Global oil market rudderless

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Global oil market rudderless

With little sign of worldwide oil prices taking a downward turn, there seems to be no much-needed economic masterplan to sort out a damaging situation, says Terry Macalister

Thursday September 14, 2000

Oil prices could remain above $27 (#19) per barrel over the next 12 months, more than 50% higher than the average over the last decade, and be characterised by high levels of volatility, some experts are warning. This is bad news for motorists unless the government reduces petrol taxes in the aftermath of the country's biggest civil disturbances since the 1970s. A really cold winter and price peaks of up to $40 (#28) per barrel are highly likely.

A top economist from blue chip US investment bank Goldman Sachs said in London earlier this week there was a 5% probability prices could even reach $67 (#48) per barrel. But another US finance house, Salomon Smith Barney, says to expect prices in the region of $28 (#20) for the remainder of this year and $24 (#17) in 2001.

The reason for the continuing high price of crude oil is growing demand from recovering economies in Asia and the continuing strength of the business climate in America and Europe.

Supply remains curtailed by cuts made in investment two years ago under the impact of low crude prices and plummeting profits. This pushed many producing nations such as Saudi Arabia and Venezuela towards financial crisis, because their economies are so dependent on crude export revenues. It also badly hit the shares price of the corporate sector and forced them to cut exploration and field development.

It is difficult to believe that barely 18 months ago North sea crude was being sold on the open market at less than $10 (#7) per barrel and there was speculation it could move toward $5 (#3.50). So what has happened over the intervening period? Opec came under intense pressure from the US government to reduce output in order to force the crude price up.

Washington was worried then about its own domestic oil industry, which was being driven out of business. Texas is still a state packed full of "nodding donkeys", onshore rigs which produce a few barrels of oil a day for small proprietors. Millions are employed in the wider oil industry there and the world's biggest corporations, such as Exxon (which trades as Esso in Britain), exercise huge political muscle.

Even though many Opec nations were frightened that cutting production would reduce their income further, the cartel, led by its biggest producer Saudi Arabia (which has close political ties with the US), agreed to president Clinton's demands.

New production quotas were introduced in April 1999 and by June output had fallen dramatically. Oil prices recovered dramatically and by the start of this year were over $30 (#21) per barrel.

Since then Opec has been under pressure to increase output to try to lower the price and on three successive occasions has agreed to put more crude on the market. To little avail: prices have dipped briefly following Opec actions, but they bounced back as traders fretted about rising demand and low stock levels in refineries.

Now Opec says it might be willing to put an extra 2m barrels onto the market and the US might leak some of its emergency supplies onto the market in a bid to help lower prices. The bellwether October Brent futures contract fell nearly a dollar on this news, but remained at $32.10 (#23) at the end of last night's trading.

This has left everyone scratching their head about what the oil markets really want. Professor Peter Odell, a world-regarded petroleum expert from the London School of Economics concludes: "There is no vestige of economic rational in the present oil price situation. What we appear to have is the result of market manipulation and political pressures."

http://www.guardianunlimited.co.uk/petrol/story/0,7369,368462,00.html

-- Martin Thompson (mthom1927@aol.com), September 14, 2000


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