– Oil Crisis...is the world about to be shocked

OPEC increase will not answer global oil worries
DAVID BLACK - DEPUTY BUSINESS EDITOR

OPEC - the Organisation of Petroleum Exporting Countries - yesterday agreed to increase its daily production quota by half a million barrels in an effort to cool high crude costs and head off a further dampening of the global economy.

After meeting in Vienna, it said its output ceiling will rise from 27.5 million barrels to 28 million at the end of this month, and that it will consider another 500,000-barrel increase later this year if prices don't fall.

The group said it also agreed on a new, larger oil basket - the combination of crude oils that OPEC uses as its price gauge. The basket will now increase from seven types of crude to 11.

OPEC ministers then queued up for microphones to broadcast to the world just how sympathetic they were to the plight of the big oil consuming economies; how "on-side" they were when it came to ensuring supply stayed several steps ahead of demand, and how hard they were working to drive crude prices down and kick-start growth around the world.

All the figures were big and all the noises positive. But all the reaction was totally flat.

The announcement failed to move global-economy watchers, and analysts around the world dismissed it as purely symbolic. Crude prices have been hovering around $55 per barrel, despite all OPEC's efforts to date to get the figure back below $50. Hence the general scepticism that OPEC's latest solution - lifting the quota ceiling - would give any real relief to consumers or ease market fears of a tightening supply. The reason, they observed, was simple. OPEC is already pumping more than the level to which the quota would be raised.

Yesterday, oil markets held their gains. Light, sweet crude for July delivery rose 64 cents to $55.64 a barrel on the New York Mercantile Exchange. On the International Petroleum Exchange, July Brent was up 82 cents to $54.55 a barrel, with no sign that OPEC's move was likely to do anything to ease market fears of tightening oil supplies.

"The quotas have become meaningless," said Julian Lee, an analyst at the Centre for Global Energy Studies, a London-based consulting company founded by former Saudi oil minister Sheikh Zaki Yamani. "The only likely way out of $50 to $55 a barrel oil is a dramatic slowdown in oil demand. There's no new source of supply that's going to come on stream."

Away from the headlines, and the megaphone oil diplomacy, when it comes to the minutiae of what can and cannot be done, OPEC is willing to admit its current impotence. While its intentions are only to help, its options are limited.

Including Iraq, which is not bound by the quota, OPEC is currently churning out close to 30 million barrels a day, or about 35 per cent of current global demand. The group needs to increase supply at the end of July or early August to meet demand in the fourth quarter, which is projected at 30.5 million barrels a day.

OPEC president Sheik Ahmed Fahd Al Ahmed Al Sabah said: "There is enough supply in the market. We are confident we can reach the fourth quarter with enough supply."

So what's the problem? William Dudley, chief US economist at Goldman Sachs, explained: "It's not just a question of crude supplies, it's also a question of refining capacity. There are limits to what OPEC can do to bring down prices."

Iran's oil minister, Bijan Namdar Zangeneh, echoed his qualms, conceding that raising the ceiling will have little impact on crude prices. "If you want to be realistic, it means no change in the real situation."

"The world faces no shortage of supply of oil," Qatar's oil minister, Abdullah bin Hamad al-Attiyah, said after the Vienna meeting. "Its concerns are about products, like gasoline, and diesel. There is a shortage of production of these because of the limitations in refineries. That is the problem that everybody should be paying attention to. How can we solve it? OPEC has no solution."

The facts back al-Attiyah up. No new refineries have been built in the past 30 years in the US and in the last decade in Europe. And environmental concern and local opposition to new plants mean there are no plans to rectify the shortfall.

The consequences are already being felt. The International Monetary Fund forecasts world economic growth will slow to 4.3 per cent in 2005, from 5.1 per cent in 2004, and G8 finance ministers last weekend said higher energy costs are a "significant concern".

And it's not only the unexpected the industry is worried about - another 9/11 or a war breaking out in any of a dozen or more potential global hotspots.

The hurricane season is about to begin in the Caribbean. Last year, refineries on the US Gulf coast experienced shutdowns and lesser disruptions to production. This year will be no different, and possibly worse.

Goldman Sachs has already issued a briefing note predicting disruption in supplies may send oil to $105 a barrel.

As OPEC's al-Sabah told yesterday's meeting, markets are sufficiently supplied: it is the lack of spare refining capacity that is driving soaring prices.

"We have to trace the root of the problem, and that is whether refineries can accommodate further increases in oil production by processing lower-quality crude," al Sabah said. "The main problem now is the refineries."

NOTHING IS AS SIMPLE AS IT LOOKS

OPEC currently has two million barrels a day of spare capacity - four times the announced increase in production quotas. It has also consistently said it is "happy" to allow global oil inventories - the amount of oil consumer countries store against unexpected increases in domestic demand - to increase.

The US, in particular, has pumped up its crude inventories close to a six-year high to ensure refineries have enough oil to turn into fuel for the fourth quarter, when demand peaks. But some of that crude is difficult to process into jet fuel, petrol for cars and heating oil because of its high content of sulphur.

So, even if the extra capacity is pumped, backlogs at refineries already working to capacity mean demand could overtake supply.
 

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