THE PANEL
Dr Gary Ross is the chief executive of PIRA Energy Group, a New York-based international energy consultancy, which advises several Opec member nations.
Robert Laughlin works as an oil broker at the London offices of GNI-Man Financial.
Adam Sieminski is a global oil strategist, based in London with Deutsche Bank.
Julian Lee is a senior energy analyst at the Centre for Global Energy Studies, an independent energy studies organisation.
Richard Savage is the head of commodities research and strategy at Bank of America in London.
Klaus Rehaag is the Head of the oil industry and markets division at the International Energy Agency in Paris.
Opec provided Times Online with its official position on these topics from its press office in Vienna.
To post your comments and views on any of the issues raised, click here.
THE DEBATE
What has driven the record oil prices seen in recent months?
Opec: We see a combination of factors as destabilising the market this year — even though, throughout, it has remained well-supplied with crude and fundamentals have been sound.
There has been higher-than-expected oil demand growth, especially in China and the United States; refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications; and the geopolitical tensions of which we are all aware.
Combined, these factors have led to unwarranted fears about a possible future supply shortage of crude oil, which, in turn, have resulted in increased speculation in the futures markets, with substantial upward pressure on prices.
The rapid rise in demand has taken major forecasters by surprise and growth projections for 2004 have more than doubled since this time last year, to 2.2 million barrels a day, which represents a 16-year high.
Dr Gary Ross, chief executive of PIRA Energy Group: Geo-political risks have been the over-riding factor. The situations in Iraq and other exporting countries, set in an environment of demand growth and limited Opec spare capacity, have propelled prices higher.
Other factors, such as the state of the whole supply chain – which lacks the refinery capacity to meet demand – have also contributed.
Julian Lee, energy analyst: The most important factor is a tight fundamental market. Oil demand began to grow strongly in 2003, unnoticed by Opec, the International Energy Agency (IEA) and much of the industry.
After several years of very modest demand growth, Opec become obsessed with preventing a price collapse, fearing a repeat of 1998. As a result, it was slow to respond to the need for more of its oil in late 2003 and early 2004, instead agreeing two cuts in output quotas over that winter. Meanwhile, strong oil demand growth in China and India, as well as in America, lie behind the strongest oil demand growth seen in the world as a whole for more than 25 years.
In this environment, any fear of a supply disruption, be it the result of pipeline sabotage in Iraq, the bankruptcy of a major oil company in Russia or another strike in Venezuela, is enough to cause prices to spike.
Richard Savage, banker: The market was wrong-footed by a surge in demand, which was much stronger than anybody had thought. Second, the increase in prices was exaggerated by the role played by speculative investors, which has been far greater this year than ever before.
What will be the hottest topics of discussion this week?
Opec: It is clear that the present volatile situation in the oil market is of much concern to us, and that we are doing everything we can to restore stability to the market, with fair and reasonable prices for consumers.
Dr Gary Ross: As far as quotas go, Opec is already producing two million extra barrels of oil a day and the Saudis have been given room to engineer a soft landing for oil prices. Opec is aware that an increased price band will have to be defended. Remember that only five years ago the press was able to say that there would be a "sea of oil forever". Such perceptions can change very quickly and there is a lot of thinking to be done on this issue yet.
Robert Laughlin: Above all, Opec does not want the present boom to turn to bust. This will be the major preoccupation in Vienna. The price hawks among the organisation – principally Kuwait and Iran – do not want the price of their black gold to plummet.
Because of this they will be reluctant to give public guarantees of increased production, although we can expect plenty of the normal supportive rhetoric to the G7 countries.
Julian Lee: Many in Opec are calling for the target price band to be raised from one centred on $25 a barrel to one centred on $30 a barrel in order to offset the effects of inflation and the deterioration in the value of the US dollar against other major trading currencies. It might be politically difficult for Opec to do this at a time when it wants to portray itself as acting to help bring prices down.
Richard Savage: Quotas and price bands. The organisation is pumping above their quota limits. When the time comes to reduce output it will be easier to improve compliance than to cut quotas. It is worth noting that countries such as Venezuela - who are struggling to fulfill their present allowances - will be very reluctant to see them increased.
Stories have circulated that all the members agree that the price band should be raised but it's hard to see the Saudis going along with this. If Opec is serious about reducing prices, now would be the wrong time to increase the band. It would be much easier to reduce prices and then raise the band than the other way around.
Adam Sieminski, oil strategist: Price bands and quotas may be discussed. But recent inventory data from America and the IEA have given conflicting views of the market. We think Opec is likely to postpone new price and quota decisions until early 2005 - after the US elections are out of the way and when they have better data on supply and demand.
Is Opec as important as it once was?
Opec: We believe that, as an organisation which has about four-fifths of the world's proven crude oil reserves and accounts for around two-fifths of current output, we are in a special position to influence order and stability in the international oil market, in the interests of producers and consumers alike.
We are also conscious of the importance of the future welfare of the oil industry and that a satisfactory balance must be found between meeting today's needs and catering for those of future generations. This is of particular relevance to Opec, because, in the longer term, the widely forecast gradual depletion of non-Opec reserves means that our organisation will be increasingly called upon to supply the incremental barrel.
Robert Laughlin: Opec has lost market share over the past decade. On the back of higher prices, people are now willing to dig deeper and travel outside of the Opec cartel for oil. The recent Cairn Energy oil finds in India highlighted this.
That said, Opec's grip on the market is likely to remain tight as long as the cartel remains united. Key here will be whether Saudi Arabia's dominance over Opec is seen as becoming too great, especially in view of Saudi's close political relationship with America. These kind of political issues could split Opec. The organisation will have to keep them contained.
Richard Savage: The market has been tempted to dismiss Opec as irrelevant because it has run short of capacity and has not been able to cool prices over the last nine months, but the organisation is still very important. Such is the volume of Opec's reserves (80 years' worth, compared to around 16 for the non-Opec producers) the organisation it will continue to play a key role for a long time to come.
Klaus Rehaag, IEA: Opec is a key supplier representing several key producers. We would not agree with the view that the organisation has become in some way insignificant. Inherent lags in the system make controlling the market in the short-term extremely difficult. However when it comes to medium- and long-term issues such as sourcing oil for the future, Opec clearly has a central role to play.
Where does responsibility lie in calming the oil markets to ensure stable global economic development?
Opec: With all the principal players in the market: Opec and non-Opec producers, consumers and the intermediary bodies, such as the large oil companies and the international financial institutions. There must be reasonable burden sharing within the industry.
This underlines the importance of co-operation within the industry. All parties stand to benefit from co-operation.
Big advances have been made in this area over the past two decades and that the concept of co-operation is now well-established — although such is the complexity of this industry that there remains plenty of scope for improvement.
A clear realisation has emerged that the industry is better-off if there is an underlying consensus on the means of handling, at least, the major issues that concern all parties — such as pricing, stability, security of demand and supply, investment, environmental issues and sustainable development.
Dr Gary Ross: Both producers and consumers must share responsibility. It is important to realise that Opec only controls one end of the chain. For example, consuming countries need to think how regulations calling for low-sulphur grades of petrol will affect demand for the sweet, light grades of crude from which they are produced.
Robert Laughlin: If the world's economy is being damaged then consumers have to act. The end user picks up the tab and so far has not chosen to cut back on consumption. It may also be worth remembering that the UK Government must be doing very well out of the North Sea. The longevity of UK's reserves is an issue, but the Government is certainly making hay while the sun shines.
Julian Lee: It seems that the solution can only come from the demand side. Oil demand growth needs to slow down, either as a result of higher oil prices around the world, or through the world's major oil consumers acting to cool domestic oil demand growth. China appears to be trying to slow the growth of its energy demand. Other major oil consumers have consistently resisted raising taxes on oil products to control oil demand growth. It seems that the present situation will only begin to ease once high oil prices have had a sufficiently negative impact on global economic growth and energy demand growth for oil production and refining capacity to catch up.
Richard Savage: Opec would like to claim that the responsibility lies with them. There has been, for many years, an unwritten rule that consumer countries will not use their energy reserves in anything other than the most extraordinary circumstances. This is because Opec has had on tap an excess of capacity, which costs a significant sum to maintain. Opec has implied that it is happy to hold this "central banker" role to keep consumer countries happy.
Adam Sieminski: Opec says that it "seeks to devise ways and means of ensuring the stabilisation of prices". When demand is weak and supplies abundant, this means that the members have to be disciplined in adhering to quotas. When demand is high and supplies uncertain, it means that they must have sufficient capacity to rapidly expand output.
Opec's ability to manage the markets has obviously varied. The IEA and the US Department of Energy should probably give some consideration to the use of their own strategic inventories in "helping" to calm the markets when prices are extremely volatile. This could be done by "loaning" or "swapping" oil into the markets when prices are extraordinarily high, and "borrowing" oil from the markets for temporary storage when prices are extremely low. Economists and politicians are split on the wisdom of having either Opec or consuming governments trying to "manage" the markets.
Klaus Rehaag: One way to look at this is in terms of interest. Both producers and consumers have an interest in a stable market. Certainly for Opec stability is key. Likewise, instability makes long-term investments, which can often involve billions of dollars, very difficult. All the interested players hold a responsibility. This extends to those involved in aspects of the industry, such as shipping, where neither Opec nor consumers play a direct part.
To post your comments and views on any of the issues raised, click here.
Useful links
Opec: www.opec.org
Centre for Global Energy Studies: www.cges.co.uk
PIRA Energy Group: www.pira.com
IEA: www.iea.org
Researched and compiled by Rhys Blakely
