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OPEC Not to Blame for Volatile Market

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TEHRAN, June 9 (ICANA) – The Organization of the Petroleum Exporting Countries (OPEC) has decided to leave its production levels unchanged despite demands for an increase in production.
Thursday, June 09, 2011 10:46:27 PM
OPEC Not to Blame for Volatile Market

In an interview with Manouchehr Takin, senior petroleum upstream analyst at the Center for Global Energy Studies, Press TV discussed the issue.

Q: A surprise outcome, to say the least, even you had predicted an increase in production. What happened?

Takin: Well, we don't know what went inside the meeting. As you know it is confidential, but judging from the communiqué and the press conference afterwards, the ministers could not reach an agreement. My personal impression is that I'm not very happy with this. I think this is not a very good outcome for OPEC as such. In the last 50 years, I think OPEC has never come up showing differences among the ministers in a meeting as such, very openly saying that we could not reach agreement. I think it is really irrespective of the ups and downs of the supply and demand balance and so on. I think, on a public relations basis and the image of OPEC, this was not really to the advantage of OPEC. It shows that they could not reach a consensus. This was my first impression.

Q: Saudi Arabia said it was the worst meeting. OPEC members usually follow Saudi Arabia's lead, which is the only country that has excess capacity for export and had said it was ready to up production to 10 million from 8.7 million. Any significance, or signal to Saudi Arabia?

Takin: I don't agree the way you put the question. I don't think Saudi Arabia leads in that stark and forward manner as you explained. The OPEC ministers over so many decades, when they meet, they have major differences of opinion based on the state of the oil industry in the countries with a large reserve, high production capacity, would like to have a moderate price in a country with smaller reserve or a country that cannot produce anymore, would like in the next six months to have higher price so that their revenues are maximized. So these differences are always there and when they get together, they usually reach a consensus and they do not come out saying that they could not reach an agreement.

Now I wouldn't say that Saudi Arabia has been this starkly and forward each time pushing the OPEC policy. Because Saudi Arabia has three million barrels per day, and now even more spare capacity, has the power to produce more and balance the market or any policies that they want. We should not look at it that way. That is a reality and Saudi Arabia has had it for many decades. But when the ministers get together, they used to reach an agreement and discuss and even when they had disagreements, they came out and gave a common approach, saying for example that at present they are not going to make any changes and that they would continue as supply-demands and the activities as they are--in a very polite concealed way.

But regarding that Saudi Arabia leading or not leading any more, I don't think it is really a shift. That influence has always been there and, on the other hand, other countries like Iran have been always trying to make more moderate policies of producing too much in order to have the prices not fall.

I think the main question is on a technical issue, for the next few months and past few months, how the supply-demand balance trend would be. And I think even OPEC analysts, that is OPEC secretariat, did agree and they had given out numbers saying that seasonally in the world, especially northern hemisphere, going from spring to summer, world demand increases by more than two million barrels per day. During the last few months, we had Libyan oil missing. Japan economy slowed down due to the Tsunami tragedy and they didn't get any oil deliveries. They even returned back some of the tankers. But Japan economy is gradually coming back, so they will buy more oil, in fact for generating electricity, because nuclear power plants are out. So they will buy more oil.

So these two examples, plus others, are indicating that world would need a bit more oil for the next few months. And I think OPEC would have to supply more oil and in practice, in the next few months, the countries like Saudi Arabia that has the oil, will produce more. That is I think a technical argument, irrespective of politics, that the world needs more oil and OPEC should have increase its production. OPEC has already been producing actual ceiling that they have voluntarily discussed and arranged, so OPEC was producing a bit more. 1.3 or 1.4 million barrels per day above its quota. This is excluding net of Libya. Before the Libyan crisis, OPEC was producing 2.7 million barrels per day above its quota, because the market needed it.

I think that trend would have continued a little bit more production. May be they better outcome that they have making a nominal increase in the production ceiling and in practice; market would have received more oil. As the ministers said, because we really don't know the statistics--that is always a problem in the oil market, numbers of how much oil is being used, or produced--takes many months before the actual statistics are received and that is too late. At each time when they make decision, they don't have enough data, so there is always approximation. It could be higher or it could be lower. So in spite of all these unknowns, the factors that I mentioned such as seasonal variations, Japan economy and other factors, show that world would need more oil in the coming months. And I think that was really the issue.

Q: Would you please explain the effect of the weak US dollar on oil revenues and the proposal to price oil against a currency other than the dollar?

Takin: I'd like to make two short comments and then come to the pricing of oil in dollar.

The first is on the role of OPEC. I think we have to give credit to OPEC. During the last 50 years, they had been a force of stability in the oil market. For example; at the end of 2008, oil price fell from 147 dollars in July and by December about 30 dollars per barrel. And it was OPEC an a organization that managed to reduce its supply by four million and get the prices back to normal, about 70 or 80 dollars at that time. Even the United States and some other countries who are now criticizing OPEC, were lobbying at that time and were asking OPEC to do something about it. So I think this is the role of OPEC that in spite of the story we had today-- which I am a bit unhappy about personally--I think it has had many success stories over the last fifty years.

On the volatility that you mentioned, that is not the fault of OPEC. OPEC as an organization tries to balance supply and demand to the best that it can --in spite of all these differences within its members--the history shows it. The financial players, large fund, billions of dollars around, not only speculative around, but pension funds and others don't have enough confidence to buy shares of BP and other companies. So, they go into commodities, they go out and take position in the paper, in the barrel in the future, and so forth. That volatility has nothing to do with OPEC and OPEC as an organization has always been criticized and the debate is not only within OPEC, it is in the United States congress, among academia that how much the volatility is, what is the role of these funds which are noncommercial. They are not involved in oil business, but just come in and go play casinos or just take investment positions.

Now on dollar, I have to say that oil is traded in dollar. So when the value of dollar goes down, investors and the financial players themselves, in order to hedge themselves, look for something else for value.

So in practice, when the value of dollar falls, the price of oil goes up, but as to actually doing the trade of oil in dollar, this had been a debate which has been going on for 50 years-- since OPEC was established. At one time they thought it should be special drawing rights of international monetary fund, basket of currencies were used in the old good days within OPEC organization to decide on the price. Those days were the days that OPEC actually decided on a price and announced it. The decisions were made based on the basket of currencies and OPEC was trying to have a price which would balance the revenue of the oil producers. But in actual operations, unfortunately whether we like it or not, oil is being traded in dollar and that is a reality. How we can get away from it, it takes time. Many countries like Iran, although the prices are decided in dollar, it tries to avoid having dollar because of the political problems with the US. And other countries like Japan could do the same thing; they could trade oil in Yen. But unfortunately, from technical point of view, how the world can decide to have the trading and the exchanges of oil instead of in dollar, in another currency, that is a very nice academic question, but I really don't think there is very simple answer to it.

Q: In the United States, one of the major television stations said, “OPEC in crisis.” Why would they say that?

Takin: I think that is an exaggeration. The critical comment that I made at the beginning: that I wished the ministers had not come out and say that they could not reach an agreement. I think that TV is exaggerating, saying OPEC is in disarray and that it is an ineffective organization. That type of judgment has been made about OPEC for many decades and we should not take it seriously.

Q: Are we going to see an increase in three months time?

Takin: Well, it depends on the global economy. If really the global economy goes down and we have recession, no I don't think so. By that time, they might decide not to do so.

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