Gulf oil producers' stance appears vindicated

OPEC countries, which supply about 40 per cent of world crude production, have already responded by increasing oil production by 350,000 bpd to 32.4 million bpd, with Saudi supply rising to 9.45 million bpd. Exports from offshore storage have also lifted Iranian supply to 3.8 million bpd.

Following Goldman Sachs' prediction that crude prices could hit $200 a barrel before the end of 2008, analysts at Lehman Brothers are now saying they believe oil prices have reached "a tipping point", with forecasts that the price per barrel will ease to $110 by the fourth quarter and decline further to $90 early in 2009.

Qatar's oil minister Abdullah al-Attiyah, the GCC's and OPEC's longest serving petroleum minister, has been among the most vocal arguing that speculation in energy markets has been the biggest driver in the rise in the price of oil this year which peaked at $147.27 on July 11.

OPEC's recent annual report states that the trade in "paper barrels in regulated oil futures and unregulated over-the-counter exchanges has expanded dramatically in recent years".

The ratio of paper barrels traded on the New York Mercantile Exchange (NYMEX) to the physical barrels actually supplied has exponentially increased. In 2003, for each physical barrel, six paper barrels were traded; today that ratio has risen to more than 18 barrels traded, three times as high.

These ratios are even higher if London and Singapore futures exchanges, the unregulated Atlanta-based Intercontinental Exchange, as well as over-the-counter transactions, index trading and derivatives products are taken into account.

Unhealthy oil speculation

Many believe that the structural integrity of futures markets has been damaged by the various loopholes that effectively allow unlimited and undetected speculation, far beyond the limits of healthy liquidity-providing levels towards damaging price distorting ones, OPEC says.

Producers have no reason to welcome the dramatic rise in prices for crude oil. They have been accompanied by sharp increases in other commodities, notably food and construction costs, releasing rampant inflation into their economies. OPEC members national budgets as well are predicated on crude prices well below $100 a barrel.

At the start of 2003, oil traded at $28 a barrel, yet the advantage to consuming countries of much lower prices in the past also has to be judged against the effect on the oil industry, OPEC says.

Prices were very low throughout most of the 1980s and much of the 1990s. This meant oil industry investments were scaled down; drastic cost cutting strategies were put in place; R&D spending was reduced and, more importantly for the longer term, the oil industry no longer attracted the much needed skills from those just beginning their careers.

Growing energy interdependence means that a pragmatic dialogue is necessary among all parties, OPEC believes.