Oil market needs balance
Updated: 2007-11-19 07:15
As global oil is rocketing to $100 a barrel, the oil-exporting cartel, Organization of Petroleum Exporting Countries (OPEC), has reached a consensus that prices should be stabilized. But they hold different views on how high is too high.
Venezuelan President Hugo Chavez hit media headlines by saying $100 a barrel was a "fair" price when he delivered a speech on Saturday to kick off the weekend gathering of the Third OPEC Summit. Chavez even warned the price of oil per barrel could surpass $200, if regional tension goes from bad to worse.
This differs from OPEC's mainstream judgment that the demand-supply fundamentals of oil remain unchanged and the price should drop despite the forecasts of some industry gurus it will surpass $100 this winter mainly because of growing demand and market speculation.
However, Chavez agreed with the prevailing view among OPEC members that it was necessary to ensure the price of oil remained stable through steady supply and by cooperating with oil importing countries.
Basic market rules will test fairness of the $100 a barrel.
High prices encourage conservation measures and investment in alternative energy resources, which reduces demand for crude. But they also slow the economies of consuming nations by increasing costs for companies and reducing consumer spending, which is harmful to world economic growth.
And historically, high crude oil prices in the past have led to recessionary prices, which depressed demand and a crash in prices.
Fortunately, OPEC has decided to take measures to prevent such a scenario. It plans a $150 billion investment to increase capacity from now until 2015, which will lead to an increase in production of 25 million barrels a day.
Apart from the steady production capacity increase, the international community should take measures to prevent volatility in oil prices. However, it seems that there is growing difficulty in stabilizing the oil market now as more speculative forces have entered the profit-making industry.
Since the last OPEC summit in Caracas in 2000, oil pricing has changed significantly, particularly with regard to the increased volume of trade on the futures markets. Hedge funds and other investment vehicles that Pierre Terzian, head of the Paris-based consulting company Petro Strategies, collectively referred to as "liquidity providers" had grown from 0.2 percent of trades on the Intercontinental Exchange in 2002 to 32 percent by 2006. These liquidity providers have not only expanded the business chains of the oil industry but also increased the volatility in oil prices.
Amid growing risks in the international financial market and uncertainties in global economies, the international community should join hands and take legislative action to better balance the market.
(China Daily 11/19/2007 page4)
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