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Not quite dead yet.

REPORTS OF OPEC's approaching demise are greatly exaggerated despite gloomy forecasts, writes our oil correspondent ("An old battleground in a subdued market", page 22). At its latest meeting in Vienna at the end of November, the cantankerous organisation managed to reach an agreement on the allocation of production quotas which permits it to survive as a market force.

For the first time since the Kuwait crisis, Opec has returned to a system of distributing production among most of its members. Effectively excluded are Ecuador, which says it is leaving the organisation, and Iraq, which shows no signs of being able to resolve the UN embargo. Saudi Arabia has won an allocation of 8.4m b/d and Iran gets an allowance of just under 3.5m b/d. Kuwait has an officially recognised quota of 1.5m b/d after being permitted to produce at will since the end of the Iraqi occupation.

The markets were rightly less than impressed. Any Opec member which can boost its exports beyond its production quota will continue to do so. Saudi Arabia, Iran and Kuwait will almost certainly do so.

The significance of the agreement, however, lies not so much in whether it is actually implemented as in its recognition of the real power brokers in the club of oil exporters. First, Saudi Arabia has achieved implicit recognition that it should account for a third of Opec's overall output. Second, Iran has been acknowledged as the organisation's number two producer and broken free from its long-resented quota parity with Iraq. Third, Kuwait has resumed its place in the hierarchy of producers with Opec's blessing, even though it is free to produce more than its official allocation for the time being. A definite pecking order is in place.

That is very different, however, from a concerted control of the markets. Less than ever, Opec fails to fit the threatening image of a dominant cartel with which it was cursed in the 1970s. The latest agreement may provide a psychological floor for oil prices equivalent to $19 a barrel for Brent crude. But there is every likelihood that prices will tumble in the spring and summer of this year as member states go their separate ways.

Market conditions are not entirely depressing. World demand is expected to grow over the next few years at an average rate of 1.5% annually. This is encouraging for Opec as a whole, but because of the difference in growth rates between key consumers the benefit will accrue most to those producers with access to the best markets.

Demand will probably remain stagnant in Europe, for example, but is beginning to pick up in the United States. Already it is about 1.3% higher than a year ago. Demand for crude oil supplied by Opec members has been projected at about 25.5m b/d for 1993 (comfortably above the Opec output ceiling agreed at Vienna in November of just under 24.6m b/d), but it will be unevenly divided among the exporters.

The big threat to Opec lies in its increasingly demonstrable inability to cope with the political problems of its members. Nothing more starkly underlined this than the coincidence of the Vienna meeting with a second (failed) military coup attempted in Venezuela. The upheaval in Venezuela was a dramatic demonstration of what happens to a once wealthy oil-exporting country when it falls on hard times as oil prices dip.

Ecuador's departure from Opec will hardly affect the organisation. It has always been one of the smallest producers in Opec and has never respected its quota allocation anyway. But at last September's Opec meeting in Geneva its oil minister declared that his country could no longer be constrained by its 300,000 b/d quota. This must be doubled, he said. At present, Ecuador does not have the reserves to do this. What it is really saying is that foreign companies must come and invest.

The same message is coming out of many other Opec members. Libya is trying to attract foreign investments which might open up a further 500,000 b/d of new production. Algeria has said it wants to attract oil companies back to the country for some time, but the embattled regime has become nervous. Oil firms were talking to Iraq until earlier last year after the regime indicated it was prepared to make joint venture agreements. (The persistence of UN oil sanctions has placed most of these talks in limbo.)

The Iranian government would follow the same path if it could find the ideological wherewithal to do so. Even Saudi Arabia has hinted that foreign investment might be welcome to finance its ambitious capacity expansion programme.

Herein lies Opec's dilemma. It was originally set up as an organisation to break the international companies' grip on the global market. Only through closer national control of their oil industries could Opec states have an influence on the price of crude and the resulting revenues.

Now domestic economic pressures seem inexorably to be tempting the member states to make themselves once again attractive to overseas investors. The lesson they are slowly learning is that supporting prices by attempting to coordinate production cutbacks will eventually be doomed to failure.

Opec's efforts to impose output discipline over the past ten years are an object lesson in the ultimate fragility of commodity cartels. Oil prices rose at a staggering rate in the early and late 1970s. They fell equally sharply in the mid-1980s. Opec was able to behave as a strong and cohesive force during the first cycle and almost fell apart in the second. Market forces dictated the course of both; in retrospect, Opec played only a secondary role. While it may stumble on through the 1990s, it is hard to see what long-term future it still has.

In the immediate future, however, the organisation's cohesion will be maintained so long as oil prices do not become too volatile. Against the prospect of a depressed market next year must be set the medium-term likelihood of Russian exports continuing to decline. It says little for the cartel that prices will receive less support from its own efforts than from the decay of the former Soviet oil industry.

Foreign sales from the ex-Soviet republics, mostly accounted for by Russia, ran at only 1.8m b/d last year. They will almost certainly fall again in 1993, possibly as low as 1.3m b/d. The chief reason is the difficulty in attracting Western finance and technology to revamp the decrepit and underdeveloped oil industry.

But Opec can hardly count on Russian inefficiency to bail it out in the longer term. Oil resources are too important to the future of the Russian economy to allow Moscow to let them remain under-exploited. Opec's pre-eminence will therefore face a major challenge as the century draws to a close.

That is, of course, if it survives what is likely to be an aggressive return of Iraq to the markets. The attitude of the incoming Clinton administration to Iraq will be critical. If for humanitarian reasons alone the new president nudges the UN into easing its embargo, Opec's shaky quota structure will disintegrate beyond repair.
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Publication:The Middle East
Date:Jan 1, 1993
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