Thursday, August 30, 2007

An OPEC Less Opaque

Do oil prices always have to be a matter of surprise?

The price of oil has always been a subject of great debate, analysis, and not least, fascination. And not surprisingly so, given the importance of that simple little number to the world economy. However, oil prices seem to have a remarkable propensity to confound the bravest of predictions. Real oil Prices began an upturn in late 2002, and trebled by mid-2005*, leading to predictions of $100 oil over the next few years. While the nightmare $100-a-barrel predictions have not materialized - and don't appear very likely to do so anytime soon** - the fact remains that a price rise that appeared to be a temporary spike does seem to have led to a more or less permanent plateau.

What's more, as the US DoE's graph shows, the behavior of oil prices over the past 30-some years can hardly be described as monotonic. And each time it lurched up or down, it is not difficult to imagine the wide-ranging impact on the fortunes of nations, governments, industries and individuals.

The benefits of steady oil are thus not far to seek. But can the price of oil be steadied, or at least made to move in more predictable ways over the short- as well as long-term?

Clearly, this is an immensely difficult question to answer. Many factors are at work. The prices of even the staidest of commodities are volatile at the best of times. And oil can hardly be described as a staid commodity. It's price is affected by a heady mix of geopolitical considerations, speculation, regulatory moves, and so forth. Also, as the DoE graph shows, the price trajectory has been punctuated by various events which caused the price to react sharply, most of which were quite unpredictable at the time. And against this backdrop of formidable factors, it appears there isn't really much any single entity, such as one government or one institution, can do to steady the price.

More transparency
But make no mistake- there is an awful lot that one particular organization can do - if it has the will. This organization is, not surprisingly, the Organization of Petroleum Exporting Countries (OPEC). Headquartered in a deceptively unassuming building in central Vienna, OPEC still wields enormous clout in deciding the world's energy future. Of course, it's record of influencing the oil price since the oil price shock has been somewhat less than stellar, particularly after Saudi Arabia abandoned the swing producer role in 1986.

The world oil industry is beset by lack of good data (and probably some obfuscation) on production figures - actual output as well as capacity. Similarly, there is rarely much clarity on oil reserves. OPEC can make a big difference by evolving better mechanisms to govern output and reporting.

This sentiment is not exactly new - a US Joint Economic Committee press release dated 2005 says, "Much more transparency in OPEC oil production is needed, as noted by the International Energy Agency and others".

Price gyrations are clearly not good for anybody. And OPEC suffers almost as much from high prices as consumers do. High prices can severely crimp demand, particularly if measures such as gasoline taxes imposed to control the environmental impact of oil use gain wide traction. Consistently high prices can also encourage research into technologies to produce alternative energy*** (although these are not without concerns of their own.). And so OPEC will do itself a favor by becoming more transparent. And it will greatly help the world economy avoid getting onto a slippery slope.

* the US Dept. of Energy has a nice graph that traces the prices of oil (nominal as well as real) over the period 1970-2006.

** interestingly, $100 oil predictions are still going strong.

*** More on alternative energy technologies in my next post, where I'll also be talking about how we applied our methodology for foreseeing emerging technologies to the problem of guaging the potential of technologies that produce energy from solar, wind and other sources.