Dar Al Hayat - 16/4/2006

OPEC officials generally define the targeted oil price as being fair and just for both producers and consumers. Previously viewed as a mere rhetoric, this slogan is now enshrined in the recent "OPEC Long-Term Strategy," particularly on page 18 thereof, where OPEC stated, "There is a need to support fair and stable prices." In this sense, these prices must provide the producer with reasonable revenues, while safeguarding the consumers' interests.

Nonetheless, this question is away from being definitively settled. For the targeted fair price continuously spirals upwards every time the receipts of the oil-producing countries mount.

Back in 1998, oil prices collapsed when OPEC oddly decided in Jakarta to boost its production by 10%. In the meantime, the demand for oil crashed in Asia following the financial-economic crisis. Hence, prices fell to less than $10 a barrel though OPEC's stated goal was to regain its pre-crash price levels of $18 a barrel.

Early this decade, the organization set a fixed price ranging between a floor of $22 a barrel and a ceiling of $28 a barrel - to be preserved through the following mechanism: if prices outstrip the fixed ceiling for some time, OPEC must boost its production by half million barrels a day. But if prices drop below the floor, then the organization must, in this case, drop its output by the same proportion.

In fact, accordingly to the then published statements, for the price to be fair, it must hover around $25 a barrel. But when OPEC officials met early 2004 in Algeria, and though the market price outstripped at that time $28, they decided, contrarily to the aforementioned mechanism, to curb production by 10%. Accordingly, output dropped by some half million barrels per day. The oil market strongly reacted to this development, mainly because of the unexpectedly mounting consumption in China and the United States.

In this respect, OPEC has apparently overlooked its fair price, initially set at $25 before hitting 45 then 50 and now $60. In this regard, an OPEC minister said to "Al-Hayat" on April 7 that the current prices of $60 are "reasonable owing to the investment cost." In the same vein, the OPEC president had previously stated that the organization would preserve its output ceiling and would only act if prices dropped significantly below the current level. In other words, to the organization, the current price is indeed fair.

Obviously, neither economics nor the market economy refers to the so-called fair, profitable, or reasonable price or any other cosmetic attribute. Either the price is affected by the current and expected supply and demand changes or it is deemed monopolistic to attain economic or commercial goals, especially as concerns the targeted quota fixed for OPEC countries in the global oil and energy market. At this, no alternative would be possibly developed. For this reason, the organization must adopt clear attainable strategic goals to control, thanks to the surplus productive capacities, production and to establish a price system deterring investment in the alternative.

In truth, the ambiguous oil pricing does not serve OPEC's long-term objectives. Some fear today that oil exports would be hindered given the geopolitical conditions in Iraq, Nigeria, and Venezuela. Even more, if OPEC fails to adopt a pricing policy based on realistic and understandable bases, then it will alarm even further the consuming countries currently concerned by energy.

So, based on the following maxim: he who does not read history is doomed to commit the same errors, the prevailing conditions do not serve OPEC's long-term interests. In the 70s, the price shocks have, as we all remember, undermined the organization's capacity to meet the global energy needs.

As proof, let's compare between Western Europe and Japan's former dependence on the Middle East oil to meet their energy needs and the huge decline in such dependence during the past decades. In the 70s for instance, the Arab oil represented 41% of the gross energy consumption in Europe compared with less than 10% nowadays. But in Japan, the share of the Arab oil in the total oil basket amounted to 63% in the 70s, down to 38% now.

So, does OPEC want to apply the same trend in other parts of the world? President George Bush have indeed sounded the alarm in his "State of the Union" Address last January when he called for curbing the addiction to oil, especially the one exported from the Gulf. This is a glaring example of the expected changes in energy to the detriment of the Gulf oil.