Steady quotas, uncertain supply
(Economist.com Via Thomson Dialog NewsEdge)OPEC has decided not to lower its production quotas, to the relief of oil-consuming countries. But the amount the cartel pumps may no longer be the main factor determining prices. Security woes in some of the big oil-producing countries have become a particular worry
WITH oil trading above $60 a barrel, it seems strange that in the run-up to this week's meeting of the Organisation of the Petroleum Exporting Countries (OPEC), people were speculating that the cartel might cut its self-imposed quotas. Yet markets were watching the proceedings anxiously as OPEC ministers assembled in Vienna on Wednesday March 8th. Rising oil stocks and an unusually mild winter in the northern United States had raised fears that the ministers would cut back on production in order to prevent prices from falling far below their current heights.
On Wednesday afternoon OPEC assuaged those fears, announcing that it would not trim quotas from their current level of 28m barrels per day (bpd). Oil markets welcomed the news; the price of Brent crude fell back below $61 a barrel in morning trading. But stockmarkets were less relaxed: all the main indices in America, the world's largest oil consumer, dipped, possibly because the outlook for oil prices remains so murky. Though the Kuwaiti oil minister told reporters that OPEC is working hard to keep crude below $60 a barrel, the organisation appears to have less control over prices than it used to. That is partly because most of its members are already producing near capacity, and partly because current supply may no longer be the main factor keeping prices high.
Many economists have blamed the high cost of oil on lively demand, particularly from America and China, colliding with tight global production capacity. No doubt that has been, and continues to be, part of the problem. But according to America's Energy Information Administration, the country's stocks of crude oil are around 330m barrels, well above normal for this time of yeareven before the government's Strategic Petroleum Reserve is counted. Rising stocks should signal easing demand, which should in turn cause prices to soften. Instead, they have remained near record levels (though not, in inflation-adjusted terms, anywhere near the roughly $90 a barrel oil reached in the early 1980s).
Some blame the high price on speculation, saying that investment managers have been pouring funds into oil futures in the belief that the only way is up. This is cited by those OPEC countries that want to see quotas trimmed, such as Venezuela. If the speculators flee the market for any reason, they argue, the oil price will plummet. However, there is no way to gauge the extent to which the futures market is driven by speculation, and right now there is a more plausible culprit to blame for pricey petrol: growing security worries in oil-producing countries.
Iraq is probably the worst case. At its height, before the Iran-Iraq war of the 1980s, the country's oil output was 3.7m bpd. These days, Iraq is producing less than half that (see table), and substantially less than the 2.5m bpd it was pumping before Saddam Hussein was deposed. American efforts to upgrade its decrepit infrastructure have been hindered by insurgents.
Iraq is not the only trouble spot in the region. Markets were spooked on February 24th when Saudi security forces foiled a terrorist attack on Abqaiq, the world's biggest oil-processing plant. Now they are nervously watching tensions grow between Iran and the West over the Islamic country's nuclear programme. On Wednesday, as diplomats were preparing to send the case to the United Nations Security Council, America threatened serious consequences if Iran did not abandon its uranium-enrichment plans. Iran fired back with a warning that it, too, could inflict harm and pain. While Javad Vaeedi, deputy secretary of Iran's Supreme National Security Council, told Reuters news agency that his countrythe second-largest producer in OPEChad no immediate plans to use the oil weapon, he hinted at doing so in the future.
The battle over oil in Nigeria is creating the same sort of trouble as it has in Iraq. Like Iraq, Nigeria is an uncomfortable amalgamation of ethnic and religious groups, formed more for the convenience of its former colonial master than any natural political or cultural affinity. Like Iraq, resources are distributed unequally. Militants in the oil-rich Niger delta have begun attacking installations in a bid for greater local control over the oil there. Production has fallen by almost 500,000 bpd as a result, and oil companies are nervous about the future.
For once, notoriously indifferent American consumers may be forced to pay attention to civil wars half a world away. Thanks largely to energy prices, inflation has spiked sharply, not just in America but also among its trading partners. This week, the OECD released figures showing that energy prices have driven inflation to 3% among its members. This is still a manageable level, but if oil prices continue rising, it may not remain so. If central banks are forced to tighten the money supply to fight inflation, the ugly result would be higher interest rates combined with higher oil prices. OPEC's decision not to lower quotas may be largely symbolicits members have a habit of cheating on their targets. But in a market full of anxious investors, symbolic gestures are not to be sneezed at.