Opec strategy should go beyond increasing or decreasing production

In less than six months, oil prices have fallen by more than $110 (Dh403.7) from their peak above $145 in July to almost $37 per barrel this week.

Analysts and observers of the international economic scene attributed declining oil prices to the global financial crisis and dwindling demand for oil in global markets.

However, oil prices have continued to drop despite the huge production cut of 3.7 million barrels per day announced by the Organisation of the Petroleum Exporting Countries (Opec).

Apparently, oil markets remained unaffected by Opec's latest output cut as oil prices continued to fall reaching $30 per barrel.

The gradual oil output cut, started in October, failed to raise oil prices, which appeared to drop further after each production cut. This has prompted the Secretary General of Opec to make an emotional statement saying that Opec will continue to make more production cuts until oil prices rise to $75, as demanded by Opec.

In my opinion, the issue is bigger than reducing production.

A production cut would have been effective if it was only a matter of supply and demand powers in the market.

The problem has many other aspects, which include speculations and the strategic reserve of industrial countries as well as the global financial crisis and its repercussions.

Opec's main problem is its lack of clear strategy, which leaves it with only a few options.

Prices

The only factor that Opec controls is the volume of production, which had lost its effectiveness a long time ago.

Raising production in the middle of the year did not reduce prices, and reducing production at the end of the year failed to increase prices.

Such a situation implies that matters in the global oil market are beyond Opec's control, as new players emerge and become more effective in directing markets up or down. In the meantime, Opec mainly deals with reactions.

Under the circumstances, oil prices will remain low, at least in the first quarter of 2009, despite any production cuts by Opec members in the past or future.

These situations, which take place almost every ten years, make it a necessity for Opec to have a strategy, which is not based only on reducing production.

This is because despite the expected increase in demand in the coming years, which would be accompanied by price hikes, the new US administration under the President-Elect Barack Obama has a long-term strategy to reduce dependency on hydrocarbon fuel.

This has become evident through the appointment of a Nobel Prize laureate in physics as the US secretary of energy.

If Obama's plan succeeds, demand for oil in the US would remain at its current levels until 2030, while the increase in consumption would be met by clean power, such as solar, wind and waterfall energy.

I wonder if Opec members have any strategy from now until 2030, especially when experience has proved a production cut policy is not enough.

Furthermore, committing to production quotas by member countries is very hard under the current economic circumstances, since some of these countries, such as Iraq, drafted their 2009 budgets based on an oil price of $80 per barrel.

Fortunately, some Opec members, especially GCC countries, have the financial capability to cope with the sharp decline in oil prices in the next year, due to cash surplus in the past five years.

Ensuring fair oil prices is needed, as stability of oil prices at reasonable levels allows producing countries to implement their development programmes.

Dr Mohammad Al Asoomi is a UAE economic writer