OPEC deserves some respect - Views on News from Equitymaster

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OPEC deserves some respect

Jun 22, 2000

The Organisation of Petroleum Exporting Countries (OPEC) has decided in its meeting yesterday to increase crude oil production by 2.5% or 708,000 barrels per day. This is the second production hike in just the first quarter of 2001. The earlier increase was of 1.7m barrels per day (mb/d) on 1st April 2000.One has to say that the OPEC has shown greater integrity in the last two years. It seems to be evolving from a notorious cartel to a congregation of more responsible members. It has however done away with its earlier price band mechanism and such ad-hoc judgements create a cause for concern.

After the initial production hike, prices softened for a brief period before rebounding to $ 30/barrel, levels which were seen during operation desert storm (Kuwait invasion). With the recent production hike the prices have dipped marginally as the increase is more than what the market expected (500,000 b/d). Brent crude August futures were trading at $28.8/barrel and NYMEX August futures were at $ 29.9/barrel. For a greater correction in prices the market was expecting an increase of 1-2 mb/d.

The production hike by OPEC is not for meeting any social cause. Higher crude prices in the long run could result in :

  • Affecting worldwide economic growth and this would result in a decline in crude oil demand.
  • Users of crude shifting to alternative sources of energy, once again impacting crude demand.
  • Most importantly, it makes exploration & production (E&P) activity more attractive. Resulting in an increase in crude supply and consequently reducing the OPEC market share. TotalFinaELF and ExxonMobil have indicated plans of increasing E&P expenditure by 18% to $ 86.7 bn.

Although, high crude prices will adversely affect India as it imports 72 m tonnes of crude. If one has to look at the brighter side, high prices make E&P attractive and this is the best time for the Government to speed up the tendering for new oil & gas fields under the new exploration & licensing policy (NELP). This is will reduce our import requirements. Lets hope the Government sees the high prices as a blessing in disguise.

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