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OPEC happy, for now

Last updated: Thursday, December 06, 2012 12:49 AM

JEDDAH – As OPEC members meet in Vienna next week, they have good reason to feel satisfied, Gulf Oil Review said in its market insight released Wednesday.

For the first time in history, the average price of the group’s basket of oil has been above $100 a barrel for eight consecutive quarters.

The stability of the oil price, especially in the past three quarters, is remarkable given the many weaknesses in the world economy; the EU debt crisis; sanctions on Iran’s oil; geopolitical tensions in the Middle East; and unplanned supply outages outside this region. While macroeconomic risks abound, the risks of a shock are receding and therefore, so is the prospect of a sharp dip in the oil price.

So the most likely outcome for the Vienna meeting is for OPEC to keep nominal quotas unchanged. Given that OPEC is producing at elevated levels above its 30 million b/d ceiling, adjusting output to keep the oil price within a preferred range could be achieved. In the absence of a major economic shock, we see OPEC holding the line to stop any significant slide in oil prices.

Risk of severe macroeconomic problems that could drag the global economy into a prolonged recession has substantially receded. Economic data from China and the US have been strong in recent months. Even in the EU, sentiment has improved for the first time in November, reversing eight months of decline.

But non-OPEC supply next year will likely be lower than expected.

The big potential sources of supply growth such as Brazil and Kazakhstan are struggling to meet their ambitious targets, while in mature areas such as the North Sea, companies are struggling to arrest high decline rates.

Europe’s debate over whether to exploit its unconventional energy resource offers a lesson on how MENA governments handle an industry loaded with potential but fraught with manageable risks, says Spencer Swartz, vice president of energy and government relations at Fleishman-Hillard in Brussels and former Wall Street Journal senior energy correspondent.

Although far away from having its own US-style shale-gas boom, Europe is providing a studied example into the laundry list of environmental impediments that Middle East and North African nations face as they begin tapping shale deposits at scale. Producing shale gas and other more geologically difficult-to-extract unconventional resources is seen as a rising necessity in MENA nations, where growing domestic demand increasingly squeezes the export and revenue potential of conventional oil and natural gas supply.

In the past year, more European states, regions and localities have imposed bans on hydraulic fracturing, or fracking – the drilling technique used to crack open shale rock to release the gas or oil – over what are, at a basic level, legitimate concerns about potential impacts. Chief among these is water quality.

Shale-gas development in the US over the years has a fairly good environmental and safety track record.


But an enduring problem affecting the European debate is that a relatively small number of cases in the US in which processes like wellbore integrity failed and raised concerns about water contamination, have been inaccurately portrayed by opponents as representative of shale gas development as a whole.

MENA leaders should learn from Europe and waste no time in initiating sustained public discussion about the various implications of shale-resource development and robust regulatory measures and enforcement, Otherwise they could find themselves fighting bigger battles down the road with publics that, over the past two years, have demonstrated their willingness to challenge government policy. – SG

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