Saudi Writer Urges OPEC to Prepare for Oil Market Surprises, Falling Prices

Text of report by London-based newspaper Al-Hayat website on 16 August

[Article by Id Bin-Mas'ud al-Jihni, Saudi thinker and chairman of the Arab Gulf Energy and Strategic Studies Centre: "Collapse of Correction?"]

The oil market saw, in January 1979, a race between the industrial countries, the main oil consumers, to increase their strategic reserves in addition to the emergence of the role of speculators in the international oil market. Oil prices broke the $40 a barrel barrier during the second half of that year and this constituted the second shock in oil prices following the first oil revolution in 1973. These high prices followed the 1973 war, the breakout of the Iranian revolution, and the Iranian-Iraqi war.

With the rise in prices during this period of the history of oil, the industrial countries decided to spoil “OPEC’s” victories after the two 1973 and 1979 price revolutions and brought into the ring oil producing countries from outside the organization and united them against it. No sooner had the sun of the 1980′s risen than oil prices started to reel and drop gradually to reach around $7 in 1986. The International Atomic Energy Agency, IAEA, which directs energy prices in the industrial countries, became in a stronger position than the oil-producing “OPEC” after these countries succeeded in rationalizing their outlays and applied that policy scrupulously.

How today is similar to yesterday. Before the occupation of Afghanistan and Iraq, “OPEC” was fighting courageously to stabilize oil prices at between $22 and $28 a barrel. But the winds swiftly swept away the prices. The American and British forces occupied Afghanistan, which overlooks the Caspian Sea oil whose reserves are estimated at around 40 to 50 billion barrels, overnight and the same forces occupied Iraq, with its reserves of 115 billion barrels, in no time and the Iraqi oil ministry was the first one seized by the American forces. From there started the process of increases and swift leaps until they touched $150 a barrel following the American- Israeli threats to Iran over its nuclear dossier.

As soon as the storm of the threats exchanged by the three parties – the United States and Israel on one side and on the other side Iran which threatened dire consequences if anyone stepped on its foot, foremost of all its threats to close the Hormuz Straits through which the Arab Gulf’s oil passes -abated, oil prices began to swim downward to drop in one month by 20 per cent from the highest level it recorded in July. This drop in prices is expected to continue moving downward due to the slow demand for oil and the slump in the world’s economic growth.

While some lean towards saying that the recent big drop in oil prices was a corrective response or the international oil market’s reaction after prices saw a steep rise, the explanation that is closer to acceptance is the drop in the demand for oil from the countries consuming it, foremost of them the United States where the demand for oil dropped by a large percentage to around half a million barrel a day and also in the Organization for Economic Cooperation and Development countries.

This important factor in the fast drop in oil prices is boosted by OPEC’s hasty response to the consumer countries’ (false) shouts about shortages in oil supplies and the daily demand to the organization to increase its production. The latest of these appeals, and it will not be the last, was the IAEA director’s demand last week to OPEC to increase its production when he said: “Only the OPEC countries are capable of increasing the production capacity effectively.” Out of good intentions, OPEC responded to the appeals, though it opposed them sometimes. But the final result was swamping the market with oil and some of the organization’s members started to search for buyers but did not find any.

Despite all the organization’s efforts, the future seems to portend a cloud full of mist. Prices might drop to $100 or less in view of these developments. We see a member which took a hard-line stand and demanded an increase in prices now reiterating its support for the drop in these prices. Venezuelan President Chavez recently said the drop in oil prices was good and even added: “$100 for a barrel is a fair price.”

With this backing for the $100 price, OPEC has not armed itself with a prudent futuristic vision for facing the oil market that is full of surprises. Prices might drop to below $100 and might go down to $80 or $70. All of this is possible in view of a future full of surprises, optimism and predictions.

If the Russian-Georgian struggle disrupted the shipment of Azeri crude oil and refined fuel from two ports in Georgia and the fire which broke out in the Turkish part of the Baku-Tbilisi-Ceyhan oil pipeline stopped the shipment of Azeri crude oil to the Turkish port of Ceyhan and increased oil prices by $2 a barrel before the Russian president announced a cessation of fighting, the fact which OPEC must acknowledge is that the industrial countries have adopted a new policy of rationalization that exceeds those of the late 1970′s and early 1980′s. They even added to that by promoting the sale of nuclear energy to developed countries as an alternative to oil. French President Sarkozy is carrying this banner and promoting it in the world.

One who reads the history of oil realizes that the new campaign against OPEC has actually started, starting with the (false) allegation of shortages in oil supply. The reason, as the consumer countries claim, is OPEC while it is the opposite which is true. But the consumer countries always blame the organization time and time again. OPEC was blamed when the oil price rose whereas the wars, conflicts, speculators, financial markets, and the high taxes the industrial countries impose on oil are main reasons behind this rise.

The time has come for the organization to say its opinion and decide on production now that it is certain that the oil market is saturated with oil and that it has nothing to do at all with the shortage in oil supplies. Supply has exceeded demand and the prices have started to drop quickly and if OPEC wants to escape from the industrial countries’ (trap), then it must act to correct its production ceiling to balance the supply and demand.

OPEC – which will hold next meeting on 8 September and which is exceeding its production ceiling as stated by its president, Chekib Khalil, in a statement last week in Tehran when he said “OPEC’s members should comply with the target production shares -must understand that the 1,000 mile trip starts with one step and it must examine the drop in prices steps which started with a single step.

Originally published by Al-Hayat website, London, in Arabic 16 Aug 08.

(c) 2008 BBC Monitoring Middle East. Provided by ProQuest LLC. All rights Reserved.