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June 12, 2014

Iraq violence threatens OPEC's precarious balance

NEW YORK — The oil market has balanced out quite nicely for OPEC in recent years. Now, upheaval in Iraq shows that balance may be more precarious than it has seemed.

Dramatic changes in oil production around the globe have offset each other instead of wreaking havoc. This has helped world oil prices stay high enough to provide OPEC countries with robust income, but not so high that they scare customers away from buying more of their precious product.

One major stabilizing factor has been rising production from Iraq. But that output is suddenly threatened by an outbreak of violence by militant groups, who seized two cities this week and have threatened to march on Baghdad. Brent crude, the most important international oil benchmark, rose nearly 2 percent in trading Thursday morning to $111.30.

Brent has hovered in the range of $110 per barrel over much of the last 4 years, with remarkably low volatility for oil markets. That has also led to stable gasoline prices for U.S. drivers, who have been paying in the neighborhood of $3.50 per gallon over the period.

"It's comfortable for everyone," says Judith Dwarkin, chief energy economist at ITG Investment Research. "The global economy has recovered, oil demand is growing at trend, and prices are high and stable."

Or, as Secretary General Abdullah Al-Badry said in Vienna Wednesday after the Organization of the Petroleum Exporting Countries decided to maintain its current output of 30 million barrels a day: "Everybody's happy."

But this happy, stable market masks some difficult realities that OPEC has been fortunate to skirt. There have been production booms in some areas of the world that could have sent prices plummeting. And there have been shortages in other areas, including in OPEC countries, that could have sent prices rocketing higher.

OPEC is fortunate, experts say, because the organization would be hard-pressed to adjust if this precarious balance were upended. OPEC members have a very limited ability to either raise or lower production to steady the market, they say.

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