The Global Perspective - The OPEC Problem.

With this perspective in mind, OPEC's 11 oil ministers were scheduled to meet in Cairo on Dec. 28 to discuss efforts to keep crude oil prices defended. They were to weigh the 447,500-462,500 b/d pledge from the five non-OPEC states mentioned above. The pledge should be satisfactory since the US Energy Department will be injecting more than 100,000 b/d of crude oil into its Strategic Petroleum Reserve (SPR) during the first half of 2002.

It was made clear since Dec. 15, however, that OPEC cannot afford a price war with non-OPEC exporters. President Chavez of Venezuela, who was the first to warn of such a war in October, will be among the worst sufferers if oil prices collapse as his country's economy is already in deep recession.

If the average price of OPEC basket of seven crude oils remains below $17/b in the first half of 2002, export income for the organisation's 11 member-states will drop from $170 bn in 2001 to $121 bn in the coming year. As the biggest producer, Saudi Arabia would stand to lose $16 bn in export income in 2002. Of the organisation's members only Iran, a prime mover in OPEC's confrontation with Russia, has taken insurance against an oil price war. Tehran has put $10 bn of recent receipts in a special oil stabilisation fund.

The world economy is going through a painful period of readjustment from the boom of the 1990s. The financial crises in Turkey and Argentina have created instability, and recent bloody riots in Argentina resulted in many deaths. With industrialised countries looking fragile, a unified approach to crisis resolution has proved elusive.

Yet most analysts predict a global economic rebound in 2002, although this is not likely to mirror the boom of the 1990s. The rebound will begin in the US, the locomotive of the world economy, which according to recent indicators appears to be more resilient than feared after the Sept. 11 terrorist attacks.

In an unprecedented loosening of monetary policy, the Federal Reserve cut US interest rates 11 times in 2001. Other OECD central banks followed suit, though at a slower pace. With lower oil prices already having provided a powerful stimulus for an eventual recovery, the US will get an economic push through higher spending and tax cuts. There will be elections in 2002 in France and Germany.

Financial markets have rebounded smartly from their post-Sept. 11 lows. With the threat of inflation virtually gone, central bankers can keep rates low through 2002. Industrial production is expected to rise following a rapid fall in business inventories, which ballooned during the last days of the 2000 technology bubble.

Economists add that even the swift developments in the war in Afghanistan should contribute to a turn-around in consumer and business sentiment in the main industrialised countries.

However, a fall in consumer spending is matching a slowdown in business investment, with unemployment marching higher in the US, Europe and Japan. Because demand will not recover strongly enough to get chip factories and auto plants running at capacity, companies will not see their profits rise to levels they enjoyed in the 1990s.

Economic growth in 2002 will not be even. Deflation in Japan will continue, but it is not likely to spread elsewhere. Businesses will not build new plant when there is the prospect of a new US war against Iraq (see review of developments in the OPEC countries on the following pages and in Gas Market Trends).

The recent collapse of Enron, a giant US energy-trading company which was not audited objectively, marked the biggest bankruptcy in history. This put pressure on a number of other energy traders. On Dec. 14, Moody's cut to junk the credit rating of Calpine, a California-based builder and operator of power plants; and that was just one day after putting the company on review for a downgrade.

Moody's also cut to one notch above junk the ratings of Dynegy, which had been under pressure since its failed rescue bid for Enron. To satisfy regulators' demands for greater transparency, El Paso Corp. agreed to sell $2 bn in assets and move debt held off the books onto its balance sheet.

Only months earlier in 2001, Enron was shining in California's blackouts and what seemed to be a looming energy crisis in other parts of the US. By end-March Enron had stood out as the industry and market leader in the energy business.

Based in Houston, Enron bought and sold wholesale electricity, natural gas and scores of other commodities, including the weather and broadband tele-communications capacity for data-delivery services. In the fourth quarter of 2000, Enron's sales more than tripled to $40.75 bn, from $10.97 bn in the fourth quarter of 1999.

That mushrooming of Enron revenue was traced to an unprecedented surge in the price of power and natural gas - particularly in California, where the spot price of gas at one time in early 2001 rose above $40/m BTU. In late March 2001 power regulators in California approved a 46% increase in electricity rates, the highest ever in that state.

Enron's edge at the time was its sheer size and what the New York Times on March 31 described as "its recognized competence in helping scores of corporate clients cope with unprecedented swings in electricity prices". Analysts then were predicting that Enron's stock price would climb to $99.20 in 12 months. By Nov. 30, however, Enron shares had fallen to a few cents.

Enron was the largest energy trader in Europe as well. It had moved into the European market long before most governments had opened their markets. In 2000, Enron traded about 300 bn kilowatt-hours of electricity in Europe and was by far the biggest player in the field.

There are many post-Enron lessons. Analysts across the Atlantic warned in December that, without good auditing, many trading companies could implode in the same way. The Washington Post on Dec. 5 warned: "Without objective auditing, there will be more and more Enrons, and more and more investors, lenders and employees who get unfairly burned".