OPEC: A DOUBLE-EDGED SWORD?

The Organization of Petroleum Exporting Countries (OPEC) announced Saturday, November 29, that the organization would wait until its next scheduled meeting in Oran, Algeria, to agree on its output reductions, according to Reuters. The Algerian meeting is scheduled for December 17. (www.reuters.com)

OPEC, the cartel producing nearly forty percent of the world’s oil supply, is experiencing significant declines in oil revenues. From the high of nearly US$150/barrel in July, prices have dropped to approximately
US$54/barrel last Friday. A decline in world oil consumption resulting from the general global economic slowdown has fueled the decrease in prices.

Both Saudi Arabian Oil Minister Ali Ibrahim al-Naimi and his sovereign, King Abdullah, cited the figure of $75/barrel as the “fair price” of crude oil “to protect the marginal producer.” OPEC refused to agree to further
production cuts until the Algerian meeting. (www.arabianbusiness.com)

Venezuela and Iran, both OPEC members, called for immediate production cuts after October’s
decrease of 1.5 million barrel/day, The division is a sources for disagreement among cartel members. (www.english.daralhayat.com).

According to various sources, Venezuela is overstating its current production and would benefit by
further mandated OPEC cuts. Anticipating resulting price increases from further production cuts would bring expected economic benefits to the country.

Iran which possesses the world’s fourth largest oil reserves is subject to continuing technological and infrastructure problems. It benefited substantially from last year’s record oil prices. It is, however, also subject to the Iran Sanctions Act, first passed by President Clinton by Executive Order in 1995. It was subsequently renewed until 2011. Among other items, the Act precludes foreign investment in Iran of more
than $20 million per year. Attesting to the overall ineffectiveness of the sanctions, Iran and China signed a multi-year oil and gas supply accord in 2004 potentially worth nearly $200 billion. The country is also eying improved trade relations with India, Russia, and Indonesia.

In a show of bilateral support, Indonesian President Yudhoyono met with Iranian President Ahmadinejad earlier this year.  Indonesia, which leaves OPEC at the end of December, is also a non-permanent member of the United Nations Security Council. It was the only member not to condemn Iran’s alleged nuclear research program. Stated in its charter, “OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” (www.opec.org)

The political troubles within OPEC may presage further short-term cuts in production to reach the target levels suggested by Saudi Arabia to stabilize world prices for consumers and producers alike.

However, it is potentially dangerous to short and long term options to new exploration, drilling or alternative energy development. As global demand shrinks in the short run and oil prices decline, so do potential profits from energy investment.

Last year approximately $77 billion were committed globally by major producers in alternative energy projects, including nuclear, hydroelectric, wind and solar power.  British Petroleum (BP) alone is responsible for roughly ten per cent of alternative energy investment. It agreed to provide $8 billion over ten years. The company has already funded $1.5 billion in 2008.  Chevron-Texaco invested $2 billion since 2002, and expects additional investments of $2.5 billion through 2009.

Exxon-Mobil, the world’s most profitable company, reportedly spends roughly one percent, or $3 billion, of its annual profits on alternative energy each year. While not investing directly in wind, solar or other different sources of power, the company concentrates mainly on hybrid car development and battery and fuel cell technology.

The recent global financial problems specifically point to the interconnectivity of international economics: continually rising populations (especially in the less developed world) and increasing expectations to achieve
increasing material standards by the world’s populations, face greater knowledge of finite material supplies. This knowledge invariably leads to heightened tensions such as exemplified by OPEC members.

If one is inclined to look at the negative potential of each human crisis, this could be as dismal as Malthus’ incorrect prediction regarding population growth nearly two centuries ago. The short-term impact on the global economy could easily be seen as the decline of civilization.

Yet, allowing for the flourishing of mankind’s intellect and ingenuity and motivation, the current crisis can easily point the way to an even more fruitful, productive and innovative period throughout the coming centuries.

2 comments to OPEC: A DOUBLE-EDGED SWORD?

  • Raymond

    Great article Mr Z. A double-edged sword indeed. OPEC governments use their country’s oil resource as a tool for foreign and domestic political leverage. For now. The oil under their feet would have stayed there without western innovations. At some point we will move away from oil dependence.

    I would not be surprised if our own profit seeking loss avoiding much maligned energy companies take us there.

    The OPEC economies and their politics have lived by the oil and will die by it. They are the ones in a precarious position.

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