Sunday, October 22, 2006

Is OPEC cooking its golden goose?

As OPEC members agree to cut production yet again, in the hope of shoring up crude prices at a time of weakening global demand; you don't have to be an analyst to see tough times for the cartel ahead. At present, the cartel pumps almost 40% of the world’s oil, and their decision will affect retail prices for gasoline and other petroleum derivatives in importing economies such as the USA, Japan, China, India and across Europe.

This OPEC meeting unfolds against a backdrop of global economic fragility. It is not the announcement of the output cut that will hurt -- I think the cut (heavily speculated) is already more or less factored into the market. There may yet be a short-term rebound in prices, but crude prices would eventually decline over the next year or two.

The U.S. will not doubt find the OPEC strategy to cut output “disappointing.” In the past U.S. Officials have stressed the need to step up crude production within the US. In fact the current administration has gone on the record in the past saying it wants to increase America’s energy production, to reduce reliance on imported oil. OK, GWB and DC have their eye on ANWAR. But, OPEC’s decision hammers home to everyone the importance of finding a domestic energy source and the need for a sustainable national energy policy that will ensure a stable, reliable, affordable and diverse energy supply.

Of course, OPEC could be shooting itself in the foot here, by ignoring signs from a weakening world economy. By propping up international energy prices, OPEC is not supporting the growing economies in Asia or the energy dependent mature Western economies. Additionally, OPEC will need to keep an eye on its 40% share of world oil production. High international prices will definitely fuel exploration and production in ex-OPEC regions, notably Siberia, the Caspian, Africa and South America. If the world economy is indeed slowing... OPEC's latest move could backfire. When oil can be found and produced for just $10 a barrel exploiting the world’s oil reserves is just too profitable at the current oil price. OPEC countries also need to support their energy-dependent customer economies, if they intend to be in business for long. Outside of traditional sources, surge over a critical price threshold could also push energy dependent economies to seek non-traditional sources. Japanese companies, notably its auto manufacturers have been developing alternative fuel engines for some years now. A workable engine burning something other than gasoline might not be that far off. Now, I am sure that's not good news to OPEC.