Biting the Hand

Remember the adage about the dog which bit the hand that fed it? There’s a chance it may apply very directly to the opec nations.

Two years ago in a fit of unaccustomed unity, the Organization of Petroleum Exporting Countries adopted a strategy of coordinated production control. Since then world oil prices have more than tripled. But opec really had not thought clearly through to the outcome of their target price range of us$22-28 per barrel. It has produced a significant profit incentive to many non-opec countries and enterprises to bring oil reserves into production at production costs made suddenly viable by the opec price hike. The result is a loss of market share from opec to non-opec oil-producing countries.

A rash of development has taken place in the North Sea fields, the Caspian basin and the deep-water fields in the Gulf of Mexico and offshore Africa. Hence opec is in a catch-22: If they keep their prices above us$22 per barrel, the non-opec producing countries will simply increase output. This will put a real strain on the capacity for opec to hold its ranks in their production strategy. Already some opec members have exceeded agreed quotas during the recent price hikes. The chances are, if prices plummet, they will “cheat even more,” as Stratfor Systems recently reported. This all has a sense of déjà vu attached to it.

“Moreover, in what amounts to a rerun of the early 1980s, there are few signs that opec members are using their revenues responsibly or productively. Instead, many opec countries are showing signs of ‘Dutch Disease,’ including overvalued currencies, soaring imports, falling non-oil exports, and inflated balance of payments surpluses—all without any corresponding improvement in living standards” (www.stratfor.com, Feb. 11).

It’s a simple equation. It gets back to the two prime forces that drive the market—fear and greed. This time, it seems, as Stratfor aptly puts it, “Greed got the better of opec” (ibid.).