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Opec humbled as price of crude tumbles to $39

The Guardian

The once-feared Opec was further humbled today when the price of crude fell to its lowest level in four and a half years despite the cartel’s decision to slash production by record levels.


The price of a barrel of oil fell to $39.19 compared with a high of $147 in the summer, leaving Opec struggling to decide whether it will make deeper cuts or accept defeat.

The organisation has announced two output reductions since September, amounting to 4.2m barrels a day, to try to counter the impact of falling demand caused by the world economic slowdown.

But unlike during the oil shock 1973, when huge cuts in output by Arab countries caused prices to quadruple in retaliation for US involvement in the Yom Kippur war, members are trying to save their own skins rather than punish the west.

The rulers of Saudi Arabia, Venezuela and many other Opec countries are dependent on petroleum revenues for maintaining economic, as well as social and political, stability.

Iran is especially vulnerable because 80% of its revenue comes from oil. The International Monetary Fund recently calculated that to balance its budget, the price of crude must not fall below $95 a barrel.

Opec’s official communique from yesterday’sministerial summit in Algiers stressed its “firm commitment to providing an economic and regular supply of petroleum to consuming nations” and that it was trying to maintain crude oil prices at “fair and equitable levels for the future well-being of the market and the good of producers and consumers alike”.

Leo Drollas, deputy director of the Centre for Global Energy Studies in London, said the cartel had become a bystander like everyone else in the face of economic forces much stronger than itself.

“Opec is running up an escalator the wrong way with these attempts to cut output to force up prices. Global demand for oil is falling so fast that there is little it can do. And even if it does make even more sizeable cuts in future that could push oil up to $75 a barrel, it would be counter-productive as it would just reduce demand,” he said.

The centre’s calculations suggest that a $75-a-barrel oil price next year would cut demand by 1.4m barrels a day, but if values remain at $45 — Drollas’s current estimate — the reduction in demand would be only 150,000 barrels a day. More seriously, pushing up oil prices would simply delay a bounceback for the world economy.

“Opec have really brought this whole crisis on itself. Cutting output at the end of 2006 and into 2007 reduced stocks and ultimately led to the oil price hitting $147 this summer. That, in turn, helped trigger the global economic slowdown that is causing all the trouble,” said Drollas.

Not everyone agrees. But with the oil cartel expected to increase its share of the global market as areas such as the North Sea go into decline, some experts were far from convinced that Opec was a busted flush.

Peter Odell, emeritus professor of international energy studies at Erasmus University in Rotterdam, said Opec was unnecessarily demonised and was still largely in control of events. “Opec is a very astute body and has much more influence now than it did between the 1980s and 2002. The current price decline is demand led and most people accept that Gulf [Opec] states such as Qatar, Abu Dhabi and Dubai are of great importance in the world,” he said.

Russia, a major crude producer but not a member of Opec, has considered government budget cuts in the wake of the falling crude price, while future production levels could be endangered because oil companies have cut spending on exploration and development. Shell, for instance, has postponed spending on some high-cost tar sands projects in Canada.

But a fall in oil prices, and the impact on gas and even coal prices, should bring benefits to western consumers through lower bills for heating and transport.

Petrol prices traditionally lag falls in wholesale oil prices, but declines seen so far have been welcomed by hard-pressed car owners and haulage firms.

Manufacturers such as brick and steel producers, which use a lot of power, have also welcomed lower costs at a time when demand for their products is falling because of the recession.

But they are far from celebrating. Jeremy Nicholson, director of the Energy Intensive Users Group, said: “It cannot be helpful to consumers that major swing producers in the Middle East are conspiring to raise prices and we know that in future the Opec share of global crude production is set to grow.”


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