Venezuela OPEC oil band restoration proposal rebuffed

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Venezuela's Minister of Popular Power of Petroleum and Mining, Rafael Ramirez, answering journalists' questions before the start of the 161th meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, on 14 June, 2012. Photo - Getty Images

Venezuela’s proposal to set an oil price band of $80 to $120 a barrel came under immediate scrutiny from a Middle East OPEC official who dismissed the idea as a non-starter on Wednesday. Earlier, Energy Minister Rafael Ramirez urged the oil cartel to restore a price control policy that was tried 12 years ago by adjusting supply.

The Organisation of the Petroleum Exporting Countries (OPEC) in 2000 adopted a $22 to $28 price band, requiring its members to cut or raise output in an effort to keep prices in that range for an OPEC basket of crudes. However, differences over quotas and increased demand from China rendered the policy unworkable and pushed prices irreversibly through $30 in 2004.

“We need to restore the band system,” Ramirez told Reuters late Tuesday. “It could be between $80 and $120 right now, that would be sufficiently wide to allow flexibility.”

The Middle Eastern official, on condition of anonymity, rebuffed the idea.

“Having a band was never successful in the past and won’t be successful now,” the official said. “It’s OK to have a band when the prices are going up, but what happens when the price goes down? You’ll have to keep cutting production? This is out of the question.”

Iran, an ally of Venezuela in OPEC, welcomed the idea and pointed out that the $100 middle of the band proposed by Caracas is where many producers, including Saudi Arabia, want prices.

“Venezuela is not the only country to believe the price should be around $100. The question is how do we protect this level. This issue should be discussed if it is proposed officially to OPEC,” Mohammad Ali Khatibi, Iran’s OPEC governor, said in a statement.

Ramirez, also the head of state oil company PDVSA, insisted that a fall in global crude prices to $90 a barrel was a threat to core oil projects around the world.

“Right now it’s a case of holding on to see if the prices are going down for circumstantial reasons, but if the situation continues, we are entering a risk zone. Anyone who enters into play like this in the oil market is shooting himself in the foot,” he added.

Venezuela, which relies heavily on oil for infrastructure and social welfare projects, has criticised the Saudis for ramping up production to help suppress prices and support global economic growth.

Despite a surprise fall in crude prices below $90 a barrel for the first time in 18 months, Saudi Arabia has not given any signals of changing its policy of high oil output to boost prices.

Many analysts believe the world’s biggest OPEC oil producer consolidated a revenue surplus during the first half of the year. As a result, it can sustain a much lower oil price to balance its budget than most of its fellow OPEC members and leading non-OPEC producer like Russia.

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