OPEC cartel faced with future risks in its 50th year (Feature)

By Albert Otti Sep 10, 2010, 3:06 GMT

Vienna - The Organization of the Petroleum Exporting Countries is set to mark its 50th anniversary on Tuesday not with a grand ceremony, but with a simple press conference at its Vienna headquarters.

This might seem surprising for the world's only oil cartel, but the modest commemoration is fitting in view of the group's diminished importance and the risks it faces amid current technological shifts.

'I think it is still both relevant and powerful,' energy expert Andreas Goldthau said about the 12-country organization. OPEC says it pumps a third of the world's oil and controls 80 per cent of reserves.

But some experts say that the group founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela in 1960 could see demand for its product fall because of the trend towards alternative ways of powering vehicles and policies to curb climate change through new technologies and taxes.

Together with efforts by the United States to become less dependent on foreign oil, these developments do not bode well in the long run, said Fadhil Chalabi, who acted as OPEC secretary general in the 1980s.

'This affects growth of consumption,' said the Iraqi expert who now heads the Centre for Global Energy Studies in London.

Another question is whether OPEC's five founding countries plus Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and the United Arab Emirates can still control prices.

In 1973, the cartel's Arab members proved they could do so when they doubled oil prices and cut production, setting off the so-called first oil crisis.

But when the value of oil hit its all-time record of 147 dollars per barrel (159 litres) in July 2008, it was not simply because of what OPEC had or had not done, said Goldthau, who works at the Central European University in Budapest.

It was rather a mix of speculators driving prices, increased demand from China and elsewhere, a lack of OPEC spare production capacity and investors shifting to oil amid the US financial crisis, he explained.

'OPEC has lost a lot of its ability to set prices,' said Goldthau, who recently published a book on the organization.

The cartel is partly to blame for this. OPEC's high crude prices in the 1970s made it profitable for oil firms to look for the commodity outside the Middle East, leading to a more diverse market.

Yet the group still retains influence by sending signals on production goals or price targets to oil future markets, which trade on expectations rather than on the physical availability of barrels, Goldthau said.

The effect of OPEC oil ministers' utterings can be witnessed at their meetings in Vienna, when financial reporters breathlessly relay every comment directly to their market-trading clients, even if it is just a 'yes,' 'no' or 'maybe.'

The cartel currently also benefits from credibility in the market, as its member countries are sticking relatively closely to their agreed production quotas.

But OPEC meetings also regularly reveal that the group is not as effective as it could be because of long-standing internal divisions on long-term price policy.

While some countries like Iran and Venezuela seek high prices to finance their budgets, others like Saudi Arabia want to make sure oil does not get so expensive as to push down demand.

There is usually more agreement on reaping gains in the short term, Chalabi said.

To secure its future, the oil organization should think long-term and reconsider its price policy to discourage the shift to alternative sources of energy, Chalabi said. 'But this is the theory. In practice, short-term considerations prevail,' he added.