Aug. 2, 1999
The wind-down of a tentative transition year for the oil market casts new light on politics of the Organization of Petroleum Exporting Countries

The wind-down of a tentative transition year for the oil market casts new light on politics of the Organization of Petroleum Exporting Countries.

With unprecedented discipline, group members have complied with the cuts in oil production that they put into effect last Apr. 1.

The cuts, in effect, have made room in the market for a reduction in global inventories, which ballooned when production kept growing after demand growth stalled in the second half of 1997. And since the cuts took effect, Asian economies, the collapse of which torpedoed oil-demand growth, have shown solid signs of life.

Hence $20/bbl crude oil.

Now the fun starts for OPEC. The Apr. 1 production targets are supposed to last through next March. But the quick price response already has members wondering whether a production hike will be in order before then.

In July a Venezuelan delegation visited other OPEC countries to promote a meeting on production limits before current quotas expire. Jorge Valero, head of the group, said members largely agreed with the necessity for such a meeting.

Inevitably, questions emerged about price targets.

Iranian Oil Minister Bijan Namdar Zanganeh, head of OPEC's market monitoring committee, said the price for the OPEC basket of crudes should reach $21/bbl before the group reconsiders production limits. Kuwaiti Oil Minister Saud Nasser al-Sabah, in a newspaper interview, called the "average price" at the end of July "still below the desired level." And what level would that be? He didn't say.

More recently, Qatari Energy Minister Abdullah bin Hamad al Attiyeh said the best oil price for both producers and consumers falls in the $18-20/bbl range.

All this talk by OPEC luminaries might trick someone into believing that OPEC can fix the price of crude oil, which it can't. It influences the price, to be sure, and has done so this year. But fix the price? Never.

There are too many market variables over which OPEC has no control. One of them even belongs to OPEC.

While attention has been focused elsewhere, prices have risen enough to make a United Nations revenue ceiling become a consideration in production from Iraq. The maverick OPEC member, embargoed by the UN for invading Kuwait in 1990, is allowed to export enough crude to raise $5.2 billion every 180 days for humanitarian purposes.

When crude prices were lower than they are now, Iraq couldn't meet the revenue target even when production was at the maximum physical limit of 2.6-2.7 million b/d. That changed recently. The UN says the country exported crude worth $277 million in the last week of July-a rate that makes the revenue ceiling a factor.

If the UN tries to enforce the ceiling, Iraqi President Saddam Hussein's minions will complain that it is keeping food and medicine out of the mouths of Iraqi children. They'll also accuse the UN of pandering to the U.S. and Britain.

What Saddam really wants, of course, is removal of the sanctions so he can control the money. In the UN, sentiment for elimination of the sanctions already is strong. For the UN leadership, an end to sanctions will be a way to escape allegations of cruelty.

Apparently, the Iraqis expect limits on their country's oil output to end one way or another. An oil ministry official recently said Iraqi production capacity was within weeks of rising by 100,000 b/d. The ministry has plans to raise capacity to 3 million b/d by the end of the year and to 3.5 million b/d by the end of 2000.

A question for OPEC, therefore, is whether to try to enforce an Iraqi quota if and when the already feeble UN restraint dissolves. And if OPEC does try to enforce a quota, how will Iraq respond?

At the meeting on production that OPEC probably will hold sooner rather than later-certainly before March-these questions will be unavoidable. There is no indication at present that Iraq even plans to attend.