TOPICS : Why OPEC is straining to reassert its authority

Peter Grier

Members of the cartel want to set a higher floor for world oil prices in part to meet growing budget problems at home. It’s not the cartel of old. But OPEC may be attempting to regain as much control as it can over oil markets — even as US gas prices reach record highs.

With Asian demand for petroleum booming, OPEC ministers believe now is a good time to try out preemptive production cuts. Long term, they may want to set a higher floor under volatile oil prices, in part to provide more cash for fast-growing Middle East populations. But as always with this fractious, exclusive club, agreeing on a plan is one thing. Actually carrying it out is another.

In Washington, OPEC’s decision to reduce production by about 4 per cent, announced last week, has caused consternation, if not outrage. Some lawmakers have even suggested that the cut will revive tensions between the US and OPEC’s most influential member, Saudi Arabia. Saudi officials moved quickly to try to dampen such controversy. The influential Saudi ambassador to the US, Prince Bandar bin Sultan, showed up at the White House last Thursday to defend the oil cartel’s actions.

Still, OPEC’s production cut strategy is remarkable given the backbiting and quota-cheating that fissured the cartel only a few years ago. The low point may have been reached in 1997, when OPEC decided to increase production 10 per cent shortly before demand was flattened by an economic crisis in Asia. Prices cratered down to around $10 per barrel. It seemed as if the cost of gas might stay low for years.

Out of this debacle arose what might arguably be termed a new OPEC. Its market share was much reduced, at around 38 per cent of world production, as opposed to some 50 per cent during the heydays of the mid-1970s. But renewed unity on strategy helped the cartel regain influence. That development, plus rising demand, have kept oil up in OPEC’s current target range of $22 to $28 a barrel.

Lately, of course, prices have spiked higher, nearing $40 a barrel in some cases. That’s where they are likely to stay for some time, say many forecasters. Is OPEC trying to establish a new paradigm, with a new floor for cyclical oil prices at $28 or above? It’s certainly possible, say experts. A number of trends might be pushing the cartel in that direction. For one thing, world demand for oil is heating up. China and other East Asian nations in particular are using more as their regional economy booms.

The developing countries of the Pacific Rim are expected to double their oil imports by 2025, according to some estimates. For another, the decline of the dollar relative to the Euro and other major currencies costs OPEC money, because its oil is priced in dollars. Raising prices might help compensate for this slide.

And many OPEC nations need the cash. The days of petrodollar excess are over. Saudi Arabia and many other Middle Eastern oil exporters have been running budget deficits for a decade or more. Their governments are struggling to pay for current entitlement programs, plus projected investments. At the same time, their populations are rising sharply. — The Christian Science Monitor