The Times: Crisis looms again for the cartel as it celebrates its 40th anniversary FROM the elegance of Prague to the slums of Caracas there is a distance to travel and the measure is not just geography. A sombre Group of Seven (G7) industrial nations met in the Central European capital last week and berated oil producers for creating the conditions for an inflationary slump. In Caracas, the meeting of the Opec heads of state will put on a brave front of back-slapping and kisses. It is the 40th anniversary of the oil producer's cartel, an achievement of some significance for such a collection of squabbling and unstable nations. The 11 Opec members are celebrating at a critical juncture. A winter energy crisis of shortages and high prices looms but Opec is worried about an oil glut. Opec member states are currently in clover; an unprecedented show of solidarity by the cartel rescued the oil price and several Opec countries from disaster in 1998. So successful were the three production cuts that followed oil's $10 per barrel trough that the commodity is now being fingered as the biggest risk for the world economy. Energydependent companies in the US and in Europe are issuing profits warnings; enormous political pressure is being brought to bear on Opec to bring the price down. Widely perceived two years ago as washed-up, Opec is almost back to enjoying its 1970's caricature of public enemy number one. Or is it? The price is certainly high but it has been much higher. In real terms - priced in today's dollars - a barrel of crude oil costs about the same as it did in 1973-74, when Opec first used its production clout as a political weapon. Discounting inflation, oil reached its peak in 1981-82 at $50 per barrel but since then the spending power of Opec's currency has been in more or less steady decline. It could decline fairly rapidly next spring. According to Deutsche Bank, crude oil inventories are set to rise sharply next year. JJ Traynor, Deutsche bank's oil analyst, is expecting a weak crude price in the second quarter and he reckons the organisation will resist pressure for further production increases. "They want a $25 oil price and Opec can see clearly that this industry is investing more upstream than anywhere else." The spending surge is alarming to the oil cartel. The big oil companies cut expenditure in 1999 as their revenue accounts turned red. But lured by high prices, the industry is spending again. According to Salomon Smith Barney's survey of producers, global spending on exploration and production will increase 18.6 per cent this year, with an even sharper 23 per cent rise in investment by US oil companies. Much of the investment is aimed at delivering quick barrels that can profit from the recent price gains. Without a two million barrels-per-day cut in Opec's quota early next year, prices could be heading back to $13 per barrel by the end of next year. The view from Caracas is less pretty than in Prague. Venezuela exports some three million barrels per day but appalling economic mismanagement has left the country mired in debt. Nigeria, producing two million barrels, is in worse shape and there is probably no Opec producer, not even Saudi Arabia, that is not smarting from the recent impact of $10 oil. At the peak of the crisis, the Kingdom was forced to raise emergency loans from Abu Dhabi to ease its cashflow. Not surprising that Opec is angry about the posturing of American and European politicians. As politicians faced consumer rebellion over petrol prices, they cynically revived the image of the greedy oil sheikh. "We need to put pressure on Opec," insisted Tony Blair to the impromptu mob of truckers and farmers demonstrating about fuel taxes. Opec has been protesting for the past year that consumers are overtaxed, noting that they earn just 16 per cent of the price of a barrel of refined oil, while Western governments take 68 per cent. But the battle to wrest control of the rent in a barrel of oil has been waged by Opec for 40 years. If the enemy has switched from British Petroleum to Gordon Brown, there is little evidence to suggest that Opec is winning. In 1960, Abdullah Tariki was angry about falling oil revenues. The son of a camel owner, the "Red Sheikh" studied geology in Texas and shaped Saudi oil policy at a time when producers were at the mercy of Standard Oil and BP. The market price of crude was then falling, due to increased supplies from the Soviet Union and, in an attempt to protect their margins, oil companies cut the "official price" on which the producer's 50 per cent profit share was pegged. Standard Oil cut Middle Eastern crude prices by 7 per cent and Tariki contacted Juan Pablo Perez Alfonzo, the Venezuelan minister of mines. Between them, they hatched the framework for an organisation that would defend the oil price and regulate production. They have had mixed success, not least because the oil price is today driven not by the numbers of crude tanker liftings in the Gulf but by stocks of gasoline and heating oil in Rotterdam and New Jersey. It is an irony troubling to Saudis that while President Clinton threatened to release US strategic supplies, cargoes of Arab Light were going begging in the Gulf. Refineries in America, seeking to comply with environmental legislation, do not care for the heavy, high-sulphur Arabian product. Threatened with an impending glut and facing an oil market that is fragmenting, Opec's celebrations could be short-lived. Their consolation is that consumers no longer believe that the sheikhs are to blame. _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
