OPEC is preparing for its meeting tomorrow with members gathering in hotel suites to try to reach a consensus before the actual meeting. The difficulties of this meeting are greater than most.
Three months ago it seemed as though all that OPEC would have to do at this meeting is decide to make a minor downward adjustment to production to coincide with the normal lower demand in the Spring season and thereby maintain support for their price targets.
Now they face a greater problem. The U.S. appears to be on the brink of recession. Japan's economy is in bad shape and much of the rest of Asia is uncertain at best.
Europe may follow and the current problems with foot and mouth disease will not help as that problem impacts agriculture, tourism and slows transportation. In summary, the outlook for crude oil demand is uncertain at best.
The situation is not unlike the one that they faced in November of 1997. OPEC decided to increase production by 10 percent at the same time Asian economies were slipping into a recession. The result was that crude prices plummeted. OPEC does not want to repeat that mistake.
Since 1997 OPEC has steadily worked to increase prices and has had much more resolve in maintaining production quotas than normal.
Their efforts were so effective that they were well above the target range of $22 - $28 dollars per barrel for a considerable period of time.
There is little doubt that those high prices contributed to weaker world economies just as the low prices strengthened economies which are dependent upon energy imports.
What will they do at this meeting? Faced with the possibility of a world recession a large cut of 1.5 million barrels might make sense if the goal is only to maintain prices.
However, OPEC is aware of the negative impact of high prices on the world economy and is also aware that high prices encourage non-OPEC crude production which erodes OPEC's share of the crude oil market.
The wise course of action is to take a risk of slightly lower prices and moderate the cut to something in the range of 700,000 to 1 million barrels per day.
As little as two weeks ago we anticipated a cut of 700,000 and would have virtually ruled out anything higher but the economic reports have become increasingly dismal and it may take a million barrels to maintain prices.
Add to this the uncertainty of Iraqi production and the problems multiply. The best course for OPEC to take is a month to month decision or at least for them to emphasize that they will be flexible in the coming months.
In the long run, even the low end of OPEC's target price range is too high and non OPEC production will either force them to go below a basket price of $22 per barrel or to lose market share to non-OPEC production.
Behind any decision is the real problem for the OPEC countries. A $5 change in crude prices causes a drastic change in the GDP of OPEC countries.
© 2001 Mena Report (www.menareport.com)