OPEC QUOTAS UNDERMINE OIL PRICES

Oil prices have fallen sharply since the Organization of Petroleum Exporting Countries decided on a rollover of members' production quotas into the third quarter. That raises concerns that the low ceiling is effectively an incentive to cheat. This fear was voiced by the Centre for Global Energy Studies (CGES), London, following the announcement that OPEC's quota will stay at 23.582 million b/d despite Kuwait's decision to act outside the agreement.

July 12, 1993

2 min read

Oil prices have fallen sharply since the Organization of Petroleum Exporting Countries decided on a rollover of members' production quotas into the third quarter.

That raises concerns that the low ceiling is effectively an incentive to cheat.

This fear was voiced by the Centre for Global Energy Studies (CGES), London, following the announcement that OPEC's quota will stay at 23.582 million b/d despite Kuwait's decision to act outside the agreement.

Kuwaiti Oil Minister Ali Ahmed al-Baghli turned down a 10% increase from the 1.6 million b/d second quarter quota, saving Kuwait will raise production to 2.16 million b/d in the third quarter (OGJ, June 21, p. 35).

CGES said the market discounted the agreement because the ceiling:

Is well below current production levels.
Does not formally allow for higher production by Kuwait.
Is much lower than the expected third quarter call on OPEC crude.

"Even so," CGES said, "the market also recognizes the agreement is probably irrelevant in practice since it merely represents a politically motivated compromise in response to conflicting positions adopted by Iran and Kuwait."

The key question for the oil market is how other OPEC members react to Kuwait's inevitable production hike, CGES said. Although Kuwait's demands for special treatment tried the patience of fellow members, they will not necessarily retaliate by boosting output inordinately.

"There is certainly enough incremental demand for OPEC oil in third quarter to allow almost all members to raise output without weakening the price," CGES said.

If OPEC raised total flow to 24.9 million b/d in the third quarter, members would have 450,000 b/d of production over May's production to share, after Kuwait's demands had been met.

Although this would not allow other members to increase production in line with Kuwait, almost all would see some increase and smaller producers would see significant increases, CGES said.

"As long as Saudi Arabia, Iran, and Nigeria are prepared to accept these modest increases, production is unlikely to exceed the demand for OPEC crude.