Speakers at a London conference explained how the Organization of Petroleum Exporting Countries is in crisis right now but will regain market dominance in the next century (OGJ, Apr. 18, p. 75).
All speakers, that is, except one.
Edward N. Krapels, president of Energy Security Analysis Inc., Washington, said OPEC has let the balance of oil market power shift to financial markets and now stands little chance of regaining control.
By dismantling the vertically integrated structure of international oil in the 1970s, Krapels said, OPEC created the conditions from which extreme day to day price volatility would emerge.
"This gave the world financial community, which was evolving risk management mechanisms, a chance to get into the oil business," Krapels said. "Had OPEC been more effective in the 1980s, paper markets for oil would not have been born."
OPEC has underestimated the power of the financial markets, Krapels said. OPEC may control 40% of the physical barrels of oil produced, but it controls only 5-10% of all oil trading.
NYMEX FUTURE
"If you want to see into the future for oil markets, look to the New York Mercantile Exchange," Krapels said. Oil margins undergo constant change as a result of trading by the Wizards of Wall Street.
Now oil is part of a market much like any other commodity. The characteristics of such markets include low profit per unit for the companies that produce the commodity.
"The markets are hard on slow and bureaucratic producers," Krapels said. "And every time the oil price passes $25/bbl, the Wizards of Wall Street will mount a selling campaign, based on the theory that a high price cannot be maintained, and bring the price down again."
OPEC'S OPTIONS
Krapels listed these five requirements for OPEC to regain oil market control: Saudi Arabia and Iran must work in unison, a tight supply/demand balance must return, OPEC's members must become integrated, an effective mechanism for providing oil at a required price must evolve, and OPEC must demonstrate financial superiority over Wall Street.
None of those things is assured.
A Saudi/Iranian entente is not likely, said Krapels. The supply/demand balance won't be tight because of Iraq's expected return to exporting. OPEC is capable of only partial integration of its members. A price mechanism is impossible without integration. And financial markets can move billions of dollars into oil very quickly--and out again.
With all these requirements, what are the chances of OPEC regaining power from the Wizards of Wall Street?
Krapels answer: "I'd say less than 50-50."
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