There’s good news and bad news. The
good news, which really isn’t news at all, is the global
economy. Fueled by unprecedented growth in South and East Asia and
skillfully maneuvered by collaborative macroeconomic policy, the
international market system has been hugging corners like a new
sports car. Having outperformed even the most optimistic of
forecasts, it seems to have finished its ascent from the red ink
and shaken off what was left of its post-Sept. 11 sluggishness. The
bad news, according to a recent Centre for Global Energy Studies
analysis, is it may be driving without an airbag.

Sam Singer

In its precisely timed press release, the London-based energy
consultancy firm argues that the Organization of Petroleum
Exporting Countries, a multinational cartel that for decades has
served the international economy as a paramedic squad during energy
supply crises, is losing its market clout. Arriving just days after
the trading community had flouted an OPEC effort to relax supply
markets with higher export ceilings — a snubbing that
amounted to public emasculation for the petro alliance — the
market-sobering report landed on trading floors with instant
validation. Presuming the study’s chief assumption holds
water, that OPEC, arguably the world’s most powerful
multinational institution, has lost its price-swinging savvy, the
global economy may be approaching the coldest winter it’s
seen in years.

To say that the growth trajectories of international markets
rest beneath the spigot of OPEC’s vast oil reserves would
only be telling half the story. For the past two decades, the
cartel has used its immense stockpile capacity to shelter world
energy markets from what would have otherwise been some of
history’s most crippling price shocks. In the early 1980s,
when production complications stemming from the Iran-Iraq war
shrank OPEC’s market share by 7 million barrels per day,
Saudi Arabia (OPEC’s kingpin and most well-endowed affiliate)
opened the flood gates — a move that almost immediately
stabilized prices and soothed inflation pains.

Less than a decade later, in an effort to hush war-time energy
anxieties, OPEC (with obvious dissension from Iraq) agreed to hoist
export quotas throughout the duration of Operation Desert Storm to
fill the gap left by a projected production dearth. And more
recently, when Venezuela’s energy sector was debilitated by
wide-scale labor unrest, instead of basking in the higher energy
premiums that accompanied the supply disruption, cartel members
voted to turn on the faucet once more. Though these policy
decisions were far from gestures of benevolence (the organization
has long-term financial incentives in keeping petroleum
affordable), they were nonetheless reminiscent of a protracted
period of time when the cartel had the reserve flexibility to blunt
the impact of global price tremors.

So does OPEC still have the goods to glut the markets? The CGES
study indicates that, despite numerous attempts over the past year,
the cartel has failed to lay the price of crude to rest in between
its target margins of $22 and $28 a barrel. And if you’re
half as shocked as I was to learn that OPEC, once considered the
global economy’s security blanket, could let current prices
(now teetering around the $50 mark) reach twice their sustainable
target levels, then consider this: With the U.S. economy surging,
and double-digit growth in China and India a monthly phenomenon,
the CGES anticipates that added global demand will boost
consumption levels by two million barrels per day over the next
fiscal year. Now here comes the scary part: The firm estimates that
in 2005, tightened energy markets will plunge OPEC’s spare
exporting capacity to a thin 1.5 million barrels per day — a
figure that falls markedly short of accommodating projected demand
intensity. You do the math, folks. If the numbers are right, this
is no longer about wiggle room or reserve space — it’s
about an actual supply deficit.

So assuming OPEC’s price-swinging hands are sufficiently
tied, is the international economy capable of self-stabilizing
while still traveling at its current speed? If there is in fact no
cushion from the brunt of a major supply disruption, should
monetary officials continue forward with their feet off the brakes?
Let’s consider the circumstances of our key energy suppliers:
There’s Saudi Arabia, embroiled in an internal holy war,
where policy analysts have given the embattled monarchy 18 months
before it crumbles from within, or Nigeria, where separatist rebels
are threatening to siege the country’s multinational oil
installations if political autonomy demands aren’t met. What
about Russia, a nation whose largest oil producer has been
effectively dismembered by a central government tax audit? And we
can’t forget Iraq, a country where pipeline sabotage attacks
have grown as common as Al-Jazeera broadcasts. Personally,
I’d like the airbag back.

 

Singer can be reached at
“mailto:singers@umich.edu”>singers@umich.edu.

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