OPEC’s price hikes
could push down demand

By Fereidun Fesharaki
East-West Center

If Asian demand for oil does not pick up significantly, OPEC may have made a serious mistake in its recent decision to cut production further and keep prices high. In fact, that decision could mean a big drop in Hawaii's cost of oil by the end of the year.

Higher OPEC prices appear to have deeply dented Asia's oil demand in the latter half of 2000. The region's appetite for oil last year grew by just over 500,000 barrels per day compared to more than 850,000 in 1999. Of this growth, more than two-thirds came from China. Thailand showed negative growth and India, the economic giant, did very poorly with an increase of only 65,000 barrels per day, about one-third of its 1999 growth.

For this year, an increase in Asia's oil demand is likely to be around 600,000 barrels a day, but it could drop lower if orders from India, Thailand and South Korea do not pick up. With Asian demand faltering and the U.S. economy slowing, this could indeed slow oil needs.

While OPEC can manipulate prices in the short term, the state of the U.S. and Asian economies will determine them in the long run. Therefore, OPEC, in its recent decision, may have set itself up for a loss of market share and a big price drop. What this means for Hawaii and all of the United States: prices will remain relatively high for the next few months but by the end of the year, they could fall to less than $20 a barrel.

Any energy proposals by the Bush administration will have zero to little impact on oil prices in the next five years and marginal impact after that. Even opening up the Arctic National Wildlife Refuge to more oil drilling will not replace the natural decline of Alaskan crude oil. The U.S. energy situation cannot be fixed by domestic policies short of Draconian energy conservation that would further slow the economy.

Complicating the picture is an overall slowdown in production. Oil companies aren't investing in new supplies. Although profits are bigger than ever, stockholders are not keen on smokestack industries or taking on environmentalists, and the last thing on their minds is exploring for new oil discoveries in risky places. They prefer to spend their money on easier ventures such as buyouts of others, buybacks of company shares, or higher dividends. If Asian demand does pick up significantly again, coupled with restraint by oil companies for additional investment, that growth will outpace supply and keep prices high. In the long term, however, fast oil demand growth is unlikely to be sustained if prices continue to be high. As such, OPEC's insistence on high oil prices may hurt the Asian economic recovery and growth as well as the oil cartel itself.

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Fereidun Fesharaki is an energy and economic
development expert at the East-West Center. He can be
reached at 944-7527 or fesharaf@eastwestcenter.org