OPEC has never been this powerless
By AFX News Limited, August 25
Plagued by spiraling demand and a chronic lack of production capacity, OPEC has lost much of its power as market stabilizer and will be powerless to boost production at its Sept 15 meeting, analysts said.
"They really can't do anything. They're producing effectively close to 100 percent," said Investec Securities analyst Bruce Evers, speaking of OPEC's next scheduled meeting of oil ministers in Vienna.
"I think all you will get is Saudi Arabia saying: 'We got plenty of spare capacity and we will be able to meet customers demand'," Evers said.
He noted that this tactic was already tried a few weeks ago, but failed to stop prices nearly hitting the US$50 per barrel mark in New York.
Evers said that despite their public assurances, Saudi officials are unlikely to show much enthusiasm to boost output in the short term. Any attempt to speed up pumping rates requires technical changes to the wells, which could make it impossible to recuperate all the oil in a field.
France's Petroleum Institute (IFP) also says that "under the current circumstances, OPEC's ability to curb the rising price of crude is very limited."
IFP's experts note the current situation has eroded much of OPEC's power, which derived from the huge reserves it controlled despite the fact it only produced 40 percent of the world's oil. Today, these have all but disappeared, dwindling to one million barrels per day this spring from 4.6 million a year ago.
This makes OPEC's main market regulating instrument, its quota system, almost useless, with its once eagerly-awaited quota decisions now being all but meaningless, IFP said. In fact, the quotas are being exceeded every month.
The London-based Centre for Global Energy Studies said OPEC has invested too little in production capacity and utterly failed to foresee the sharp increase in demand, coming on the back of economic recovery in the west and rapid growth of the emerging economies.
Also, OPEC has ignored the appearance of supply constraints that became evident as early as the first quarter of 2003, the CGES analysts said.
"They've completely underestimated the demand," Investec's Everts said. "Everything that could go wrong, has gone wrong."
He said the fact that OPEC has never been this powerless adds to its woes and goes some way to describe its less-than-decisive approach to the current situation.
For its part, OPEC said in its monthly report last week that output is "more than adequate" to meet demand until end-2005, and that the current high price levels encourage speculative activity.
Evers says OPEC's main concern is to get itself off the hook and blame the oil companies for the under-investment.
"I think they realize now they have to invest heavily in additional capacity, but to get a lot of additional capacity, it's going to cost a lot of money and take time," he said.
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