Market conditions make oil price stability impossible

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Oil & Gas

Market conditions make oil price stability impossible

By Stanley Carvalho Abu Dhabi - It is unfair to blame Opec for high oil prices, but price stability cannot be achieved under present circumstances, a senior Abu Dhabi National Oil Co (Adnoc) executive said. Moreover, the oil importing countries have no right to pressure producers to sell oil cheaply, he said during a discussion on oil price stability at an energy conference which concluded yesterday. "No matter what course of action is taken, Opec would incur the blame," said Roy Jordan, marketing advisor in the Adnoc Marketing and Refining Directorate. He questioned whether it was reasonable for Opec members to be forced to sell at a low price.

In the past decade the Opec basket price has been approximately $18 a barrel except during the Gulf War and the recent price spiral. "Due to the high level of taxation in the importing countries (approximately 70 per cent), consumer prices bear no relationship to the prices oil exporters are paid. The oil importers want to purchase oil at a low price but are not prepared to lower consumer prices," he said.

Jordan maintained that the current situation has led to speculation and risk management. For example, on the futures market the amount traded each day on paper is more than three times the amount of oil actually produced.

"Psychology also plays a role in market perceptions, which in turn affects the price of oil." He denied that Opec is a cartel because by definition a cartel is a group that tries to limit competition and fix prices. But Opec has stimulated competition; moreover, it is not possible to fix oil prices.

To achieve price stability under current circumstances, he suggested the creation of an organisation similar to the World Trade Organisation (WTO), complete with a rule book and enforceable sanctions against non-compliant members.

Price stability is a new concept in the oil industry, he said, noting that at the recent Opec summit meeting, the issue of stable prices and markets was high on the agenda. Their final communique stated that "fair and stable prices for the consumer" was important for both consumers and producers, he said.

Earlier, Michael Lynch, vice-president of Global Oil at WEFA Energy and a research affiliate at the Massachusetts Institute of Technology Centre for International Studies, said that as a group, Opec is concerned about competition but its weakness is its lack of enforcement powers, which leads to market volatility.

Short-term volatility is unavoidable since it almost impossible to predict the short-term future of the market, he said, and prices are unstable because the market itself is difficult to stabilise.

http://www.gulf-news.com/10102000/BUSINESS/business9.htm

-- Martin Thompson (mthom1927@aol.com), October 10, 2000


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