OPEC DISCIPLINE AND MEMORIES OF 1998

The year 1999 will prove to have been a good one for members of the Organization of Petroleum Exporting Countries-but not that good.

It will have been a good year in the sense that it was not 1998.

Total oil-export revenue of the OPEC member-countries, according to projections of the US Energy Information Administration, will be up 24% in 1999 from year-earlier levels.

Average oil prices, in EIA's estimation, will be up 29%.

The reason for the disparity is the production volumes OPEC sacrificed last April to prop up prices.

EIA projects OPEC revenue from oil exports this year at $123.6 billion. The estimated $99.9 billion total for last year compares darkly with $154 billion in 1997.

These figures need historic perspective.

Adjusted to 1990 dollars for comparison, the 1998 revenue figure was $80 billion, lowest since the $77 billion of 1972, the year before the Arab oil embargo. OPEC's oil export revenue in 1986, when crude values collapsed, totaled $83 billion on the same inflation-adjusted basis.

OPEC's best year was 1980, when total oil revenue reached $439 billion (again, in 1990 dollars).

The same inflation adjustment pulls this year's projection to $97 billion-better than 1998 but still on the low side by historic standards.

Regarding revenue shares of individual OPEC members, EIA notes five trends.

  1. Saudi Arabia earns more from oil than any other OPEC member, but its share swings widely. The kingdom's revenue now account for 28% of OPEC total. But the share has been less than 20% (in 1972) and more than 40% (in the early 1980s).
  2. Iran has never recovered the revenue share it lost after the Islamic Revolution of 1978-79 and war with Iraq during the 1980s. Its current share of OPEC earnings from oil exports: about 11%.
  3. Iraq's share of the OPEC total has been as high as 15% in the late 1980s and as low as near 0% after the invasion of Kuwait. Producing under United Nations supervision to raise funds for humanitarian purposes, Iraq now accounts for about 11% of total OPEC oil revenue.
  4. Venezuela has maintained a fairly constant share of OPEC oil revenue at 10-12%.
  5. The rest of OPEC has accounted for 40-50% of total oil revenue since 1972. Kuwait, the UAE, and Qatar together account for about half of that share.

Oil earnings have always driven OPEC behavior. This year, however, the group's members-or at least the most important ones-have demonstrated an ability, absent in years past, to stick with production limits undertaken to support the value of crude oil.

The unifying factor is last year's pain in producing countries that fund major portions of their national budgets with oil revenues. The low crude prices and historically low revenue levels of 1998 hurt budgets enough to make those countries fear political instability.

Hence this year's production discipline. The payoff for OPEC members is a rebound in revenue sufficient, at least so far, to keep political pressure under control. By historic standards, however, the payoff hasn't been lavish.

So the temptation on OPEC's most important members to cheat on production quotas remains a problem for the market. What holds the temptation at bay is the memory of 1998.

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