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Oil sharks

Christopher Swann & Martin Hutchinson/ 09 Jul 12 | 12:10 AM

Venezuela and Iran are looking desperate. Barely three weeks after the most recent OPEC meeting, the two countries are clamouring for an emergency gathering. They’re claiming that overproduction is depressing prices and want to institute a price band to halt the drop. But crude is hovering just below $100 a barrel, near its highest level in decades.

Until recently, an oil price of over $90 a barrel would have been a cause for celebration for all members of the Organization of the Petroleum Exporting Countries. Apart from the short 2008 spike, the last time real oil prices, adjusted for inflation, climbed above that was in the early 1980s. But for an increasing number of OPEC members, the current price is no longer enough to balance their budgets.

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This is a dangerous situation for the likes of Venezuela and Iran. The oil cartel, which accounts for close to 40 per cent of global output, has to tread a delicate balance. If the 12-nation club gets too greedy, it threatens to weaken global growth, and thus send oil prices tumbling. It also risks promoting rival sources of supply, such as oil sands and shale oil.

All these threats become more acute as oil rises above $90 a barrel. Even after a more than 20 per cent drop in oil prices since March, about 85 percent of oil rigs in the United States remain profitable and Canada’s oil sands are also in the money, according to Tudor Pickering. That spurs production and eats into OPEC’s market share.

Ominously for OPEC, many members now need oil prices near this danger zone. Venezuela’s public spending has been rising relentlessly, climbing 17 per cent in real terms in the first quarter of this year alone, according to Bank of America Merrill Lynch. An oil price below $100 causes budgetary pain. Nigeria, another OPEC hawk, needs $113 a barrel, double its 2006 requirement, according to business service Zawya Middle Eastern.

By mismanaging their domestic finances OPEC nations are endangering the club’s effectiveness. Lofty oil prices should be an occasional luxury for the cartel, not a necessity.

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