OPEC nations grappling with plunge in oil export revenues

Lowell Feld, Douglas MacIntyre
U.S. Energy Information Administration
Washington, D.C.

• OPEC Oil Revenues [64,987 bytes]
• OPEC Oil Revenues Per Country [68,334 bytes]
• OPEC Oil Export Revenues at a Glance [98,281 bytes]

Oil export revenues for members of the Organization of Petroleum Exporting Countries are expected to plunge this year to $80.5 billion (in constant 1990 dollars), the lowest level since 1972 and less than a fifth of the peak revenue year of 1980.

OPEC oil export revenues are expected to be a third less in 1998 compared with 1997.

The sharp decline in OPEC oil revenues has serious implications for both net oil exporting and net oil importing countries worldwide. Changes in oil prices (and OPEC revenues) have wide-ranging ramifications for the world economy.

Many OPEC nations face difficult social, economic, and political challenges, because they are overwhelmingly dependent on oil export revenues, and governments have responded to a drop in those in revenues with a variety of fiscal (e.g., cutting subsidies) and monetary (e.g., devaluating currencies) policy measures.

Saudi Arabia maintains the highest share of OPEC oil export revenues (at about 30% of the OPEC total). Other top OPEC oil exporters include Vene- zuela, Iran, U.A.E., Nigeria, and Ku- wait, with Iraq increasing quickly.

Declining oil export revenues are also squeezing non-OPEC countries, such as Russia and Mexico. Russia's current economic difficulties are in part due to a sharp decline in the country's oil and gas export revenues.

Overview

The sharp decline in world oil prices, beginning in late 1997, has had serious implications for OPEC oil export revenues, balance of payments, budgets, and overall economic conditions.

Since late 1997, the OPEC "basket" crude oil price (a weighted average of Algeria's Saharan blend, Indonesia's Minas, Nigeria's Bonny light, Saudi Arabia's Arabian light, Dubai, Vene-zuela's Tia Juana, and Mexico's Isthmus) has fallen more than $7/bbl, from nearly $19/bbl in October 1997 to $11.91/bbl in August 1998.

In real (constant 1990 dollar) terms, world oil prices during 1998 have been at their lowest levels since before the Arab oil embargo in 1973-even lower than the oil "bust" year of 1986.

In a sense, this represents a reverse oil price "shock" in contrast with the conflict-related sharp oil price increases of 1973-74, 1979, and 1990.

Currently, low oil prices are causing a "shock" to exporting countries, while the economies of oil-consuming countries are benefiting. The situation is similar to, but not as extreme as, the oil price collapse of 1985-86, when oil prices were halved.

Low oil prices since late 1997 have been caused by several main factors, including: OPEC's Dec. 1, 1997, agreement to raise the group's production quota by 10%; a warmer-than-normal winter (1997-98) in the Northern Hemisphere; increasing Iraqi oil exports; and reduced demand stemming from the severe economic crisis in East Asia.

If low oil prices continue for a long time (and at present, no obvious end appears in sight), OPEC nations will be forced to make difficult economic, social, and political tradeoffs.

Budget problems

Collapsing oil prices have thrown 1998 budgets for OPEC countries into chaos, as they scramble to cut expenditures, raise revenues, and minimize budget deficits.

During first half 1998, OPEC countries earned $53 billion from oil exports, a drop of $22 billion (30%) from first half 1997.

For 1998 as a whole, OPEC is expected to earn $101 billion in oil export revenues, down 32% from $149 billion in 1997 (see table, p. 31).

The OPEC basket price averaged around $12.37/bbl in first half 1998, compared with $19.30 in first half 1997.

In real-dollar terms, OPEC oil revenues peaked in 1980 at $439 billion. Prior to 1998, in constant-dollar terms, the worst year since the early 1970s was 1986.

In 1986, OPEC earned $83 billion (constant dollars), compared with $77 billion in 1972. OPEC revenues for 1998 will be around $81 billion, in constant dollars.

If agreed-upon OPEC output cuts fail to boost oil prices, it is possible that 1998 will be the worst year for the group's revenues (in real terms) since 1972.

Individual OPEC members' shares of total oil export revenues have fluctuated over the past 3 decades, but several trends are apparent:

• Saudi Arabia consistently has earned the most oil export revenues in OPEC, with its share ranging from below 20% in 1972 to over 40% in the early 1980s. Today, Saudi Arabia's oil export revenues account for about 30% of total OPEC revenues.
• Iran's revenue share fell after the 1978-79 Iranian revolution (followed soon thereafter by the Iran-Iraq War for much of the 1980s) and has never recovered. Today, Iran accounts for about 10% of total OPEC oil export revenues.
• Iraq's oil export revenue share has fluctuated greatly, from a high of around 15% in the late 1980s to near zero for several years following its August 1990 invasion of Kuwait (and the subsequent United Nations oil embargo, which continues to this day). Iraqi oil export revenues have increased over the past 2 years or so under the U.N. oil for aid deal, which permits limited Iraqi oil exports to buy food and medicine, for war reparations, and for other U.N.-authorized purposes. Iraq's share of total OPEC oil revenues is now increasing towards 10%.
• Venezuela has maintained a fairly consistent share, around 10%, of OPEC oil revenues.
• The rest of OPEC has earned 40-50% of total OPEC oil export revenues during 1972-98. Around half of this was earned by "other Persian Gulf" countries, notably Kuwait and the U.A.E.

Hydrocarbon economy

The price of oil is of critical importance to the world economy, given that oil is the largest internationally traded commodity, both in volume and value (creating what some analysts call a "hydrocarbon economy").

Also, the prices of energy-intensive goods and services are linked to energy prices, of which oil makes up the single most important share.

Furthermore, the price of oil is linked to some extent to the price of other fuels (even though oil is not fully substitutable for gas, coal, and electricity, particularly in the transportation sector).

For these reasons, abrupt changes in oil prices have wide-ranging ramifications for both oil producing and consuming countries. The sharp decline in world oil prices since late 1997 certainly qualifies as an abrupt and significant change.

Generally speaking, a sharp decline in oil prices benefits oil importing nations and hurts oil exporters. For importers, lower oil prices act like a tax cut, increasing consumer disposable income.

This allows for looser monetary policy, and hence lower interest rates with lower inflation and stronger economic growth (the situation the U.S. currently finds itself in) than would otherwise be the case.

Sharply higher oil prices, on the other hand, have been identified as a major cause in seven out of the eight post-World War II recessions in the U.S.

Although this may sound like a straightforward relationship, the economics of oil price changes are actually somewhat more complicated.

For one thing, oil revenues earned by producers are, to a large extent, "recycled" back to consumers in imports of all types of goods and services.

Fluctuations

For oil-producing countries, the effects of oil price fluctuations can vary greatly, depending on many factors.

Within OPEC, countries such as Algeria, Nigeria, and Indonesia contain relatively large populations and relatively small oil reserves.

These countries, therefore, generally have tended (with numerous exceptions) to favor a strategy of short-term revenue maximization and tend to have had relatively low political/social tolerance for the pain caused by low oil revenues.

Countries with small populations and large oil reserves, like Kuwait, the U.A.E., and Saudi Arabia, on the other hand, have tended (also with exceptions) to favor a strategy of long-term revenue maximization and generally have been in stronger positions to weather price declines.

The effect of oil price fluctuations on oil-producing countries also varies greatly depending upon whether the country is a relatively low-cost or high-cost oil producer.

For low-cost producers, such as Saudi Arabia, Kuwait, the U.A.E., and Iraq, the marginal cost of producing each additional barrel of oil is relatively low, and, therefore, it often remains economical to produce oil from these countries when oil prices fall.

For relatively high-cost oil producers, such as the U.S., Norway, the U.K., or Canada, on the other hand, low oil prices can turn many oil fields from economical to uneconomical in a short period of time.

High oil prices, meanwhile, generally have tended to encourage oil exploration and production in previously marginal fields (like the North Sea in the late 1970s and early 1980s).

Finally, the effects of oil price fluctuations on oil producers (and consumers, for that matter) are greatly affected by government reactions (or lack thereof).

An oil-producing country can react to a price collapse by devaluing its currency, cutting subsidies, raising taxes, and privatizing energy industries.

Algeria

Oil and gas export revenues play a key role in Algeria's economy.

In 1997, Algeria hydrocarbon export revenues accounted for 97% of Algeria's total export revenues and 58% of total fiscal revenues.

A rule of thumb for Algeria is that every $1/bbl drop in the price of Algerian Saharan blend results in a $560 million/year revenue loss (around 4.3% of normal export levels, 2.6% of the country's budget, and 0.8% of gross domestic product).

For Algeria's light crude (Saharan blend), prices decreased 40%, from over $20/bbl in October 1997 to around $12/bbl in July 1998.

In addition to lower prices for its oil, Algeria also has pledged to cut a total of 80,000 b/d in oil production from February 1998 levels as part of overall OPEC production cutbacks.

As a result of lower prices and lower production, Algeria has experienced a 35% decline in oil revenues, to about $4.9 billion in 1998 from $7.5 billion in 1997.

This is putting pressure on government finances as well as on the country's overall economic growth. In recent years, Algeria's real GDP had grown strongly (5.5% in 1997).

For 1998, a 6% growth rate had been projected prior to the oil price collapse, but this growth rate projection has been slashed to 2%.

The decline in Algeria's oil export revenues already has put pressure on the country's finances, with the government reducing its assumed oil price for 1998 budgetary purposes by $3/bbl.

Finally, declining oil revenues are a complicating factor for a country that is already experiencing severe economic and social tensions and has suffered an estimated 75,000 deaths resulting from the government's 6-year conflict with the Islamic Salvation Front and the Armed Islamic Group.

On the positive side, Algeria is a major gas exporter, and continued expansion in that area could mitigate declining oil revenues.

Indonesia

Indonesia's oil revenues are expected to fall 32% to $3.5 billion in 1998 from $5.1 billion in 1997.

This comes in addition to the already dire economic straits Indonesia finds itself in as part of the Asian economic crisis.

Indonesia exports around 750,000 b/d of oil (net), with oil and gas exports accounting for about 23% of Indonesia's total export revenues.

For 1998, Indonesia's GDP is expected to fall 13.5-20% in real terms. To cope with its worsening economic crisis, Indonesia has taken a number of measures, including lowering its oil price projection for the country's fiscal 1998-99 budget to $13/bbl from $17/ bbl.

In addition, Indonesia also has taken a number of measures affecting its oil and gas sectors.

On July 29, the government said it would postpone appraisal of the supergiant (42 tcf) Natuna gas field operated by Exxon Corp. (Mobil Oil Corp. holds a 26% stake as well, with Indonesia's Pertamina holding 24%).

Indonesia also has cut back on production of polyethylene, polypropylene, and other petrochemicals. Meanwhile, Indonesia has pledged to cut 100,000 b/d from its February 1998 oil output levels as part of OPEC's efforts at reversing the world oil price decline.

Iran

Oil exports account for about 36% of Iran's state revenues and 80-85% of total export earnings. Iran is suffering serious economic problems, exacerbated by low oil prices. (Iran also has pledged to cut 305,000 b/d from February 1998 levels.)

Iran originally had budgeted for the fiscal year beginning Mar. 21, 1998, based on an oil price of $17.50/bbl.

This was cut in January 1998 to $16/bbl, and then again to $12/bbl effective Mar. 21, 1998 (the beginning of the country's new fiscal year). For all of 1998, Iran's oil revenues are expected to be $10.2 billion, down 35% from $15.7 billion in 1997.

Last March, President Mohammad Khatami said that "the structure of our economy is sick" and that "we have to get used to spending less hard currency." Iran's Central Bank estimated that Iran had $26.4 billion in foreign debt obligations, including $14.1 billion in confirmed debt.

Repayment of this debt will be made much more difficult due to the sharp decline in Iran's oil revenues.

Iran also will most likely experience a larger budget deficit, a depreciation of the riyal, and a shortage of foreign exchange.

Other problems facing Iran's economy include inflation and unemployment. At current oil export levels, Iran loses about $1 billion/year in oil export revenues for every $1/bbl drop in prices.

One result of the decline in Iran's oil export revenues has been a lack of available cash for much-needed investment in the country's oil sector. As a result, Iran is looking increasingly towards western capital markets as a source of investment capital.

Iraq

The effect of declining world oil prices on Iraq is more complicated than other OPEC countries for one main reason: Iraqi oil exports continue to be constrained by U.N. oil export sanctions.

With U.N. permission, Iraqi crude oil production (including condensate) has increased by about 1.5 million b/d since late 1997, from 781,000 b/d in December 1997 to about 2.2-2.3 million b/d in August 1998.

Iraqi oil exports also have been increasing steadily, reaching an estimated 1.7 million b/d in July 1998 and perhaps as much as 1.8 million b/d in August (up nearly 500,000 b/d since Apr. 1, 1998).

This increase in Iraqi oil exports has been playing a significant role in the world oil glut that is responsible for the sharp decline in world oil prices since late 1997.

So, Iraq is in the strange (and unique) position wherein its ability to meet the increased dollar value of oil exports ($5.26 billion every 6 months) permitted by the U.N. is being made more difficult by the sharp decline in oil prices, caused partly by its own increased oil exports.

To meet the $5.26 billion, 6-month target, Iraq would have to increase its oil exports from 1.7 million b/d to over 2.4 million b/d (assuming $12/bbl).

For all of 1998, Iraq is forecast to earn $6.1 billion in oil export revenues, up 45% from $4.2 billion in 1997.

Kuwait

With oil revenues accounting for about 90% of Kuwait's government income (and nearly half the country's GDP), the sharp drop in oil prices obviously has had serious implications for Kuwait's finances.

For 1998, Kuwait oil export revenues are expected to reach $7.9 billion, down 33% from $11.8 billion in 1997.

At the beginning of March 1998, in response to plummeting oil prices, Kuwait's Finance Ministry asked state bodies to cut spending by 25% for the remainder of the fiscal year ending June 30, 1998.

In April, Kuwaiti Oil Minister Saud al-Sabah warned that Kuwait could face an "economic catastrophe" if Kuwaiti crude remained at $10.50/bbl.

In early May, Kuwait's Supreme Petroleum Council decided to increase domestic fuel prices by 40-50%. Kuwait has pledged to cut 225,000 b/d from its February 1998 oil production.

Libya

Oil exports will earn Libya $5.8 billion in 1998, a 36% drop from 1997 earnings of $9 billion.

Oil export revenues account for about 95% of Libya's hard currency earnings. In addition to lower oil prices, Libyan oil export production and export earnings have been affected by U.N. sanctions imposed after the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland. In 1992, the U.N. imposed economic sanctions on Libya for refusing to extradite two Libyan nationals accused of carrying out the attack. The sanctions were extended in November 1993 to include a ban on the sale of equipment for oil and gas export terminals and refineries, among other items. In 1996, the U.S. passed the Iran-Libya Sanctions Act, extending U.S. sanctions to cover any companies-including those outside the U.S.-that invest $40 million or more over a 12-month period in Libya's oil or gas sectors.

As a result both of sanctions and lower oil prices, Libya's economy has barely grown in several years (0.7% growth in 1996, 0.6% in 1997, and a forecast decline of 0.5% in 1998).

The country has been forced to adopt a more conservative fiscal policy and to limit public infrastructure spending to a few main projects, such as the Great Man-Made River, a $25 billion project to bring water from underground aquifers beneath the Sahara to the Mediterranean coast.

Libya has pledged, beginning in February 1998, to cut 130,000 b/d from its 1997 crude oil production of 1.4 million b/d, in an attempt to boost oil prices.

Nigeria

Crude oil exports generate over 90% of Nigeria's foreign exchange earnings.

Due to lower oil prices and production cuts (pledged), Nigeria's crude oil export revenues are expected to fall by 36% in 1998, to $9.2 billion from $14.5 billion in 1997.

The sharp decline in world oil prices and export revenues comes amidst a period of political and social turmoil for Nigeria, especially following the deaths of President Sani Abacha on June 8, 1998, and of Mashood Abiola, the presumed winner of 1993 presidential elections, on July 7.

All this is having a serious effect on Nigeria's short-term economic and fiscal outlook. Real GDP is expected to grow only 2.2% in 1998, compared with 3.8% in 1997.

Nigeria's budget for 1998 was made with an assumption of $17/bbl oil, compared with the actual $13/bbl that the country has seen so far in 1998. Nigeria's government already has cut back on funding for oil sector joint ventures, delayed the release of capital budget funds, and capped foreign debt repayments. Nigeria has pledged to cut 225,000 b/d from its February 1998 level.

Qatar

Oil continues as the dominant feature of Qatar's economy, providing around 70% of government revenues.

The collapse in oil prices hurts Qatar in several ways, including the loss of revenues that were to be used for balancing the budget and paying for a huge liquefied natural gas (LNG) development program (Qatar has the third largest natural gas reserves in the world, after Russia and Iran).

Qatar's oil export earnings for 1998 are currently forecast at $3 billion, down 26% from $4 billion in 1997.

Qatar's sovereign debt stands at around 30% of GDP. Much of this debt has been accumulated as the country has invested in LNG, petrochemicals, refining, and electric power capacity.

This capacity should start coming on line beginning mainly in 2000, but in the interim, Qatar faces a period of tight budgets and lower economic growth (4.5% forecast for 1998 vs. 10.5% in 1997).

Qatar has pledged to cut 60,000 b/d as of February 1998. Despite the fall in oil prices, Qatar still plans to increase oil production capacity by 20%, from 714,000 b/d at present to 854,000 b/d, by yearend 1999.

Saudi Arabia

Saudi Arabia is the largest OPEC oil producer and a leader in the organization's production quota decisions-including the decision of Dec. 1, 1997, to raise the OPEC oil production ceiling by 10% (although actual OPEC production increased by less than 2% from November 1997 to February 1998).

Currently, Saudi Arabia produces a little more than 8 million b/d of crude oil (30% of total OPEC crude production). This represents a significant cut from February 1998 production of 8.7 million b/d.

Saudi Arabia also supplies 16% of U.S. crude imports (Venezuela and Mexico are its main competitors for U.S. market share).

The current sharp decline in oil revenues that the country is experiencing represents a major challenge for the Saudi government, because oil export revenues account for nearly 90% of total Saudi export earnings.

Aside from the overall oil price decline that is affecting all world oil producers, Saudi Arabia's difficulties are being compounded by the economic crisis in Asia, because Asia accounts for around 60% of Saudi oil sales.

Saudi Arabia earned about $45.5 billion in 1997 from crude oil exports. In 1998, this is expected to fall by 35%, to around $29.4 billion (Saudi Arabia loses an estimated $2.7 billion/year for every $1/bbl fall in the price of oil).

Since January 1998, the price of Arab light has averaged $10-13/bbl, down about $7/bbl from the last few months of 1997.

These prices also are well below Saudi Arabia's $16/bbl oil price expectations originally assumed for use in 1998 budgetary calculations.

In inflation-adjusted terms, these represent the lowest Arab light prices for a sustained period of time since 1973.

Saudi Arabia is being affected by the decline in oil prices as well as by its cuts (pledged and being implemented) of 725,000 b/d.

On the positive side, lower oil prices to some undefined point can be helpful to Saudi Arabia, for several reasons.

For one, Saudi Arabia has at least 250 billion bbl (and as much as 1 trillion bbl) of oil in the ground, and is among the world's lowest-cost oil producers.

Given the country's high reserves-to-production ratio of 100 years or more, low oil prices can help to accomplish several main economic objectives for Saudi Arabia.

These include deterring development of alternative energy sources, maintaining Saudi market share against its main competitors, and deterring marginal non-OPEC oil production investment.

Saudi problems

On the negative side, despite its attempts to diversify, Saudi Arabia remains heavily dependent on oil revenues-for 88% of total export earnings, about 75% of state revenues, and 40% of GDP.

This year's oil price decline comes just as the Saudi economy appeared to be recovering from the damage from the 1990-91 Persian Gulf crisis and war.

The dramatic reduction in these revenues will likely result in a significantly lower GDP growth rate (possibly even negative, compared with an average 4.4%/year growth rate over the past 2 years), as well as a higher budget deficit (possibly 4.8% of GDP) than expected for 1998.

Meanwhile, the oil price decline has forced state oil company Saudi Aramco (whose expenditures account for around 6% of Saudi GDP) to delay a series of upstream and refining projects (at an estimated savings of $2 billion in 1998) and to defer bidding on the $150-200 million Haradh Phase 2 crude oil production project, its only upstream oil project in the tendering process.

This decision apparently leaves Saudi Arabia with only two major energy projects under bidding: the $2 billion Hawiyah gas processing plant and an $800 million upgrade of the Rabigh oil refinery.

The Hawiyah gas project is part of an ambitious expansion plan for the Saudi Master Gas System, through which Saudi Arabia hopes to increase domestic gas consumption and free oil for export. Aramco also is pushing ahead with delineation of the deep Khuff gas reservoir.

U.A.E.

The U.A.E. economy appears to be slowing significantly, at least in part due to the decline in oil prices.

The U.A.E. is expected to earn $9.3 billion in oil export revenues in 1998, down 32% from $13.7 billion in 1997.

Real GDP is expected to fall by 4.1% in 1998, compared with growth of 1% in 1997 and 9.9% in 1996. International cash reserves will likely fall to $5.6 billion from $6.9 billion in 1997, while the current account balance will fall to a $2 billion surplus (from a $4.5 billion surplus in 1997).

In response to falling oil export revenues, the U.A.E. has called for restraint in government expenditures.

The U.A.E. has pledged 225,000 b/d in production cuts for 1998, from a base of almost 2.4 million b/d.

Venezuela

A 37% drop in Venezuela's 1998 oil export revenues to $11.1 billion, from $17.7 billion in 1997, is seriously hurting the economy, which could contract 1-2% this year vs. 5.1% growth last year.

It also is adding political uncertainty in the Dec. 6 presidential elections. The populist candidacy of former army commander Hugo Chavez, who attempted a coup on Feb. 4, 1992, and who has called for a partial moratorium on debt repayments, among other measures, is worrying many foreign investors in Venezuela.

In response to its economic crisis (including a 40% drop in the country's stock market in the first 9 months of 1998), Venezuela is cutting spending. So far this year, state oil company Petroleos de Venezuela SA (Pdvsa), has cut its budget repeatedly, slashing as much as $2.4 billion.

The government planned to float a $1.4 billion global bond offering in September to help bridge the gap between revenues and expenditures.

On the positive side, the nation has undertaken reforms over the past several years (encouraging privatization and increased foreign investment, strengthening the banking sector, and increasing foreign exchange reserves) that could help Venezuela withstand itscurrent economic problems.

Pdvsa's profits are expected to drop sharply in 1998, from $4.4 billion in 1997.

Pdvsa's production capacity target for 2007 has been lowered from 6.4 million b/d to 5.8 million b/d (up from 3.3 million b/d in 1997).

As of late August, Venezuela had pledged production cuts during 1998 of 525,000 b/d (to 2.845 million b/d), down from its agreed February 1998 baseline production of 3.37 million b/d, in an attempt to raise oil prices. In late June, Venezuelan oil prices were at a 12-year low of $8.43/bbl.

Non-OPEC nations

The decline in world oil prices is affecting non-OPEC countries as well, particularly Mexico and Russia.

Mexico has been forced to slash its budget three times this year (as of July 9) to make up for lost oil export income (as much as $4 billion) as a consequence of falling prices and production.

In addition, and partly as a result of low oil prices, Mexico's stock market fell 40% from mid-July to early September, while the peso was down 13%, during the same period, against the U.S. dollar. As a result, the Mexican government has recalculated its budget based on a price of $11.50/bbl, down from $15.50/bbl contained in the original 1998 budget.

Mexican state oil company Petro- leos Mexicanos is estimated to provide about 40% of Mexican government revenues.

Russia, which depends heavily on energy exports for revenues, has been seriously hurt in recent months by the sharp decline in oil prices.

Russian oil export revenues are estimated to have fallen by 25%, despite higher export volumes, in first half 1998 from first half 1997.

This has contributed to a severe deterioration in Russia's trade balance. On Aug. 17, Russia said it would allow the ruble to fall by as much as 34%, suspend trading of treasury bonds, and defer repayment of corporate and bank debt.

Other oil exporting nations also have been affected by the decline in oil prices and revenues.

Ecuador's oil export revenues, for instance, fell 36% (from $674 million to $430 million) in first half 1998 from the same period in 1997. As of late August 1998, the price for Ecuadorian crude was about $7.60/bbl, a 47% drop from $14.82/bbl a year earlier.

Egypt's oil export revenues fell 52% (from $640 million to $310 million) in the first 5 months of 1998 from the same period in 1997.

Lower oil prices have affected Canada as well, causing oil companies to lay off workers and to reduce heavy oil production in British Columbia.

Norway, the world's second largest oil exporter, raised interest rates on Aug. 24 in an effort to boost its sagging currency.

If low oil prices continue in the long term, it is possible that relatively expensive oil fields throughout the world could become uneconomical, while new exploration could be reduced.

Prospects

Probabilities are poor for a rapid short-term improvement in OPEC oil revenues.

In fact, downside risks are strong. Factors that could help push oil prices even lower include: a worsening of the East Asia crisis, which could further reduce marginal world oil demand; a failure by OPEC to cut as much production as it has pledged; a sharp downturn in Russia's economy, which could reduce domestic oil demand and put more Russian oil on world markets; and continued increases in Iraqi oil output.

Upside risks include: a more rapid recovery in Asia than expected; a disruption in Iraqi oil exports; and a colder-than-normal winter in the Northern Hemisphere.

Taking these considerations into account, EIA expects world oil prices at best to increase slightly (possibly $2/bbl) by yearend 1998, from about $11/bbl estimated for August.

The main assumption behind this scenario is OPEC coming increasingly into compliance with its pledged production cuts.

According to the International Energy Agency, as of July 1998, OPEC (excluding Iraq) was about 55% in compliance with the 2.6 million b/d in oil supply cutbacks it has pledged to make.

This percentage is expected to increase gradually to around 75% by yearend, even assuming continued increases in Iraqi output, which so far have been partly canceling out other OPEC member production cuts.

The Authors