Which Way Now for OPEC?

By Ford, Neil | The Middle East, March 2004 | Go to article overview

Which Way Now for OPEC?


Ford, Neil, The Middle East


With the war in Iraq now subsiding into a lower level affair, the future for world oil prices should look more certain. Fear and uncertainty over the war--even more than the actual impact of it--inflated prices for over a year. Yet the influence of North America's harsh winter weather on oil demand has demonstrated just how many factors can affect prices and there can be no real certainty that the period of high prices is finally coming to an end. OPEC oil ministers will face a testing time in balancing the needs of the cartel with domestic ambitions.

The most recent OPEC quota changes were made in Algiers in February (see report). Saudi Arabian oil minister All Al Naimi summed up feelings within OPEC: "We want a stable oil price". Stability enables oil companies to determine whether particular developments are economic in the long run. The cartel has indicated it believes oil speculators were at least as responsible for buoyant prices during 2003 as the events in Iraq or OPEC quota cuts.

The main difficulty in predicting oil prices is that there are so many interacting factors at play. Firstly, there are many global or regional developments or trends that can influence demand for oil, such as the rate of economic growth, severe weather across a large area or the popularity of oil as a power sector feedstock. Secondly, production policy within major producers or within OPEC itself can have a massive impact. For example, while OPEC may seek to maintain prices by cutting production, Russian producers may decide to maximise output to make the most of these high oil prices and so the OPEC actions could be cancelled out.

Thirdly, oil policy or political instability within a particular country can exert a global influence. While the Algerian government may pursue a policy of maximising oil and gas production on the grounds that hydrocarbons may not always be the energy sources of choice, Angola may opt to ration the acreage available for licensing in order to secure the maximum possible signature bonuses or to preserve oil reserves for future use.

It is insecurity within oil producing states that most often hits the headlines. Strikes in Venezuela greatly reduced production in that country but also may have encouraged overproduction in other OPEC states. Similarly, unrest in the Niger Delta has led to attacks upon oil sector infrastructure, which in turn has curtailed production, although the government may then push oil producers to maximise output in order to make up for lost time and lost government revenues.

Looking ahead over the year to come, plans for a referendum on the rule of President Hugo Chavez should calm the situation in Venezuela, providing the poll is seen to be free and flair by the Venezuelan population. …

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