OPEC’s changes

May 28, 2007
Much of what has been written about the Organization of Petroleum Exporting Countries lately concerns not the group but the model.

Much of what has been written about the Organization of Petroleum Exporting Countries lately concerns not the group but the model. As demand grows worldwide for natural gas, the question arises: Can a global cartel of gas producers form with enough control over supply to influence price? The special report starting on p. 22 examines the issue.

Most other questions about OPEC focus on immediate conditions in the oil market. How will political unrest affect production in restive members such as Nigeria and Venezuela? Will the group predict demand accurately and make timely adjustments in production?

Questions such as those are now the routine because OPEC, contrary to lingering prejudices, has become a steadying influence in the market. The group regularly parries the lurches of its maverick members and has settled into its role as the oil market’s balancing mechanism. While internal politics can be testy, OPEC as a whole has learned from its mistakes and improved its ability to anticipate and adjust production to requirements for members’ crude. That the group sometimes misreads market signs hardly makes it unique.

Stability, though, is not stasis. OPEC is changing.

Adding members

Most obviously, membership of the group is growing. In January, Angola, with its 1.6 million b/d of production, became a member. Sudan, with 300,000 b/d of production, wants to join. Ecuador, which produces 500,000 b/d, might rejoin after having left the organization in 1992. New members increase OPEC’s market share and, therefore, its leverage. They also represent new bundles of interests that must be accommodated when the group tries to coordinate production.

Divergence of interest is the bane of any cartel. The problem seems minor when, as now, the oil market absorbs most of what OPEC members can produce. But conditions change. The next time OPEC needs to apportion production cuts across the membership, an expanded roll will complicate the politics. So will another important influence on the group’s character: the contrast between members able to increase production capacity and those with no hope for output gains.

Another often-overlooked but important trend in OPEC is the steady growth of members’ production of natural gas liquids. In its May Oil Market Report, the International Energy Agency says OPEC output of NGL might rise by 7.8%/year to reach 7.1 million b/d by 2012. There are several reasons for the expected increase, most having to do with burgeoning gas production and antiflaring programs. Most significant about the increase is that OPEC quotas don’t apply to NGL. In the context of quota pressures, OPEC NGLs represent, to OPEC, competitive supply.

In international affairs, OPEC frequently expresses concern about security of demand, the reciprocal of the supply-security worries voiced regularly by industrial consuming countries. For OPEC, security of demand has a vital financial component. Members able to expand capacity must make immediate decisions about the enormous investments required if they’re to meet projected demand for their crude oil years and decades from now. They naturally worry when politicians in the US and other consuming countries make diminished reliance on foreign oil a touchstone of energy policy. At present, the mutuality of interest between buyers and sellers gets little attention as a source of security. Still, an opportunity for international cooperation presents itself here.

Iraq and OPEC

Looming over all matters pertaining to OPEC is Iraq. Still exempt from group quotas, the beleaguered country struggles to produce 2 million b/d. Key pipelines and production equipment remain subject to attack by insurgents. Insecurity precludes oil-field modernization. Work on a hydrocarbon law has stalled over regional politics. The government wants to take a 2-month vacation.

But Iraq’s travails, deadly and drawn out as they have been, can’t last forever. Not everyone has given up hope for peace and prosperity for Iraqis. With stabilization, wherever that might lie in the future, comes a renewal of prospects for the 6 million b/d of oil output of which the country surely is capable.

When Iraq realizes its production potential, OPEC will be a different organization than it is now-and hopefully not much older.