By Nader Habibi
keeping the price of oil high OPEC will encourage a more efficient pattern of
oil consumption in the
Up until year 2000 the primary objective of OPEC cartel was to prevent a decline in price of oil by regulating its members' production levels. With the sharp increase in demand for oil in the past five years OPEC has occasionally found itself in a situation where it has had to ask its members to increase output in order to prevent the price from rising too fast. In 1999 OPEC committed itself to preserving the price of oil within a range of $22-$28 per barrel. On several occasions after 1999 OPEC increased production when the price rose above $28 dollars. Initially, OPEC was able to keep the price of oil within or near this range. In the past two years however, with the rapid increase in global demand for oil, the cartel has been unable to prevent the sharp increase in oil prices that we are witnessing today, because OPEC members are already producing up to their production capacities.
This shortage of excess capacity, however, is
temporary and the high price of oil has resulted in a surge of investment in oil
and gas production activity, both inside and outside of OPEC. Indeed, the
investment activities in the energy sector have increased so rapidly that there
is now a severe shortage of material and technical experts in the oil industry.
These new investments will significantly increase the supply of oil in the next
As OPEC's production capacity expands over the next few years, its ability to influence the price of oil in either direction will increase. OPEC's influence in the oil market will also increase because its share of global production is expected to rise during the next decade.
While currently the world demand for oil is so strong
that producers can hardly keep up, the situation is likely to stabilize and on
occasions lead to overproduction. This reversal can happen as early as mid-2006
and OPEC must decide on whether it should allow the price of oil to decline or
to stabilize the price at current levels. In this article I argue that
stabilizing the price at $40 to $60 per barrel will be better for the global
community than a retreat to lower prices. OPEC (specially its leading producer
Why higher oil prices are better?
They are better because they can encourage a more
efficient pattern of oil consumption in the
In addition to causing air pollution, the excessive
consumption of fossil fuels is a major contributor to global warming which is
threatening our entire planet's ecosystem. Scientific research has clearly
established a link between emission of fossil fuel gases and global warming. The
world community is well aware of the adverse consequences of global warming and
most industrial countries have signed the
Indeed the high price of oil in the past two years
has already led to a reduction of demand for low-gas mileage vehicles in the
Furthermore it is not just the American consumers
that are responding to higher energy prices. We are witnessing some positive
developments at the state government level. So far 19 States have passed laws
requiring that a portion of their electricity come from renewable sources of
energy. By 2009 at least 4% of
If crude oil prices remain at the average levels of past 18 months production capacity outside OPEC will increase and OPEC will face more competition from other suppliers in the future. Would it not then be in OPEC's interest to lower the price of oil to discourage production capacity expansion in non-OPEC producers? The Answer is no. The competition that OPEC faces from non-OPEC producers will only be a threat to OPEC in the short-run. This threat will be limited in the long run because the global oil reserves outside OPEC are smaller than OPEC's and they are diminishing at a faster rate. Year after year OPEC's share of remaining world oil reserves will increase.
High production levels will put downward pressure on price of oil in the short-run and OPEC will have to cut back its output to preserve the price but its revenues will not necessarily be smaller than the alternative scenario of low price and high production level. The advantage of high price and smaller exports is that the oil reserves of OPEC members will be depleted at a slower rate. Furthermore, most OPEC members have accumulated large international reserves in the past two years. They can rely on these resources to sustain their fiscal spending during periods of low oil revenues that arise because of production cut backs. It is in OPEC's long term self interest to prevent any significant decline in price of oil, although it might lose market share in the short-run.
This is true but OPEC can help relieve this burden on
low income countries by increasing its imports from these countries and also by
providing aid and foreign investment. The faster economic growth of OPEC members
will also create additional job opportunities for expatriate workers from
low-income countries. The number of expatriate workers in the Arab oil exporting
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... Payvand News - 7/11/05 ... --