Oil prices: OPEC's high wire act

The cartel struggles to keep oil prices high, but not high enough to kill the economy. Long term, are they investing enough to meet worldwide demand?

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By Steve Hargreaves, CNNMoney.com staff writer

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OPEC struggles to keep prices high, but not kill the economy.

NEW YORK (CNNMoney.com) -- High oil prices are a drag on the economy, but OPEC isn't likely to raise production at its special meeting next week. But experts say the cartel is on track to meet worldwide demand - and keep prices from rising further - in the long run.

In the short run, OPEC's special meeting set for next Friday will be under the microscope to see how the cartel will address high oil prices amid a stalling economy in the United States.

But it's a tough call for OPEC. They clearly don't want high oil prices to kill the world economy since that would also cut demand for oil. But if production is increased and the economy stalls anyway, oil prices could collapse.

That's exactly what happened in 1997, when OPEC boosted production at a fall meeting in Jakarta, only to have the Asian financial crisis erode demand for crude the next year. Analysts say the so-called "Ghost of Jakarta" still haunts OPEC thinking - between the end of 1997 and the end of 1998, crude prices went from $20 to $10 a barrel.

"The general sense is they are not going to do anything," said Ann-Louise Hittle, an oil analyst with the energy consultants Wood Mackenzie. "With the economy being weak, prices could come down anyway."

OPEC will also likely maintain its long-stated belief that refining problems, a falling dollar, and speculative investing are the main culprits behind high oil prices - not a lack of crude.

But despite all the doubts about a short term boost in production, one factor may convince OPEC to open the spigot: Sources say a major arms deal between the Saudis and the U.S. is up for approval before U.S. lawmakers the week after next. It's possible the Saudis will throw U.S. politicians a bone - many of them are up for re-election amid fears of a recession - in exchange for an easy pass on the weapons.

In the long run, the outlook for the world's oil consumers is a bit more upbeat.

Over the next two decades, the world will need to ramp up oil production from 85 million barrels a day currently, to about 117 million barrels a day, according to the Energy Information Administration. Nearly two-thirds of that new production is expected to come from OPEC.

There have been well-publicized concerns some oil-rich states are tapping the profits from their nationalized oil companies and using the money not for re-investment in oil production, but to fund social programs like roads, schools and healthcare. The concern isn't that poor people are getting services, it's that the world won't have enough oil.

But experts say that's mostly unfounded.

"I don't have any concerns with OPEC making good decisions," said Rick Chimblo, a former head of exploration at Saudi Aramco who now does development work for Genoil, a Canadian oil technology company. "They are spending money. They aren't some group of mystic states, they're planning for the future and running it like a business."

Chimblo said OPEC is adding 6 million barrels a day of refining capacity by 2011 in the Middle East alone. The gasoline could be used to satisfy growing demand in the region as well as exported to the U.S., where a new refinery hasn't been built in decades.

Wood Mackenzie's Hittle said the Saudis are making heavy investments in five new projects, which should boost production from 11 million barrels a day currently to 12.5 million by the end of 2009, and that's including the offset from the fairly quick rates of production declines the Saudi's are seeing in some of their older oil fields.

'It's extremely important the Saudis make these investments, otherwise there won't be enough oil," she said.

Saudi Arabia has been the most aggressive in investing in new production, according to Falah Al Jibury, an energy analyst who has advised several OPEC nations.

But it's not just the Saudis who are expected to boost production. Angola and Algeria are adding production as fast as possible. And Iraq and Nigeria could both bump up output by about a million barrels a day in relative short order if the security situation improves.

Venezuela's oil production under left-leaning Hugo Chavez has already fallen and analysts believe it's likely to fall further as he directs oil money into social programs rather than new production, unless additional investments are made.

But, as Hittle pointed out, chastising a country for investing in education or healthcare for its poor instead of providing U.S. motorists with the cheapest gas possible is a fairly biased way of looking at the world of oil.

"Each country has the right to make its own investment decisions," she said.  To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.