Rodríguez's dilemma

Four production hikes and, according to Organization of Petroleum Exporting Countries figures, over 3.7 million b/d later, OPEC's attempts to steady the price of crude have come to naught.

Four production hikes and, according to Organization of Petroleum Exporting Countries figures, over 3.7 million b/d later, OPEC's attempts to steady the price of crude have come to naught. As OPEC changes direction and begins to think about cutting output to evade a price collapse in the spring and as investment banker Simmons & Co. International Pres. Matt Simmons forecasts a "savage" energy crisis on the horizon, the question of why such a massive output increase has had so little effect on the oil market looms large.

One explanation comes from, among others, the London-based Centre for Global Energy Studies. By CGES computations, OPEC's aggregate output increase numbers exist only on paper. Throughout the year, says CGES, OPEC countries have produced at higher levels than quotas would suggest. So, in the case of OPEC's September output hike, once overproduction and leakage are factored in, the number of "new barrels" coming on to the market was a fraction of its claimed 800,000 b/d. CGES calculates the total production rise this year from OPEC to be something closer to 1.5 million b/d.

"This [discrepancy] fits with the fact that we've had $32/bbl oil for so much of this year," it says.

'Other factors'

From OPEC itself, one hears the oft-repeated rejoinder to explain the $32/bbl oil. OPEC Sec. Gen.-designate Alí Rodríguez Araque went so far as to say on Nov. 13 that by opening the tap on 3.7 million b/d over the year, OPEC had succeeded in "prevent[ing] oil prices from skyrocketing."

Then he pointed again to "several other factors" influencing the oil price: a steep fall in refining capacity in the US caused by the closure of more than 100 refineries since 1981, a tanker fleet "insufficient" to meet current industry transportation needs, and "expectation"-driven speculation in futures trading that leads to "significant price distortions."

"We must conclude that high oil prices are not only the result of the balance between crude demand and supply," said Rodríguez.

Out of control

To chart the relationship between global production levels and oil price over the longer term, Rodríguez's "other factors" don't seem the red herrings much of the world took them to be a few months ago. Texas-based Edwards Energy Consultants Inc. Pres. William R. Edwards, for one, goes even a step further.

"[In] April of 1998, OPEC made their first production cut of maybe a million [b/d], and falling prices continued to fall, and it wasn't until almost a year later that a turnaround began," Edwards reminds. From the time the oil price began its recovery, no output increase has done anything more than momentarily take the steam out of the oil price's climb, he stresses.

"The fundamental assessment is: price cannot be controlled by production," says Edwards. More perplexing yet, "if you try to correlate pricing with production, inventory levels, inventory builds, whatever, you don't get [a correlation]. What I conclude is that prices occur, in effect, randomly-and will continue to do so until OPEC does something."

Whatever the price drivers, it is not production alone, and Rodríguez, as the "father of the price band mechanism," is going to have to come up with new answers to oil price volatility.

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