Global Geopolitics Net Sites / IPS
Saturday, October 25, 2008
All rights reserved, IPS – Inter Press Service, 2008.
Humberto Márquez
CARACAS, Oct 24 (IPS) – In an unexpected reaction, oil prices continued to slide, by up to six percent Friday, despite OPEC’s decision to cut output by 1.5 million barrels a day as of Nov. 1.
West Texas Intermediate (WTI) was trading at 64 dollars a barrel Friday, nearly four dollars down from Thursday, and Brent experienced a similar drop, to just over 62 dollars.
The drop ”is an extremely harsh blow for OPEC (the Organisation of Petroleum Exporting Countries), because the market that it has refrained from regulating since 2003 is responding to its cutback with less demand, and the cancellation of orders,” Elie Habalián, a former Venezuelan OPEC governor, told IPS.
In 2003, OPEC abandoned the price band system on which it had based decisions for years to increase or reduce production, in order to keep prices within that range. Habalián pointed out.
Since then, it has produced at near capacity, covering around 40 percent of global demand and accounting for 60 percent of oil exports.
So when the effects of the U.S. mortgage crisis began to be felt in the global financial markets last year, investors started to speculate in futures contracts for oil and other commodities, and the bubble grew until the price of oil reached nearly 150 dollars a barrel in July, said the expert.
When the speculative bubble burst a few weeks ago, oil prices quickly returned to levels more in line with actual economic conditions, ”but the global economy is stagnating and could fall into a severe recession. There are indicators that the United States, the European Union and Japan could be looking at zero economic growth next year,” he noted.
If global economic growth falls several percentage points, ”oil prices could go down to 40, or even 30, dollars a barrel,” said Habalián.
Another Venezuelan expert, Víctor Poleo, a professor of graduate studies on the oil economy, said OPEC ”no longer has the power to dictate the level of global oil prices.”
According to Poleo, there is an agreement among global powers that met in Jeddah, Saudi Arabia in February, to manage global oil prices.
He said the agreement is between ”the governments of the Group of Seven (richest countries) and other industrialised nations, the International Energy Agency (IEA), several global energy corporations and Saudi Arabia,” which led OPEC to decide at its emergency meeting in Vienna Friday to cut output and plan to study a further reduction in mid-December.
OPEC, made up of Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Sauda Arabia, United Arab Emirates and Venezuela, produces just over 30 million barrels per day (bpd), while global demand stands at 86 million bpd.
The partners, with the exclusion of Iraq, have a combined total production quota of 28.8 million bpd, which will be reduced by 1.5 million bpd starting in November, in proportion to their production levels. Saudi Arabia, for example, will pump 466,000 bpd less, and Ecuador 27,000.
In a statement released after its meeting Friday, OPEC said ”Oil prices have witnessed a dramatic collapse — unprecedented in speed and magnitude.”
”This slowdown in demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time.”
But despite OPEC’s warning of oil shortages in the medium-term, fears that a global recession will drive down demand for oil continued to push prices down, according to analysts.
”We believe this week will mark the start of a new quota reduction cycle by OPEC and it will continue through 2009,” said analyst Michael Lewis with Germany’s Deutsche Bank.
”However, we believe production cuts will not rescue the oil price,” he added. ”We target WTI crude oil prices hitting 50 dollars a barrel next year.”
The White House lambasted OPEC’s decision as ”anti-market.”
”It has always been our view that the value of commodities, including oil, should be determined in open, competitive markets, and not by these kinds of anti-market production decisions,” spokesman Tony Fratto said.
Venezuelan Energy Minister Rafael Ramírez, on the other hand, said the step taken by OPEC Friday ”is the right decision, and marks the start of an OPEC policy aimed at removing the excess output from the market.”
Iran and Venezuela, which have long argued for production cuts to prop up prices, did not run into the resistance Friday that they normally encounter.
The cut will be phased in gradually throughout November and December, said
OPEC President and Algerian Oil Minister Chakib Khelil,
The organisation also called on non-members like Mexico and Russia not to undermine efforts to shore up prices.
