OPEC FOR PRICE STABILITY

SAAD ANWAR HASHMI
(feedback@pgeconomist.com)

Feb 13 - 19, 20
12

Globally, oil has always attracted high degree of focus because of its price movements and demand. Oil prices are regulated by oil producing nations through the organization of the petroleum exporting countries (OPEC), an intergovernmental organization of 12 oil producing countries including Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

OPEC has a prime responsibility to regulate the supply of oil and ensure stability in the prices and income. The body has received numerous criticisms for its capacity to match the demand and supply and ensure price stability.

OPEC's ability to control the price of oil has diminished after discovery and development of large oil reserves in Alaska, the North Sea, Canada, the Gulf of Mexico and Russia. However, OPEC members still hold 79 per cent of world crude oil reserves and 44 per cent of the world's crude oil production giving the organization considerable control over the global market.

The members meet to discuss the global oil scenario and prices of oil. In order to maintain a price level, production quotas are defined and communicated to all member exporting countries to produce and export within the allocated quota. If the quota is made to increase supply, such excess supply of oil reduces price, thus GDP for exporting countries.

Members have constantly pushed OPEC to raise the price of oil to ensure high revenue for exporting countries resulting in criticism since each dollar increase in price further increases global inflation.

Saudi Arabia does not endorse production quotas and primarily exports based on assessment of the demand for oil. USA is the largest consumer of oil followed by the European Union and China.

To ensure the stability of income for OPEC members, the organization is maintaining price consistently above a theoretical benchmark of $100 per barrel.

Since January 2012, oil is trading between $105 per barrel to $115 per barrel, which results in speculative trading and derivative trades in the futures market, which increases the price of oil.

The recent fluctuations have also been linked to the Euro debt crisis expected to bring down the demand in Eurozone by 0.5 percent in 2012. The global oil demand is expected to grow to 1.1 million barrels per day in 2012 from 0.9 million barrels per day in 2011.

Considering the global outlook, oil price is expected to remain around $100 per barrel through CY12 whereas growth in demand shall be below four percent. With the given price range, developing countries facing acute shortage for necessities including food, shelter and clothing are expected to be affected by inflation.

There are concerns related to oil prices. Firstly, Euro debt crisis, if unmanaged and subsided, will lead to turmoil in the banking sector of Europe having exposure in sovereign debt.

The Euro continues to devaluate against the dollar, which does not show signs of recovery. The second concern for OPEC is related to the US economy and the recession. Questions continue to be raised for recovery of mortgage and household sector since the demand for housing in US exceeds supply. The third issue is concerned with developing nations expected to experience high inflation with the current price of oil.

Recent increases in price of crude resulting in inflation have forced developing countries to make provisions to avoid their economies overheating. Economists argue that if oil price is not reduced, such countries will eventually opt for bio-fuels and alternate energy sources to generate power for running their industries and transportations.

OPEC ministers considered at their 160th meeting of the OPEC Conference in December 2011 to fix the organization's production ceiling at 30 million barrels per day.

According to the points highlighted, the global economy will face uncertainty through recession, debt crisis, political uncertainty, and upsurge in developing nations and inflation. The debt crisis may directly cause unemployment in Europe and indirectly affect the employment status of those who trade with such nations to earn a living. Global economic growth is expected to decrease by 3.5 percent to four percent. Global oil demand currently estimated at 900,000 barrels per day may drop further through CY12.

Estimating the future price of oil remains a challenge for industry experts resulting in variation of views on future oil movements. The decisions of OPEC eventually affect the decisions taken by the oil and gas regulatory authority (Ogra) in Pakistan. Taxing oil for is considered the easiest option to finance the budget. Time and again, the government announces increase in price in line with the international oil prices. The government has also pushed OGRA to increase the price of oil independent of either inflation or international oil prices in order to earn additional revenue to finance its expenditures and deficits.

For a country like Pakistan, rising oil import bill because of international oil price hike and devaluation of rupees against the dollar keeps the domestic oil price high.

Inflation, which is linked to price of oil, cannot be controlled unless government gives in taxing petroleum products. Taxes oil can be removed provided the government finds similar cash cow.