The Mercury

Opec may learn from past mistakes and announce an increase in quotas this week

TRADING AGENDA

- Ethel Hazelhurst

EVEN oil exporters are sometimes willing to concede that too much is too much. Late last week came news that Opec, which meets in Vienna on Wednesday, could raise output by up to 1.5 million barrels a day. Opec supplies about 40 percent of global demand.

Only a few weeks ago markets were expecting no change in production, based on statements by Opec oil ministers. But recent events, including depressing economic data from the US and renewed concern about the quality of sovereign debt, have changed the mood.

And, by the end of the week, Reuters reported “some Opec members, including the most influentia­l, Saudi Arabia, said the group was considerin­g raising”.

Brent blend crude oil on Friday traded at under $114 (R766) a barrel, down from its recent peak of nearly $127 at the end of April. But, even at Friday’s levels, oil prices are seen to be taking the steam out of the global recovery.

Opec has learnt from the experience of the 1970s when to hold its hand. On that occasion, price manipulati­on by the oil cartel pushed the world into a prolonged state of stagflatio­n – low growth and high inflation.

By draining consumers’ resources, high prices cripple demand.

And by pushing up costs, they create inflationa­ry pressures. These in turn attract high interest rates, leaving consumers cash strapped.

The organisati­on has also learnt from the experience of 2008, when Brent crude peaked at $147 in mid-year and crashed to under $40 by December.

The price pressures simply crumbled under their own weight, sweeping away the speculativ­e positions that had been holding them up.

This year, with a number of countries balancing on the brink of sovereign debt default, Opec has presumably looked at the mountain of debt in advanced economies and decided to take remedial action to avoid a recurrence.

The danger was underscore­d by US data on Friday, which showed employment growing much slower than expected – a clear signal that measures like fiscal and monetary stimulus are not enough to keep the US recovery on track.

Without economic growth, the US and other troubled countries won’t be able to reduce their debt. They will move into a debt trap, borrowing to pay the interest on their debt, with dangerous consequenc­es for the rest of the world.

What is needed is relief in cost pressures to free up disposable income for other uses. Unless oil producers create that space, the global economy could slide into the much feared second leg of a double-dip recession.

If Opec members agree to lift output, it would be the first increase since 2007, according to Reuters.

In 2008, 11 of the 12 members agreed to produce no more than 24.85 million barrels a day; the exception was war-torn Iraq.

However, it is an open secret that the quotas are often exceeded – the Financial Times reported that in April, the 11 members produced 1.3 million barrels a day above the quota.

Saudi Arabia has reportedly been exceeding its quota since December last year, when supply was disrupted by the start of troubles in north Africa and the Middle East.

One of the factors that will determine the impact of an official increase is the extent to which the additional output agreed to will exceed 1.3 million barrels a day.

Lower oil prices could transform the outlook for growth.

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