The Organization of Petroleum Exporting Countries
called reporters to its Vienna headquarters Tuesday to fete the 50th
anniversary of an organization dedicated to "supporting stability"
and "fueling prosperity," in the words of an official commemorative
logo.
The cartel, which has been marking the anniversary all year, does indeed have
plenty of reason to smile right now. After long stretches of extreme highs and
lows in recent years, oil prices have stabilized in a fairly narrow trading
band this past year. Especially propitious for OPEC is the fact that the de
facto trading band comes in at $70-$80 a barrel, a high baseline by historic
standards.
Yet a longer-term view suggests OPEC will likely once again face difficulties
from both within and outside the organization.
In the near term, those challenges include a much-feared, much-discussed
double-dip recession that could wreck demand again. In the long run, the
questions concern increased production from members like
Iraq
and
Angola
and from rising power
Brazil
that could pose more serious problems to quota discipline, especially if
significant energy consumption growth doesn't materialize.
OPEC is likely to keep its production policy unchanged when it meets Oct. 14 in
Vienna
, its first gathering in seven months, underscoring the cartel's
relative contentment with the global oil market.
OPEC "Comfortable" With Prices
"Only a double dip (recession) will change this
scenario," a senior OPEC official said of the expected outcome of next
month's meeting.
OPEC Secretary-General Abdalla Salem el-Badri Tuesday described current prices
as "comfortable" and said OPEC recognized that the global economic
outlook was still too brittle to allow for talk of higher prices.
"We don't want to rock the boat," el-Badri said at a news conference.
Today's prices are in some ways a mystery. The world oil market remains as
awash in crude oil as it was when OPEC initiated production cuts about two
years ago due largely to lagging consumption. Total petroleum inventories in
the
U.S.
are currently at their highest level since around 1990, according to
the Energy Information Administration. The oversupply is also a function of
many OPEC states producing far above the amount allotted to them under OPEC's
production quota system.
That prices have remained supported in spite of these inventories no doubt
reflects an underlying confidence in the global economy. Yet oil prices,
trading Tuesday at about $77 a barrel in
New York
,
are being driven by various factors other than oil supply and demand, such as
the direction of equity and foreign exchange markets. That structural change,
building over the past decade, is a function of oil's increased role as a
financial asset and not just a physical commodity, as investors look to new
investment tools to boost returns.
Angola
,
Iraq
and
Brazil
But
history suggests the market won't necessarily continue to ignore fundamentals.
Among current OPEC members who are required to abide by quotas, the biggest
question mark may be
Angola
.
Angola
's
decision to enter OPEC in late 2006 was hailed as a success for the
organization. But its production ramp-up is becoming a challenge for the
cartel--particularly as
Angola
needs
the revenue to rebuild its war-torn infrastructure.
After OPEC decided to cut output by 4.2 million barrels a day late 2008,
Angola
became one of the organization's biggest overproducers and disputed OPEC's
calculations of its quota.
In the autumn of 2009, as it prepared to host its first OPEC meeting, the
Southern African nation even commissioned a report to assess whether it should
stay in the organization, according to people familiar with the matter. Though
it concluded the benefit of political prestige offset quota restrictions, the
pressure to leave the quota-bound system may increase in the coming years. The
International Energy Agency expects
Angola
to
increase its capacity by 20% by 2014, when it will reach 2.4 million barrels a
day--900,000 barrels a day more than its current official quota.
Iraq
, a
founding OPEC member that has been excluded from quotas due to sanctions and
war, stands out as a potential giant within the organization, although the
war-torn nation faces numerous security and other internal problems that could
leave drilling projects delayed.
Iraqi Oil Minister Hussein al-Shahristani said earlier this year at one of the
OPEC meetings that his country would consider abiding by OPEC quotas once its
production increase to at least 4 million barrels a day from roughly 2.4
million barrels a day now in possibly 2013.
The country has been struggling to revamp its oil infrastructures after decades
of war, U.N. sanctions and lack of investment. Last year, the Iraqi government
signed 11 deals with international oil companies, including the majors, to
develop one of the country's vast oil fields.
Iraqi officials hope that these mega projects would increase the country's
production to 12 million barrels a day in 2017, bringing it just a little above
the organization's largest oil producer,
Saudi
Arabia
.
Iraq
, home
to the world's third largest proven oil reserves, depends on oil for 90% of its
state revenues.
Then there is non-OPEC
Brazil
, home
to a number of huge oil discoveries in recent years. Production in the South
American nation is expected to increase by 210,000 barrels a day in 2010,
according to OPEC and could rise several times that over the next five to 10
years.
OPEC's current emphasis on price stability represents a departure from its
earliest history and most storied moments.
OPEC was conceived amid cloak-and-dagger secrecy in an exclusive
Cairo
yacht
club in 1959, when exporters concluded a "gentleman's agreement" to
keep prices up and create national oil companies. The organization, which was
formally established the following year, didn't have much clout until 1973,
when Arab states cut off all oil supplies to the West right after the
Arab-Israeli War, resulting in a massive price surge.
OPEC has had its ups and downs since this storied period. Quota compliance has
remained a challenge intermittently, especially in the 1990s, when the group
was too politically divided to lift prices amid a glut.