OPEC Price Mechanism Creaking Under the Strain
While protestors squeal about the cost of fuel and oil importers warn of the grim economic backlash of surging crude prices, OPEC ministers in Vienna have a far more prosaic concern: their own price mechanism.
Set up in March to adjust crude supply automatically to take account of market prices, the so-called stabilization system has quickly fallen out of favor with ministers of the Organization of Petroleum Exporting Countries (OPEC).
Several ministers at a weekend conference here have spoken of overriding the system or turning it into a "manual" mechanism, a move which would strip it of any remaining credibility.
The system calls for output to be hiked by 500,000 barrels a day for each 20-day period that the oil price persists above 28 dollars a barrel. It also calls for a similar cut if prices languish under 22 dollars for 10 consecutive days.
However, when the price mechanism first kicked in August, OPEC dallied. Its leaders were highly reluctant to bind their hands to the mechanism, particularly when prices were so volatile.
Late last month the price mechanism was applied automatically for the first time, resulting in an output increase of 500,000 barrels a day.
Ministers here are apparently still reeling from the experience.
Even Saudi Arabia, which as the only OPEC nation with spare capacity stands most to gain from an output hike, is getting cold feet.
"There is no mechanism in the world that replaces good judgment," said oil minister Ali Naimi. "You watch over the parameters and see if they have met your objective."
For other countries, the system is an imperfect model which should be made more flexible by factoring in other market fundamentals such as stock levels and supply and demand.
Iran believes the system could use some fine-tuning. For others such as Algeria, the mechanism is proving a "straitjacket."
Qatar's ebullient oil minister Abdullah al-Attiyah summed it up with a wry sense of humor.
"We are not going to cancel" the mechanism. "We will go from automatic to manual as Florida now does," he quipped.
"This mechanism should work (to increase output) when there is a shortage of supply," he added. "If there is a shortage of supply, for sure we are going to increase. But if there is no shortage of supply: it is very difficult to increase now."
Al-Attiyah also said he hoped OPEC would not wait until prices fell to 22 dollars a barrel before taking a decision to cut production. Other ministers have also talked of overriding the system and cutting output.
The controversial system is fast becoming the talk of the town here, as OPEC ministers take the pulse of the bubbling oil market and fret about the prospect of crude prices swinging from one extreme to the other next year amid an expected supply glut.
Analysts and market players had hoped that OPEC would send a clear signal as to whether the mechanism would be set in stone or put on the backburner. Much of the volatility in the recent oil price has been blamed on the uncertainty of supply -- VIENNA (AFP)
© 2000 Al Bawaba (www.albawaba.com)