Ministers of the Organization of Petroleum Exporting Countries agreed Nov. 14 to cut their oil production quotas by 1.5 million b/d by Jan. 1, 2002, but only if non-OPEC producers also reduce their combined output by 500,000 b/d so as not to infringe on the cartel's market share.
Otherwise, Ali al-Naimi, Saudi Arabia's oil minister, indicated that his country was ready to unleash its oil production capacity in another price war for control of world markets. He was quoted as saying at that meeting, "You know what happened in 1985 and 1986" when Saudi Arabia flooded the markets with oil and pushed prices below $10/bbl to dry up non-OPEC supplies that cost more to produce.
In his opening address, Chakib Khelil, conference president, noted that OPEC members had already slashed production quotas by 3.5 million b/d, or 13%, on three separate occasions earlier this year this year, "together with the resulting revenue, partly to the benefit of non-OPEC producers."
Russian support needed
OPEC's hardline approach apparently is aimed primarily at Russia, the only non-OPEC producer with the potential production capacity to challenge OPEC's control of world markets. At the close of last week's meeting, OPEC members expressed appreciation for "the positive responses expressed by some non-OPEC producers, especially Mexico and Oman," both of which signaled support for a cut in OPEC production prior to the meeting.
World energy prices shot up earlier this month when Russian Prime Minister Mikhail Kasyanov said Russian oil companies were prepared to reduce crude exports to support a cut in OPEC production. However, Al-Naimi apparently is pushing for a stronger commitment from the Russians.
Paul Horsnell, head of energy research for JP Morgan Chase & Co. in London, earlier predicted that any production cut by OPEC would be "explicitly linked to further cooperation from non-OPEC countries, making it clear that the price war threat is not an idle one."
It amounts to test of wills between Russia and OPEC in "the oil market equivalent of the Cuban missile crisis," Horsnell said.
"The implication is clear. Unless Russia cooperates, OPEC is prepared to let prices collapse until Russia changes its mind," he said. "OPEC is effectively saying, 'You can cooperate now, and we'll get the prices back up. Alternatively, you can wait as long as you like before making that cooperation, and in the meantime your economy may be torn to shreds.'"
If Russia withholds its support of OPEC, Horsnell said, "We would be on the verge of a very major move down to well below $15/bbl. With that support, prices can head back towards $25/bbl."
He claimed traders, market analysts, and international political leaders have all underestimated OPEC's determination to regain control of the world oil market.
"Staying sustainably at current prices is not an option. The only two options are all or nothing as far as OPEC is concerned," Horsnell said.
OPEC's market share
Bruce Lanni, energy analyst at the investment firm of A.G. Edwards & Sons Inc., said, "Although OPEC is willing to sacrifice market share near term for the sake of higher prices, we believe the cartel will ultimately regain market share, as the only non-OPEC country that poses a credible threat longer term is the former Soviet Union."
"Furthermore," said Lanni, in a report issued late Nov. 9, "if you assume an annual demand growth rate of 1% following economic recovery, this translates into a need for an additional 800,000 b/d and does not take into account a worldwide natural field decline rate estimated at 2.6%, or another 2 million b/d."
Lanni noted that OPEC members' compliance with production quotas improved in October after generally exceeding assigned levels in September. "While skeptics portray the relatively low level of compliance as a breakdown in OPEC discipline," he said, "we believe the last 2 months were an aberration that is partly attributable to the cartel's uncertainty over the impact of the Sept. 11 events and the tenuous states of the US and global economies."
