NYT: OPEC Wants to Avoid the Mistake of 1998

Neela Banerjee, in the NYT (June 6, 2004):

At their meeting here last week, members of the Organization of the Petroleum Exporting Countries seemed to abdicate responsibility for the recent record-high oil prices. Purnomo Yusgiantoro, the group's president and Indonesia's minister of energy, complained in his opening remarks that"the high prices have been caused by a combination of factors over which OPEC has no control - speculation on futures markets, tightness in the U.S. gasoline market, geopolitical concerns and higher-than-expected oil demand growth, especially in China and the U.S.A."

This is not entirely the case. The 10 voting members of the cartel did help drive up prices over the last 18 months, underestimating world demand and sometimes cutting production to buoy prices.

But it is true that the market OPEC has successfully managed over the last five years seems to be slipping from its grip. By pumping less oil OPEC can keep prices from falling, but it has little power to curtail violence and political instability, and so cannot keep prices from spiraling upward on bad news. For consumers, that could mean continual volatility in fuel prices, and the possibility of continued high prices, which have hit $40 a barrel over the last month.

"How can they control prices when there are three wars in the Middle East?" asked Walid Khadduri, editor of the Middle East Economic Survey, a weekly newsletter."There is the war on terrorism, Iraq and Palestine." He added:"In talking to a lot of delegates here, I think they have reached the point, except for the Saudis, that there is nothing more they can do."

OPEC lives with the ghost of a disastrous miscalculation in 1998. The global economy looked strong at the time, and OPEC increased its production to meet what it thought would be higher demand. Shortly afterward, the Asian economy crashed, demand sank and oil prices plummeted to as low as $10 a barrel. The cartel's member nations recovered by collaborating more closely than they had in years, and mustering the cooperation of non-OPEC countries like Mexico and Norway, to cut production to bolster prices.

Over the last four years, the cartel has tried to keep oil within its so-called price band of $22 to $28 per barrel. But the fear of another price plunge was always a factor, and remains so today, even with high global demand and high prices. The reason is obvious: OPEC members are wholly dependent on oil revenue to run their states and maintain internal social stability.

Prices did in fact stay below $30 a barrel for several years. But OPEC, like the rest of the world, got the supply and demand balance wrong last year, largely because it underestimated the robust growth in China and the United States.

OPEC also fretted about the return of the Iraqi oil exports after the war. The production took longer than predicted to recover, but before the war there was no way of telling how much oil would return and when. And OPEC did not want to produce enough to cause a glut in the market when Iraq did pump more.

Nor did OPEC immediately become concerned about rising prices. The cartel now believes that Western economies and their consumers can thrive with oil that costs more than $30 a barrel, though they may not like it....