The Obsession With High Oil Prices

  • 11 March 2006

Although OPEC's decision to peg its production ceiling up to 28 million barrels per day was widely expected, it was almost the first of its kind. The decision came in spite of the availability of not only official supplies to meet the demand, but also a steady rise in global oil reserves. It was ironic that the decision announced last Wednesday coincided with statements issued by the US government indicating an unexpected increase in US' crude oil reserves, which have now reached their highest level in seven years. The trend of raising global oil reserves is not new. It began over a year ago which shows a glut in the global oil market. Consequently, it was not surprising that the price of crude oil fell by more than one-and-a-half-dollar immediately after OPEC's decision. Analysts expect the drop to continue in the forthcoming days if supplies are not been affected by emergencies.

As it appears, the obsession with high oil prices and the desire to reassure the market have been the driving force behind OPEC's decision to maintain production ceiling. This is despite assertions made by analysts and officials of member countries that the persistence of prices above $60 per barrel cannot be attributed to fears of disruption in supplies in the future. It appears that OPEC thought that it was inappropriate or even embarrassing to cut down production when oil prices were still high. However, with the exception of this obsession, most indicators suggest that the oil market has enough crude, not only to meet actual demand but also to allow the major consuming countries build huge reserves.

In this case, OPEC should closely monitor market movements that have become subject to acute fluctuations, including even a collapse in prices. Besides, it should be prepared to take necessary action promptly in case there are signs of an undesired fall in prices. Soon after present anxieties over future supplies disappear and after people are convinced that there is no supply shortage for the present or the future, prices might take a downturn that may be uncontrollable, and would require a radical change in measures involving production policy as well as major plans for expanding production capacity.