Opec's Subtle Price Rise: A New Era in Oil Markets

Opec's primary objective, to promote a long-term rise in oil prices, has been remarkably successful. Since the 1998 Riyadh pact between Saudi Arabia, Venezuela, and Mexico, crude prices have nearly doubled from an average of just under $20/bl in the 10 years preceding the Asian financial crash of 1998 to over $35/bl in the first quarter of this year. This slow-motion price rise has been achieved through Opec's tight grip on production, which has been exacerbated by a persistent structural shortage highlighted by a two-year prompt premium on crude. Global stocks are below their five-year average, and demand, growing annually by nearly 2mn b/d, is at record highs.

Key Takeaways:

• Opec's prime objective is to promote a long-term rise in oil prices, and it has been remarkably successful in achieving this goal since the 1998 Riyadh pact.
• Crude prices have nearly doubled since the 'nineties, with the average price rising from just under $20/bl in the 10 years preceding the Asian financial crash of 1998 to over $35/bl in the first quarter of this year.
• Opec's tight grip on production has created a persistent structural shortage, highlighted by a two-year prompt premium on crude, with global stocks below their five-year average and demand at record highs.
• The role of speculators is a distraction from Opec's strategy to promote high prices, and the organization's credibility is high, inspiring uncertainty and even fear.
• Saudi Arabia needs a price of at least $28/bl to balance its budget, driving Riyadh's policy on oil prices, which is focused on extorting a higher economic rent rather than seeking real growth through higher output.
• The view that price rises are less serious now than in the 'seventies due to oil's share of GDP having fallen does not stand up, as the world is increasingly dependent on oil.
• High oil prices are a tax on rich consumers, hinder economic growth for poorer nations like China, and do not bring real growth for oil producers.

Statistics:

• Crude prices have nearly doubled since the 'nineties, from an average of just under $20/bl to over $35/bl.
• Global stocks are below their five-year average.
• Demand is growing annually by nearly 2mn b/d and is at record highs.
• The prompt premium on crude has persisted for two years.
• Saudi Arabia's oil price target is $28/bl to balance its budget.
• The $15/bl rise in prices since the 'nineties has added over $60bn/yr to US import costs.

Sources:

• The Economist
• CGES analysis
• Opec ministers' meeting