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OPEC says it's lost control of oil prices

With world oil prices north of $50 a barrel and rising, OPEC ministers meeting in Iran Wednesday will be grappling with a problem they haven’t confronted in the cartel’s 45-year history. In the past, OPEC tried to cool overheated prices by pumping more when supplies got too tight. But most OPEC producers say they’re already pumping as fast as they can. And despite the high cost of a barrel of crude, world demand shows no signs of slowing.

As a result, some OPEC ministers say, they’ve run out of options in trying to rein in the price of crude. Global oil demand has taken up most of the slack in extra OPEC capacity. Consumption is now believed by many analysts to be pressing up against the limits of what the world can produce. Saudi Arabia is the only country believed to have any surplus production left, and even then the Saudis are pumping close to 90 percent of capacity, according to the U.S. Department of Energy.

"There is not much we can do,” Algerian Oil Minister Chakib Khelil told reporters Tuesday in Isfahan, Iran, the site of Wednesday’s meeting.

"OPEC has done all it can do.” Qatar Oil Minister Abdullah al-Attiyah said. “This is out of the control of OPEC."

But that hasn’t eased political pressure on the cartel. On Tuesday, several oil ministers said they had received calls from U.S. Energy Secretary Sam Bodman. Sen. Ron Wyden (D Ore.) said Tuesday he’s not convinced that OPEC’s hands are tied by global demand reaching the limits of production capacity.

“This is their claim,” said Wyden. “But the fact of the matter is that nobody knows what their capacity is.”

Though data on OPEC’s oil production capacity have always been hard to come by, there’s little disagreement on the rapid growth of global consumption -- especially in China and India. With worldwide demand this year rising by roughly 2 million barrels per day, whatever excess capacity is out there will be gone soon, according to Marshal Adkins, an oil industry analyst at Raymond James

“Maybe this year, but certainly in ‘06 there won’t be any excess capacity,” he said. “We haven’t been in that kind of market in our lifetime. You’ve always have more capacity than demand.”

That’s little solace to energy consumers, who are watching rising crude oil prices push pump prices to record levels. Though U.S. economy has yet to show signs of slowing and inflation remains low, a continued rise in oil prices will eventually slow growth, analysts say.

“We will find the price level that will slow demand,” said Adkins. “It may be $60; it may be $100. I think it’s fair to say its going to be in that price band.”

Seasonal lull?
Analysts say OPEC typically eases back on production at this time of year because demand slows as the winter heating season winds down and drivers haven’t yet hit the road for summer vacations. But with prices nearly double levels just 18 months ago, production cutbacks are unlikely, say analysts.

“OPEC’s only real option is to maintain the status quo for now," said Smith Barney Citigroup oil analyst Doug Leggate in a recent research report.

Oil prices have also risen for a variety of other factors over which OPEC has no control, according to Adkins. Tanker prices haven jumped from $3 a barrel to $10 a barrel during the recent run-up in crude prices. To increase output, Saudi Arabia has been selling lower grade crude, which has boosted the price of more desirable light, sweet crude. And the falling dollar has effectively cut the value of oil payments to OPEC producers.

“When were looking on our screens seeing $45 oil, Saudis are cashing checks for $25 oil,” he said. “So in their mind -– their $25 price (target) -– that’s what they’re getting.”

As rising demand has approached the world’s production limits, OPEC’s decisions have less impact on prices. In the past, the cartel has "controlled" oil prices (or tried to) by adding or withholding production. By holding back oil, the market remained "tight" and prices stayed relatively high. The "oil shortages" of the 1970s were engineered by OPEC -- not the result of a true lack of supply.

But production quotas have had mixed success. For starters, many OPEC producers have "cheated" over the years -- agreeing cut back at OPEC meetings but then pumping more when they went home.

A big run-up in inventories in 1997, for example, came just in time for the Asian economic meltdown in 1998. OPEC couldn’t cut production fast enough and oil prices fell to $10 a barrel. But eventually cutbacks sent prices back up above $30 a barrel by 2000.

Then came the U.S. stock market crash, Sept. 11 and recession -- which sent oil back down to $15. OPEC cut production again, and prices began their run back to $30 -- and beyond.

Now, with prices above $50, OPEC risks seeing prices tumble again if high energy costs put a damper on world growth. That’s why – despite relatively high crude oil inventories for this time of year – Saudi Arabia has proposed boosting production by 2 percent, to 27.5 million bpd.

"We're concerned about prices, we're also concerned about economic growth and we're particularly concerned about economic growth in developing countries," said Saudi Oil Minister Ali al-Naimi. "Hopefully I will be convincing enough to move the rest to my thinking."

But ministers from Iran, Kuwait and Nigeria have recommended postponing any increase until May 1 to see if demand eases as it usually does in the second quarter.

And some OPEC ministers don’t think oil prices at current levels will slow the global economy. Some U.S. analysts concur, noting that the U.S. economy is less dependent on oil than it was during the “oil shocks” of the 1970s, when oil hit $80 a barrel when measured in today’s dollars.

"Even at $60 we see no economic impact," Libyan Energy Minister Fathi Omar Bin Shatwan told reporters.
(Reuters contributed to this report.)

Editorial Notes: Not only does the Emperor have no clothes, he is shouting about it from the rooftops to everyone. - IG

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