OPEC Urged to Set Annual Targets for Oil Production

OPEC needs to alter its strategy and set annual production targets to ensure stability in the oil market in the long run and avert a serious slowdown in crude demand in the future, according to a top Western energy analyst. Leo Drollas, Deputy Director of the London-based Centre for Global Energy Studies (CGES), said the global financial distress is not the only factor that caused crude prices to crash from their peak level of US$147 in late July. In a study presented to a recent energy conference in Houston, the United States, Drollas ruled out a fresh oil price spike similar to that in 2008 and said prices could settle at about US$50 a barrel in the long run. Drollas cited many factors for what he described as persistent instability in the oil market, including OPEC's obsession with higher prices and inventory control, excessive reliance on crude revenues by most producers, the steady growth of derivatives market, and a drive by major consumers to cut oil consumption. He proposed that OPEC should target a reasonable price, producers reduce dependence on crude exports, oil be "depoliticised" and the 12-nation group stop its obsession of controlling global oil inventories. "Many will view these prescriptions as infeasible - trying to put the genie back into the bottle... since this looks unlikely, the second-best solution is for OPEC to set annual output targets and allow global inventories to take the strain. OPEC's annual production targets should be based on independent estimates of world oil demand, non-OPEC supplies and desired stock-cover, and on its own oil price aspirations," said Drollas. "OPEC's obsession with inventory control is harmful. Stocks need to regain their former role as safety valves. OPEC's output should be set annually based on independent projections of supply/demand. "History informs us that a 'residual supplier' is needed for oil price stability. But the price target must be reasonable, reflecting both current conditions and long-term trends and developments. Is this is a charming delusion." Referring to the surge in oil prices to their highest level in late July, Drollas said OPEC and other parties blamed the slackening demand caused by the global crisis for the ensuing price collapse in the last few months of 2008. "Although there is much truth in this, forces at work since prices started to rise in 2003 helped to lay the foundations of the eventual price collapse. The effect of prices on oil demand is clear. What is not so transparent is the adverse effect of high oil prices on economic growth," he said. "The oil industry could continue as at present, with OPEC trying to keep the oil price well above true marginal costs by restricting its production. "The result, given relatively inelastic demand, is likely to be volatility in the short run and a slow drift away from oil in the long term," he added. "On the other hand, the industry could follow a different model - one in which oil supplies are responsive to oil prices, volume takes its rightful place next to price as a policy tool and the secular decline in oil's share of primary energy is arrested. Many may not want this, but the world still needs oil." According to Drollas, OPEC will try to keep crude prices above US$60 a barrel but that the outcome in the short run will depend on the "struggle" between the current recession and the fiscal needs of the oil-producing states. "Consumers like to know where they stand, because oil consumption entails using relatively expensive capital stock over a long period. Oil price volatility makes choosing difficult and can impose significant costs on users if they happen to be caught with the wrong kind of capital."- Zawya, Business 24/7