WATCHING THE WORLD OPEC AGAINST THE ROPES

With David Knott from London The Organization of Petroleum Exporting Countries is against the ropes and taking a beating. It still claims to have a killer punch, though. Oil prices are the lowest in 5 years, with booming non-OPEC production a major cause. Yet the markets and non-OPEC producers, as usual, are looking to OPEC for production cuts to protect prices. London's Centre for Global Energy Studies (CGES) reports that November non-OPEC oil production, excluding the former Soviet

Dec. 27, 1993

3 min read

The Organization of Petroleum Exporting Countries is against the ropes and taking a beating.

It still claims to have a killer punch, though.

Oil prices are the lowest in 5 years, with booming non-OPEC production a major cause. Yet the markets and non-OPEC producers, as usual, are looking to OPEC for production cuts to protect prices.

London's Centre for Global Energy Studies (CGES) reports that November non-OPEC oil production, excluding the former Soviet Union, was 1 million b/d higher than in the same month last year.

A rash of new North Sea fields has raised the region's production by about 500,000 b/d since November 1992. Latin American production has risen by 290,000 b/d, while Middle East production has risen 230,000 b/d.

CGES said the hike in Latin American production was due largely to privatization of the upstream sector in Argentina and Peru. Higher production in the Middle East was due to new fields in Oman, Syria, and Yemen.

A SURPRISE

"The size of the increase in non-OPEC production outside the FSU has come as a surprise to the oil market and OPEC," CGES said, "not because the projects were unknown but because they were not large individually.

"Yet so many new projects have been commissioned this year that the total addition to non-OPEC output is very large. In the North Sea alone, 17 new fields came on stream, and this pattern has been repeated around the world."

It looks as though OPEC is no longer in a position to do much about prices anyway. As if accepting it is no longer the dominant market force, OPEC says it does not want sole blame for low prices (OGJ, Nov. 22, Newsletter).

So why are markets and non-OPEC producers still looking to OPEC for production cuts? And has OPEC really lost its power in the oil market?

Leo Drollas, chief economist at CGES, has a straightforward answer to the first question: "Because it's there."

COSTS THE KEY

Non-OPEC producers, private and state companies alike, need the revenues. Had OPEC not existed, Drollas said, producers outside the OPEC sphere might have had to think of cutting their own production.

Drollas said the key is operating costs. North Sea producers, for example, have honed operating costs down to $5-7/bbl. As long as the oil price is higher than operating cost per barrel, non-OPEC producers will keep on producing.

As for OPEC's waning influence, Drollas pointed out the organization is dominated by Kuwait, Iran, and Saudi Arabia. All three countries need cash and so want to maintain production.

OPEC accepts that its market influence has waned since the 1980s. Then, OPEC supplied 60% of the oil market. Now its supplies only 40%, an OPEC official said.

But in the long term OPEC will recover, he predicted: "Don't forget, OPEC countries still hold the lion's share of oil reserves. Our long term projection is that OPEC will increasingly recapture market share."