OPEC's new battle

Oil prices are falling again, towards OPEC's official price target. But is that what member states really want?

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By  Anil Bhoyrul Published  June 17, 2004

OPEC is facing a new battle over the level of oil prices, with some member states concerned that prices could actually fall too low – whilst others are already making provisions for prices hitting US $86 per barrel. Following the specially convened meeting of OPEC in June, officials agreed to increase production by two million barrels a day from July 1. The announcement helped push prices back below the $40 p/b. OPEC’s price target is just $22 p/b, but ministers who attended the June summit in Beirut privately expressed concern that the figure is too low – preferring to aim for $28 p/b. Nevertheless, there is also concern that regardless of the announcement, made in response to the recent wave of terror attacks in Saudi Arabia, OPEC will not actually be adding any new oil to the market. It already produces nearly 26 million b/p, roughly one third of world production, and two million b/p above its current quota. Some OPEC ministers fear that if prices continue to fall towards the official $22 b/p target, they will be affected by the weak dollar. “The problem that a few countries are worried about is that if it goes that low, their purchasing power will drop because of the value of the dollar. Some countries would like to see OPEC’s price target coming in at around $28 p/b,” says an OPEC spokesman. But while OPEC mulls over how low prices should go, some ministers are preparing for the exact opposite. Japan’s Agency for Natural Resources and Energy has already drawn up a crisis management scenario, calling for the country to prepare for a possible jump in crude oil prices in the event of another oil crisis. International instability could send oil prices soaring to $86 p/b, the current equivalent of prices during the second oil crisis that followed Iran's Islamic revolution of 1978, the agency has warned. Specifically, the agency bases its warning on growing concerns about the supply of oil from the Middle East, in the wake of successive terrorist attacks on oil facilities in Saudi Arabia. It also takes into account the possibility of a blockade of the Strait of Malacca as a result of international territorial disputes. As Japan relies on the strait for some 80% of oil imports, energy consumption in Japan will be gravely affected if it is closed. “This is not exactly what OPEC is predicting, but every possibility has to be planned for,” said the Agency spokesman. To further complicate matters, OPEC ministers are said to be divided on the cause of high oil prices. Whilst officially blaming the rise in terror attacks, some members believe recent increases are entirely down to increased demand in the US. In the past two years, US oil consumption has increased by 7.3%.

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