EDITORIAL OPEC and Iraqi oil

Partial resumption of Iraqi oil exports adds interest to the ministerial meeting June 5 of the Organization of Petroleum Exporting Countries. Even before last week's agreement between Iraq and the United Nations for limited oil sales, the meeting promised to be livelier than its recent predecessors.

Since the U.N. embargoed Iraq after its 1990 invasion of Kuwait, a serious question for the oil market has been how OPEC would handle the inevitable return of Iraqi crude. OPEC has promised to deal with the challenge in due course. Iraq's agreement with the U.N. gives those assurances their first, though measured, test.

Familiar question

The question for OPEC is a familiar one: Who cuts production to accommodate a change in the market-in this case restart of as much as 700,000 b/d of Iraqi exports? As always, OPEC first must decide whether to ask members to make the sacrifice or try to hold market share by forcing non-OPEC producers to cut. If it opts to surrender market share, the problem is to apportion the pain fairly among members.

This time, the second question is tougher than the first. The amount by which OPEC members as a group are exceeding their longstanding quota of 24.52 million b/d is at least twice what Iraq will be exporting under the U.N. agreement. Mathematically, OPEC can make room for the Iraqi increment by persuading overproducing members to cheat less.

From the group's point of view, it makes more sense to reduce output than to defend market share. If cutting group production by 700,000 b/d could hold average OPEC prices at $20/bbl, and if maintaining production at recent levels dragged prices to, say, $17/bbl, group revenues would be significantly higher at the lower level of output-$508 million/

day vs. $444 million/day. To force a meaningful amount of non-OPEC production from the market, moreover, prices would have to sink to levels that few OPEC members can tolerate-certainly less than $17/bbl-and remain there awhile.

With crude values now sagging due to market changes that have nothing to do with Iraq, OPEC probably can't hold prices at $20/bbl by trimming output only enough to accommodate the coming Iraqi exports. But the effect on group revenue is the same: more revenue at less production. OPEC Sec. Gen. Rilwanu Lukman has been stressing that OPEC's chief concern is its members' revenues (OGJ, May 13, p. 35).

So the tough question for OPEC June 5 is not whether to cut production but how to spread the pain. The quick answer is to make quota cheaters quit cheating by the required amounts. But one of the cheaters is Venezuela, which has other concerns.

As an OPEC member with high internal oil consumption compared with others, it wants the group to quit counting against individual quotas any volumes produced for domestic use. The argument is strong, and Venezuela seemed to be receiving consideration for it before the Iraq-U.N. accord. What's more, Venezuela's revenue effects work the opposite of OPEC's as a group with respect to the volumes in question. The country would make more money exporting at the quota rate of 2.36 million b/d with the price at $17/bbl than it would with the price at $20/bbl exporting at quota less 378,000 b/d of domestic consumption.

Spoiler's role

Venezuela thus enters the June 5 meeting in position to play the spoiler. OPEC will not easily win quota compliance from it without conceding something on the quota-definition issue. In the interest of revenues, the group will probably make the change. It may have to mollify other members on the equity question by raising the now-ignored group quota to a new level at which it might expect better compliance-something like 25.3 million b/d. The gambit has worked before.

The market would find comfort in such adjustments. Tougher tests for OPEC lie ahead. With repairs to field equipment, pipelines, and terminals, Iraq can produce five time more oil than the U.N. agreement allows. Someday it will do so.