Accommodating Libya and world economic worries weigh on OPEC

By Margaret McQuaile

September 29, 2011 - OPEC would normally hold a meeting this time of year, but has met only once so far in 2011 despite the tumultuous happenings in the world of oil and in the wider global economy.

The uprising in member country Libya has led to the United Nations recognizing a new interim government in Tripoli, veteran former leader Moammar Qadhafi is in hiding and Libyan oil production is starting to recover after dwindling to almost nothing at the height of the fighting.

The world's top economic bodies are fearful of a new, deep downturn and the price of Brent crude oil has slid to around $105/barrel from the $127/b two-and-a-half-year high traded in early April.

When OPEC met in June, the concern for the group's key Gulf Arab members was that production should be increased to meet expected higher demand for OPEC oil, but a proposal from Saudi Arabia to increase estimated actual output by 1.5 million b/d to 30.3 million b/d was shot down by Iran, Algeria and several other members. The meeting broke up acrimoniously and without agreement on output levels.

Needless to say, however, OPEC output has climbed steadily and, according to the International Energy Agency, averaged 30.26 million b/d in August -- within a whisker of Saudi Arabia's proposed target.

But, with Libya now beginning the effort to restore production to pre-uprising levels of close to 1.6 million b/d and Italy's Eni and France's Total already back at work in the country, and the world economy looking rather sick, one of the questions being asked is how OPEC will respond.

Projections of Libyan output vary, but the head of the country's National Oil Corporation said recently that crude production could be as high as 800,000 b/d or even 1 million b/d in five or six months' time.

OPEC secretary general Abdalla el-Badri said on September 19 that member countries would accommodate Libya's return to the international oil market by reining in output because it would be in their own interest to do so.

A week later, on September 27, a senior Gulf OPEC source said Libya's resumption of oil exports was unlikely to have a disruptive effect on the market because it would be gradual and would take place alongside rising demand for oil.

"Libya is coming back gradually," he said. "I don't think it's going to make any disruption," the source said.

The approaching winter, the gradual nature of the recovery in Libyan oil output, "plus growth in demand for oil will take care of it," he said, adding that world oil demand was set to grow by more than 1 million b/d next year.

"The market right now seems to be very stable," he said. But, he added, "if there is a need for action, OPEC collectively is willing to act."

The Gulf source declined to comment on current price levels but said they were "not a function of fundamentals alone" and were influenced by expectations of world economic performance and the European financial situation as well as speculation.

He also declined to speculate on the outcome of OPEC's next meeting, which is scheduled for December 14 in Vienna.

OPEC's Gulf Arab members view the previous output pact, based on 4.2 million b/d of cuts agreed in late 2008 when the world economy was plunging into recession, as redundant.

In June, OPEC's economic experts were projecting that demand for OPEC crude would rise by some 2 million b/d between the second and third quarters of this year.

Since then, OPEC has lowered that estimate to 1.62 million b/d.

Comments from Iran's OPEC governor, Mohammad Khatabi, on September 27 suggested that the positions of Islamic Republic and OPEC's Saudi-led Gulf camp may not be too far apart at the moment.

Khatibi said the oil market was currently stable but that OPEC was watching the European debt crisis and economic developments in the US and would act if prices were to resume a downward trend.

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