers have raised output by perhaps 1.5 million b/d. It also pointed out that the extra volumes take time to reach consumers.

The group didn't deserve the mild scolding it received from US Energy Sec. Bill Richardson for hinting that a production cut might lie ahead. Indeed, a surplus might be taking shape even now, as the Energy Information Administration has noted.

At the Oil & Money Conference held in London after OPEC met, Richardson criticized suggestions by OPEC members that production cuts might become necessary next year. He thus resisted the very thing the market needs: forward thinking by the exporters' group.

"The US believes that the world needs more oil, and we hope that when OPEC meets again in January they will see the need to increase production," he said.

EIA, which is part of the department Richardson heads, took this, very different, view in its Short-Term Energy Outlook published earlier in November: "EIA estimates of world oil supply and demand suggest that, while the monthly US imported crude oil price may remain above $28/bbl for the remainder of the year (corresponding to over $30 for West Texas Intermediate crude oil), a significant developing oversupply should start to move prices down soon."

That analysis doesn't support the assertion that the world needs more oil.

Richardson, who declared in London that "$34/bbl for oil is too high," isn't looking ahead. He's projecting current trends forward and not accounting for adjustments that even now appear to be taking shape.

As OPEC is learning, such failure to look ahead in the oil market is always a big mistake.

More in Economics & Markets