Based on a decision made by OPEC's ministerial meeting last summer, if the upper boundary of the price band of 22-28 d/b is broken for a sustained twenty day period, the organization will increase their production by 500000 b/d.
And if the lower one plummets for a sustained ten day period, then OPEC will cut back production by the same volume.
In practice it is very hard for OPEC to cut back production, when necessary, in ten day periods.
The fact is that production and export plans are prepared in advance for longer periods, and at least for a month.
It will be further damaging if operations based on such ten day periods become necessary repeatedly, and the member countries may not be in position to cooperate for the purpose.
Moreover such small volumes of reductions will not have a significant effect on the market. Therefore following amendments to the price band mechanism seem to be needed:
1) The volume of reduction be increased to 1000000b/d.
2) The relevant period for the necessary cut backs be prolonged to 20 days.
3) The market monitoring committee and the president of OPEC be given the right to decide about the timing of any decrease or increase in the OPEC production ceiling. And if further increases or decreases become necessary an extraordinary ministerial meeting be convened.
As seen in the recent past out of the four times increase in OPEC's production ceiling only once volume was 500000b/d and in all other three cases the production hikes were much more.
Right now oil prices are under severe pressure and production cut back of about 1.5 to 2 million barrels per day is needed. Under the present rule such a volume will have to be reduced in three to four stages.
Whereas the organization has proved to be quite slow in decision makings, it is therefore necessary to reduce the stages to one or two instead of three or four. This way the impact on the market will also be secured.
Currently the industrial countries, particularly the U.S., are trying to talk OPEC out of any production cut because their stocks levels are still low.
But even though their inventories may not be at their desirable levels, they are using those reserves to cause an even steeper fall of the prices.
If OPEC can not reverse the situation during winter, it will be much harder to do so in spring or summer.
An automatic price band mechanism ratified by OPEC is preferred to ad hoc decisions of ministerial meetings.
Firstly it would be based on a clearly logical framework, and secondly it would limit the efforts of the western media to stir up the public opinion against OPEC.
Source: www.iies.ac.ir.
© 2001 Mena Report (www.menareport.com)
