OPEC meets tomorrow and the betting is that it will do little to alter the cartel's output. With prices falling, the group, which provides about 40 percent of the world's petroleum, sees little need to boost production. Yet prices are still so high that it would be politically difficult for OPEC's mightiest member, Saudi Arabia, to heed the calls of the group's price hawks to cut production much to keep prices comfortably over $100 a barrel.
There is a surreal aspect to the entire debate. Less than two years ago, OPEC cut production by 1.5 million barrels a day to keep prices from slipping below $55 a barrel. Now Venezuela and Iran want the group to keep prices from dropping below $100 a barrel. They have tasted what $145-a-barrel oil tastes like just in July, and they thought it was good.
But the fact of the matter is that it's hard to imagine that the world can afford these prices for a protracted period of time. In the first seven months of the year, OPEC countries have received more revenues than they did all of last year. As many economists in the United States have noted, this is inflating the U.S. trade deficit, undercutting the U.S. dollar and sapping the economy of money that would otherwise have eased spending burdens of households or gone into badly needed savings and investment.
Saudi Arabia is the key player at OPEC meetings. It has the most latitude to increase, or cut, production. It raised output in recent months, pumping an extra half million barrels a day or so. Many Saudi policy makers have long fretted that high prices could force consuming countries to find alternatives ranging from biofuels to electric cars. In OPEC meetings, this is called "demand destruction." Or as one-time Saudi oil minister Zaki Yamani famously said, the stone age didn't end because the world ran out of stones, a reference to the possibility that people might stop using oil even if oil were still around. More recently, the Saudi King Abdullah said he would like to see prices come down under $100 a barrel. They aren't far off now, closing Friday at $106, down almost 30 percent from the $147 high in early July.
Yet perspectives have changed in OPEC and the gap between pricing doves and hawks has narrowed. Even Saudi oil officials see burgeoning demand in places like China and India as helping set a floor to world demand, and they too have seen that the world can tolerate much higher oil prices than anyone thought sustainable just a couple of years, or a few months ago.
News reports have said that Saudi Arabia, which boosted output over the summer, is already trimming back slightly. But slight actions are probably all we'll see.
There were plenty of hints about OPEC's outlook in a report issued last month. It suggested that the organization was leaning more toward trimming output than raising it. "Risks to the outlook for the world oil market appear to be on the downside," the group said. "With current OPEC production well above the expected demand for OPEC crude, there is potential for a sharp build in crude oil inventories."
Recognizing weak demand in industrialized countries, the group's analysts said that "The demand for OPEC crude in 2008 is estimated to average 32.1 million barrels a day, a decline of 0.1 million barrels a day over the previous year. In 2009, the demand for OPEC crude is expected to average 31.3 million barrels a day or 0.7 million barrels a day lower than in 2008."
Forecasts among U.S. analysts continue to be all over the map. Some forecast year end prices around $80 or $90 a barrel. Others say oil prices will bounce back to $150 or so. For now, the ball is in the Saudi royal court.