OPEC PINES AND LUSTS FOR "BLACK GOLD…"

The meeting of the Organization of Petroleum Exporting Countries in Vienna in early June demonstrated that OPEC is in deep crisis: the oil organization has lost its ability to influence international oil prices.

Before the Vienna meeting, experts and organization members were saying that the OPEC countries planned to increase oil production quotas by 1.5 million barrels a day - for the first time since 2009.

The well-justified decision was self-evident after the destabilization of the situation in Libya resulted in decreased oil production in the region, which required OPEC's reaction. A representative of one of the Gulf countries was quoted as saying this, and even concrete numbers were mentioned: the quota was to be raised by 1.5 million barrels.

The OPEC crisis

Let us note that Libya, which is currently going through a profound political crisis, is the "richest African country" in terms of its oil reserves (about 42 billion barrels). According to statistics, before the conflict, Libya accounted for 6-8% of OPEC oil production (1.6-2 million barrels a day) and about 2% of the international exports.

In the assessment of the International Energy Agency, supplies from other OPEC member countries also decreased because of the military operations in Libya - by 1.3 million barrels a day. To compensate for the undersupply of Libyan oil to the market, the cartel intended to increase the quota, although its members voiced different opinions, often mutually contradictory. For example, before the OPEC meeting in Vienna, Iran's representative in the organization, Muhammad-Ali Khatibi, said that there was no need to increase the quota at present. It turned out later that his point of view had prevailed in the meeting.

Incidentally, the OPEC quota has remained unchanged since early 2009, when it was decreased by 4.2 million barrels a day (about 5% of the world's total daily consumption). In 2009, the issue of increasing the quota was raised, but the decision was never made: OPEC members said that they were satisfied with the situation that had taken shape and the going price (about $70 per barrel at that time).

New surprises came in 2011. Zaki Yamani, former Saudi oil minister, said that because of the threat of political instability, oil prices might skyrocket to $200-$300 per barrel, which would pose a real threat to the international economy. Governments of many countries are still struggling to deal with the consequences of the global economic crisis, and now the threat of a new crisis is in the offing, which, according to experts, might last even longer.

The International Energy Agency warned as early as April that, if oil prices remain high, they will have a negative effect on the leading economies, which will take longer to recover from the crisis. The oil price of $120 per barrel might trigger a global economic crisis comparable in extent to the 2008 crisis. The increase in oil production quota is supposed to mitigate these risks.

However, frankly speaking, the psychological factor of making the very decision to increase the OPEC quota, not the increased production itself, might be more important in cutting oil prices. OPEC member countries could show that they keep abreast of developments in the oil market and promptly react to changing demand, as stated in the document which describes the purpose of the organization.

But the meeting in Vienna turned out to be fruitless. Members of the organization of oil exporter countries failed to agree on increasing the production of crude oil.

This lack of understanding among the organization members is nothing new: Indonesia disagreed with OPEC policy and withdrew from the cartel in 2008. Later, Saudi Arabia announced that it intended to increase oil production independently. After that, Kuwait made the same statement.

All this leads to the opinion that OPEC can no longer control oil prices. Representatives of the organization openly say this.

No oil price hike

At the same time, the International Energy Agency (IEA) intends to cut oil prices by tapping its strategic reserve - the member countries of the agency will allocate 60 billion barrels of oil from strategic reserves to make up for the decreased oil supply from Libya and push down oil prices. The agency intends to supply 2 million barrels of oil a day to the oil market for 30 days.

The IEA decided to take the unprecedented step to prevent a new global economic crisis. The IEA has drawn from the strategic reserves only twice since it was created in 1974. The first time was during the Gulf war in 1991, and then in 2005, when because of the devastating Katrina hurricane, oil production was suspended at many offshore installations in the Gulf of Mexico.

According to the IEA estimates, the shortage of oil supply because of the military operations in Libya was 132 million barrels as of 31 May.

The total amount of reserves of all the IEA member countries is 4.1 billion barrels, of which about 1.6 billion barrels are government reserves for emergencies.

At present, the futures prices for WTI crude in August exceed $90 per barrel. The Brent price for August is about $108 per barrel.

Created during the 1973-1974 oil crisis, the IEA is a governmental energy policy consulting organization with 28 member countries. The IEA is an autonomous body within the Organization for Economic Cooperation and Development.

Does OPEC have a future?

Analysts' opinions about the future of OPEC are diametrically opposite. However, they coincide that the OPEC member countries are unlikely to maintain the oil production quota or a clear-cut common policy for a long time.

The latest "failed" meeting of the cartel in Vienna, where the member countries failed to reach an agreement for the first time in the last 20 years, is cited as an example. Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi described the get-together as "one of the worst meetings ever".

The inability of OPEC to reach a consensus is a violation of the fundamental rules of OPEC and signifies the end of the system of quotas, one of the delegates said.

"We will probably see further hikes in oil prices because future oil supply volumes are increasingly uncertain. There are doubts about OPEC's readiness to make up for the shortages in oil supply," Ben Westmore, economist in charge of mining and energy sector analysis from the Reserve Bank of Australia, said.

However, despite the current differences, the OPEC members will earn more than $1 trillion in 2011 for the first time in history. As oil prices rise, revenues of the OPEC member countries are also increasing. According to the published forecasts of British government specialists, this year the revenues of OPEC members are to increase by 30% and exceed $1 trillion for the first time in history. Experts calculated this using an average oil price of $111 per barrel.

Many specialists also believe that different scenarios of development of the global economy will also have an effect on the future of OPEC. Although the number of supporters of the idea of using alternative sources of energy is increasing, hydrocarbons, and particularly oil, will remain dominant on the market for decades to come.

If not so long ago the developed economic nations increasingly leaned toward the idea of developing nuclear energy, the earthquake and tsunami in Japan forced them to revise this idea. In particular, Germany decided to stop using nuclear power stations. This means that Germany will increase its presence on the oil and gas market.

At any rate, analysts keep making forecasts that oil will remain the main energy resource for the near future, which is bound to show in its price. And until oil's role in the global economy is reduced, the oil cartel has nothing to fear.