ARCHIVE

Upward Pressure On Oil Prices Continues To Threaten Global Economic Recovery

By Marc Davis, Managing Editor
January, 2003

With surging oil prices threatening to destabilize the fragile global economic recovery, members of the Organization of the Petroleum Exporting Countries (OPEC) are now moving to ease the pressure. OPEC has indicated that it will increase production by one million to two million barrels a day (bpd) by mid January.

OPEC has decided to pump more oil because the general strike in Venezuela has brought that country's oil production to a virtual standstill and exports have shrunk to a trickle. Already, the cartel has raised production by 1.3 million bpd to counter soaring oil prices that stemmed in part from lost output in member state Venezuela. The strike has been in effect since December 02, 2002 and there is no end in sight.

In March 2000, OPEC agreed to a price band mechanism under which the cartel would raise output by 500,000 bpd if prices remained above the range of U.S. $22 to U.S. $28 for more than 20 consecutive trading days.

Regardless, oil prices are still about 45 percent higher than a year ago, not just because of the Venezuelan standoff, but also because of a more troublesome fear that an American attack on Iraq could disrupt oil supplies from the Persian Gulf.

However, despite OPEC's good intentions regarding Venezuela, oil industry analysts and traders are saying that any additional oil exports will not reach the United States soon. As a result, they expect the price of oil in the United States to remain above $30 a barrel - a level that could further damage an already-weak economic recovery.

"The global oil markets are losing two to three million barrels a day because of Venezuela. So an increase by OPEC of about 1.5 million barrels day is still a far cry from what the markets need," says Philip J. Flynn, senior energy analyst at Alaron, a Chicago futures brokerage. "It's a classic case of OPEC trying to jawbone the market down. And the market is believing it, because the market is a very, very fickle animal right now."

Also, the prospect of the U.S. being militarily and politically primed to launch an attack against Iraq by the end of January will surely see oil remain in its upper trading range for the foreseeable future. This scenario is not likely to be mitigated by OPEC's pledge in December to ensure normal deliveries of oil in the event of war in Iraq. This may not be possible. Some prominent political analysts fear that Saddam Hussein may punish OPEC by destabilizing Middle Eastern oil exports. In the past, he has succeeded in spiking oil prices by periodically withholding Iraqi oil. This time around, he may resort to a 'scorched earth' strategy (akin to Hitler's final acts of defiance in Russia and Germany in WW2). Indeed, if he feels he is going to be deposed, he may bomb neighboring Kuwait's oil fields, as well as destroy his own nation's industrial infrastructure, including Iraq's own oil refineries. That way, he could blame the United States for the ensuing economic devastation (and famine) that his people would surely suffer.

As events unfold, investors can only hope and pray that a possible protracted (and very messy) war in Iraq, along with inflated oil prices, do not precipitate a much feared 'double dip recession' in the U.S. Indeed, such a situation could dash George W. Bush's hopes for reelection. After all, that's what happened a decade ago when Bush Senior lost his seat of power from focusing on his nemesis, Saddam Hussein, more than on the recovering U.S. economy. Remember the old saying that goes: Those who do not pay attention to history are doomed to repeat it.

Featured
Oil & Gas Company

 

Oil and gas news