Oil&Gas Middle East Monthly Update - 5th July 2005

The oil market was once ruled by a ‘thumb rule’: a sustained US $10 increase in the price of oil would knock 0.4% off the gross domestic product (GDP) of the rich, oil-consuming nations of the Organisation for Economic Co-operation and Development (OECD). Now, it is being ruled by a ‘keep your fingers crossed rule’, because a US $10 increase in prices now would mean a severe jolt to the world economy, especially to that of the United States of America.

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By  David Ingham Published  July 4, 2005

Blame the other guy|~||~||~|The oil market was once ruled by a ‘thumb rule’: a sustained US $10 increase in the price of oil would knock 0.4% off the gross domestic product (GDP) of the rich, oil-consuming nations of the Organisation for Economic Co-operation and Development (OECD). Now, it is being ruled by a ‘keep your fingers crossed rule’, because a US $10 increase in prices now would mean a severe jolt to the world economy, especially to that of the United States of America.

The world no longer knows in which direction to look for assistance. Once, the market believed that OPEC’s level of production controlled prices, but last month’s 500,000 barrel increase did nothing but frighten market speculators further. While most analysts agree that the increase was only a ‘cosmetic one’, you now wonder if changes in production levels have any impact whatsoever on pricing.

OPEC’s attitude these days seems to be ‘don’t blame us’, with ministers openly admitting that half a million more barrels is not going to cool prices. Oil has become a very complex commodity, whose pricing and availability can no longer be controlled by a central force.

Making things even more complicated is the debate over reserves, with high profile analysts questioning countries’ stated reserves and even third party estimates being called into question. OPEC producers’ refusal to allow their reserves to be independently evaluated makes them even more vulnerable to criticism and does nothing to stop speculators pushing up prices even further. Shell’s debacle with its reserve figures may have put regional producers off the idea of third party audits, but pressure on them to allow independent audits of their reserves is not going to go away.

However, whilst OPEC is being pushed to open up its reserves to auditors, the same kind of pressure is not being applied on the consuming nations to increase their refining capacity. If OPEC is becoming sensitive to criticism, perhaps it should borrow a trick from the consuming nations — always blame the other guy.||**||

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