Aljazeera.net: The price of a barrel of oil reached $49.40 at one point in mid-August, with some analysts speculating that it would eventually breach $50. Last week, Venezuela's President Hugo Chavez suggested that the price might well reach $100 soon. What is fuelling the upsurge in oil prices?
Walid Khadduri: It is futile to speculate about how high or low oil prices will be in the near future. It all depends on supply and demand, as well as industrial and political factors. The current rise in prices is attributed to the high demand for energy as a result of the buoyancy in the world economy, particularly in the US and China.
Moreover, there have been almost weekly incidents that have disrupted supplies: sabotage of pipelines in Iraq, terrorist attacks in Saudi Arabia, the Yukos affairs and the disruption of exports to China, for example. Natural disasters such as the hurricanes in the US Gulf of Mexico and fires at refineries also play a role.
A move to dismantle Russia's
Yukos may disrupt global prices
What we have today is high demand coupled with disturbing political factors in the Middle East and elsewhere, as well as bottlenecks in the oil industry whether in the upstream or the downstream with refineries and shipping.
However, despite all these factors, the fundamentals do not indicate that price should be this high. There are no physical shortages today, and companies are being given what they ask for. What is keeping prices high today is the fear that there will be shortages in the future, for one reason or another.
Many analysts have brushed off any hopes of a plunge in oil prices with or without OPEC. Some OPEC members have expressed the hopes that the price of a barrel would settle at $22-28, but market factors seem to indicate that is unachievable. Is OPEC out of touch with market realities or are they just paying lip service?
OPEC has not lost touch with reality. The reason the organisation still holds to the price band of $22-28 a barrel, OPEC basket price, despite current high prices, is the fact that it is not sure yet to what level it should change it to. As it is not clear yet where the new price level will settle at, and be sustained for a reasonable period of time, OPEC thinks that it is better to retain the price band as it is until the market can sustain a new price level.
In fact, analysts are making too much of a deal of the price band. What OPEC is focusing on is providing the market with what it needs of crude oil. This is the paramount factor in its strategy and it is meeting that challenge.
The second priority for OPEC is to retain a spare production capacity for emergencies, whether they are of an industrial or political nature. Accordingly, we have around 1-1.5 million bpd of spare capacity, mainly in Saudi Arabia. This is not much, but that is what is available at the present time.
OPEC has not yet changed its $22-
28 a barrel price band
Of course, if it is necessary, the industrial countries can use their strategic reserves in times of emergency.
With political and military instability in Iraq, is it likely we will ever see an end to attacks on the oil infrastructure? Is there a reason that almost on a daily basis we see attacks on oil pipelines? Can Iraq's oil infrastructure be protected?
Oil prices are determined by market forces, not the OPEC price band. OPEC member countries price their crude in relevance to the daily evolution in Brent and WTI prices in the North Sea and the US, respectively. The function of the price band is to assist OPEC member states attain a reference price for their revenues. It is not a market reference.
The Iraqi Ministry of Oil is doing its best to protect the country's infrastructure from sabotage and destruction. Unfortunately, the company that was awarded the security contract in 2003 was unable to draw the right plans for this big challenge.
Meanwhile, Iraqi oil production and exports will continue to face destruction as long as the country lacks security. The one is the function of the other. It is not difficult to target pipelines as there are about 6000km of lines throughout the country.
Iraqi pipelines are targeted on a
nearly daily basis