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For OPEC, high oil prices bring riches and risk
By Jad Mouawad

Friday, November 16, 2007
RIYADH: As oil prices hover around $95 a barrel, OPEC should be in a celebratory mood: Its members are reaping record revenue, demand for their product keeps rising, and the world economy seems capable of sustaining oil prices that would have seemed suicidal just a few years ago.

But the oil cartel is facing an increasingly uncertain environment. There are mounting fears of a global economic slowdown, an endlessly depreciating dollar, and growing concerns about the effect of fossil fuels on the planet's climate.

As leaders of the Organization of Petroleum Exporting Countries meet in the capital of Saudi Arabia for a rare summit meeting this weekend, there are signs that high oil prices are a mixed blessing for producers.

"We cannot remain complacent," Mohamed al-Hamli, the oil minister for the United Arab Emirates said. "These prices are potentially dangerous, especially if they remain high."

But in recent days, the oil ministers have resisted calls to increase their output in order to help ease prices. In fact, they ruled out a decision on output until the group's next meeting in Abu Dhabi on Dec. 5. Saudi Arabia in particular is eager not to overshadow the meeting of heads of state with a discussion about supplies and prices.

Still, many officials were relieved to see oil prices fall back from their records above $98 a barrel last week. No one here wished to see oil reach the politically charged figure of $100 just as OPEC leaders were meeting in Riyadh.

Oil futures, which have grown four-fold in the past four years, rose $1.27 to $94.70 a barrel for December delivery in late afternoon trading on Friday.

Instead, the two-day meeting will focus on longer-term issues like security of supplies and environmental policy, an odd topic for a group that sells a carbon intensive product. But OPEC is eager to show its green credentials, especially ahead of a United Nations meeting on climate change in Bali, Indonesia, next month.

The group is expected to start an environmental initiative for producers and consumers that will fund the capture and storage of carbon dioxide.

"We do not like policies that discriminate against petroleum or fossil fuels in general," said Ali al-Naimi, the Saudi oil minister, at a press conference on Tuesday. "It behooves us to find a technological process that will make the continued use of fossil fuels possible."

OPEC's 12 members, an eclectic group that includes Libya, Nigeria, Saudi Arabia and the latest member, Angola, account for about 40 percent of the world's oil exports and 80 percent of the proven reserves. Ecuador is set to rejoin the group this weekend after dropping out of OPEC in the 1990s for failing to pay its membership dues.

The A-list of guest includes the Iranian president, Mahmoud Ahmadinejad; José Eduardo Dos Santos, the leader of Angola; and Hugo Chávez, the president of Venezuela.

Since the last such summit meeting, in Caracas, in 2000, OPEC has been particularly successful in recent years at managing the market, largely thanks to the Saudis. But in 2004, when Asian consumption surged, OPEC was caught by surprise, forcing it to quickly make up for the sudden growth by pumping full out.

These days members of the cartel are feeling increasingly frustrated about their inability to rein in a runaway oil market largely dominated by financial operators, like hedge funds and pension funds.

These higher prices also mean higher costs for oil producers, growing inflation, and, paradoxically, lower purchasing power as the dollar has also lost some of its value against other currencies.

"We are so perplexed and so frustrated with the idea we have anything to do with these prices," said Prince Salman bin Abdul Aziz , the deputy petroleum minister of Saudi Arabia.

While OPEC does not set prices, it has benefited immensely from oil's surge on commodity markets. OPEC's 12 members are expected to receive $658 billion in revenue this year, up from $605 billion last year, according to a recent estimate by the Energy Information Administration. Next year, OPEC's revenue could rise to $762 billion, according to the energy agency.

At the same time, the price of everything from drilling rigs to building multibillion dollar processing plants for oil or natural gas has doubled or even tripled, and caused delays or even leading to some projects being canceled. In Kuwait, a planned new refinery was shelved after its expected construction cost jumped from $7 billion to $14 billion.

"The rise in prices has been a nightmare for producers," said Abdullah al-Attiyah, Qatar's energy minister. He said construction costs in the oil and gas industry had tripled or quadrupled since 2004.

Oil producers have also been hit hard by the drop in value of the dollar. Because oil is priced in dollars, declines in the value of the American currency reduce the purchasing power of oil producers. In the past five years, the dollar has lost about a third of its value against the euro.

In recent days, representatives from Nigeria, Angola, and Iraq said they were considering diversifying their foreign reserves away from the dollar. Some delegates here expect the OPEC leaders to talk about the dollar's weakness during the summit meeting, but OPEC officials shot down any suggestions they wanted to price oil in any other currency than the dollar.

Raad Alkadiri, an energy analyst at PFC Energy, said: "Overall, the job for OPEC is much more difficult. You have a new environment and the bottom-line is that OPEC faces new challenges."