Neither the will nor the way: The meeting of Opec on Sunday is unlikely to bring relief
to fuel-guzzling western states concerned at the high cost of fuel
The Saudi oil minister said the Kingdom had produced an extra 600,000 barrels, but oil analysts say perhaps only half of that - 250,000 b/d-300,000 b/d - found buyers, in part because some of it was sulphurous "sour" crude rather than the "sweet" variety that has been in such high demand by US refiners.
Financial Times, September 8
Ny Robert Corzine and Andrew Hill
Human beings may not be able to remember pain, but cartels evidently can. With oil prices at 10-year highs, pressure is mounting on the Organisation of Petroleum Exporting Countries to approve a big production increase as a way to moderate the speculative fever that has sent the futures price close to Dollars 34 a barrel.
This Sunday's meeting of Opec states in Vienna may not deliver the relief that western oil-consuming countries are seeking, however. Many experts believe Opec is unable to fine-tune a market that has consistently escaped its control. More significantly, it is far from clear that the cartel has the will to try.
Opec ministers will need no reminder of western expectations. In France, concerns over high fuel prices have prompted widespread public protest, while politicians on both sides of the Atlantic have become increasingly vocal in their criticism of the cartel. As energy-dependent companies such as chemical and consumer products producers are forced to squeeze margins or pass higher costs on to customers, equity market analysts are assessing whether they have underestimated the wider industrial impact of high oil prices.
Yet even though leading Opec members such as Saudi Arabia have made reassuring noises of late about the need to balance the interests of oil producers and consumers, few observers expect the cartel to take decisive action. Part of the problem, they say, is that most of the ministers who will gather at Opec headquarters this weekend are the same ones who watched helplessly just over two years ago as prices collapsed to below Dollars 10 a barrel.
Opec's conundrum is that, in a market driven as much by speculation and psychology as supply and demand, any production increase that is likely to impress oil traders could just as easily trigger an uncontrollable price collapse - something the oil-revenue dependent countries are anxious to avoid at all costs.
"The market makes demands which are not necessarily conforming to the real supply/demand balance," says Robert Mabro of the Oxford Centre for Energy Studies. "If Opec doesn't oblige, the price doesn't go down. But if the increase in production is by as much as the market demands, it would be more than required and the risk is that the price might collapse."
On the surface, Opec states have little incentive to alter radically a production restraint policy that has more than trebled the price of oil since the beginning of 1999.
According to the Petroleum Finance Company in Washington DC, Opec producers will earn nearly Dollars 250bn this year, up from Dollars 161bn in 1999 and Dollars 116bn in 1998, when a steadily falling oil price quickly exposed the financial fraility of many of the cartel's members.
Many officials from Opec states see this year's price rise not so much as a windfall but as a way to recoup the "losses" incurred during that period. That attitude suggests any action taken this weekend will be cautious.
Even Saudi Arabia, the world's biggest petroleum producer and exporter and the Opec government most uncomfortable with prices above Dollars 30 a barrel, has so far been reluctant to embrace radical action. Senior Saudi officials have called for a dialogue between producers and consumer countries and urged industrialised countries to reduce taxes as a way to ease the price burden.
They have also tried to reassure western governments that Saudi Arabia will ensure that there is sufficient oil on world markets to prevent any shortages emerging. On Tuesday Ali al-Naimi, the Saudi oil minister, said the Kingdom had produced an extra 600,000 barrels per day since its statement in July that it would unilaterally raise output. But oil analysts say perhaps only half of that - 250,000 b/d-300,000 b/d - found buyers, in part because some of it was sulphurous "sour" crude rather than the "sweet" variety that has been in such high demand by US refiners.
Yesterday reports were circulating that Crown Prince Abdullah told Bill Clinton, the US president, on Wednesday that Opec would raise output by about 700,000 b/d at the Vienna meeting, a figure between the 500,000 b/d-1m b/d range cited by analysts as the most likely outcome.
Saudi Arabia has become the key player in this year's oil price drama because it controls most of the spare oil production capacity in the world. Other big Opec states such as Iran, Iraq and Venezuela are producing close to their limit, as are the main non-Opec producers such as Norway and Mexico.
Of the 3m b/d of spare capacity that Opec is believed to have, Saudi Arabia accounts for about two-thirds; it thus has the greatest leverage of any Opec state in forcing prices down towards its target of Dollars 25 a barrel.
But Saudi Arabia is also wary of being seen in the Arab world as caving in to US demands for lower oil prices. With Opec making final preparations for only its second summit meeting later this month in Caracas, there is a reluctance to do anything to imperil the cartel's new-found sense of unity.
On the other hand, Opec will find it increasingly hard to ignore growing evidence of the damaging economic effects of higher crude oil prices. Mr Clinton yesterday warned that an oil price shock would trigger a recession that would damage oil producers and consumers alike: "I told him (Crown Prince Abdullah) I was very concerned that the price of oil is too high, not just for America but for the world."
The political temperature in Washington has risen rapidly in recent weeks as higher oil prices have become keenly felt by corporate users.
Yesterday DuPont, the US chemicals group, was forced to revise downwards its outlook for earnings per share growth in 2000. It estimated the negative impact of higher raw material costs and a weak euro against the US dollar to be Dollars 1bn before tax.
Procter & Gamble, the consumer products company, has announced it will increase prices by 5 to 8 per cent at its laundry products division to take account of the jump in raw material costs.
At the same time, a widening range of US companies - from paper manufacturers to semiconductor producers - are having to deal with higher transportation costs as trucking companies and express carriers try to offset oil price rises. Federal Express, UPS and other express carriers, for example, have imposed additional fuel surcharges in the last two months. "We are always trying to hedge, but there's a point where the cost of a barrel of crude rises so high, and stays high for so long that you end up crying uncle," says UPS, which held off imposing a 1.25 per cent surcharge until August 7.
Analysts are beginning to voice concern that the wider industrial impact of high oil prices may have been underestimated by the equity markets. Until recently, US companies have pointed out that they have been unable to pass rising costs on to consumers because of heavy competition. Instead, they have sought internal cost savings. The resulting improvement in productivity has contributed to the virtuous circle of high growth and low inflation in the US.
But some observers believe that with workers paying higher prices for heating oil, petrol and some consumer products, companies will now face a double-squeeze of wage demands and higher raw material costs.
"Indirectly, it's going to impact everybody, in one way or another," says Bill Meehan, chief market analyst at Cantor Fitzgerald. "We have got oil prices rising; wages aren't outstripping increases in prices. You are likely to see more pressure on employers to give larger rises, increasing costs even more."
The prospect of spreading financial pain from high oil prices is bad news for the west. But it is unlikely to sway Opec oil ministers from their cautious course. |
