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Oil Prices: why they have risen?

By Humberto Calderón Berti*

The world is witness to a rise in oil prices not seen since the invasion of Kuwait in 1990. People would ask themselves, with reason, why these levels at times when supply is comfortable and with no restrictions. The reasons are essentially political.

Last month, world production reached 82,3 million barrels daily, with a significant increase in the demands of about 700 thousand barrels daily in China and 400 thousand barrels daily in the United States. OPEC countries, on the other hand, produced last month 25,8 million barrels daily, a little over 2,3 million daily over their roof production.

Iraq, where political instability persists, has managed to star recovery of its levels of production. In March, Iraq’s production was 2,4 million barrels daily.

If all what has been said favors reasonable prices, what then causes the WTI crude oil prices to be at US$ 39.00 per barrel these days? Deep down, it is a question of the perception by those involved in the market, influenced by the political situation of the Middle East, especially Saudi-Arabia, and of Venezuela.

Saudi-Arabia, country with the world largest oil reserves and the largest capacity for production, has become the target of fundamentalist terrorism which pretends to control these huge resources and what they represent as instruments of access and destabilization in the region and maybe even globally. The Kingdom was, for many years, a stable country, which offered guaranty of safety to foreign investors. However, since the invasion of Kuwait, in 1990, and the appeal of the monarch to American troops and other countries to guarantee safety, the bond between the Saudi government and Osama Bin Laden snapped, as a result, the first become the object of the latter’s destabilization plans.

This has worsened since the overthrow of the Afghan Taliban regime, in particular that of Saddam Hussein in Iraq. Lately, the strong terrorist launch against Saudi-Arabia can only be read as the intention to overthrow the monarchy to establish a fundamentalist regime. This incident alone is cause for alarm among Western and Far East consumers, who no longer considers this country as a safe and reliable source of supply. Each day the Kingdom’s oil supply to the United States increases to ensure the commitment of the American administration in guaranteeing their political stability.

All this is exacerbated by the serious political upheaval and production decline in Venezuela, manifested with marked intensity after the national strike of December 2002, which lasted 62 days and resulted in a stand still of oil exports during that time. This has been a very significant fact. Venezuela had been a safe and reliable source of supply in international markets during its long history as an oil producing country. Its geographical location, far from geopolitical conflicts in the Middle East, and its professionalism contributed to imprint a very special meaning to Venezuelan oil, especially for its privileged proximity to the American market.

Even worse was the government’s decision to fire, because of the general strike, approximately 20,0000 oil workers from Petróleos de Venezuela. This labor force represented 50% of the payroll of a company, which had reached levels of excellency internationally acknowledged. This marked decrease in the work force has affected the technical competence of the industry, which is reflected in a significant reduction in production from 3,4 to 2,5 million barrels daily, and the production of refined products, especially gasolines to furnish the local market and the market of the West Coast of the United States. This last point, in addition to the limited local capacity to refine in the American territory because of environmental restrictions against establishing new refineries, have forced gasolines prices up.

We cannot put aside the endemic problems of political origin OPEC faces with its members, or those of economical nature given the reality of their hydrocarbon reserves, their nature and different manufacturing capacity. OPEC is not and homogeneous organization. The disparities in crude oil reserves make those countries with limited reserves and a short life expectancy as producers, to constantly pressure for price increases. This is even more palpable in the case of countries like Algeria and Qatar, essentially gas producers, who promote the increase in crude oil prices through shortages in production to later benefit from the increases in the gas prices, which are indexed to the first.

Another aspect which can not go unnoticed is that there are other countries, as is the case of Venezuela, whose governments have become promoters of the increase in oil prices knowing that they can not increase their production quotas due to the decline in their oil reservoirs, as explained earlier.

All these opposing interests prevent the Organization from complying with its own decisions as evidenced by the problem of setting the oil price range for the OPEC basket. As it is well-known, the Organization decided, a while ago, to maintain the price for the crude oil basket of its member countries within a range of US$ 22 – 28 per barrel, which will use an automatic mechanism of increment or reduction in production, according to case. This decision, as well as compliance with production quotas for the countries, has not been honored, thus creating a serious breach in needed OPEC credibility.

Lastly, it is important to note, once again, that the focal problem resulting from oil price increase is not of insufficient supply, since there is enough to cover consumption needs. The real problem is, essentially, of perception by the market created by instability in the Middle East, especially Iraq and Saudi-Arabia, and in Venezuela.

*Former President of OPEC and Former Energy and Mines Minister of Venezuela

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