OPEC may raise oil production this December, if prices rise and remain above $85 a barrel.
OPEC president and Angolan oil minister Jose Maria Botelho de Vasconcelos states, “We have always defended a position of equilibrium. Some countries are available to pump more oil into the market and if it comes necessary to pump more oil into the market this will be done.”
This news comes as the International Energy Agency reports that high oil prices threaten the nascent economic recovery. Fatih Birol, chief economist at the IEA, speaking with an interviewer at a Coaltrans conference, said, “With the strong rebound of the economy, we will see high prices, especially at this juncture, as a significant risk to recovery efforts.”
Meanwhile, analysts debate whether oil prices are currently being driven by speculators, or by natural supply and demand. With oil jumping 81% this year – even as worldwide GDP shrinks more than 1% – the answer to this debate is essential for gauging the short-term sustainability of current valuations.
OPEC itself seems to believe that a combination is responsible for oil’s dramatic recovery. The United Arab Emirates oil minister, Mohamed al-Hamli, recently told a conference in Russia, “I think it is primarily driven by speculators but there is also support for the current surge in oil prices.”
However, regardless of causation, OPEC may not alter supply at all. Kuwaiti oil minister Sheik Ahmad al-Sabah recently said he doubted that oil supply would increase in December, later calling such an increase “impossible.”
Some believe al-Sabah isn’t referring to a political impossibility, but a geological one. The specter of Peak Oil is much debated, but one fact isn’t: OPEC’s largest oil fields are all in decline, or fast approaching it.
New fields are still being discovered, but they are increasingly expensive to operate – whether because they’re at the bottom of the sea floor or because we must bake the oil out of shale and sand.
All of this does suggest that higher prices are likely to be the norm, regardless of temporary blips produced by speculation or temporary dips in demand or supply.
For its part, Goldman Sachs believes that $85 is the near-term target, with demand mostly coming from China’s 8.9% GDP growth.
“Chinese oil demand is leading the way and U.S. oil demand is lagging behind,” Goldman analysts said in a report made available today, as reported by Bloomberg. “We are likely to see a recovery in which strong emerging-market oil demand puts upward pressure on crude oil prices.”
Regardless of whether speculators are currently influencing prices, the cost of producing oil going forward should create an inexorable tug towards increasing prices. An increase in demand will only hasten this long-term trend.
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