• JULY 6, 2000

Energy - Part of a larger plot?

Over the last two days there has been some confusion created regarding Saudi Arabia beefing up it's oil production. Whether it is intentional or not would be speculating but it has had the desired immediate effect of reducing prices. Brent blend crude futures are now trading below $30/ barrel.

The Organisation of Petroleum Exporting Countries (OPEC) has increased production twice in Q1 FY01 by an aggregate of 2.5 m barrels / day (mb/d). With pressure from consumer countries fearing hardening of inflation & interest rates and consequently nipping world economic growth in the bud, OPEC has had to increase production.

Of the OPEC countries only Saudi has any significant spare capacity left of 2 mb/d. The Saudi oil minister stated earlier in the week that should prices not soften, Saudi plans on hiking production. This innocuous statement has made it to the space of all print media. The Iranian minister was quoted as saying that the controversy was a result of media hype. Would Saudi Arabia take a unilateral decision, we yet have to find out.

Whether or not it is hype and part of a larger plot one doesn't know but it has the potential of creating mistrust amongst the OPEC members, which prima facie would be to the detriment of all. OPEC over the last two years has shown integrity and made judicious decisions. With crude prices skyrocketing and economic growth in danger, it has increased production.

OPEC last met in June where they decided to increase production by 708,000 mb/d and meet again in September to review prices. Should the prices remain firm in the interim it will increase production post September or even earlier. With the intention of not impeding economic growth.

Should the recent controversy not be hype and Saudi Arabia unilaterally increase production, this could have a drastic impact on the OPEC? It could result in the break down of the cartel. With most OPEC countries having access to significant oil supply they could play rogue making oil markets more volatile.

It is the best interest of all that the most influential member of the OPEC, Saudi Arabia takes its decision in consonance with others. Its close ally and largest consumer seems to be the one putting pressure for increase in production without OPEC agreement. In fact it has commended such a move. Is this just a piece of the jigsaw?

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