June 17, 2011

OPEC: It is about more oil - not quotas


William C. RAMSAY


Edito Energie, juin 2011

OPEC has certainly gone out of its way to show how little relevance it has in today’s oil market. It has successfully imported all the political rhetoric and malaise of some of its most unstable members. To be dictated by the Bolivarian Revolution from Caracas or revolutionary light Ecuador is already bad enough. But combining that with the objections of some obscure Libyan functionary and a stand-in for lack of an Iranian oil minister as Chairman of the meeting is pretty much a formula for disaster. We have not been disappointed.

OPEC’s own analysis points to a tightening market through the year and a need for more oil, but too many of OPEC’s members are production constrained or cash short and need every dollar they can get for every barrel. As any cartel manager must know, the ability to remain in a position of strength in a commodity market is a function of not driving customers out of the market. There is in fact a price elasticity of demand for transportation fuels. There are ways to substitute alternative fuels into transportation. Many are reviewing the potential of CNG to contribute to transport given the surge in available gas – and its liquids.

OPEC refused to adjust upwards its quotas. Who cares? Its quotas have been meaningless for some time it is production that counts and all the price hawks are producing their maximum. Libya is applauded for having succeeded in retaining its quota. So what? When Libya calms one of these days, whoever is running the place will ramp up production as fast as they can because a lot of damage has been done to that country and its people – without regard for any quota.

Why should anyone care about quotas? Iraq plans to exceed its quota as soon as it can and will probably claim the right to catch up for years of lost production. Angola will soon bust its quota as will Nigeria. OPEC quotas have always been intended to restrain the other guy.

The real result of the meeting is that everyone will continue to produce all they can and those with surplus capacity will produce more. That is a pretty good outcome which everyone but the market should be able to realize. Wait for the buzz in the market to pass.

As pressure builds in consuming counties to respond to high prices, out of concern for developing countries, sluggish economic recovery and co-incidentally, political pressure before elections – the idea of taking matters into ones hands comes immediately to mind. Congressman Markey wasted hardly a minute to call for US SPR release. In the last Presidential campaign there were calls for use of the SPR and 8 years before President Clinton used the SPR to help Al Gore’s Presidential campaign. Students of the market will remember that using strategic stocks for market manipulation did not work then, nor did it have the desired political result.

The issue is the need for incremental oil. Surplus capacity producers are stepping up to the plate. Hopefully consuming countries won't do anything with strategic stocks that will discourage them.

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