Business | Opinion
Opec's plan to cut oil production is ill-advised
With all the current economic turmoil around the world, a decision to reduce oil production by the Organisation of Petroleum Exporting Countries (Opec) is only going to be damaging.
- By Leah Bower, Special to Gulf News
- Published: 00:55 October 21, 2008
With all the current economic turmoil around the world, a decision to reduce oil production by the Organisation of Petroleum Exporting Countries (Opec) is only going to be damaging.
Sure, oil prices have plummeted from a high of $147.27 (Dh541) a barrel in July. But the price for a barrel of crude is sitting at around $71 to $72 a barrel. That is comfortably below that once-mythical $100 per barrel price.
Most importantly, it means that oil is once again in the range that isn't going to frighten consumers away from the pump or business into contracting. If Opec was interested in keeping the economy hot, or even lukewarm at this point, they'd leave oil production alone.
After all, with credit tightening, business frightened and consumers outright panicked, anything to provide an economic leg up is only going to be a positive thing for oil consumption in the long run.
Look at it this way - Opec stands to benefit in the long run if the American, and now world, economy start to rebound from the current downturn. If demand softens any more, the organisation is going to end up in a nasty cycle of cutting demand to inflate the price, which is going to continue slowing any economic recovery.
Basically, business needs energy to grow and at this point letting oil prices soften a little more, or even sit where they are, is going to provide a much-needed incentive for business to grow.
Economists are knocking around mid-2009 before cramped credit markets begin to ease, and in the meantime business and consumers are feeling the pinch of record-high interest rates.
Even as financial markets look to be recovering, it is only because governments are circling the wagons and dumping money into protecting banks. There is little question that worldwide, growth is either slowing or stagnating.
But already the price of oil is firming, just on the speculation that Opec will cut production at its October 24 meeting in Vienna. Since that meeting has been bumped up from its original November date, it is a safe bet that something is in the works.
Of course, Opec President Chakib Khelil and Qatari Oil Minister Abdullah Bin Hamad Al Attiyah have both spoken openly about the proposed production cut, although an exact amount hasn't been solidified. Speculation as to why the move towards the price cut has centred around the budgetary needs of some Opec nations, especially perennial troublemakers Iran and Venezuela. The story goes, those nations can't balance their budgets on crude's current price, much less if it falls any further.
It also appears that Saudi Arabia, and I'm guessing other Arabian Gulf countries like the UAE and Qatar, have been a little more conservative in their economic planning and stand to suffer less from cheaper oil.
While I'm sure the perennially vocal Venezuela and Iran are unhappy, I still don't think it is in Opec's best interests - especially those countries which have had a little foresight - to slice production substantially. If oil hits $100 per barrel again, there may be some budgets that balance.
But I still maintain it will be more painful in the long run if economic growth slows too far.
Keeping oil comfortably below that $100 mark is still the best plan for all the countries in Opec, even if an irresponsible few end up paying the price.
- The writer is a freelance journalist based in Alaska, USA
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