OPEC has maintained all along that the market is well supplied with oil and conditions don't call for an increase in output. They say oil prices are rising due to a weak US dollar and because speculators are driving up prices.
Both President Bush and his deputy Vice President Cheney have visited the Middle East this year, to try and persuade OPEC, particularly the Saudis, to help control prices by increasing production. But so far OPEC has only repeated its earlier argument that there aren't enough buyers to justify an increase in production. At their last meeting in March, OPEC members ignored calls from the US and other G-7 members to increase output and decided to leave production unchanged. Oil prices rose to $126.25 a barrel in New York Friday, before finally closing at $125.96 a barrel.
Although high oil prices are hurting consumers worldwide, the US consumer is particularly hard hit because in most emerging economies such as China and India oil prices are highly subsidized, with state controlled refiners foregoing a part of their profits. In contrast oil companies in the US will make an estimated profit of $200 billion this year. Clinton's call that these companies should either pay a 'windfall tax' or invest in developing alternative sources of energy seems to be a fairly reasonable suggestion after all.
There are finally signs that despite the obvious economic benefits of soaring oil revenues and increasing geo-political influence, OPEC is getting uneasy over runaway oil prices. They are fully aware that if world economic growth slows down, as it most certainly will if oil prices do not come down soon to reasonable levels, and oil prices start moving downwards, they would be able to do very little to stop the slide. After all in 1998 after the Asian economic crisis prices went down all the way to $11 a barrel. It is all a question of sentiment really. Presently traders fret about tight supplies and drive up prices. If they start focusing on a global slowdown instead, they can just as easily drive prices down. Oil is not an infinite resource. Most OPEC members will be without oil in another 20 to 30 years.They must understand that it is in their interest as well to have a stable world economic order. Violent fluctuations have historically destroyed wealth. They are particularly vulnerable as they are bankers to the world, lacking the geographical size as well as the population to absorb all this wealth. They need a steady and predictable stream of income from investments to sustain their population in the absence of any other worthwhile resource or technical skills.
Before President Bush leaves yet again for the Middle East next week, a senior Libyan oil official Shokri Ghanem has made a statement that OPEC may not be inflexible in future about increasing output.'We would consider among other options the possibility of increasing output as a way to ensure market stability. I expect a meeting before September. I am not calling for one, but I would support one,' he said. It is estimated that OPEC would have to increase output by at least 500,000 barrels per day to have any significant impact on prices. This should not be difficult as OPEC members currently have about 2 million barrels per day of spare capacity available with them.