WATCHING THE WORLD OIL PRICE RISE MASKS OPEC VULNERABILITY

Last summer it looked as if this month's meeting of Organization of Petroleum Exporting Countries oil ministers would be stormy.

Members inched production high enough to encourage hope of increased production ceilings. A scramble for shares of incremental production was expected "...to register 7.5 to 8 on the Richter scale" (OGJ, June 26, p. 20).

Since then, non-OPEC production has risen and demand forecasts have fallen. London's Centre for Global Energy Studies (CGES) reckons non-OPEC oil production will rise by 1.51.7 million b/d next year, while world demand will rise only 1.3-1.4 million b/d (see related story, p. 42).

September and October oil prices fell to about $15-15.50/bbl for Brent crude. It looked as if OPEC might even have to think of production cuts rather than a rollover or an increase in quotas.

Yet in the runup to the Nov. 21 ministerial meeting in Vienna, oil prices have recovered. Brent crude for December was trading for about $16.20/bbl early this month.

COMPLACENCY RISK

"OPEC is going to be meeting at a time when the price is not as bad as it has been," said Leo Drollas, CGES chief economist. "This could make the ministers complacent."

Drollas attributes the price recovery to Mexico's loss of oil production because of Hurricane Roxanne, worries about Russian production in the light of President Yeltzin's bad health, and threatened strikes of production workers in Brazil.

"The smart money is on a 6 month rollover of production quo- tas," Drollas said. "Other than that, there will be some mumbling about overproduction. Venezuela in particular is likely to get some stick from Iran, and there will be a little hand wringing over non-OPEC production."

CRISIS REMEDY

While OPEC's immediate prospects have unexpectedly improved, Charles T. Maxwell, managing director of C.J. Lawrence Inc., a unit of New York's Deutsche Bank Securities Corp., believes rising non-OPEC production threatens OPEC's survival long term.

Maxwell reckons OPEC has only one hope: "OPEC needs an extended political/military crisis such as the Iran/Iraq war, the invasion of Kuwait, or the rise of a Muslim fundamentalist government in the Persian Gulf such as that of Khomeini in Iran in the late 1970s.

"Specifically, OPEC must have the breadth of crisis that has saved it from economic extinction in the past, and it must have it quickly. The problem is that we see no made-to-order crises on the horizon."

Maxwell said OPEC members' financial problems, rising non- OPEC production, and Iraq's expected return to oil markets, "the factor most likely to deal OPEC a death blow," combine to give more than a 50-50 chance that OPEC will become inoperable within the next 2 years.

"So, will OPEC disappear?" Maxwell asks. "No, that is going too far. We suspect it will be there 10 years from now in Vienna, with its fine brass plaque by the door.

"However, if you should enter the premises, you might find a library with reading rooms, a small bar and restaurant, and occasional evening debates on esoteric petroleum subjects. OPEC, as we know it, probably will be swept away."