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OPEC Pre meeting analysis 
September 25, 2001.

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Organization of Petroleum Exporting Countries: Pre Meeting Analysis

OPEC's Ministerial Monitoring Subcommittee is meeting today in preparation for the 117th Ordinary Meeting of the Conference on Wednesday. In normal times yesterday's dramatic drop in prices would have assured a production cut by OPEC. These are not normal times.

As we have noted for over a year prices of $25 per barrel or above cannot be maintained in the long run. Before the terrorist attack we expected crude prices to come under extreme pressure in the Spring of 2002. The impact of the attack on the U.S. and World economies has moved the pressure point forward in time. It will be another 2-3 weeks before we can truly assess the damage to oil consumption. Some have said that the increased level of military activity by the United States will make up for the lower demand for jet fuel by commercial aviation. This is not the case and would not be the case even if military consumption tripled. Also any additional fuel for military jets would come from European or Middle East refineries which are much closer to the military assets which have been deployed. 

The good thing from OPEC's perspective is that we are entering the high demand winter heating season and much of the U.S. was hit with cold weather last night. Members may delay their decision until U.S. supply and demand data is released tonight by the American Petroleum Institute and tomorrow  morning by the Department of Energy, but this will not influence the decision. At this point in time political considerations will outweigh economics. It is a virtual certainty that the decision at this meeting will be to keep existing quotas. There is a consensus that OPEC is currently producing above quota and OPEC ministers are likely to publicly emphasize adherence to the current quota. They may also attempt to lessen the impact on prices by scheduling another meeting to reassess the situation in a month or two.

The bottom line is that oil prices are likely to be at or below the $22 per barrel lower limit of OPEC's $22-$28 per barrel price band for some time. This will be of long-term benefit to OPEC, as it will slow exploration activity in the rest of the world which would cut into OPEC's market share. The only scenario for higher prices would be a terrorist attack on the oil infrastructure and the impact of that would be relatively short lived.

 
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Copyright 2001 
by James L. Williams  
 
James L. Williams
WTRG Economics 
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