The Hindu Business Line : Will OPEC restore stability to oil market?

The Organisation of Petroleum Exporting Countries is meeting in Vienna at a time when crude prices are on a high with the ability to affect the stability of markets and impact world economic growth, especially developing countries such as India that import much of their oil requirement. Will OPEC do anything positive, wonders G. Srinivasan.

THE OIL ministers of the world's most-watched cartel, the Organisation of Petroleum Exporting Countries (OPEC), are gathered in the Austrian capital Vienna to begin their ordinary meeting on Wednesday to take stock of developments in the global crude oil market, the gyrations in crude prices and the resultant threat this poses to world economic growth and the stability of markets.

In recent months, the OPEC's benchmark oil price has far surpassed its official target of $22 to $28 a barrel. OPEC normally schedules two formal conferences of oil ministers a year but calls for meetings as needed. Today's meeting is the fourth this year and will consider enhancing output limits and the price target.

The cartel might also weigh increasing individual quotas to match actual supply among its ten members — Algeria, Indonesia, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia the United Arab Emirates and Venezeula.

Only early last month at an extraordinary meeting, President of the OPEC Conference, Dr Purnomo Yusgiantoro (Indonesia's Minister of Energy and Mineral Resources), had recalled that since its Beirut Meeting in June, where it was decided to raise the production ceiling to 25.5 million barrels per day (mbd) in July and to 26 mbd in August, OPEC's output been rising to cope with the larger than expected growth in global demand.

Initial reports suggest that the total OPEC output was 2 mbd-plus above the July ceiling; according to oil analysts, OPEC supplies rose 3.60 lakh mbd to 29.92 mbd in August, reaching a 25-year peak for a second month.

Thus, the demand factor has been pushing the producer cartel to pump more crude, yet softer crude prices are not in sight.

The impetus to spiralling crude prices came from a combination of factors, including higher-than-expected oil demand growth, particularly from China and the US, geopolitical tensions and refining and distribution industry constraints in some major consuming regions, coupled with more stringent product specifications.

These factors have led to fears about a possible supply shortage of crude, leading to heightened speculation in the futures market, with considerable heavy pressure on prices.

The record rise in demand pushed up crude futures last month to $49.40 a barrel in New York, the pinnacle point since trading began in 1983.

More significantly, crude oil prices have risen by about 35 per cent this year to levels unheard of since the early 1980s.

The wild spurt in crude prices is causing jitters in the importing countries about the economic cost of high-energy prices. Higher fuel prices can wreak havoc in the form of high inflation and low economic growth.

Even as prices are on a high, global economic expansion is driving what the Paris-based International Energy Agency (IEA) considers the biggest spurt in oil demand in 24 years.

There is higher than expected demand in industrialised countries and China's breakneck economic acceleration has sent the demand spiralling.

Oil analysts say the demand in the US has risen because of strengthening economic recovery and greater need for higher-grade crude oil suitable for processing into petrol (gasoline) for the fuel-thirsty Sports Utility Vehicles (SUVs) that are a rage among Americans.

It would not be out of place to recall OPEC President's address to the World Energy Council in Jakarta on July 29 when he said that the present high oil prices remain "a matter of much concern to OPEC and we are doing everything we can to restore order and stability to the market in the interest of producers and consumers alike."

He said prices are ruling firm despite the market remaining well-supplied with crude and the efforts of the OPEC members to meet market requirements. He cited how OPEC is currently producing 2 mbd above the agreed output ceiling.

Thus, in essence, OPEC has exonerated itself from any blame about being responsible for higher crude prices as it breached the agreed ceiling only as "a positive response to the current market situations".

In plain words, OPEC is contending that oil prices are high because of demand outstripping supply and not because the cartel was squeezing the market.

Regardless of all this, the fact remains that the producer cartel is the centre of attention world-wide, simply because it accounts for about half of global crude oil exports.

It is also not lost on observers of the global petroleum market that in the past OPEC Ministers have tended to wait for prices to plummet before agreeing to cut output.

But, of late, the cartel is acting more aggressively fine-tuning its response quickly to the market realities and making the best out of the evolving developments.

Even as OPEC argues that it assists in stabilising oil prices either by cutting production to keep the prices from falling, as in the past, or raising output over and above the agreed ceiling to ensure that demand is met, the track record suggests otherwise.

According to Mr Jerry Tailor, Director, Natural Resource Studies, Cato Institute (Washington), between the Second World War and the formation of OPEC, the inflation-adjusted price of oil fluctuated little.

Oil prices indeed jumped during the Middle East crises of 1956 and 1967, but receded quickly.

The inflation-adjusted price of oil-indexed by GDP fell by about two-thirds from 1945 to 1970. From 1970 to 1980, however, the real price of oil rose by about 1300 per cent. Between 1980 and 1986, it dropped by about two-thirds.

It was fairly steady between 1986 and 1997, fell further in 1997-98 and then nearly quadrupled after February 1999. Is this stability, as Mr Tailor suggests, even as OPEC is crying from rooftops that its every move is intended to inject stability in the market and certainty of supplies?

For import-dependent countries such as India that spent a staggering $18.36 billion last fiscal to import 70 per cent of its oil, the portents are anything but gloomy.

In the last three years, the average price of the India's basket of crude oil was $22.54 per barrel in 2001-02, $26.60 in 2002-03 and $27.98 in 2003-04.

With crude prices crossing the $40 a barrel in recent months, and seemingly with little prospect of their climbing down soon, the average imported crude price for India is bound to be substantially higher, exacting a heavy import bill.

It is also a pity that for far too long the government merely toyed with the idea of building a strategic store of five million tonnes of crude.

Had this decision been taken a couple of months ago, when prices of crude were soft, the country would not have to fork out massive foreign exchange to import crude.

This proposed strategic store is to be over and above the stocks of crude oil and petroleum products with the national oil companies and is intended to serve as an emergency response mechanism to oil supply disruptions.

The estimated capital cost of the project is around Rs 1,650 crore, sans the maintenance cost; of course, the crude prices were not reaching the stratosphere as they are now.

The Government must quickly gets its act together to immediately promote oil conservation measures and mandating ethanol blending of petrol, and plan other steps for the long term.

The Minister of Petroleum and Natural Gas, Mr Mani Shankar Aiyar, can perhaps use his good offices to convince OPEC to spare oil-importing developing countries like India from the inexorable impact of imported inflation through a differential pricing policy at least on a limited scale.