Chamberlain S. Peterside, Ph.DWednesday, June 23, 2004
[email protected]
New York, NY, USA



…The Return of OPEC.

his summer, as the United Nations Conference on Trade and Development (UNCTAD) convenes in Sao Paulo, Brazil, record high crude oil prices has been sending jitters around the world. Less than a month ago the benchmark North Sea Brent Crude hit the $43 a barrel mark, creating some fear that unprecedented high oil price could throw a monkey wrench into the world economic recovery process.

One could have hardly expected this price trend 30 years after the initial crude oil price spike precipitated by OPEC (Organization of Petroleum Exporting Countries) in the early 1970s. That singular event sent shock waves across the industrialized world. As recently as 10 years ago after the expulsion of Saddam Hussein's army from Kuwait, you could have hoped that prices would for long remain tamed, - not at all.

Some critics maintain that the major reason for invading Iraq last year has been defeated, since it was to wrest control of oil production and force down prices. The reverse is now the case. Whether price control would ever happen is another issue that remains to be proven. After all we have for years heard predictions of the demise of OPEC, due to widespread use of energy-saving devices and exploration of solar, nuclear energy and natural gas.

In recent months, we have seen some discord within OPEC, with Saudi Arabia threatening to unilaterally increase production by 2,0 million barrels a day. Some member countries like Nigeria and Venezuela and non-members like Russia have taken advantage of the strong demand and higher prices to pump more oil. OPEC overall has staged a spectacular come-back; has gotten smarter in understanding and exploiting global energy demand and supply dynamics and has been taking strong measures to regain relevance in the global arena, much to the chagrin of critics and politicians in developed countries.

…Asymmetry of Dependence.

The geo-political pattern of natural-resource distribution and consumption presents quite a formidable challenge - developing countries are the major producers of natural resources and cash crops like crude oil, cocoa, coffee, cotton etc, while advanced countries remain major consumers. In return, the advanced countries supply finished-goods. So historically, price mechanism of raw materials vis-ŕ-vis finished-goods have been so skewed against the developing countries that a recent report by Oxfam notes that unstable produce prices in the world market has been a major contributing factor to poverty in developing countries. Just as higher cost of imported finished-goods depletes the meager foreign earnings of developing countries and creates undue debt burden.

Not until the emergence of OPEC has producer nations been able to capture some commanding heights in determining production quota and helping dictate at what price their commodities should be sold. Don't forget that there are several other producer-organizations around the world like Cocoa, Coffee and Copper Producer unions. They have for the most part remained toothless bulldogs as price manipulations continue.

Depending on which side of the aisle you belong, it could be argued that rock bottom prices for raw materials are as harmful to producer-developing countries, as much as stratospheric price range for crude oil might not quite favor developed-importer nations, (talk less of poorer developing-importer countries). Taken as a whole, what net impact it would have on the global economy is still a matter of polemics?

…Demand-Growth Factors.

The key facts to discern here is that the global economy is now so intertwined that what happens in one country readily affects others. It's no secret that through the process of global commerce, no one country is self-sufficient in all the natural resources and finished goods required to function in isolation. So what is good for one country should also be beneficial to its partners.

Some key factors why we see a renewed high crude oil price in recent times are:

One of the major factors that could have an overbearing impact on oil prices in years to come would be demand by China and India as they continue on the path of rapid economic expansion. As inhabitants of the US - one of the world's largest consumers of petroleum products, you can't help but notice the impact of higher crude oil prices in the lives of most consumers. Gasoline prices at the filling stations have hit a level not seen for more than a decade; high-octane fuel in California is now retailing for over $2.50 a gallon. It seems to me that the higher prices might not be sustained for long without denting consumer confidence and having a serious political overtone on the coming elections.

Despite an International Energy Agency estimate that a $10 rise in crude oil price reduces US economic growth by 0.3%, a recent Fortune Magazine column captioned "Why $3-a-gallon gas is good for America", pointed out that even at $40 a barrel, the US economy is still growing at 4% a year, which is about the same growth rate in 1999 when oil prices were half its current price.

On the other side of the spectrum, high oil prices has been a God-sent for Russia that has now amassed a substantial foreign currency reserve and already beginning to retire most of its foreign debt. The windfall is a now enabling Russia to stand toe-to-toe with other G-8 countries, since it doesn't need their aid anymore - case in point, President Putin's adamant opposition of the Iraq invasion.

…Global Impact.

The situation is not at all rosy for poorer countries in Africa, Asia or Latin America that spend a large chunk of their revenue on energy import. Even for some oil exporting countries like Nigeria the high oil prices is not all-good news. A short-lived general strike by the Labor Congress two weeks ago was meant to draw attention to rising gasoline prices. On one hand, by end of May 2004, Nigeria had hit its revenue targets for the year, thanks to increased production and higher oil prices. However take a second look and you would discover that according to a Wall Street Journal article last week, more money is now spent subsidizing fuel consumption at home, due to higher import bill for refined products.

There can hardly be long-term winners in this game of prices in the world market. The world should better strive for an equilibrium of interest. OPEC continues to maintain some clout in the global oil market, (with its 60% market share), as developed countries continue to pay unfair prices for other cash crops and unnecessarily subsidize their farmers at the detriment of poor farmers in developing countries. Long standing trade inequalities must begin to be addressed.

Agricultural subsidy and unstable prices in the world market hurts developing countries as much, if not more than OPEC production ceiling dents economic growth in developed countries. Therefore, efforts should be doubled by policy makers and negotiators to strike a balance within the WTO (World Trade Organization) protocol and in other global forums. Countries and regions must be viewed as equal partners and integral parts of our economic universe with vital interests. Those interests should be well represented in trade pacts. Only then can nations function more harmoniously, anything short of that is utterly unfair and doomed to be counter intuitive to the long-term interest of the global community and as Prime Minister Tony Blair soundly put it, poverty, disease and inequality would "remain a dent in the global conscience".

Chamberlain is the Founder & CEO of New Era Capital Corp and MyCompleteFinance.com, - a New York based financial services firm. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.