The oil sheikhs are at one with the world.
Five months ago, as the Sept. 11 attacks helped to deepen U.S. recession, they were frightened and agreed to cut oil output again to try to force up the oil price. Now the oil price has rallied -- to about $24 for Brent crude -- and they are relaxed.
The relief was manifest Friday in the meeting of the Organization of Petroleum Exporting Countries in Vienna. The Saudi Arabian oil minister, Ali Naimi, told reporters that OPEC was "very comfortable. ... Inventories are on the high side. ... The price is within the band (of a $22-28 oil price targeted by Opec). We don't need to do anything."
Things have gone better than the oil cartel could have hoped when the organization held what was seen as a crisis meeting Nov. 14 last year. It cut its own output, and successfully pressed Norway, Russia and Mexico to cut theirs. But emerging Friday from their Vienna meeting, Opec members were talking about raising output again in June. What was a dire position six months ago has suddenly become all right. Hasn't it?
A combination of factors has brought about this rally in the oil price, and not all of them are what most of the world would call happy ones. Alongside the supportive hopes of a recovery in the U.S. and world economy have been the conflict in Afghanistan and the threat of a wider war in the Middle East. But what ought to concern OPEC is that neither the happy factors nor the less happy factors that have supported the oil price are necessarily sustainable.
Supply and demand should drive the oil price. And Opec has cut output somewhat in recent months. But as the Saudi oil minister acknowledged, Western stocks of oil are ample.
James Williams, an oil consultant at WTRG Economics who specializes in price trends, says that stocks for all types of oil products are much better than they were a year ago and "will remain so for some time." So why has the oil price rallied in the past few months?
In Williams' view the main driver is not economic recovery but politics. He judges that there is at present "a $3-$4 per barrel premium on crude because of the uncertainty associated with Iraq."
But it is not just the possibility that the United States will strike against the Iraqi despot, Saddam Hussein, that has driven up the oil price. The trouble, or potential trouble, is broader. The war in Afghanistan, the violence in Israel and the occupied territories, and growing fears for the Middle East have helped to push up oil prices. Might there be war war with Israel -- a war that could draw in other Arab nations? It is a possibility that cannot be ruled out. The oil price has reacted strongly to it.
This tension, it might be argued, is unlikely to go away, and could worsen, and therefore the higher oil price could be said to be justified. An attack on Iraq would drive the oil price higher still. Yet it might also be argued that Middle East tension -- exceptionally bad at present, is likely to ease -- perhaps in the short term, certainly in the long term.
Part of the reason is that the approach of the U.S. government may be changing.
Its inclination had been to ignore the Palestinian problem while focusing on its "war against terrorism." But the worsening of the Palestinian conflict and its negative influence on U.S. relations with the Islamic world has begun to present a problem for a government that needs the cooperation of moderate Arabs as it seeks to confront and eliminate militants who claim to act in the name of Islam.
The U.S. government surprised the world this week, on March 13, by presenting a resolution to the United Nations which referred for the first time to a Palestinian state, existing beside Israel. Israeli Prime Minister Ariel Sharon withdrew the tanks he had sent into Palestinian territory shortly before the arrival of the U.S. envoy Gen. Anthony Zinni.
If the U.S. government applies increased pressure on Israel to reach an accord with the Palestinians, there is a possibility that the conflict will calm somewhat, and that will tend to be reflected in oil prices.
Where Iraq is concerned, the chances of a calming tension may seem less likely. U.S. President George W. Bush seems determined to go after Saddam Hussein. And conversations between Bush and British Prime Minister Tony Blair in recent weeks were seen by some as being preparatory to an attack on Iraq.
But the assumption that an attack is imminent is almost certainly wrong. In Europe, not least in Blair's own cabinet, there is much resistance to the idea of attacking Iraq. If Bush is to attack, he must first persuade.
Bush's vice president, Dick Cheney, may be doing some of the necessary persuading on his current Middle East tour. But some of the persuasion may be pushing back the other way: toward patience on Iraq and a greater sense of urgency on calming Israeli-Palestinian violence. Militarily, too, preparing any attack on Iraq would take a long time. The impression that an attack is imminent may diminish soon, and with it the oil price.
Hopes for economic recovery, too, may be over-done. U.S. consumers have kept spending, buoying up the U.S. economy and encouraging companies, which cut inventories hard last year, to restock. But will strong consumption growth persist? And given that the personal savings rate remains very low, interest rates very low and fiscal policy loose, what more can be done to stoke up demand?
Further, what is going to carry the U.S. recovery forward? This is a question that few seem to be asking.
In the next few months the oil price will be the pawn of these factors. It will go up if conflict worsens and economic recovery strengthens but go down if the opposite is true. But the medium-term trends, Williams says, present Opec with problems that the organization if failing to address -- and that might eventually blow Opec apart.
"Russia can and will continue to increase production for the foreseeable future and the annual increase will be in the neighborhood of 400-500 thousand barrels per day," says Williams. "Mexico and Norway are not likely to renew their production cuts in June."
Williams' view is that behind the scenes Saudi Arabia will press Opec to accept lower prices and thereby reduce the (generally more expensive to extract) non-Opec oil production.
Fundamental trends continue to point, in Williams' and this correspondent's view, to lower oil prices, and the price fall could come soon. Opec's happy days are going to end. Politics will decide when.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. The column normally appears on Fridays but was delayed (for a second week) by a computer collapse. Comments to [email protected]