Asia not to blame for OPEC's woes

Asia's financial crisis is behind the recent plunge in oil prices, which hit Organization of Petroleum Exporting Countries (OPEC) members hard.

Yet Sheikh Ahmed Zaki Yamani, once Saudi Arabia's oil minister but now chairman of London's Centre for Global Energy Studies (CGES), sees Asia's crisis as no excuse for OPEC's problems.

Opening the CGES annual conference in London on Apr. 27, Yamani said, "For OPEC to be in difficulties is not that unusual, but for Asia to be in the grip of a severe financial crisis is a new experience."

Yamani said OPEC's November 1997 agreement, at which OPEC boosted quotas for the first time since 1993, was inspired by surging Asian demand. And OPEC members will benefit as Asia recovers (see related article, p. 44).

'To explain OPEC's troubles," said Yamani, "solely in terms of collapsing oil demand-or as some would have it, the effect of El Niño-is to neglect OPEC's own role in bringing itself to this sorry state of affairs.

"OPEC's predicament is not just the result of an accident of fate or a quirk of nature. OPEC's faults are deep-seated, and its mistakes have been long-lasting."

OPEC's faults

Heading OPEC's faults, according to Yamani, is lack of a long-term strategy based on a clear vision of where the organization is heading.

Since the mid-1980s, OPEC has attempted to protect high prices through production restraint. As demand has risen, Venezuela and other OPEC members have ignored quotas to boost their market share.

The recent production cutback agreement (OGJ, Mar. 30, 1998, p. 22) has helped, said Yamani, but "...all attempts by OPEC to bolster the price by constraining production are fraught with difficulties and undermine the organization's fragile solidarity."

OPEC is prone to miscalculation, said Yamani, and still has not prepared itself adequately for Iraq's re-entry into the oil export market. OPEC prefers to fight fires rather than prevent them, he added.

OPEC has also ignored the effects of technological advances: "Oil prices would have to drop below $12/bbl to deter companies from developing new offshore oil fields and go below $5/bbl to shut in significant amounts of offshore oil in producing countries outside OPEC."

Way to go

With Brent crude now at about $14/bbl, Yamani believes OPEC has headed off disaster, although oil prices are unlikely to rise much in the next 5 years.

Oil will not be in short supply. For example, within OPEC, Venezuela intends to boost output capacity to 6 million b/d by 2010 from 3.5 million b/d today, while Iraqi capacity could reach 6.5 million b/d by 2010.

"In these circumstances," said Yamani, "any attempt by OPEC to ratchet up oil prices would be misguided. First, it would encourage oil companies to explore for and develop more oil in non-OPEC areas. Second, it would slow oil demand growth in Asia and Latin America, the two main sources of incremental oil demand in the world today.

"For OPEC to escape from its present bind, it has to act on two fronts: members need to diversify their economies away from oil; and the organization needs to think hard about adopting a long-term strategy to stabilize prices at levels that would encourage oil use and at the same time discourage oil production elsewhere."