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The Big Question: Does Opec have too much power, and is it to blame for the high price of oil?

By Michael Savage
Wednesday, 21 May 2008

 

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Why are we asking this now?

As consumers continue to encounter rising living costs and higher prices at the petrol pumps, Gordon Brown has heaped some of the blame on Opec, the cartel of oil producing countries which produces around 40 per cent of the world's crude oil. He criticised Opec for holding back oil supplies and allowing the price of oil to skyrocket. Chakib Khelil, the current president of Opec, has already ruled out increases in production any time soon, arguing that there is no sign of a shortage. In the meantime, the price keeps going up. Oil hit a new high of $129 a barrel yesterday, and even Opec ministers have predicted that it could reach $200 (£100) a barrel within two years.

But while it may seem like Opec has the world over a barrel, other factors are at play. Some would argue that Brown's attack contains more than a hint of wishful thinking. After all, it is much more reassuring to think Opec is holding back the supply of oil, than to believe that the world's oil fields are simply running dry. If the latter is true, there would be little Opec could do to tackle high oil prices.

Which nations are in Opec?

The Prime Minister had no problem in labelling Opec, the Organisation of the Petroleum Exporting Countries, a cartel. Perhaps not surprising, considering that it was set up in 1960 to look after the interests of five of the world's oil producers – Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Since then, its membership has grown to 13, and now includes Algeria, Angola, Indonesia, Libya, Nigeria, Qatar, the United Arab Emirates, and Ecuador, which joined last year.

How do they plead to Brown's charge?

Predictably, not guilty. Opec argues that oil prices have soared in recent months because of the credit crunch. With investors now wary of buying up securities, which caused such trouble in banking, greater funds have headed into speculation over the future price of oil. Opec says that it is this phenomenon which has sent the price of oil so high, exacerbated by the falling value of the dollar, which has also caused investors to head for the oil futures market. It also protests that there is no shortage of oil, and no need for expanded production. US crude inventories have been filled recently, while Opec nations have seen their spare capacity increase.

So is Opec holding oil production back?

That's the billion dollar question. Several world leaders think so, but now some are reading Saudi Arabia's reluctance to invest further in its oil fields as evidence that its supply is under threat. If that is the case, some argue world oil production may soon have peaked. The country keeps information on its oil industry secret, so there are many claims and counter-claims made. But if that is true, Opec – and Saudi Arabia in particular – may not be holding back oil, but simply unable to raise production further. And if they did start supplying more oil, fears over how much oil they have left would keep the price of oil high anyway. According to the Association for the Study of Peak Oil and Gas (Aspo), global crude oil supplies will peak at 87 million barrels per day by the end of the decade, and then begin a painful decline. And it is by no means only a belief held by doom merchants from the fringes of credibility. One former US Secretary of Energy is a convert. James Schlesinger said the "peakists" could "declare victory", having transformed themselves from a "beleaguered small minority of voices crying in the wilderness. You are now the mainstream".

What else could be behind high prices?

Factors known in the trade as "above ground risks", such as instability in the Middle East. Political instability in Iraq has made it difficult to ensure steady oil production there. And though the level of oil reserves is a matter of constant debate, few would disagree that the oil market is stretched as demand continues to grow, especially in the emerging markets in Asia. Under such conditions, small hiccups in the supply chain can have a significant impact on the market. As a result, localised incidents, such as outbreaks of political instability in Nigeria or strikes at obscure oil refineries in Scotland, can have a real impact.

So could Opec solve the price problem?

That's clearly what Brown suspects. And we should probably hope that he's right. The alternative is not at all optimistic. If it is the case that the Saudis and Opec are not sitting on as much oil as once thought, the price of oil will stay high, and the search for oil alternatives will be on. Recent events have shown that there are problems with the assumption that Opec could ease the oil price by turning on the taps. For a start, Saudi Arabia has promised to raise production by 300,000 barrels a day in June, but the move had little impact on the oil price.

But even some of those who suspect the world's oil is running out believe Opec could increase production if it so chose. "Currently, Opec's depletion rate is quite low and they could increase production for a few years with the necessary investment," said Colin Campbell, the founder of Aspo. "But with oil at over $120 a barrel, they have absolutely no commercial or political motivation to do so even if, technically speaking, they could."

How can Opec's influence be broken?

By buying oil from nations outside Opec, a tactic which has loosened Opec's control of the oil market since the 1970s. But there are problems there too. The main non-Opec nation is Russia, the world's second largest oil producer. As previous cuts in gas supplies to mainland Europe demonstrated, relying on Russia for resources brings its own risks. And there are just as many fears that oil production may have peaked in the non-Opec nations too. Russia's oil production fell for the first time in a decade last month. Production in China also seems to be nearing a peak, if not already on a plateau, and the same has been said of Norway. A gloomy assessment from the wealth management firm Sanford Bernstein predicts that production in the non-Opec region could peak this year.

And in the long term?

By weaning ourselves off the precious black commodity Opec nations provide. With the oil price continuing to head north, using less of the stuff is an increasingly attractive option. More efficient use would help too, say through the adoption of smaller cars, as would heavier investment in alternative fuels and energy saving technologies. Demand for oil is growing, with the US alone predicted to need an additional seven million barrels a day by 2030. While demand remains so high, the coffers of Opec nations will continue to bulge.

So is Gordon Brown right to point the finger at Opec?

Yes...

* It controls 40 per cent of crude oil production, so of course its decisions have a huge bearing on the price of oil

* Opec nations claim to have ever greater reserves, so they could easily increase production if they so wished

* Developed and developing nations are hungry for oil. With no shortage of customers, Opec can only gain from pricey oil

No...

* Instability in securities markets has led to speculation in the commodity futures markets, pushing up the price of oil

* Opec does not produce more oil because it cannot – we have overestimated the level of reserves it has left

* There are plenty of other reasons for high oil prices, such as the level of demand and "above ground" security risks

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it's all economics : supply and demand.

those that are quicker at divising new, cleaner, more efficent energy sources will be the economies that survive.

will the UK, be one of those economies, maybe. but, we are following the US position, which is to land grab as much oil producing countries/regions as possible to keep their ancient economy alive.

there are at the moment blackouts across america, water shortages, they have used their natural resources and now are looking at harder too get at places (north pole/canada/countries with dictatorships) as a way of proping up their economy.

we are sinking in a quagmire of apathy and weak leadership on this issue.

Posted by cas | 21.05.08, 11:39 GMT

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I believe that an oil barrel is 117.3 litres or thereabouts and we are talking about $129 a barrel for crude, yesterday. This oil is difficult to find and hard to extract. So how much are you paying for a bottle of mineral water down the shops? How much are you paying for a litre of beer down the shops? Or a litre of fizzy pop?

Can somebody show a graph of oil price against Sterling for the past few years, as the Dollar keeps on dropping? And when you buy petrol, how much money is going into Fat Gordon's pocket?

Did Tony's Cronies think that oil prices would drop by invading Iraq?

And finally, when is our government going to offer real incentives to invest in renewable energy, rather than saying that they doesn't want to skew the markets by offering significant help?

Posted by Andrew O | 21.05.08, 10:59 GMT

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No one seems to mention that at the start of the current UK boom cycle oil prices were about $11 a barrel. I didn't hear too many governments offering to pay more to stabilise Middle East economies that were really struggling to pay for their infrastructure and education programmes.

Perhaps if we didn't have such artificially low prices at that time OPEC would be a bit more amenable to more stability now.

I think a lot of people in the UK should be starting to look at the Middle East and Russian job pages because they will need to follow the money and the jobs.

Posted by David | 21.05.08, 10:20 GMT

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How would oil companies react to a proposed windfall tax? Why?

Are oil companies leading the way in helping develop and bring to market alternative/new technologies?

Should the UK government be using revenues currently gained through royalties and p.r.t. (petroleum revenue tax) to help support policies to combat climate change?

Anybody have any views on the above, I would like to hear them. I am an economics teacher and I would like to discuss these issues with my classes.

Posted by Gunsel Akyol | 21.05.08, 10:14 GMT

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It is not in the interest of OPEC to increase oil production.

Why should any sovereign nation increase the rate at which their non-renewable resource is depleted, just so that some foreigner (us) doesn't have to pay as much for it?

After all, they still get the same amount of, if not more, money for it, don't they?

Posted by Pete | 21.05.08, 10:05 GMT

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It is difficult not to view Gordon Brown's attack on OPEC as the act of a beleaguered politician who is rapidly losing the confidence of the British people. It smacks of desperation, not reality, to blame someone else for a problem that lies squarely within our own responsibility.

It would be more sensible to use the high oil price as a driver to make the UK energy self sufficient by promoting energy conservation and investment in alternative renewable sources, following the example of, in particular, Germany, but interestingly also the US where there is great interest in, eg, solar power generation.

Posted by David | 21.05.08, 10:04 GMT

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Is there now a case for a windfall tax on the (abnormal) profits of UK oil companies?

Furthermore, should these profits be ring-fenced in some way?

What else can we do to accelerate the switch to new technologies or should we leave it all to market forces?

Posted by Gunsel Akyol | 21.05.08, 09:37 GMT

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Interesting that there is no analysis of the obscene profits made by the oil companies:
"Energy giant BP said on Tuesday that net profit surged 63.4 percent to 3.84 billion pounds in the first quarter of the year, driven by record-high oil prices."(AFP 29/04/08)
"BP and Royal Dutch Shell, Europe's largest oil companies, delivered record profits for the first quarter of 2008. Anglo-Dutch firm Shell netted $7.78 billion in the first three months of this year, up 12% over the same period in 2007. Profits at rival BP, meanwhile, swelled by almost half to $6.59 billion."(Time 29/04/08)
Surely some analysis is warrented to suggest that these profits are not only immoral but now unsustainable and damaging to the vast majority of the world population causing "rising living costs and higher prices at the petrol pumps"?
Surely the same level of analysis of the OPEC countries in the above article should be placed on the oil companies and their obscene profits?

Posted by Anon | 21.05.08, 09:12 GMT

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Finally the mainstream media reports the fact of Peak Oil. Took your time. Bit late now isn't it? We needed to be planning for it several years back. Simple solutions do exist. Confront the lobbies and electrify transport.

Posted by Peter McCarthy | 21.05.08, 09:05 GMT

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