It should be easy to predict what the Organization of Petroleum Exporting Countries will do when ministers meet Sept. 19 in Osaka, Japan. Under normal circumstances, the group would raise its quota by an amount approximating its members' total production above the current ceiling. There would be minor quibbling over apportionment of the quota increase among members with idle production capacity. And whatever controversy arose would end quickly and quietly.
Circumstances, however, are anything but normal. Uncertainty in the oil market, internal conflict, and geopolitical disputes present the group with more than the usual degree of challenge.
The demand question
The oil market's main question is demand, which follows economic activity, which remains shaky. A recent increase in the International Energy Agency's forecast of demand for 2002 is illusory. It reflects an adjustment for previously un- recorded demand since 2000. The adjustment represents nearly all the demand growth IEA sees for 2002.
Within this stagnant market, production by the 10 OPEC members subject to quota is increasing. Yet prices of crude oil have spurted. Part of the reason is market anxiety over US threats of military action against Iraq. Also, the effects on physical supply of past OPEC production cuts are still working through storage and refining systems. The elevated prices tempt OPEC members with idle capacity to raise production. The US Energy Information Administration estimates July overproduction at 1.6 million b/d.
If demand growth were more certain, OPEC could simply ratify what its members are already doing by raising the group quota to 23.3 million b/d. The last time it took that well-traveled course, however-in 1997-demand sagged. The market crashed under the weight of OPEC oil it didn't need.
The exporters' group has become more nimble than it was then, willing to adjust production in anticipation of consumption turns. But is the market turning now? Demand growth has definitely slowed. So OPEC must struggle with the paradox of its success: Prices buoyed by production restraint retard demand and encourage competitive supply from nonmember producers.
OPEC's own members, meanwhile, have become restive. Algeria and Nigeria have requested quota increases. Algeria's production capacity exceeds its quota by more than 400,000 b/d, Nigeria's by more than 500,000 b/d. Both countries expect capacity to increase. Both countries need revenue. And both countries are overproducing their quotas, but neither by anywhere near the amount of its idle capacity. If OPEC let Algeria and Nigeria produce at capacity, other members would have to trim output. Securing agreements for that type of sacrifice is never easy.
International politics further complicates OPEC decision-making. So far, other than Iraq, the group has kept politics out of its production decisions. With Palestinians and Israelis in open conflict, this is remarkable.
Strain, however, is apparent. The possibility of war in Iraq is unsettling. Producers around the Persian Gulf mostly oppose a US invasion, al- though most probably would change positions once the US demonstrated commitment to the mission.
More significant than that for the oil market is deterioration in relations between the US and Saudi Arabia. In some American political factions, anti-Saudi rhetoric has become shrill.
While the Saudi royal family is hardly above reproach, the sudden US disdain is high-handed and inappropriate. The kingdom won't become a free-wheeling democracy overnight because the US wants it to. Turning against a longstanding ally and important trading partner because of shady and probably unofficial ties to terrorist groups helps terrorists achieve their goals. And it's hypocritical for the US to all but ignore the Saudi proposal of a Middle East peace program calling on Arab nations officially to recognize Israel. For its part, the Saudi government should have done more by now to distance itself from anti-US fanaticism, which the US has reason to view as deadly threat.
Legitimate grievances
Saudi Arabia and the US have legitimate grievances with each other. They should work them out without breaking relations. They don't have to like each other. But they do need each other. Reports last week that Saudi investors had pulled hundreds of billions of dollars out of the US are cause for concern.
OPEC meetings are usually dull affairs. The Osaka get-together, even if ministers just raise quotas and go home, will be an exception.
