Spike, then slump, in oil rattles Middle East

updated 3:52 p.m. ET July 17, 2009

CAIRO - As oil prices rollercoastered from record highs near $150 per barrel a year ago down to $35, many pointed fingers at traditional scapegoats OPEC and the oil sheiks long synonymous with the group.

The reasoning was that the 12-member bloc — source of more than 30 percent of the world's oil — was to blame for the spike, then doubly culpable as it struggled to engineer a rebound as prices fell during the start of the worst global recession in decades.

For the Organization of the Petroleum Exporting Countries, and its key Mideast members, however, it was a question of economic survival.

The price drop stunted sharp growth in Arab sheikdoms such as the United Arab Emirates, rattled deeply entrenched political systems in places like Kuwait and Iran, and endangered security and reconstruction efforts in war-ravaged Iraq. Across the region, the petrodollar-fueled subsidy programs that serve as placebos for often disgruntled people in the politically volatile region were in jeopardy.

But even as oil prices staged a modest rebound — the fruit of OPEC's rare moment of unity and quota compliance — it is unclear whether the producer group has come away from the year's turbulence any the wiser. That uncertainty carries sweeping implications for both the region and the world.

"OPEC never learns from the past," Fadhil Chalabi, an economist at the London-based Centre for Global Energy Studies, said in comments echoed by numerous other experts. "They just don't look to the future."

The end of spending sprees
OPEC's total revenue from petroleum exports climbed to slightly over $1 trillion in 2008, more than five times their 2002 levels, according to the group's latest Annual Statistical Bulletin.

From the splashy man-made islands of boomtown Dubai to Iranian President Mahmoud Ahmadinejad's penchant for costly populist projects, oil's run-up in 2007 and 2008 allowed many Mideast nations to stuff their coffers and go on lavish spending sprees.

The boom, however, quickly turned to bust as a global economic meltdown siphoned energy demand, battered regional stock markets and real estate and dried up the easy credit of earlier years.

The price collapse in the second half of 2008 — which wiped out some four years of gains in just five months — "was a sobering thing for OPEC," said Fadel Gheit, chief economist at Oppenheimer & Co. "These guys were spending money like it grew on trees."

For the most part, "they were the typical nouveau riche people who go and spend money on stupid things," he said.

OPEC scrambled to formulate a response, initiating a rapid-fire series of supply reductions aimed at cutting production by 4.2 million barrels from September levels. The bloc's members largely adhered to the new output quotas — a break from the past when stated policy was routinely undercut by the vastly different priorities of the group's diverse members.

The cuts brought prices to within shouting distance of the $70 to $75 level that OPEC kingpin Saudi Arabia and other members say is needed to fund new exploration and production — something demanded by both the West and developing nations like China to maintain future supply.

At the same time, the group's efforts to explain the need for a higher price, while also shifting the blame for the volatility in the market to speculators, appears to be resonating outside its borders.

"There is greater recognition (by consumer nations) that producers need some kind of market security and stability," said Catherine Hunter, an OPEC expert with the IHS Global Insight consultancy in London. "That's helped the producer side in terms of not being constantly criticized for wanting higher prices."

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