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OIL: Prices Won't Be Falling Anytime Soon

Omid Memarian

UNITED NATIONS, Jun 28 2008 (IPS) - Although some policy-makers have blamed producing countries for steadily rising oil prices, many experts say more fundamental factors are a growing demand-supply imbalance, a weak dollar, and market speculation.

"Most members of OPEC are already producing at peak capacity, and Saudi Arabia, which has the greatest spare capacity, has been incrementally increasing its production -with the result that its spare capacity has been plunging to relatively low levels," Dariush Zahedi, a research fellow at the Institute of International Studies in at UC Berkeley, told IPS.

"Other factors, such as the decline in the value of the dollar, rising demand from emerging economies, existing and potential geopolitical turmoil in oil-producing countries, and market speculation, have contributed more to price rises than OPEC," he added. "I also think that prices are unlikely to decline in the near term because the factors mentioned above are unlikely to be modified appreciably."

Saudi Arabia recently agreed to produce an extra 200,000 barrels a day in July on top of a promised 300,000 barrels a day in June. However, the news failed to prevent a further surge in oil prices, to a record-shattering 140 dollars a barrel for the first time in New York and London on Thursday.

"We face imbalances in a growing world economy and energy supply is not adequate for growth safe for the climate," said Jeffrey Sachs, the U.N. secretary-general's special advisor on the Millennium Development Goals.

"That's why the price of oil is not going to come down sharply. We are not returning to the situation of three or four years ago. We are going to face high energy prices for the foreseeable future with major investment necessary for the new supply, more efficiency and doing this in a way that is safe for the environment," he said at a U.N. briefing last week.

In response to a question from IPS regarding the role of OPEC in the oil price rise, Sachs, a professor at Columbia University in New York, said that the cartel was not directly to blame for the crisis.

"I think the world economy is the largest and the oil-hungriest that we have [ever seen], with the limited supply of oil the main cause," he said. "I don't know that we've reached the peak oil now or we'll reach it 10 years from now, but there is definitely a big strain on the global supply and the world economy is growing so fast in demand that it is hard to imagine."

OPEC, the Organisation of Petroleum Exporting Countries (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, the UAE, Algeria, Nigeria, Ecuador and Angola) produces 32 million barrels a day (mbd). Saudi Arabia produces the most, at around 9.25 mbd. "OPEC has been important, but more as providing a backdrop for the recent months' price rises," said Samuel Ciszuk, an energy analyst at Global Insight Limited in London. "Most of its members have been producing at full capacity leaving mainly Saudi Arabia to react to fluctuations, something it has not really done, except in relatively small amounts."

"Saudi Arabia could step out of the OPEC framework and add a total of 500,000 b/d of production unilaterally in the past month and a half, without anyone really talking about the death of the OPEC quota system, because virtually every other member can't produce more anyway," added Ciszuk.

Paul M. Sampson, a senior Gulf correspondent at Energy Intelligence Group based in Dubai, told IPS that the steady rise in the oil price is due to a combination of factors.

"Oil demand in India and China has grown more quickly than many people expected and there is a belief that consumption of oil in these two countries will continue to grow to fuel expanding industrialisation," said Sampson.

"There's not a huge amount OPEC can do to bring down prices," he added. "Saudi Arabia, the only OPEC producer with significant spare capacity, has pledged to increase production next month but not by enough to cool prices. The fact that prices rose yesterday after the consumer-producer meeting in Jeddah is testament to OPEC's powerlessness."

In Sachs' view, the main problem is the world's dependence on fossil fuels, like oil and coal, which also contribute to global warming. "We do not have just an energy problem. We have an energy and environment problem and both have to be addressed," said Sachs.

"We need an energy supply increase but in an environmentally sustainable manner. It's going to require a lot of technology, major global cooperation, and large-scale investment – but the problem is that we haven't got started."

Sachs noted that the world economy has been growing between 4 and 5 percent per year, meaning it will double in about 15 years. "That's a very rapid growth for the global economy and puts a huge strain on the supply of energy, water and basic food," he said.

The Group of Eight (G8) most industrialised countries – the United States, Russia, Japan, Germany, France, Italy, Canada and Britain – are supposed to discuss how they plan to reduce dependence on oil at a summit meeting in Japan next month.

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