Wednesday, October 24, 2007

Maybe OPEC Does Not Have the Power It Used To Have

Excerpts below from a WSJ article discuss the waning ability of OPEC to control the price of oil like it has in the past. A cost of “Peak Oil”?

Oil prices are hovering near historic highs, but consuming nations shouldn't expect quick relief from OPEC, the world's only source for big, quick supplies.

For several reasons, the Organization of Petroleum Exporting Countries has neither the clear leverage nor the inclination to open the spigots and drive down the price of crude, which jumped past $90 a barrel in intraday trading in New York last week for the first time. . . .

. . . . OPEC officials insist that geopolitical jitters and speculative cash are driving the price surge, not a crimp in supply. Any step to boost output would come on top of the cartel's decision last month to add about 500,000 barrels a day to world supplies as of Nov. 1, a move that did little to calm the market.

The cartel, which satisfies nearly 40% of the world's demand of 86 million barrels of crude a day, is estimated to have slightly more than two million barrels a day in spare capacity, nearly all of it in Saudi Arabia.

Using a large share of that capacity now would erode the ability of major oil-producing countries to intervene later if prices surge even further.

OPEC and its de facto leader, Saudi Arabia, have fought for more than a year to reassert the group's ability to modulate oil-price swings. But the thin margin between the world's strained supplies and growing demand results in wide price swings in both directions. Saudi Arabia's ability to influence markets also is hampered by a lag of as long as three months before new supplies hit markets.

Last autumn, with prices hovering around $60 a barrel, OPEC ministers agreed to cut output by 1.2 million barrels a day, or about 4%, to try to drain off what they saw as overly large international oil inventories.

The cartel agreed to a second cut, of 500,000 barrels a day, in December. But oil prices responded by falling abruptly in January to near $50 a barrel, their lowest level since mid-2005.

Prices have gyrated in the past 15 months despite OPEC's moves to calibrate production, hitting a then-high of $77.03 a barrel in July 2006, then falling early this year before climbing again. Late last week, the price of oil settled at $89.47, setting a record. At the close of trade on the New York Mercantile Exchange . . . . .

The turmoil has revived a longstanding debate over whether OPEC has any real ability to calibrate a market that has grown infinitely more complex since the cartel's heyday in the mid-1970s. "OPEC has become more a responder to events than a mover of events," says Joseph Stanislaw, an energy adviser at Deloitte & Touche USA LLP. "OPEC can promise but it can't always deliver."

OPEC officials and ministers have expressed similar exasperation in recent days, arguing that the price surge had nothing to do with the one lever they command. "The market is very well-supplied," OPEC Secretary-General Abdalla Salem El-Badri said in a statement last week. Rising oil prices, he said, were "largely being driven by market speculators," though he cited refinery bottlenecks, the falling U.S. dollar and geopolitical jitters as other factors. . . . .

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