March 3rd, 2011
03:15 PM GMT
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Three short years ago in the first quarter of 2008, members of OPEC, especially those in the six Persian Gulf states, were riding a wave of surplus capital flowing into their coffers as oil crossed over the three digit level of $100 a barrel.

As we all know, prices continued the march to $147 that summer and started a sharp spiral downwards when the banking crisis set in, the recession took hold in the West and spread like a virus to the fast growing economies of Asia.

Is this a case of deja vu and we will witness a nasty correction as oil prices undermine fragile recoveries in the U.S. and Europe?  Quite possibly yes.  Contrary to some of the popular thought being shared online, the major producers in the Gulf States are not eager to see a repeat of the autumn of 2008 when prices tumbled more than $100 in six months.

What OPEC, especially Saudi Arabia which sits on a quarter of the world’s proven reserves, has been striving for is a "Goldilocks price" for crude.   You remember the fairytale, the porridge that was not too hot, not too cold, but just right.

King Abdullah of Saudi Arabia actually stated what he thought Goldilocks oil was during the run up to a record price of $147 - something in the range of $85-90.  OPEC countries are sitting on spare capacity of about four million barrels a day - three-quarters of that in the Kingdom.  Most of that spare capacity is there because global demand still remains well below the pre-recession peak levels.

China, India and Southeast Asia have revved up growth again, but America and Europe have needed historically loose economic policies and easy money to sustain a tepid recovery.  If this Middle East crisis would have hit right in the midst of the peak of global growth, one would probably be looking at a new record for crude.

While many are quick to jump on the bandwagon and ask Saudi Arabia and others to open their taps (which they are doing already) we should also keep in mind that the market is starting to price in worse case scenarios.  Not only are consuming states pondering the future of Libya and its 43 billion barrel reserve, but Algeria, Egypt and Oman as well.

All four combined have production output each day of more than four million barrels. With that simple math, it is quite easy to see why OPEC’s spare capacity gets stock market investors a bit nervous.  But it is difficult at this stage to ponder all four of those countries not sustaining production over the medium term.

Whoever comes into power wants the cold hard cash that their black gold generates. There are also other key forces at play in today’s “three digit market,” most notably the hedge and pension fund managers who see the commodity market as an easy bet for making money.  Some of the best energy strategists that I have spoken to say that at least 10% of today’s price is driven by these funds. They say another 10% if not more represents a security risk as in the concern that supplies out of the Middle East may be hampered if the region continues to have no endgame in site for political stability in Libya, Egypt, Bahrain, Tunisia and Algeria.

In the classic version of story, Goldilocks wakes up out of a deep sleep, sees the three bears and scampers out of the cottage where she is an unwelcome visitor.  The return of the “Goldilocks scenario” to the energy market would certainly be welcomed by producing and consuming nations.  They are fearful of the impact today’s $100 oil will have in the near term - but this looks as elusive as the character in the fairytale.

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soundoff (11 Responses)
  1. John

    So pretty much this article is talking a bunch of crap/speculation... and most of the backup/evidence for such speculation is loosely referred to...

    useless article -_-

    March 3, 2011 at 4:49 pm |
  2. pcb

    How about OPEC doing something fiscally responsible and, for the world's benefit, price a barrel of oil as it should be instead of trying to line their pockets and further escalate this world-wide economic crisis. If they do so, then maybe others will follow. Maybe this toppling of dictators should take a wider scope and the toppling of these theives be next on the agenda. We have all had enough and maybe revolt is the only way.

    March 3, 2011 at 5:21 pm |
  3. Anita

    John Defterios gives valuable commentary on the happenings as we see them, but there seems to be no valid point he is making at the end of it all.
    And writers should really take care! He writes "the region continues to have no endgame in site for political stability " when he should actually say " no endgame in SIGHT." This sort of poor language usage underlines the pointlessness of his writing. Really, it is more than column inches that he should worry about.

    March 3, 2011 at 6:47 pm |
  4. kme

    Those OPEC officials kept changing their tune on what was a "goldilocks" price; the higher the price went the higher the "goldilocks price they stated. What does that tell you.....

    March 3, 2011 at 7:28 pm |
  5. phil

    Are you kidding me???? Finally an article that is addressing Opec and their monopoly!?!!? What took so long CNN?
    I mean, is there anything that can be done to stop these price gouges???? As our congressmen remain tight lipped about this issue, I tend to really doubt it.

    March 3, 2011 at 9:12 pm |
  6. airlangga

    please strive the oil exploitation to full the subsidize
    puss the inflation because of the striving oil price
    come on PERTAMINA i hope ypu'll struggle to do the best

    March 3, 2011 at 10:34 pm |
  7. A Seghir

    Concerning petrol and money, most articles miss the point. The real cost of energy is the money OUR governments add to oil. 75% the money paid at the gas station is tax, at least in Europe. All that support wasteful governement.

    March 4, 2011 at 8:33 am |
  8. Oladipo Akinyemi Omole

    Hello Everyone,
    I'd like to apprise you that the Apara and the Obe families to which I belong have two large parcels of arable land in Osun State, South West Nigeria which I believe are suitable for the cultivation of Peppers and Tomatoes and other consumables.At present, the farms are lying fallow and not much activity is going on there.
    There's hardly a day that Nigerians and the West African sub-region don't eat Peppers and Tomatoes.There's a huge market for these consumables, but the land is concealed in the interior of Osun State and I believe it needs a viable road network to be able to distribute the produce from the farm.
    There is at least one other opportunity that's indispensable to the project. It's packaging.I'm sure you are all familiar with that alluring and neat packaging of produce in your domains.
    If you're interested and you consider it worthwhile please contact: Mr Olawale Edun, The Chief Executive Officer of Denham Management, Marina, Lagos.You may obtain his email address and other details from the British Council/Chamber of Commerce in Lagos.You may also contact Ex-deputy governor of Osun State, Erelu Olusola Obada or Joseph Oladapo Apara through these contacts for discussions and other details.
    I'm always much obliged.It can only get better.Cheers.
    Yours sincerely,
    Oladipo Akinyemi Omole

    March 4, 2011 at 12:22 pm |
  9. Friedman II

    Hello! There is no shortage of oil and yet the price of the commodity keeps shooting up. This contradicts all the things we learn in Economics 101. Surely, something isn't quite right. Not only is there no shortage of oil, there is also lots of spare capacity in the industry, according to the expert reports. And huge new reserves are being constantly discovered which will ensure the world won't run out of oil for the next hundred years. The world is literally swimming in oil. And demand is going to drop significantly in the next few years. According to energy specialist reports, America is projected to use 20% less oil in the coming 5 to 10 years as hybrid and electric cars start to replace gasoline ones. Alternative energy production and use is also picking up momentum. Nuclear power is also gaining popularity as global warming fears escalate. Don't all these mean that the oil price should drop? Yet it is still climbing higher and higher. Who shall we turn to to find a rational answer?

    March 4, 2011 at 3:36 pm |
  10. Ali Mutahir

    OPEC is not directly responsible for this price hike....or the last one in 2008......or the steady increase since 2003.Its the United States Foreign Policy.With all these wars going on in Iraq and Afghanistan, and now the wave of change in North Africa and parts of the Middle East, are all contributing to the instability in the region.Oil isn't scarce,nor has it become more expensive to drill but a constant "Risk Premium" is added to the price.Actually it would be more appropriate to refer to it as the "Fear Premium".Everyone knows how it all started. The biggest oil producing nation, Saudi Arabia, has priced its oil higher on the advice of the Americans.Otherwise the average price to lift a barrel of oil in the Middle East is between $1 and $3.The solution has to be in creating new oil contracts that are in the Euro or other currencies,since currently both benchmark contracts,the NYMEX Crude and the Brent Crude are priced in USD.

    March 6, 2011 at 8:47 pm |
  11. Gromex

    Social conflicts in the Middle East and Africa, generating economic impacts that affect the stability and growth of the global economy, mainly because they are oil-producing countries. Here's an analysis:


    April 7, 2011 at 5:27 pm |

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