OPEC hits brake again to stabilize price roller coaster

Published March 18th, 2001 - 02:00 GMT

The OPEC oil cartel hit the output brake again this weekend, cutting its production by four percent in its latest attempt to stabilize the roller coaster price ride of recent years. 


But the financially stomach-churning ups and downs may not be over yet, analysts warn. For the 11-member Organisation of Petroleum Exporting Countries (OPEC), painful memories of crude at 10 dollars a barrel in 1998/9, after it misjudged the Asian meltdown, are all too recent. 


Above all, it wants to avoid flooding the market again. Having seen prices fluctuate wildly over the last two years, from the $10 nadir to over $35 last year, OPEC is nervous about a new price slump as demand eases going into summer in the northern hemisphere. 


OPEC says that by cutting output by one million barrels a day from April 1, as agreed in Vienna Saturday, it is protecting the interests of both consumer and producer countries by working towards a stable oil price within its target range of $22-28 a barrel. 


"We are trying to ... prevent the situation that happened in 1986, in 1998, or even in 2000 when oil prices went through the roof and we acted four times to lower the oil price," OPEC President Chakib Khelil told reporters. 


An excess of oil could spark a "downward spiral and a collapse in prices, which would be detrimental to producing and consuming countries" and undermine investor confidence, he said. 


But analysts warn that the latest squeeze, which will take OPEC cuts so far this year to 2.5 million bpd, could turn the heat up uncomfortably high for industrialized countries already sweating it out amid a global economic slowdown. 


"It wasn't required. It will push prices higher than they should be," said Leo Drollas of the London-based Centre for Global Energy Studies. 


Although prices will remain around current levels or ease gently over the next month or two, they are likely to rise from May onwards as refineries begin to process more oil as is usual at that time of year, he said. 


"In May when the crude demand is increasing it might slow down world economic recovery," he told AFP. 

OPEC says consumers should look closer to home for someone to blame for high energy costs. 


"Before they point the finger at OPEC they should probably reduce taxes in their own countries," Khelil said. In Europe, crude prices are only 20 percent of the price consumers pay for gasoline.  


Simon Williams, an oil expert at the Economist Intelligence Unit in London, agreed that it was in OPEC's interests to see a stable oil price. 


"In terms of their own domestic economic planning, stability is absolutely crucial," he said. "Obviously they'd like prices at the levels they are at, and some of them have begun to make decisions in terms of their capital spending in particular based on prices that are above the historical average." 


But with their public finances in better shape than in the past, many OPEC countries can now "afford to be a bit more sensible," he said.  


Drollas said that OPEC kingpin Saudi Arabia had apparently held out against price hawks who wanted a bigger production cut. 


"The Saudis have been dragged up. They are saying 'let's worry about the world economy, let's worry about the US economy.' The others are saying 'well why worry about that'." OPEC hopes that by monitoring the market closely, it can meet its objective of a stable oil price. 


Both consumer and producer countries will be hoping that at the group's next scheduled meeting in June, prices will not have already embarked on another roller coaster ride.—AFP. 

©--Agence France Presse 2001. 


© 2001 Mena Report (www.menareport.com)

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