Oil prices have been fluctuating wildly in recent years, testifying to disagreement over the management of this fast-depleting resource, writes Hussein Abdallah* In the meeting of OPEC oil ministers in Vienna on 8 June, the OPEC secretariat presented a market report predicting a rise in world demand for OPEC oil from 28.8 billion barrels per day (b/d) in the second quarter of 2011 to 30.9 million b/d in the third quarter. Saudi Arabia, backed by Kuwait, the UAE, Qatar and Iraq (which is currently not bound by OPEC quotas) called for a two million b/d hike in production to fill the gap, so as to cap rising oil prices and halt further damage to a faltering global economy. Six countries -- Venezuela, Iran, Algeria, Libya, Angola and Ecuador -- stood opposed. The meeting broke up without an agreement, although the Saudi Arabian oil minister announced that his country and its fellow Gulf producers were ready to step up production to meet demand, even if that meant having to draw on their spare crude oil capacities. The meeting was not a pleasant one. Accusations were hurled. Gulf countries were charged with bowing to US pressures and concealing political motives behind economic ones. The fluctuations in oil prices had less to do with production shortages than they did with speculation in oil. It was the mounting speculation in crude since the outset of this year that had driven up prices from $77 per barrel in 2010 to $113 per barrel in the second quarter of 2011, or so it was argued. By the end of the acrimonious meeting, the official OPEC quota system had been suspended. Some members may have unofficially exceeded quotas before this, but that is of a different order. Then, two weeks after this disastrous meeting, the International Energy Agency (IEA) delivered the surprise announcement that it would release 60 million barrels from its strategic reserves and make these available on the international oil markets. The decision baffled experts, many of whom simply drew up lists of possible explanations, leaving it for readers to decide which was the most likely or significant. In any case, it is impossible to understand what motivated the OPEC schism and the IEA decision to tap its strategic reserves without taking a closer look at developments in the oil market between 2003 and 2007. During this five-year period the global economy experienced a rapid spurt of growth, bringing with it a commensurate spurt in the demand for oil from 78 million b/d to 85 million b/d. However, it simultaneously caused a reduction in OPEC members' spare crude oil capacity, which is one of the most important price determinants because it is central to purchasers' confidence in the security and continuity of the flow of petroleum supplies. The consequent imbalance between the mounting demand, and supplies not supported by a sufficient spare capacity, shook the world oil market, as has been evidenced by unprecedented spikes in prices. In addition to such oil-related market fundamentals as supply, demand and spare crude capacity, non-oil-related factors have also contributed to soaring prices. A major one has been the weakness of the dollar, which has propelled a large portion of commodity speculation toward "paper barrels", or market transactions in non-physical oil (such as futures trading), the volume of which can rise many times beyond the transactions in "wet barrels," or the physical commodity, whether crude or refined. All factors combined drove up the price of OPEC oil from $28 per barrel (/bl) in 2003 to $36/bl in 2004, $50/bl in 2005, $61/bl in 2006, $69/bl in 2007 and $95/bl in 2008. Then came the shock of July 2008, when the price suddenly skyrocketed to $150/bl, after which it almost just as suddenly plunged to $40/bl in December that year as a result of the global financial crisis. Hardly had people recovered from this dizzying fall in oil prices than a number of analysts from OPEC countries and elsewhere began to suggest that $75/bl was a just and realistic price. They argued that this price fell at the intersection between the investment prospects of international oil companies and the national budgetary needs of oil-producing countries. It was also supported by Saudi Arabia, which controls around a third of OPEC oil reserves. Yet, there is no theoretical or concrete basis for the $75/bl figure. Some may be inclined to call it "the just price", but this is a nebulous notion that has no place in international commercial transactions. In fact, it is simply the price agreed upon by key oil exporters and key importers with an eye to regulating the flow of oil in the markets so as to prevent a recurrence of the price spike of July 2008. Oil exporting nations have a right to raise the price to this level, but the reasons have no immediate bearing here. Another tactic of advocates for increasing oil production in order to keep prices down has been to define oil as a "strategic commodity." Such a categorisation paves the way to the internationalisation of oil, opening a window to importing nations to insist on participating in steering the industry and particularly in decisions pertaining to the volume of production and pricing, on the grounds that such decisions affect their vital interests. The first signs of this trend emerged during talks between oil producers and consumers at various forums, the most notable of which has been the International Energy Forum (IEF). A significant dialogue took place at the summit meeting of the heads of state of oil producing and consuming countries held in Jeddah on 22 June 2008. Chaired by King Abdullah of Saudi Arabia, among its most prominent participants were former British Prime Minister Gordon Brown and the vice premier of China, a country which is striving to strengthen its relations with Riyadh. The summit concluded with a joint declaration drafted collectively by the host country and the secretariats of OPEC, the IEA and the IEF. This stated that the levels and fluctuations in oil prices had reached a state that threatened the global economy and, therefore, that all participants in the global oil market needed to take joint measures, such as ensuring large-scale spare capacity to offset crises and intensifying investment in the expansion of productive capacity of crude oil and refineries, in order to steady them. It is sufficient here to note that the "Jeddah Declaration" produced a lengthy list of pledges and commitments, most of which essentially obliged OPEC to guarantee the stability of the global oil market. Western nations regard this as vital to sustaining their economic growth and to supplying the world with its oil needs at stable and competitive prices. Clearly such commitments, derived from the categorisation of oil as a strategic commodity, restrict the freedom of OPEC nations to run their own industry, and they deprive them of benefiting from the real value of their single most vital, yet depletable, resource. It is largely from the revenues of this commodity that these nations' peoples live, nations whose combined GDP is barely equivalent to that of a single European nation such as Spain. Perhaps the meeting of the G8 energy ministers in Rome on 24 May 2009 best underscored the danger of this situation. At that meeting, the chief executive officer of the Italian energy company ENI, Paulo Scaroni, proposed the creation of an international oil agency that would stabilise the price of crude and would compensate producing countries when prices fell too low. The agency would host a fund in which money would be deposited at times when the market price was higher than that agreed upon by exporters and producers, and from which producers would draw when the price fell below the agreed-upon level. The proposed agency would also oversee the management of reserves, in order to maintain sufficient spare capacity to offset the forces of supply and demand and minimise price fluctuations (by which he actually meant drops in prices). Subsequently, at the IEF ministerial meeting in Cancun, Mexico, in 2010, officials from both oil-producing and oil-consuming nations reached the virtually adamant position that the right price for both sides was $75/bl, and that the fluctuation rate should not exceed a range of $70 to $80/bl. In the light of the foregoing, we can now proceed to the question as to why the IEA released 60 million barrels from its strategic reserves in order to put them on the market. Some experts have claimed that the IEA move was intended to throw down a gauntlet to OPEC and that it was a threat that the spirit of accord that had prevailed between the two organisations over the past decade was about to expire. This may be true, but it is only half the truth. OPEC is no longer a homogeneous whole, and it was divided down the middle even before the IEA decision, as has been observed above. One camp in OPEC, led by Saudi Arabia and representing about half of the organisation's capacity, called for a production hike in order to ward off a rise in prices, now that global demand for oil is approaching the record figure of 89 million barrels per day (Mb/d). The opposing camp rejected a production increase on the grounds that OPEC was not responsible for the price rise from $77/bl in 2010 to $113/bl today. It takes little effort to grasp that the IEA decision was meant to support the Saudi-led Gulf camp, which agrees with the IEA over the need to bring the price of oil back down to the $75/bl level agreed between top oil producers and consumers last year. Even so, the IEA decision is little more than a warning signal to countries opposed to any increase in production. Firstly, the decision only involved pumping some two million barrels a day into the market during July 2011. This is a very short period, and unlikely to hold down prices against the increasing tide of demand, especially in the summer holiday season when there is intensive fuel consumption for transportation. Secondly, the IAE had previously taken the opportunity of the drop in the oil price (to $77/bl) in 2010, and the consequent surplus of supply in the market, to add to its strategic reserves, building up a stock that would last its members 150 days, when officially the reserve is not supposed to exceed 90 days. In the long run, the IAE anticipates global oil production to reach its peak in 2020, after which world oil reserves will begin their slide towards depletion. In fact, many of the world's major fields, which up till now have provided a quarter of the global production, have already passed their peak. The agency now estimates declines in the production of fields that have begun to deplete at an average of 6.7 per cent per year, whereas its last estimate of this, in 2007, stood at 3.7 per cent, a figure which the agency now admits was wrong. Such predictions should compel both oil-producing and oil-consuming nations to wake up to the reality that the oil age is now approaching its sunset years and that they would be wise to spend the remainder of this period without resisting the role of price as the regulator between supply and demand, thereby rejecting US-led Western pressures on producing nations. The sole purpose of these pressures is to enable consumer nations to gobble up the rest of the oil as rapidly and as cheaply as they can. This brings us to the question of whether the Arabs can pursue independent oil policies that could open up avenues for the optimum investment of Arab oil revenues during the remainder of oil's limited lifespan. There is no doubt that the Arabs can pursue independent oil policies, but first they need to find the political will and rally together in a framework of solidarity, such as that formed at the time of the October 1973 War. Once they have been able to do this, OPEC countries, and particularly the Arab oil producers which account for three-fourths of OPEC oil, should take a good look at the reserves of oil and gas they in fact have, rather than relying on Western reassurances that they have abundant supplies of oil for the foreseeable future. Then, on the basis of these findings, they should devise a collective framework for how best to market their oil in order to ensure optimum returns on this depletable resource. They will have to decide whether to pursue a marketing strategy that maintains prices that reflect the actual value of the oil, or to maintain a reasonable quantity of reserves to meet the consumer and revenue needs of their future generations and, in tandem with this, to put into effect policies for enhancing energy efficiency in both consumption and production. The Western industrialised nations, for their part, must also realise that they can no longer persist in their habit of resorting to various forms of coercion in order to ensure that their oil needs are met at the cheapest possible prices, a policy that is detrimental to the volume of investment needed to expand petroleum production capacities. As for the US, if it wants to ensure its oil needs under the previously described conditions, rather than spending more than $50 billion a year to secure Gulf oil through military means, then it should leave this task to the oil producers themselves and learn to deal with them as trade partners. Certainly, this would be wiser and more cost-effective than occupying the territories of such countries, courting the destruction of oil facilities, discouraging investment in the exploration of new oil resources, and frustrating efforts to develop oil production for the service of humanity as a whole. * The writer is a consultant on petroleum and energy economics.
