FOLLOWING terrorist attacks on the World Trade Centre (WTC) and the Pentagon in the United States on September 11, the crude price surged to $31 a barrel, in the first place.

Subsequently, it slipped by about 30 per cent to $21 to $22 a barrel in the first week of October. At one stage, it even fell below $20 a barrel.

According to oil market analysts in the United States, the deteriorating world economic outlook, exacerbated by the September 11 tragedy, may have a dampening effect on the world oil demand and keep the crude prices at a lower level. However, if the supply of crude oil is in any way disrupted as a result of military action by the US-led coalition against terrorism, then its price may surge to $40 to $50 a barrel, in the coming weeks or months.

In its meeting held on September 26, the Organization of Petroleum Exporting Countries (OPEC) had decided to continue pumping at current levels of production, in spite of the dramatic drop in crude prices.

The OPEC delegates planned to meet again on November 14 to review the market conditions and, as stated by them, they could cut production at that time, if necessary. There were indications that they could meet even earlier, if the situation warranted such a meeting. However, a meeting of OPEC and some non-OPEC members scheduled for October 7 was cancelled, according to press reports, presumably in view of the attacks on Afghanistan.

The OPEC is producing 23.2 million barrels of crude, at present, as against 26.7 million barrels produced last year. It may be recalled that in January 2001, The OPEC decided to remove 1.5 million barrels a day from the market. Subsequently, crude production was slashed by another one million barrels by the OPEC in its meeting held on March 16 and yet another one million barrels a day, with effect from September 1, bringing the crude production to 23.2 million barrels a day. However, in addition to the official production of 23.2 million barrels, the OPEC members were overproducing between 700,000 and 1.5 million barrels a day, in excess of their production quotas fixed by the OPEC, according to a report appearing in the Dallas Morning News, dated the September 28, 2001.

The OPEC delegates said they still had a target to stabilize prices between $22 and $28 a barrel. The OPEC President, Chakib Khelil had told a news conference that the Group would take all necessary steps, including holding telephone conferences, to try to defend the above-mentioned target. Under the existing arrangement, OPEC had declared its policy to cut its daily production by 500,000 barrels if its benchmark price for crude fell below $22 a barrel for 10 consecutive trading days.

The Business Week, while reporting on the OPEC meeting held in Vienna on September 26, in its issue of October 8, 2001, had stated that there was a feeling right now that the OPEC was going to lose its grip on the oil market. This feeling was based on the fact that although oil prices plunged by 30 percent in recent days, the OPEC had decided to keep the production level unchanged in the meeting on September 26. Traders felt that while the demand for crude oil would drop, firstly, due to the global economic downturn and, secondly, due to economic impact of the events of September 11 on the market, the OPEC might not be able to respond in its usual fashion with cutbacks, because of the political responsibility that had fallen on it to keep crude prices at a reasonable level, in the aftermath of the terrorist attacks in the US on September 11. To cut production, at the present moment, would put the OPEC on the wrong side of the current US war on terrorism.

According to the report, although Saudi Arabia’s Minister for Petroleum and Minerals Ali Naimi did not agree to the suggestion that the OPEC was under pressure from the US, the factual position was that some important members of the OPEC felt the moral pressure, because all those named in the terrorist attacks of September 11 in the US so far were of Middle Eastern descent and they were, also, reported to have received financial assistance from some Arab and Muslim countries. It would, therefore, be natural for these OPEC members to feel a moral responsibility to support the international community in its efforts to counter terrorism, at present.

Another reason why the crude prices should remain at a lower level, according to the report, was that the OPEC members were collectively producing approximately 800,000 barrels a day above its agreed ceiling, at present, in violation of their fixed quotas. Currently, world supply was estimated to be outstripping demand by 1.5 million barrels a day. If the aforesaid imbalance continued, inventories would build up and pull down prices even lower.

The other side: However, there was another side of the picture, also, which was quite alarming. According to certain oil market analysts in the US, there was a strong possibility that rising tensions in the Middle East could lead to the disruption of oil supplies in the next two years. In the short run, according to these reports, there was a 30 per cent to 40 per cent chance of a supply interruption if the US targeted alleged terrorist organizations linked to oil producing countries such as Iraq. Predicting the timing of an interruption in supplies was difficult. However, oil prices were likely to jump $4 to $5 a barrel as soon as news of such an attack hit the wires, according to the report.

Another development, which was based on the universal law of demand and supply, could also put pressure on the crude prices in the coming weeks and months. According to reports published in the US press recently, some US companies had issued warnings about third quarter earnings and oil market analysts expected the earnings to fall in the second half of the year by at least 20 percent, in view of the drop in crude prices in the last two weeks. Drillers in the US had, also, pledged to reduce their drilling activity in order to cut costs. If this trend was followed on a wider scale in view of the falling crude prices, supplies could be hit at a later stage. Particularly, if a tightening supply situation coincided with the approaching winter season, surge in crude prices could be witnessed, as early as in November.

Countries heavily dependent on oil imports, like Pakistan, would be well advised to prepare themselves for such an eventuality. While an effort should be made to increase oil storage capacity, consumption of a non-essential nature may also be restricted to the minimum.