OPEC's oil production cut can be absorbed

SINGAPORE: Any impact on Asia of the production cut announced on Saturday by the Organization of Petroleum Exporting Countries (OPEC) -- its second this year -- may not be as drastic as thought. The talk is that this would affect global economic growth, what with the United States already in a slowdown, as well as cause general price rises when output is reduced by one million barrels a day from April.

The oil price could rise by US$6 a barrel. Higher prices will have an impact on the U.S. and its economic partners, including Singapore.

A one percentage point slowdown in U.S. growth will pull Singapore's down by 1.4 percentage points. Of course, the cartel, which accounts for 40 percent of world output, wants to prop up slumping prices.

True, OPEC has been on a roller-coaster ride in recent years, with prices falling below $10 in 1998 during the Asian crisis, only to surge to over $35 last year, and then tumble last December to about $25.

True, prices will fall with the warmer weather approaching in the Northern Hemisphere, so its desire to shore up prices in anticipation of reduced demand is understandable. Yet, if this move actually tips the world over into a recession, demand for oil would be reduced drastically.

More likely though, the market has already factored in OPEC's cut, and the consensus is that the one million barrel cut is not big enough to boost prices, but will stabilize the group's reference basket of seven crudes at $25 a barrel. That is why there was only limp market response, although OPEC faced widespread criticism in the international media. Asian crude and swap markets changed little.

It will take actual cuts totaling 1.5 million barrels to move markets, which are waiting to see how effectively the reduction will be implemented. That is, how committed OPEC members are to implementing the posted cut.

The cooperation of non-OPEC producers -- Mexico, Oman, Russia and, for the first time, Angola -- is probably merely lip service. Russia especially needs the revenues. If implemented fully, the cut would leave several OPEC members with spare production capacity; thus, the temptation to exceed production targets.

Also, OPEC's June meeting is expected to call for a production increase to meet the seasonal rise in demand for summer motoring in the Northern Hemisphere.

If so, there is even more incentive for producers to cheat to secure market share ahead of any increase. So OPEC, like any cartel, cannot defy the laws of demand and supply for long. All told, the actual cuts may amount to only half the announced target. It is possible OPEC would not get the price it wants.

Experts say the world is looking increasingly at a credible alternative: natural gas. Demand for this clean energy source will reach 145 trillion cubic feet by 2015, an 85-percent increase from 1995.

This will be especially pronounced in Asia. There are proven reserves of some 4,900 trillion cu ft worldwide, enough to last 60 years. More nations may turn to natural gas if caps on carbon emissions are enforced globally.

So OPEC might want to be more customer-friendly, for there is a likelihood it may one day become a pale shadow of what it used to be. What makes Asia's current outlook bad is not this particular OPEC maneuver, but the fact that both of the world's largest economies, the United States and Japan -- which together account for 40 percent of world output -- are near zero-growth at the same time.

Also, the fact that there is no restructured international financial architecture in place yet. These two factors are key, not the April 1 cut.

-- The Straits Times/Asia News Network