Weak dollar caused oil's rise, OPEC president says

By Natalie Obiko Pearson
Dow Jones Newswires
via TradingMarkets.com
Saturday, April 12, 2008

http://www.tradingmarkets.com/.site/news/Stock%20News/1354648/

ALGIERS -- OPEC has no plans to adjust its oil production before September, despite signs that record high oil prices have begun to sharply hit demand, because the U.S. dollar's slide is the primary factor driving crude prices in today's market, the group's president said Saturday.

Chakib Khelil, president of the Organization of Petroleum Exporting Countries and Algeria's oil minister, told Dow Jones Newswires in an exclusive interview that he will not be attending an oil producer-consumer meeting later this month in Rome, nixing the possibility that the 13-member producer group might call an extraordinary meeting there to consider whether they should take action amid dramatic developments in the global oil market.

Prices at historical highs of around $110 a barrel have begun to hinder consumers' appetite for oil, with the International Energy Agency -- the energy watchdog of major industrialized countries -- on Friday predicting its biggest cut to world oil demand growth in seven years in its monthly oil market report.

"The fact that demand is not going to be strong reinforces the position that we've had, which is that there's no need" for an increase. "Why would you produce if there's not going to be demand? And it reinforces the decision we have made not to meet until September," Khelil said in an interview in the Algerian capital. "As a matter of fact, I won't be going to Rome even."

Khelil, noting that demand would likely pick up in the summer during peak driving season in the U.S., also ruled out cutting output for the time being.

"There is no demand for cutting oil prices. I think it's not in the cards to cut production. We'll have to look at the situation in September," when OPEC is next scheduled to hold an oil output policy meeting.

"Prices are high ... because of the devaluation of the dollar. There is a direct relationship," Khelil said. A former World Bank economist, Khelil said he had looked into the issue and estimated that for every 1% decline in the value of the dollar in the past two years, there has been a $4 increase in the average oil price.

"We would be lying to ourselves if we say to the world, 'Well, if we increase oil production, the price will go down,'" Khelil said, pointing to how OPEC's decision to raise output by 500,000 barrels a day last September did little to stem crude's climb.

A depreciating dollar has driven investors to commodities seeking a hedge against inflation. Consumers paying for oil in other currencies have also not felt the rise in the price in oil as sharply as Americans, which has helped to support demand.

Khelil said that if the U.S. economic outlook improves -- with a subsequent strengthening of the dollar -- "we would see the improvements in the oil price."

But following cautionary statements about the economic outlook from both the International Monetary Fund and the U.S. Federal Reserve this past week, Khelil said, "It doesn't look very good...We have the impression that things will get worse before they get better."

Khelil said that if the impact of the sliding dollar were factored out, the oil price would be far lower and the fundamentals of oil supply and demand would re-exert themselves.

"If we can take out that impact, if the dollar index goes back to where it was two years ago, we would see a much lower price than we do today ... at $55 to $60 (a barrel), you could say that whatever we did would have an impact," he said. "Because the major parameter influencing oil prices would be supply and demand."

Khelil said the onus of dealing with the current oil market didn't only lie with producers and that governments of oil-importing countries could be doing more to help consumers, like lowering taxes on gasoline and other oil products.

"One thing the consumers never want to talk about is the taxes. Why can't they lower the taxes? ... We hate to mention that. We hate to talk about it. But when people are focusing on OPEC and how OPEC is getting $110 (a barrel), they forget that it's only 25% of the price that consumers are paying," he said.

Khelil said that for every dollar that OPEC producers get, some European governments are earning as much as $4 in tax.

"It's good to have to have higher taxes for conservation and so on, but isn't it time for consuming countries to lower the pay on consumers?" he asked.

Khelil suggested that some of those extra tax revenues could be put toward an oil "stabilization fund" that could help consumers when prices go up and "to maintain a level of stability in the market."

OPEC members, who collectively supply about 40% of the 87 million barrels of oil consumed daily, have insisted that there is no shortage of oil and that other factors -- including financial speculation, geopolitical tensions, and the weakening dollar -- are responsible for record prices.

Others counter, however, that world oil demand growth is far outpacing the growth in supplies, which has seen OPEC's spare capacity -- the cushion of oil it maintains on hand in case of disruptions -- has fallen to a mere 2 million barrels a day, or less than a third of what it was in 2002. They say OPEC's reticence in confronting that trend is contributing to the anxiety behind oil prices.

Pressed on whether OPEC could be making more of an effort to be seen at least trying to manage prices, Khelil indicated that a resolute policy was more helpful than any action it could take at this time.

"It helps the market knowing that OPEC is not going to meet. When OPEC meets there is all kind of speculation: are they going to cut, are they going to remain, are they going to increase," he said.

"OPEC has to be credible," he said, and as president he aimed to ensure that "OPEC does what it says it's going to do -- not lie about its intentions or the reasons that are really controlling the market."

* * *

GATA is grateful for financial contributions, which
are federally tax-deductible in the United States.