Cairo Crunch Time For Oil Prices

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[shadow=black]The RAC thinks that, by the end of December, we'll be paying 88 pence for a litre of unleaded petrol. Happy Christmas, everyone! Well, perhaps not everyone.[/shadow]

The drop in oil price is not going to be greeted with good cheer by members of OPEC, who are meeting in Cairo this weekend.

For Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Algeria, Angola, Ecuador, Libya, Nigeria, Qatar and the UAE, the sudden collapse of the price of oil is something of a disaster.

The situation is graver for some countries than for others.

According to research by Deutsche Bank, Venezuela needs to see oil at $95 a barrel to balance its current account. Even the oil titan Saudi Arabia needs oil at $54 to do the same.

Three months ago crude oil peaked at $147 a barrel; today it threatens to fall below $50. It's a fair bet that some OPEC countries are pumping oil at a loss.

In Vienna in October, OPEC tried to prop up the falling oil price by reducing production by 1.5 million barrels a day. Since then, though, the price has kept on falling.

OPEC members together account for 40% of the world's oil output, so they can fix the price of oil to some extent by manipulating supply. Yet even they are helpless to do anything about flagging demand for oil as the world's economies slow down.

Iran - which gets an eye-watering 80% of its wealth from oil revenues - and Venezuela are both calling for a new round of reductions. There is a chance the cartel will cut again in Cairo, although many analysts believe they may decide to wait until the next formal meeting on December 17 before taking action.

Of course, the low price of oil gives precious grounds for genuine economic optimism. The "r" word - recovery - is still a long way off but when the green shoots do sprout they will have their roots dipped in cheap oil.

Long term, though, don't kid yourself that oil will remain at $50.

Most of the world's easy oil has been found. New fields do get discovered but extracting anything meaningful from the Canadian tar sands or below the Arctic ice is an expensive business and those costs will get passed on.

OPEC says it exists to "ensure the stabilisation of oil prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations". Quite so; a steady oil price is in everyone's interests.

However, OPEC countries also want to get a "fair price" for their oil. Quite what that price is, they have never said.

One thing you can bet your bottom dollar on is that it sure ain't 50 bucks a barrel.

Source:
Sky News
http://news.sky.com