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No change of course.

Saudi Arabia will continue to produce as much oil as it thinks in its own and the market's best interests, despite speculation after last May's Opec meeting in Vienna that it was undergoing a change of heart. That means the next Opec meeting in the autumn could be a stormy one.

KEEP AN EYE on Saudi Arabia's oil output over the next couple of months. As crude spot prices remain unseasonably firm, the kingdom is likely to edge up its production by small degrees above the minimum 8m b/d it has effectively set as its floor. That would have two consequences. First, prices will be kept under control, even if they remain higher than they were last autumn. Second, Opec's next market monitoring get-together scheduled for Geneva in September will be noisy.

If this is indeed what happens, it will put a stop to rash speculation that the kingdom is in the throes of changing its oil policy in favour of squeezed production and a higher long-term price level. Only a few weeks after the organisation's last ministerial meeting in Vienna, it is hard to see why theories about a major Saudi policy switch ever gained much credence.

The May meeting in Vienna was notable for the things which failed to happen rather than anything dramatic which did happen. Hisham Nazer, the Saudi oil minister, was "too exhausted" to attend and there was no grand battle about whether to raise or lower the overall production ceiling agreed the previous February.

Superficially, this looked significant. Only days before the meeting, Saudi Arabia was said to be advocating a one million barrel a day hike in the official ceiling for the third quarter of the year to accommodate anticipated growth in demand. This would have flown directly in the face of the wishes of other Opec members led by Iran and Algeria who want to take advantage of the tightness in the market to boost prices. In the event Nazer never turned up to press the issue.

The strange case of the missing minister and his non-policy gave rise to the fancy that Saudi Arabia had abandoned its goal of preserving its share of market demand for Opec output and maintaining stable prices. Rumours abounded about restrictions imposed on Saudi supply and shipments to storage in Europe and the Caribbean rather than to the usual customers. Was Riyadh having a change of heart? Is Nazer on his way out? Would Opec act in unison again to ratchet up oil prices to long-forgotten levels?

Not a bit of it. Saudi Arabia is quite happy to stay in line with the majority of Opec, providing the majority does not aim to boost prices as far as the more hawkish members of the organisation would like. Close watchers of Saudi oil policy at the Vienna meeting claimed that the kingdom is convinced that an increase in oil prices of two or three dollars will have no discernible effect on economic growth or demand for crude. The real price of oil is still low in historic terms, so in order to buy amity in Opec Saudi Arabia an afford to let it creep up a little.

Since Vienna, the price has indeed remained remarkably firm. In late June, the spot price of North Sea oil was still above $21 a barrel, which is the target level for Opec's own basket of prices. Saudi Arabia is prepared to go along with such a price for so long as the market will still accommodate the kingdom's own production in excess of 8m b/d. But make no mistake. If the kingdom finds itself unable to sell what it regards as its legitimate market share, the price will be forced down.

The Opec meeting in Vienna agreed to roll over its second quarter output ceiling of 22.98m b/d for the third quarter while allowing for an increase of around 300,000 b/d in Kuwaiti production. Just as they did at the previous meeting in February, Saudi Arabia, Iran and Iraq all expressed reservations. The Saudis said they would not be tied by their allocation of 7.88m b/d and would "keep options open" for a possible rise during the third quarter. Iran will not (or cannot for any length of time) produce its own allocation because it wants to maintain the principle of upward pressure on prices. Equally expected was Iraq's rejection of the agreement which it says ignores the need to prepare for Baghdad's re-entry to the oil market. For the moment Opec can ignore Iraq, however, since its oil minister, Usama al Hiti, is unable to give any indication of getting nearer to breaking the deadlock with the United Nations over the sale of limited quantities of crude as an exception to the continuing UN embargo.

"Reservations" aside, everyone except the Iraqis said they were satisfied with the roll-over accord. In practice, it means that Opec will produce around 23.5m b/d which seems to be what the market can bear through the summer.

This happy compromise was far from inevitable, as the reported Saudi ploy of calling for an increased ceiling suggests. Before the meeting, Gholamreza Aqazadeh, the Iranian oil minister, expressed his determination to counter the expected Saudi move by pressing for a cut in output. Algeria's energy minister, Nordine Ait Laoussine, was widely quoted as describing the proposed increase as totally unjustified.

It was probably the prospect of finding himself isolated at an acrimonious meeting which persuaded Nazer to stay away. If the Opec majority had insisted on a reduction in output, the kingdom could always justify a refusal to sign the agreement by sending a representative who was not an oil industry official.

But Fayez Badr, who took Nazer's place in Vienna, is no minor subordinate. As the veteran head of the Saudi Ports Authority, he is a senior member in his own right of the kingdom's decision-making team with ministerial rank and renowned by being a shrewd negotiator. If the Saudis had come in for a barrage of angry criticism in Vienna, he would have been as capable of standing up to it as Nazer.

In the event he did not have to do so. Having staked out their diametrically opposed positions before the conference, the two camps compromised by making no changes. Once again, what failed to happen was what was ultimately important.

There is one other explanation of Saudi Arabia's tactics which should be borne in mind. The kingdom is likely to be telling the European Community that plentiful supplies of Saudi oil should not simply be taken for granted. Saudi Arabia has made no secret of its irritation at EC proposals to impose a tax on carbon dioxide emissions in member countries which would reduce the increase in oil consumption.

In one of the kingdom's few interventions at the Rio Earth summit. Hisham Nazer warned against the introduction of a carbon tax because of the disruption it would cause in the oil markets. Oil is already heavily taxed and a further charge would have an adverse effect on investment and energy production.

The Saudis, supported by other Gulf producers, have a point. European governments, already collect more than $50 from every barrel of oil consumed. That is a lot compared with the $15 a barrel which even the most efficient producers (such as Saudi Arabia) manage to make out of their exports. The proposed tax would grow in stages to an additional $10 a barrel by the end of the century, none of which would accrue to Opec. If oil is to become more expensive, the Saudis feel, it is Opec rather than the European importers which should benefit.

Shortly before the Earth summit, however, the European Council of Ministers put aside the carbon tax idea for a while, largely under pressure from the United States and much to the chagrin of the environment commissioner, Carlo Ripa di Meana, who refused to go to Rio as a result. The Saudis will be well pleased by the American attitude. Like the US, they believe that priority should be given to stabilising rather than increasing prices.

And that is likely to remain Saudi policy. Since Iraq's invasion of Kuwait, the kingdom has been determined to offset the loss of Iraqi and Kuwaiti production to the market by lifting at least 8m b/d. One effect of this was to send oil prices into a steady decline during 1991. Even though Opec members were producing more than 24m b/d (against an official ceiling of 23.65 b/d by January this year, Opec's reference price had dropped as low as $16.50 a barrel, lower than at any time since the Kuwait crisis burst. Even when Opec agreed to trim its ceiling in February for the second quarter, prices went on sliding -- chiefly because Saudi Arabia continued to ignore its allocated quota.

Saudi Arabia's apparent perversity in the short term was a reflection of a longer term argument with Iran about the desired shape of the market in the 1990s. The kingdom wants Opec to recognise its right to a 35% share of the market. Only when that is firmly established will it refrain from playing games with the price level and jeopardising its co-members' oil revenues. Iran tried to challenge the Saudis by boosting production to 3.5m b/d, the highest level achieved since the 1979 revolution. But Saudi Arabia refused to budge.

The compromise in Vienna therefore marks a temporary acceptance that nothing much can be done to stop the Saudis producing at the level they want. It is an acceptance only made possible by the strength of the market since the February agreement and the resulting revival of prices.

So what next? Opec expects that demand for its exports in the last quarter of the year will exceed 25m b/d. If so, most of Opec's members will be producing close to sustainable capacity and only Saudi Arabia will have the leeway to meet extra demand.

This would suit the Opec majority nicely since it points to an upward trend in prices. Contrarily, it will prompt Saudi Arabia to pump out even more oil to dampen prices. Saudi hints that the kingdom would keep its options open during the coming months leave the way open for it to do just this. Next September's meeting of the organisation's price and production monitoring committee -- which in effect will be a full Opec meeting -- looks set to be an argumentative one.
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Title Annotation:Business and Finance; Saudi Arabia's oil production output
Publication:The Middle East
Date:Jul 1, 1992
Previous Article:A pale shade of green.
Next Article:Springing a leak.

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