Opec chases a solution instead of the bucks

For a long time now, I haven't written about development in the oil market due to the disappointment I felt, like many analysts who failed to see demand crises coming. We were all victims of the very high oil price, which made us reluctant to look at other sectors diligently.

Now that we're sober again, it's time to remember the oil market cannot be isolated from the rest of the economy. The idea of "decoupling" between oil demand and economic growth was false in the 1970s and 1980s as much as it is now. There is no economic growth without energy and when economic growth slows, so does oil demand. This is the Second Law of Thermodynamics, a law, which no one can ever change.

However, observers should not feel so guilty. What could we do if we depend entirely on research organisations such as the World Bank, OECD, IEA, EIA and the Organisation of the Petroleum Exporting Countries (Opec)? These organisations told us only a few weeks and days before the break of the financial crises that everything was fine, and that energy and oil demand was buoyant. Less than one month before the precipitous fall of oil prices in July 2008, Opec increased production to cool the rise in oil prices. Shortly afterwards, Opec decided to reduce production to arrest the slide of prices.

So far it has reduced its official production ceiling by 4.2 million barrels per day (bpd) from the September 2008 level of 29.045 million bpd. Compliance of members is reported to be close to 80 per cent in February 2009 thereby stabilising the price at $40 (Dh146.94) to $45 per barrel.

As we approach the second quarter, where oil demand usually drops by about 1- to 2 million barrels a day, Opec was expected to reduce production further in its last meeting in Vienna last week. However, Opec elected not to do so, instead pledging to abide by the allocated production level for all members until a further meeting planned for the end of May.

There's no doubt oil producers desire higher prices for their most important revenue-earning commodity to ensure economic development, and most importantly expansion of the oil industry itself to meet future demand. But faced with the current economic situation and the diplomatic pressure of the consuming countries, Opec selected to be part of the efforts to salvage the global economy from recession.

Let us hope this stand will be rewarded with understanding when further decisions to improve prices have to be taken.

- The writer is the former head of Energy Studies Department in Opec Secretariat.