The Supply Equation

The Oil Cartel Agrees to Raise Annual Output In a Move to Try to Ease Consumer Worries

The 145th OPEC Conference began on Sept. 11 in Vienna amidst tight security and the intense scrutiny of the media.

Mohammed bin Dhaen Al Hamli, Minister of Energy of the United Arab Emirates and President of the conference, introduced the conference’s pressing agenda: To assess the turbulence in international financial markets, the implications of climate change and conflicting economic data, and the need for greater investment in the oil and gas sectors.

After seven hours of long talks, Saudi Arabia finally persuaded OPEC to raise oil output to 500,000 barrels per day, starting Nov. 1.  This increase is believed to be a friendly gesture toward consuming countries and a sign of cooperation between producers and consumers.

“Our message to the consumer is that we care and that is why we have raised our production,” said Secretary General Abdullah Al Badri at a news conference.

The proposal to increase output was backed by Saudi Arabia and the Gulf Countries. Prior to the meeting, Libya, Algeria and Venezuela had been against the increase. Algerian Energy Minister Chakib Khelil recommended examining the market at upcoming meetings in November and December of this year, following the expected significant increase of one million barrels/day.

“Increasing the output will have a moderating effect,” said Paul Tossestti, a market analyst from PFC Strategic Advisors in Global Energy.

The state of the financial markets is a main concern for the cartel, as Secretary General Al Badri emphasized to journalists before the meeting. Analysts share this view.

“When you have turbulence you will have a spill-over effect into the real economy,” said Cornelia Meyer, an independent energy expert, “which means people would lose their jobs, consume less and drive less, and the demand for oil would go down.”

For consuming countries, the key issue is security of supply and whether or not OPEC will be able to expand output to meet demand. At the same time, oil producing countries want confirmation of demand and approximate estimates of worldwide usage for the next 15 to 20 years.

The meeting’s outcome demonstrated that OPEC recognizes the importance of maintaining oil market stability, and confirmed to consumers that it is prepared to respond to any changes that could threaten market equilibrium – an important goal of the conference for OPEC.

“The security of supply is one of the points that OPEC has the obligation to convince the market of,” said OPEC consultant Dr. Falih al-Jibury, “that it can provide the market with the oil it needs, when it needs it, and in the quantity and quality it requires.”

Reassuring signals were already visible in June, when Secretary General Al Badri explained at the Reuters Global Energy Summit in London that prices/barrel would not increase as much as was feared.

“I don’t think the price will go up to $80,” Al Badri said. “There are no fundamental problems in the market.”

This summer, oil prices reached record levels, trading as high as $78.77 a barrel in early August, and many analysts predict prices will reach $80 by year end. The International Energy Agency (IEA) has consistently called for increased output, saying jittery markets needed assurance that OPEC was paying attention to the global situation and was dedicated to maintaining prices at a reasonable level.

“So far, obviously the oil prices have only gone up […] and the price has to come down,” said OPEC consultant Dr. al-Jibury. “OPEC is trying in its way to satisfy the market and to prove to the market that it can provide it with what it needs.”

Algeria’s Energy Minister Chekib Khelil was elected president of the conference for a one-year term that begins in Jan. 2008, with Desidério da Graça Verissímo e Costa of Angola as Alternate President.

Conference proceedings are expected to be published on Oct. 11, following ratification by member countries. The next OPEC summit will take place in Riyadh, Saudi Arabia Nov. 17-18. OPEC will reconvene for its Ordinary Meeting in Vienna on Mar. 5 2008.

The twelve OPEC member countries are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela and Angola, who joined the organization in 2007. Non-OPEC countries Egypt, Oman, Mexico, and Russia also attended the conference.

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