Opec to maintain current output

Source: Opec set to keep unchanged output

Opec will deny pressure from oil-consuming countries to increase production to offset inflationary pressures, attributing the recent record highs to price speculation rather than increased demand. Ministers of the oil producers’ cartel insist that there is no need to increase supplies, warning that the impending economic deterioration could force a cut later this year. Although prices soared to an unprecedented $100.69 per barrel earlier this year, Opec ministers insist that this peak is merely the result of Wall Street investors pouring money into the commodity market. Said one delegate, “Crude oil is the new gold. Investors are using crude oil as a perceived safe heaven and as a hedge against the weakening of the US dollar.” Opec president Chakib Khelil said “There is not demand for more oil and consequently I expect that production (levels) will be maintained. Additionally, Opec delegates offered that Saudi Arabia, the cartel’s de facto leader, shares the growing consensus that output levels should remain unchanged, although the kingdom is concerned about the impact of high oil prices on consuming countries. Saudi oil minister Ali Naimi insisted that “if there is a need to take an action we would take it. But the current situation shows that all market fundamentals are sound.” Additionally, “supply and demand are equal, and global reserves are fine.”

Not all consuming countries are content with maintaining current outputs. US President George Bush personally called on Riyadh to increase its oil supplies, arguing that record energy prices are only exacerbating the current economic crisis.
Opec delegates echoed the concerns that inventories are too low, but pointed out that gasoline stocks remain healthy. Additionally, the cartel’s own analyses insist that inventories will recover sharply in the second quarter due to lower season demand as the northern hemisphere’s winter comes to an end. Opec forecasts that it would need to supply approximately 31.99 barrels a day this quarter to balance the market but only 30.5 barrels per day in the second quarter. Current total output is 31.98 barrels per day. Opec plans to review its decision to maintain current output at its March 5th meeting. At this meeting, some countries, such as Venezuela, will propose the idea to cut production if the US economy falls into a recession.

Questions for Discussion
1. Is Opec making the right decision in maintaining current production rates?
2. Is the economic strain resulting from higher energy prices likely to considerably accelerate the economic decline?