SAUDI ARABIA - The OPEC Meeting & The Saudi-Russian Pact:.

The Sept. 24 OPEC ministerial conference in Vienna, joined for the first time by a delegation from post-Saddam Iraq, unexpectedly decided to cut oil output by 3.5% to 24.5m b/d as of Nov. 1, driving oil prices sharply higher. OPEC officials said the decision was caused by slowing demand from a still sluggish global economy and an expected rise in Iraqi oil output threatening to lower prices. They also cited rising non-OPEC production, mainly Russia, for the decision to reduce output by 900,000 b/d. (Iraq was excluded from the OPEC quotas, as had been the case since it resumed oil exports in late 1996).

The current ceiling of 25.4m b/d - about one-third of the world's oil consumption - was originally expected to be kept unchanged, though there was talk of cuts by early 2004 when Iraqi exports were expected to rise.

The OPEC decision was more political than a reflection of oil market fundamentals. It was a double message to Washington and Moscow:

1. While OPEC was forced to recognise a US-appointed regime in Iraq, the group wanted to remind Washington decision makers that it alone controlled oil pricing, a line inspired by Venezuela and other members angered by a war that ousted Saddam's Baathist regime on April 9.

2. OPEC indirectly endorsed a price defence pact between Saudi Arabia and Russia struck as part of accords signed in Moscow during a Sept. 2-4 visit by Saudi Crown Prince Abdullah Ibn Abdel Aziz (see implications of Abdullah's visit in APS Diplomat's News Service No. 12).

OPEC had been careful before and during the war in Iraq to avoid moves that would hurt the global economy, with Saudi Arabia and other members increasing production to keep the market amply supplied in a bid to help steady soaring prices. But the presence of Ibrahim Bahr Al-Ulum, the Iraqi oil minister designated by the US-appointed Iraqi Governing Council, (IGC) irked some members.

Venezuela, still struggling to restore production after national strikes in December and January against the government of President Hugo Ch vez, had tried to bar Bahr Al-Ulum from attending, saying he did not represent a legitimate government. But OPEC's current president Abdullah Bin Hamad Al Attiyah, the Qatari energy and industry minister, said the group "welcomed" the return of an Iraqi representative.

Over the long term, OPEC is eager to keep Iraq in the fold. Iraq has the second-largest oil reserves in the world after Saudi Arabia. Bahr Al Ulum insisted that Iraq will continue as one of OPEC's 11 members, telling a news conference: "Iraq is a founder member of OPEC. It will stay and remain a member of OPEC. Iraq should play an active role in achieving the objectives of this organisation, with full co-operation with its members".

Bahr Al-Ulum said Iraq planned to increase oil production sharply from the current level of 1.8m b/d, which is about 700,000 b/d short of the pre-war output under the UN-monitored oil-for-aid programme. But sabotage to Iraqi oil facilities continues and the wartime damage could cost as much as another $2 bn to repair, he said. By the end of 2005, he said, the country aims to produce 3.5-4m b/d, and about 6m b/d by the end of the decade. Those targets will depend on political stability in Iraq and massive foreign investment to tap its oil reserves.

Such a substantial increase in output would mean that Iraq would also have to adjust the quotas of individual members. Before UN sanctions following Saddam's August 1990 invasion of Kuwait and a subsequent war led by the US, Iraq's quotas were comparable to those of its neighbour, Iran. At a news conference after the meeting in Vienna, Attiyah said OPEC did not address the issue of Iraq's eventual quota.

OPEC has been losing market share and has watched its influence over oil prices wane since the 1970s. The new OPEC output of 24.5m b/d from Nov. 1 brings the group's official production ceiling back to the level that prevailed before a meeting in April. At that time, the group raised the official limit to 25.4m b/d, although the actual output was much higher.

OPEC's Sept. 24 communiqu called for "compliance and strict discipline" under the new limits. Attiyah said leading non-OPEC oil producing states including Russia supported the group's goal of keeping prices within its band of $22-28/barrel.

Angola's representative, one of the non-OPEC members present at the meeting as an observer, questioned the need for a cut in production at a time when Iraqi oil still is only trickling onto the market and the global economy shows signs of improving, leading to possibly higher oil demand. Attiyah and other OPEC officials said they expected inventories to rise during the fourth quarter, amid mixed signals on the course of global economic growth.

The OPEC officials also expected that Iraq may be able to ramp up production faster than was foreseen. "We saw more supply than the market needed", said UAE Oil Minister Obaid Bin Saif Al-Nasseri, "Any lack of action could have been very negative for prices".