OPEC Countries Optimistic After Meeting

Sources: Bloomberg, OPEC Holds Production Quotas Steady, Predicting Demand Recovery; Bloomberg, Saudi Arabian Oil Minister Naimi Says Oil to Reach $75 a Barrel; Forbes, OPEC Gets Overexcited; Boston Globe, OPEC News Sends Oil to Six-Month High; Financial Times, Oil-Rich Region Faces Gas Shortfall; Financial Times, Opinion: Spending Sees Gulf Through Crisis

At a meeting in Vienna on Thursday, OPEC countries decided to maintain their oil production quota at 24.845 million barrels a day, hoping for a recovery in global demand late in the year. Despite a current oversupply in oil, representatives were concerned that reducing output would disrupt the current global recovery. Saudi oil minister Ali al-Naimi noted before the meeting that his goal is to keep the price of oil between $75 and $80 a barrel, and that he expects the price to rise to $75 based on rising global demand, which is in his opinion ideal for the world economy. For this reason, he recommended maintaining the output quota.

However, despite these predictions and assurances, the production quotas appear to have limited meaning when OPEC countries are regularly exceeding them. In April, despite an earlier pledge to cut production, OPEC countries actually increased their production, moving away from their targets as global prices recovered. Saudi Arabia is the only country that complied fully with the quota. Furthermore, despite demand recovery, al-Naimi noted that at present the only significant demand is coming from Asia. Low U.S. demand means oversupply—oil being produced but not exported.

After the OPEC meeting, the price rose to a six-month high, at a little over $65 over a barrel for July delivery. OPEC is hoping for the price to maintain at $60 to $70 through the end of the year. Despite al-Naimi's hopes, analysts warn that price improvement happening too quickly could jeopardize the global recovery, and that $70 to $80 oil would particularly harm the recovery of developed economies.

The problem is that recovery leads to higher demand for oil, which then quickly leads to higher prices since supplies of oil are fixed in the short-term. However, right now there is an oversupply of oil already, and if prices pass $80 analysts expect that OPEC will increase its production quota, hoping to cash in.

Despite the plummet in oil prices during the global crisis, the Middle East is a region well-placed to withstand it. It has experienced higher growth during the crisis than other oil-exporting regions, including Latin America and Eastern Europe. Though real GDP has expanded less during the crisis than in recent years, it is still expanding, and the Middle East and North Africa have been the most productive regions in the world during the global crisis.

Reasons for their ability to weather the crisis include limited exposure to toxic assets in the banking sector, limited exposure to declining exports and withdrawal of capital, timely monetary easing, the timely provision of liquidity and capital by national governments, and a high level of government spending from the reserves built up in the years of astronomical oil prices. Spending is especially crucial to the global economy, because it helps to sustain global demand and also helps poorer neighboring countries that do not export oil, because their nationals work in the exporting countries and send home remittances. Though this level of spending will create a deficit in countries that use it to escape the crisis, the size of the deficit varies.

One of the stranger problems emerging in the region is an expected future gas shortage, caused by excessive focus on oil production without attention to the need for natural gas. Quickly growing economies need gas to run, and the Arab Gulf states will be in trouble without it. Though both Qatar and Iran have their own gas supplies, there is no guarantee that they will provide gas to their neighbors, so this will be a problem to keep an eye on as recovery occurs.

Questions:

1) Do you think that the strategy of maintaining production quotas in expectation of rising demand is wise, or should OPEC countries cut production in order to address the current supply glut?
2) Do you think that these OPEC targets have any real meaning, considering individual countries' tendency to fall short, or is significant (but not total) compliance enough?
3) What do you think the global economy will look like post-recovery? Do you expect the Middle East to take a different economic role? A different political role? A different relationship with the United States?