MOSCOW Oil consuming nations risk a long conflict with a trenchant OPEC by challenging the producers' club on its own turf with a supply response to high prices, and the strategy could backfire, BP's chief economist said on Monday.
Christof Ruehl, chief economist at the British oil major, said the International Energy Agency's decision to launch a coordinated release of emergency oil reserves could create upward pressure on prices if OPEC cuts supply in kind.
"The single biggest risk up is that there is a war of attrition between OPEC and the IEA which goes on for a long time and leads nowhere," Ruehl told Reuters Insider.
"The biggest single risk down is there is overshooting, that they don't trust each other, both say they will produce more, both do produce more and all of a sudden prices go to lower levels and the OPEC countries breach their discipline."
Reuters Insider - BP Chief Economist on OPEC-IEA Rift, click link.reuters.com/zaf42s
That, he said, could leave OPEC producers, some of them fiscally stretched by increased budget spending to quell the popular dissent spreading through the Middle East, competing with one another for shrinking revenues from oil exports.
"That is how the cartel eventually breaks up and prices go to lower levels for awhile," Ruehl said.
But he said he was looking at "theoretical extremes" when he spoke of a war of attrition between OPEC and the interests of the consumer countries represented by the IEA.
"I think at least for the medium term we will see a settlement in between the peaks the oil price had recently, and what seems to have been OK with major consumer companies about a year ago."
Brent crude was trading in the neighbourhood of $80 in the second quarter of 2010.
Ruehl said the IEA stock release would cover the loss of exports from Libya, where a standoff between the government of Muammar Qaddafi and rebel forces has left the country's export outlets dry.
"Will it be enough to satisfy the other 2 billion barrels (of additional demand)? That is the question," Ruehl said.
"If markets had stabilised at $110-$115, people don't realise that it would have been the highest average annual oil price ever in nominal terms and real terms this year. This century it was never above $100. So that threatened the U.S. recovery.
Concerns about Greek debt and its influence on Eurozone demand are overrated, he added.
"The eliminations of many subsidies from Chinese demand are going to dwarf anything that happens in Greece," he said.
(Writing by Melissa Akin; editing by editing by Jim Marshall)