OPEC Failure Foretells Decline 10 Years After $10 Oil

By Anthony DiPaola

Dec. 1 (Bloomberg) -- A decade after OPEC failed to prevent oil from collapsing to $10 a barrel, the world’s biggest producers are delaying the action needed to arrest the steepest slide in energy prices.

Ministers from the Organization of Petroleum Exporting Countries postponed debate on a second cut in output in as many months during meetings in Cairo Nov. 29. They will wait until later this month, after a slump in global economies and the popping of the commodities bubble sent oil down almost $100 from its record price in July to as low as $48.25 a barrel in New York on Nov. 21.

“They are riding the economic wave just like the rest of us,” Adam Sieminski, Deutsche Bank AG’s chief energy economist, said in a telephone interview in Washington. “In the past when there has been a big economic downturn, OPEC has had to go through a series of cuts to stabilize the oil market.”

They haven’t done enough this time around to halt the 67 percent drop. Merrill Lynch & Co., forecasting the first contraction in global demand in a quarter century, sees crude bottoming at an average $43 a barrel in the first quarter, 21 percent below where it ended last week. In December 1998, crude tumbled 61 percent from its peak to as low as $10.35 when OPEC failed to eliminate a supply glut.

Demand Suffers

OPEC members, the producers of 40 percent of the world’s oil, said at the Cairo meeting that they would wait to gauge the effect of a 1.5 million-barrel cut agreed to Oct. 24. That reduction was meant to restrict OPEC’s daily output by 5.2 percent, about the same amount that Spain, the world’s ninth- largest economy, uses in a day.

Ali al-Naimi, the oil minister of Saudi Arabia, OPEC’s largest exporter and its de facto leader, said in Cairo that $75 a barrel oil represents a “fair price” needed to support investment in new fields. The group’s next meeting is in Oran, Algeria, on Dec. 17.

Oil fell as much as $99.02 a barrel from its July record, making the four-month slump steeper than crude’s drop from its 1996 peak to the low set in December 1998.

At that time the hesitation of countries including Iraq, Venezuela and Russia to rein in output amid the Asian financial crisis and a warm U.S. winter contributed to the decline. Now, sinking demand is the main issue as the world’s largest economies slip into recession.

Crude oil for January delivery dropped as much as $1.47, or 2.7 percent, to $52.96 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $53.07 at 10:19 a.m. in Singapore.

Supplies Rise

OPEC, the International Energy Agency and the U.S. Energy Department reduced consumption projections in November because of the economic outlook. OPEC trimmed its forecast for average oil use next year by 530,000 barrels, or 0.6 percent, and the IEA cut its estimate by 670,000 barrels, or 0.8 percent.

“Prices are coming down because demand is,” said Robert Ebel, a senior adviser on energy and national security at the Center for Strategic and International Studies in Washington. “There’s no way of knowing how long this will continue.”

U.S. crude-oil supplies rose for a ninth week, the longest stretch since April 2005, the Energy Department said Nov. 26. U.S. fuel demand declined the most in 27 years in the first 10 months of this year, the American Petroleum Institute reported Nov. 18.

The world’s three biggest economies, the U.S., Japan and Germany, are in or close to recession. The countries represented about one-third of global demand in 2007.

‘The Main Determinant’

Oil prices may fall more as world growth slows, Fatih Birol, the IEA’s chief economist in Paris, said in an interview Nov. 27.

“The main determinant will be how the global economy performs,” Birol said. “If the economy continues to slow, this will put downward pressure on demand and also have an impact on prices.”

OPEC reduced its quota 11 percent in the year through March 1999 to battle falling prices, according to data on the group’s Web site. Its decision in October to cut removed less than half that amount from the market.

By June 2000, the cartel’s quota was almost 25 percent lower than the 27.5 million-barrel limit agreed to in the three months from January 1998 through March 1998.

While New York-based Merrill Lynch predicts a recovery in the second half, with 2009 prices averaging $50 a barrel, Barclays Plc says crude will trade at $72.10 next quarter and average $100.50 for 2009, according to a report Nov. 21.

Spending Programs

Oil producers are depending on crude prices to support spending programs. Venezuela, the largest oil exporter in the Western Hemisphere, estimated an average price of $60 a barrel for its 2009 budget. The Latin American country depends on oil for half its public spending and more than 90 percent of exports.

Russia’s 2009 spending plans are based on a forecast of $95 a barrel of Urals crude, and Finance Minister Alexei Kudrin said Sept. 16 the budget will break even next year if the price of oil averages $70 a barrel. Urals crude, Russia’s benchmark blend, was last priced at $49.60.

Oil producers “do have leverage but it depends on how much unity they can muster up,” said Simon Wardell, an analyst at Global Insight Inc. in London. “They’re facing budget shortfalls, so a decline in output will hurt them even if it does push prices up.”

At the same time, international oil companies, concerned falling crude may make new exploration projects unprofitable, are curtailing investment plans and slowing projects. That may affect supply when demand does recover.

Investment Plans

Producers such as Royal Dutch Shell Plc are cutting back plans to develop deposits like Canadian oil sands. Shell indefinitely postponed the second-phase expansion of its Athabasca project because of rising construction costs. Shell, based in The Hague, also delayed seeking regulatory approval for Carmon Creek. Higher cost plans require $80-a-barrel oil to be profitable, according to Merrill Lynch.

“The market is very related to the global economic crisis,” Qatari Oil Minister Abdullah bin Hamad al-Attiyah said in Cairo. “There’s pressure on demand.”

To contact the reporter on this story: Anthony DiPaola in Dubai at adipaola@bloomberg.net.