High price levels an incentive to non-cartel countries

Jun 29, 2004 02:00 AM

As long as OPEC does not let oil prices become "exceedingly high", the cartel will still be a force to be reckoned with, economists say. The 11-member cartel supplies just under 40 % of the world's oil, and possesses more than three-quarters of total proven crude oil reserves. Economists say, however, if the cartel keeps prices at a persistently high level, non-OPEC countries could increase their own oil production.
"If the cartel makes prices too high, it could become irrelevant," Chris Hart, treasury economist at Absa, says.

At the end of last year, non-OPEC countries produced 62 % of the world's oil.
"Potential alternative supplies tend to force OPEC to keep prices lower," Hart says.
Goolam Ballim, group economist at Standard Bank, says non-OPEC countries currently have a "marginal" influence on the pricing of oil.
"OPEC is a force to be reckoned with in terms of oil supply. Only when oil prices become exceedingly high and stay high will the non-OPEC countries be able to increase their influence in the oil market." The price of Brent crude oil was trading at about $ 33,70 a barrel. A few months ago oil prices soared to 13-year-highs of $ 40 a barrel for the first time since Iraq's invasion of Kuwait in 1990.
"If OPEC decrease supply to increase prices, non-OPEC countries are not bound by that, so they stand to benefit," Hart says.

Earlier, OPEC president Purnomo Yusgiantoro said major non-OPEC oil producers such as Russia, Norway, Mexico and Oman were in no position to substantially increase their exports and thereby help bring down world oil prices. The Middle East, home to the largest OPEC producers, accounts for a total of 29 % of world production, North America accounts for 20 %, while the remaining 51 % of production is dispersed across the globe.
OPEC countries generally have state-owned and state-operated oil industries, while most of the non-OPEC countries have private oil sectors, and their governments therefore have little control over production levels. Non-OPEC countries are very vulnerable to price collapses. Prolonged periods of lower prices can drive higher cost producers out of business, and make major oil companies focus less on higher cost areas.
In the future, non-OPEC production is expected to increase less rapidly than OPEC's, as non-OPEC countries have less reserves. The Energy Information Administration's outlook predicts that non-OPEC production will shrink to less than half of total world oil production by 2015.

Private companies, which are more prevalent in non-OPEC countries, do not hold back profitable production, and maintain little spare production capacity. Therefore, should there be big disruptions in world oil production, OPEC would be the immediate primary source of additional oil to make up the loss.
Most of Russia's oil sector, for instance, is owned by private companies, but the export pipeline network is controlled by the state company Transneft. Ballim says because of the volatile oil price, non-OPEC countries cannot instantaneously commit themselves to an increase or a decrease in the supply of oil. Although there have been instances where OPEC members produced beyond their quotas, "because of volatility and a low oil price in real terms, there is greater benefit in collusion than in non-compliance".

At OPEC's meeting on June 3, the cartel agreed to increase its oil production and export quotas by 2 mm bpd. The cartel will increase its daily output by another half-a-million barrels if oil prices fail to settle "at an acceptable level" by August.
"Over the last 30 years, stemming from OPEC’s oil embargo in the 1970s, to production restraint in the late 1990s, OPEC has shown that it has a clear influence in determining prices in the market," Ballim says.

Source: Business Day
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