Yesterday OPEC agreed to cut production by one million barrels per day in a bid to prevent oil prices from slipping any further. Whether it achieves that objective will depend on forces beyond OPEC’ s control. Thirty years ago, it could raise or lower oil prices at will. Today, its problem is that it represents only a part of the oil-producing world. Its attempts to control the market by quota alterations have too often been undermined by the actions of nonmembers. Most recently, countries such as Russia, Norway and Mexico, oblivious to the destabilizing effects of their actions, have deliberately upped production to profit from a surge in prices since 1999. That is why the price has dropped.
OPEC has, on this occasion, managed something of a diplomatic tour de force by persuading at least Russia to join the cut and help prices falling any further. The credit goes to Ali Al-Naimi, the minister of Petroleum & Mineral Resources, who went to Moscow specifically to convince the Russians of this obvious truth. Nonetheless, even though they have responded with strong hints of future regular consultation with OPEC, the reality is that the cartel has an uphill struggle ahead of it if it is to maintain oil price stability.
The international recession is major factor. Demand for oil is in fact falling — down 1percent or 750,000 barrels per day during the third quarter of 2001 — despite the current lower prices, and is likely to fall further before the recession ends. President Bush’s proposal, just announced, to increase the US’ national oil reserve may provide some small counteractive pressure. On the other hand, Monday’s air crash in New York will probably further add to downward pressure on demand; as people continue to avoid air travel following on from Sept. 11, airlines are going to cut yet more flights and with it fuel consumption. The greater problem, however, is that so much more oil is scheduled to come on stream in future — and from non-OPEC sources. If it is difficult now trying to stabilize prices with countries like Norway and Mexico refusing work alongside OPEC and cut production, it is going to be many more times harder when Central Asian oil and gas start to flow in large quantities and Alaskan oil comes on stream.
Like Russia, whose promise to cooperate with OPEC will vanish like a mirage the moment Moscow decides it needs more hard cash, the Central Asian Republics will want maximum earnings from their newfound oil wealth. It is possible that in time they may come to adopt a more responsible attitude to international oil pricing, especially if oil revenues become their dominant source of income; but in the immediate term, they will be looking for as much money as they can get. As for Alaskan oil, it will thrust the US back into the role of the world’s largest producer — and by a long shot.
All of this points to two inevitable conclusions. The first is while OPEC is still in a position to stabilize prices, that is going to be far more difficult to organize in future. The second is that oil prices are more likely to drop rather than rise in the longer term. For countries like the Kingdom, that means just one thing: diversification, away from reliance on oil, is not an option. It is an absolute necessity.
