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Oil in a Week: Tough Decisions for Exceptional Circumstances.

Byline: Walid Khadduri

The oil ministers of the Organization of Petroleum Exporting Countries (OPEC) decided, during their ordinary meeting on December 17 in the Algerian city of Oran, to cut production by around 2.2 million barrels a day compared to that of November. Thus the total decrease in production decided by the organization since last September becomes of around 4.2 million barrels a day. Such a level of decrease represents an unprecedented attempt by the organization to face the regression in demand resulting from the global economic crisis, as well as the rapid and considerable drop in prices.

The speed at which the decisions to cut production, in the first months of the outbreak of the economic crisis, were taken, as well as the fact of not waiting for the member states to reach a consensus, is reminiscent of the previous cases of delay, which had allowed prices to hit rock bottom (around $10). What took place in Oran clearly shows that the member states have agreed among themselves to defend prices of no less than $40, especially after they reformulated their 2009 budgets on the basis of $45 to $55 per oil barrel. It also clearly shows that these countries have decided to defend their interests, despite having been subjected to a great deal of criticism from the US concerning dropping production in these times of economic crisis.

It is well-known that one of the most difficult things for the organization to do is to cut production, as it would mean increasing its available excess production power, which in turn puts pressure on prices and pushes them down. It also provides opportunities for disagreements among member states over the share of each of them in the overall production, and over the true rate of decrease they commit to, to become more acute. This was at the center of what took place in Oran, in terms of disagreements and of ambiguity in explaining the decisions that were taken. Later, the confusion that took place in world markets, and resulted in dropping prices by about $3, was followed by a rapid decrease in prices to about $34, instead of rising or at least stabilizing after such decisions were taken.

Despite decisions to decrease production, it is not certain that prices will improve in the foreseeable future. Indeed, for the first time in three decades, demand for oil has decreased for two years in a row. Statistics published by the US Department of Energy's Energy Information Administration (EIA) indicate that demand decreased by 50 thousand barrels a day in 2008, and that it is expected to decrease by around 450 thousand barrels a day in 2009. The agency projected that the average price of oil in 2009 will be of around $51 for light US crude oil, compared to its average in 2008 which reached around $100 a barrel. This means that it expects the average drop in prices to be of about 49 percent for 2009 as compared to 2008.

Reduction in demand has not only been restricted to Western industrial nations, as the decrease has finally reached China. Indeed we find that, for the first time in seven years, Chinese exports - of both goods and services - have decreased in November by around 2.2 percent, compared to the same month of last year. Chinese imports have decreased by around 17.9 percent during that same period of time. This reduction in foreign trade does not include China alone, but also other important emerging countries in East Asia, such as Korea and Taiwan. As for Japan, it has officially been classified as being in a state of economic recession since the beginning of 2008.

Despite such negative expectations, there are other positive factors that indicate quite the opposite. It is noticeable these days that large international oil companies are buying oil at these "cheap" prices and storing it in anticipation of prices rising in the future. Available information indicates that around 50 million barrels have been stored this way.

These factors, along with many others, are behind OPEC's decision to cut oil production. It is clear that the organization has taken this decision without having obtained a compass that would indicate what such a drop in production will lead to, and whether it will be sufficient to stop prices from deteriorating. In these critical times for the economy, the organization's stance does not differ from that of central banks that have reduced interest rates, almost reaching zero, without concrete evidence that this can put a stop to the global economic meltdown in the foreseeable future.

What is important in both cases is that oil ministries and central banks are trying to quickly and positively deal with a difficult and dangerous situation, and this is the fundamental difference when compared to policies of the past and the manner of dealing with such crises.

* Mr. Khadduri is an energy expert

2008 Media Communications Group

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Publication:Dar Al Hayat, International ed. (Beirut, Lebanon)
Date:Dec 21, 2008
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