OPEC losing its bite

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Fact or fiction: between them, the all-powerful leaders of OPEC hold the power to dictate the cost of crude oil on the world markets?

In recent weeks, it's a question few people seem clear on. And, despite the Organisation of Petroleum Exporting Countries' (OPEC) decision to increase oil output, prices have continued to rise with US crude breaking the US$80 mark for the first time.

Each time OPEC acts the reverse seems to happen," says energy analyst Simon Wardell of the US-based economic and financial analysis company, Global Insight. "The OPEC meeting itself always creates tension." In a market where the spectre of the US$100 barrel of oil has surfaced, it seems that the consequences of this tension are enough to defy logic. Indeed, in a market where consumption and demand has risen with prices in recent months, common sense theories of market dynamics do not always prevail.

So, what does this mean for oil consumers? Are the impacts of resource depletion and the ever-increasing demand for energy supplies converging to push oil prices to an unsustainable level that could threaten the global economy? And what role will OPEC be able to play over the coming months?

"We're certainly getting closer" to the US$100 barrel says Wardell, but "we're not forecasting reaching it at the moment. Unless you have a major disruption of course, which is entirely possible," he adds. "We think we're reaching a peak now," Wardell continues, with the convergence of three factors forcing prices to their current highs.

On top of the tension generated by the OPEC meeting itself "a bad inventory report from the US and a tight situation expected in the fourth quarter have come together to see prices pushed up," Wardell explains. And while there is "nothing on the horizon that will act to push up prices further, there is bound to be some volatility."

On Tuesday 11 September OPEC agreed to raise oil output, the pressure of near-record oil prices forcing their hand. Their decision marked the first time the organisation had taken such a measure in over a year.

Yet despite OPEC's decision oil prices continued to rise. In the days following OPEC's announcement they broke the US$80 mark, and early last week US crude futures reached a record US$81.24 a barrel. Oil prices have risen 30% since the beginning of the year, and and they are now four times higher than their 2002 level. Only a day after OPEC announced its decision, the US administration's Energy Information Administration's (EIA) weekly petroleum status report recorded a decline in US commercial crude inventories. Not only was the drop-off of 7.1 million barrels in these reserves for the week ending 7 September larger than anticipated, but it was accompanied by a fall in US gasoline stocks of 0.7 million barrels over the same period. Goldman Sachs expects "inventories to draw to critical levels this winter," according to its latest Energy Watch report released on 17 September.

Recent EIA data has also showed that global liquid fuels production in August was almost a million barrels a day lower then the same period in 2006. And the International Energy Agency has forecasted an oil ‘supply crunch,' expected to hit by 2012.

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