OPEC's best option

OPEC's decision yesterday to simply roll over their production ceiling of 24.5 million barrels per day (bbd) for another year seems to be the best option available for the 12-member organization. The agreement saved the oil ministers from their usually long sessions of huffing and puffing about the sensitive and often divisive task of setting a new quota and distributing the quota among the members.

Extending the quota, unchanged since September, 1993, for one year is also the best way of sending a positive, strong signal to the market. Past experiences have shown that setting the production ceiling on a quarterly or semester basis often results in market volatility due to speculation. The buyers were often led into uncertainty every time the organization met to fix and distribute their output ceiling, especially when the ministerial meeting dragged on and on with widely differing views.

We think President Soeharto's address at the opening of the OPEC meeting touched upon the fundamental problem faced by the organization. Soeharto's strong appeal to the major oil producers to put aside their differences, to close ranks and act wisely in order to provide the market with the right message should not be seen as a cliche at all.

In fact, as the Organization of Petroleum Exporting Countries now accounts for only about one third of the world's oil supply, its market clout, which has steadily been declining, would become even less significant if they could not close ranks and were united to properly implement what they had agreed. Bickering among the ministers would not help bolster the reputation of the organization which most buyers have always criticized as a cartel.

A one year extension will allow for a more reliable monitoring of market trends because the period covers the four seasons in the major consumer countries which strongly influence the demand cycle of oil. Of most importance, though, is for all OPEC members to fully honor their agreement on the output ceiling.

Theoretically the market demand for oil will increase next year as a result of the strong economic recovery expected in most major consumer countries. But the oil prices are not expected to be highly volatile due to the steady increase in supplies from non-OPEC exporters. OPEC will not likely achieve its price target of US$21 per barrel. In fact, the prices averaged only $15.40 during the first ten months of this year.

The price levels have obviously been hurting many OPEC members, notably those which rely mostly on the hydrocarbon sector for their revenues. But relative price stability during the past ten months is still much better than wild fluctuations, even though they continue to be on the high side.

We could argue endlessly about on which level the prices should stabilize. OPEC would like the prices to average $21 but most buyers prefer the prices to be fully determined by market forces. We agree, though, with President Soeharto's argument that the oil prices should be high enough to allow for viable investments in developing new oil reserves. Without new reserves the oil market will sooner or later be monopolized by a few producers and that situation surely will not benefit anybody.