The curious crisis of crude oil on troubled waters

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Friday 8 September 2000

The curious crisis of crude oil on troubled waters By Gerald Butt in Nicosia

Middle East Economic Survey

PETROL exporting countries will announce an increase in crude oil production after the Opec meeting in Vienna on Sunday but the extra oil coming on to the market is unlikely to bring down prices. The exchange of recriminations looks likely to continue, with buying nations accusing Opec of failing to take sufficient measures while oil producers will say that they have already pumped out extra crude this year.

Both arguments are justified. The steep rise in prices came about through a combination of unusual circumstances.The story began in the United States where, earlier this year, new environmental regulations dictated tighter specifications for the ingredients of petrol and diesel.

This forced many refineries to install new equipment, while others said it was too expensive to do so, and opted to process only light, clean crudes. Up went the prices at the pumps.

In a presidential election year, politicians sought to win the votes of the car-crazy Americans by blaming Opec. In the ensuing nervousness, world oil prices rose to over $30 a barrel.

To compound the problem, refiners in Europe and the United States became reluctant to buy more than they had to at these prices, so stocks fell and finance companies, investment funds and traders were moving in.

The forward-looking oil producers would be happier to see prices stabilise at around $25 a barrel. They recognise that a substantial increase in production would help to calm the market and make it less susceptible to the prey of speculators. But here lies another problem. Most Opec states are producing at capacity or somewhere close to it. The exception is Saudi Arabia which has substantial spare capacity.

Oil exporters have, on the whole, neglected to invest in the development of existing oilfields or look for new ones. Also, when oil prices slumped, no funds were available for the costly and time-consuming business of exploration and development.

All of which leaves Opec with difficult choices. Even if Saudi Arabia were to turn on the taps in a major way, there would be no immediate impact on petrol prices. Saudi crude is "sour" - containing hydrogen sulphide - the most difficult to refine. There is also a fear in Opec that by flooding the market with oil, the organisation might precipitate a market crash.

At the same time, Opec members say the buying countries could ease the crisis by reducing taxes, an average of 60 per cent of the price paid at the pumps for fuel. The mutual recriminations, then, look set to continue.

But in this crisis Opec has no political agenda, as it did in the Seventies. For once, neither producers nor consumers know what to do to resolve the most curious crisis ever to beset the world oil market.

Gerald Butt is Gulf Editor of the Middle East Economic Survey

http://www.telegraph.co.uk/et?ac=002844489039691&rtmo=LlSbdbyd&atmo=99999999&pg=/et/00/9/8/wblok408.html

-- Martin Thompson (mthom1927@aol.com), September 08, 2000

Answers

The writer of this piece is "right on." The Clinton Administration's ecological mania, in the form of all the new restrictions on content this year, has forced American refineries into a dilemma--buy expensive new equipment to comply, or, in effect, say, "The hell with it," and keep producing the acceptable light, sweet crudes, which involve no new capital expenditures. Unfortunately, many refineries said, "The hell with it." And, the Saudi high hydrogen sulfide, sour oil cannot cut it. It cannot substitute.

Unfortunately, this new reliance on such countries as Nigeria, which produces a truly premium sweet crude, perhaps the best quality product in the world, is falling fast in production.

This is really becoming an Alphonse-Gaston act--a Comedy of Errors. You've got wonder: what strange turn will this 3-ring circus take next?

-- JackW (jpayne@webtv.net), September 08, 2000.


It looks like this puzzle is like playing a game of internatonal chess.

-- Nancy7 (nancy7@Hotmail.com), September 08, 2000.

All of this has to hit Wall Street like a ton of bricks one of these days. I'm sure curious to observe the fall-out. It could be frenzied.

October surprise, anyone?

-- Wellesley (wellesley@freeport.net), September 08, 2000.


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