[OPE-L:6246] Re: Edward Elgar 2002

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Fri Dec 14 2001 - 14:47:30 EST

Speaking of Elgar books, I quote here from a chapter "Oil: 
temporarily a special case" in Kunibert Raffer and Hans Singer's The 
Economic North South Divide: Six Decades of Unequal 
Development.(Elgar, 2001) They seem to reach the same conclusion here 
as Cyrus Bina regarding the dwindling pricing power of OPEC or Saudi 
Arabia in particular.

"When OPEC could not stop the gradual ersoion of its market share it 
abandoned its policy of restricting supply, which led to the price 
collapse of 1986. This policy was mainly based on Saudi Arabia's 
willingness to be a 'swing producer', the country reducing its 
production substantially. Between 1980 and 1985, Saudi production 
declined by more than two thirds. It fell so low that associated gas 
production could no longer meet the kingdom's internal needs. 
Maintaining their idel capapcities in a state of readiness caused 
considerable costs. In August 1985, Saudi Arabia linked prices to the 
spot market, and raised output to 5 million barrels per day in early 
1986. The emerging new pricing system linked transaction prices 
closely to prices, established in organized trading markets. This 
change highlighted OPEC's new situation. In the 1970s,  Saudi Arabial 
Light served as the so called 'market crude,' the basis on which all 
oil prices were calculated. At the beginning of the 1980s, spot 
prices started to dominate official OPEC prices. Nowadays non OPEC 
crudes, such as Brent UK or West Texas intermediate (as traded at the 
New York Mercantile Exchange), are usually quoted as THE oil price.

"UNCTAD (1999) describes the present situation: 'a new pricing system 
dominated by future markets has emerged. Under this system, traders 
set up key futures prices based mainly on expectations of market 
conditions. Transaction prices have become closely linked to prices 
established in the organized trading markets. The large influence and 
the functioning of futures trading have resulted in more transparency 
in the petroleum market, enabling not only consumers but also 
speculators to react to shifts in supply or demand more rapidly.'

"The former direct link between changes in supply and price does not 
exist any longer."

Then on the conditions in the oil market in 2000:

"In spite of further increases of production, prices have not fallen. 
As prices are now determined on exchanges speculators may well be 
able to raise prices further while output expands, thus reducing the 
pricing power of producers, as OPEC (2000) pointed out. After the 
summer OPEC became more outspoken. After three agreements by OPEC 
members to raise output in 2000 and a total increase of  'no less 
than 3.3 mb/d, brining supply to the market will in excess of 
anticipated oil demands', crude prices had [not?] fallen noticeably 
over recents days. According to OPEC, the real reasons for market 
volatility were therefore refining botlenecks, 'speculation in the 
futures market, manipulation of the Brent market due to dwindling 
volumes of this crude,' and widening diffrentials between certain 
types of crudes. These are all elements 'about which OPEC can do 
little or nothing at all'. Naturally the approaching winter is one 
reason fuelling speculatio. Should it be very dold, this would 
strongly affect demand for heating oil."

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