IEEJ: June 2012 All Right Reserved
Special Bulletin

A Japanese Perspective on the International Energy Landscape (91)June 16, 2012

OPEC Production Ceiling Left Unchanged at 30 Million bpd at 161st Meeting
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe Organization of Petroleum Exporting Countries, at its 161st General Meeting on June
14 in Vienna, Austria, discussed such topics as recent crude oil price trends, the supply-demandbalance in the international oil market in the second half of this year and the future course of theworld economy, and decided to leave the oil production ceiling at 30 million barrels per day for its
12 member countries.

In the international oil market, the benchmark West Texas Intermediate crude oil futures
price continued an upsurge from the beginning of this year and soared above $100/barrel before
weakening on a resurgence of European credit fears from May. Just before the OPEC GeneralMeeting, the WTI futures price moved in the $80-85/barrel range and indicated a market
environment change from the upward trend earlier this year. Due mainly to Saudi Arabia’s oil output
expansion, actual OPEC oil production far exceeded the ceiling of 30 million bpd as set at the 160th
OPEC General meeting last December.

Under such market environment, OPEC reached an agreement to keep the production
quota unchanged, as well expected by most market analysts including the author. The decision cameas no surprise.

This quite-expected decision does not necessarily mean that discussions at the meetingwere smooth with no need for coordination of views. Rather, market analysts before the meetingwere aware that there were differences over an adjustment of the production quota. Saudi Arabiacalled for raising the production quota, while Iran and others advocated lowering the quota.

The former view means that the quota has been far below the actual production level, has
become meaningless, and should be raised to meet the actual production level, and that crude oil
prices including the $80-90/barrel range for the WTI futures and around $100/barrel for the North
Sea Brent futures are still historically high and should be stabilized. Another factor behind the view
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might have been that world oil demand is expected to moderately increase in the second half of thisyear as indicated in the communiqué issued after the OPEC meeting (although the demand increase
could be covered by a rise in non-OPEC oil output).

The latter view represented by Iran indicates that the production ceiling should be lowered
instead of raised for such reasons as (1) the easing supply-demand balance as indicated by crude oil
price falls from May in the international oil market and (2) (excessively) abundant supply in theinternational oil market. Behind this view is a more serious situation for oil-producing countries thatcannot take the Saudi Arabian option of expanding oil output to offset the impact of recent oil pricefalls on oil revenues. They apparently hope to take advantage of a cut in the oil production quota(that can send a signal of supply cuts to the market) to create momentum for a crude oil price upturn
to boost oil revenues.

It may not be easy to coordinate the two different views because they indicate that OPEC
members could be sharply divided not only over the supply-demand balance in the international oilmarket but also over policy decisions regarding the impact of an action by OPEC on the world
economy and geopolitical decisions for the Middle East and oil-producing countries. One realistic
problem is that great uncertainties exist with regard to international politics, the global economy andthe international energy situation. Given the risk of great uncertainties, it was realistic andreasonable for OPEC to prevent any OPEC division from surfacing and adopt a wait-and-see policy.
In this sense, the OPEC decision met majority expectations.

The OPEC communiqué from the latest general meeting interestingly spells out and puts inorder key points and risks for OPEC’s future market analysis. While the presence of geopoliticalrisks is important, the European economic fears and downside risks to the world economy are evenmore important for the immediate future. The communiqué signals grave concerns on theseproblems.

The latest OPEC General Meeting decision indicated a forecast that had been wellreflected in the oil market. Therefore, it may not be any major price-moving factor in theinternational oil market. Rather, the most important crude oil price drivers are the results of theapproaching Greek parliamentary election, market fears regarding Spanish government bonds,indications of the debt crisis spillover to Italy and other countries, and other future developments inthe European economy that form the downside risks indicated in the communiqué. Just as OPEC
members are urged by the cartel, economic stakeholders in the world are required to closely monitor
European economic problems and risks to the world economy. They must not only monitor suchproblems but also make timely, appropriate responses to market developments. Without such
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responses, the world economy and the international oil market may plunge into severe turbulence orturmoil. The problem analysis indicated by the OPEC meeting is apparently common to the world
economy and international financial markets as well as to the international oil market.

Contact: report@tky.ieej.or.jp
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