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Oil: an old battleground in a subdued market.

The oil markets will not be healthy for exporters in 1993. As a result Opec is likely to suffer from further internal strain. The real tension will arise from growing rivalry between Saudi Arabia and Iran, the two biggest producers in the Gulf.

OIL PRICES ARE LIKELY to remain subdued throughout 1993, as recession in the industrialised world continues to depress demand, and Opec's key producers try to expand their production. Even without a resumption of Iraqi exports Opec's reference price of $21 per barrel (based on a weighted basket of seven crudes) is likely to be honoured in the breach.

Should Iraqi exports resume (and there is no immediate prospect that they will) Opec will need some deft footwork, involving no-nonsense quota cuts among the biggest producers, if a serious fall in prices is to be avoided. Overall in 1993, there will be more factors pushing prices down than helping them to remain stable or increase.

Opec meetings will continue to be dominated by the rivalry between Saudi Arabia and Iran, the organisation's two biggest producers. Iran, now boasting production capacity of 4m b/d and threatening 4.5m b/d by May 1993, has serious economic problems and needs to maximise oil revenues.

Until the latest Opec ministerial conference in November its allotted quota was only 3.2m b/d. Iran wants other Opec members to reduce their production so that it can sell more without jeopardising prices.

On the other hand, Saudi Arabia is determined to maintain its market share of Opec production which has stood at around 34% since the Iraqi invasion of Kuwait. With Kuwait being allowed to produce as much as it can, and the UAE an acknowledged maverick in Opec quota calculations, Saudi Arabia will have to bear the brunt of any cut-backs to allow room for increased Iranian sales.

The November meeting managed to find a temporary solution to satisfy both sides. Saudi Arabia is to maintain its existing production of 8.4m b/d through the first quarter of 1993, and Iran's quota has been raised to 3.49 b/d. In the month before the meeting Iran had been claiming actual production of 3.8m b/d, although some industry observers questioned whether this was sustainable, or merely possible on a surge basis. There was also some speculation that Saudi Arabia was producing nearer to 8.5m b/d rather than 8.4m b/d.

Such an easy compromise was possible because the first quarter is the time of year when the call on Opec crude is at its highest. The November deal provided for total Opec production in the first quarter of 24.9m b/d, compared to 24.2m b/d agreed at the previous Opec meeting in August.

Saudi-Iranian rivalry within Opec is sure to resurface in the first few months of 1993 as oil demand declines in advance of spring and summer. The Paris-based International Energy Agency (IEA) is predicting a call of Opec crude of 24.4m b/d during the second quarter, compared to 26.6m b/d in the first (the figures exclude stock draws by consumers). With Kuwait still increasing its production and the UAE failing to observe quotas, Saudi Arabia and Iran will bear most of the pressure for spring and summer cutbacks.

Saudi-Iranian rivalry has been a feature of the Middle East oil industry since the 1950s, but since the mid-1970s Saudi Arabia has enjoyed a pre-eminence which has rarely faltered. The Saudi position was overwhelmingly reinforced when the country pushed up production by some three million barrels a day to cover most of the shortfall in Kuwaiti and Iraqi exports which followed the invasion of Kuwait in August 1990.

As a result, Saudi Arabia's market share of Opec production rose from around 25% to around 36%. The Saudis have since indicated that they will not go back to 25% and that they will defend their present share.

The Saudis argue that they need to recover the hundreds of millions of dollars (some say billions) which they spent to expand production following the Iraqi invasion - an expansion, they point out, which was desperately needed to stabilise the world economy and was not part of their oil policy.

More fundamentally, the Saudis point out that, despite their increased output, they are still not producing at full capacity, in contrast to most other Opec members who are producing at capacity, or very close to it. No one doubts that Saudi Arabia can produce more than 8.4m b/d barrels a day, although exactly how much more is a rather controversial question. Certainly the Saudis are continuing to expand their production facilities in line with their long standing aim of reaching sustainable production capacity of 10m b/d. If cutbacks from existing quota are required, the Saudis argue, those who are now producing at full stretch should be prepared to cut back too.

Iran's move to be clearly recognised as Opec's second most important producer comes at a time of worsening political relations between itself and its Arab neighbours in the Gulf. Relations have also been soured with non-Gulf states such as Algeria and Egypt. The dispute over the Gulf island of Abu Musa, which erupted in April, continuing support for anti-establishment Islamic groups throughout the Arab world, and its perceived expansionist aspirations in Muslim Central Asia are all viewed with trepidation and hostility in the Middle East.

Having emerged from revolutionary turmoil and eight years of war with Iraq, Iran is now preparing to resume its traditional role as a Gulf superpower. Oil exports and the revenues secured by those exports are a key element of Iran's ability to project its influence. As a result, its position within Opec will be an important factor in its political status in the region as a whole.

Opec has frequently been able to square the circle of conflicting demands by member states, at least on a temporary basis - the most recent example being the November deal when both Iran and Saudi Arabia had made hardline positions know in advance of the meeting. It is quite possible that some deal will be worked out in the first quarter which will satisfy both sides.

However, if push comes to shove, the Saudis are in the stronger position. They have consistently shown that market share is more important to them than a temporary loss in revenues - and providing a country is prepared to risk losing revenues, a country with excess capacity can always defend market share.

Iran, by contrast, needs money to assist its ailing economy. Its oil minister, Gholamreza Aghazadeh, has publicly stated that Iran's Opec policy is based on securing budgeted oil revenues, and it will produce as much as it requires to achieve that target.

Nevertheless, if the Iranians decide to increase production in the teeth of Opec opposition they risk losing their gains through lower prices. It should be noted that there are no signs that Iran will be able, or is even trying, to build an anti-Saudi coalition to support their view.

The re-integration of Kuwait into the Opec quota system is another key issue for the organisation during 1993. Currently Kuwait is exempted from any production restrictions. It was producing 1.5m b/d - its pre-invasion quota - in the final quarter of 1992 and this is expected to rise to 2m b/d and beyond by the end of 1993.

Kuwait has already said that it will not return to its old quota level. Certainly it will be very hard to refuse a higher quota, but Kuwait will have to play its part in maintaining prices. Kuwaiti demands will merely intensify the problems of satisfying the various aspirations of member states during the year.

The biggest issue hanging over Opec during 1993 is also the one whose outcome is most difficult to predict - the possibilities of a resumption in Iraqi exports. There is no reason to think that Iraqi crude will re-enter the market in the first few months of 1993. Hopes of a deal between Iraq and the UN were squashed at the beginning of 1993 when Security Council members, and especially the United States, refused to consider a compromise on the terms of UN resolutions. Iraqi hopes that the Clinton administration will be more flexible than the one it replaces will turn out to be unfounded, if only because Clinton cannot afford, in the early months of his presidency, to be seen to be soft on Iraq.

The coming year will also see continuing questions being raised about the future of Opec itself. The organisation's power is based on its ability to increase and decrease supply and so influence prices. But most of its members have little room to increase output and are unwilling to accept reductions. Opec has for some years been dominated by a small group of mainly Gulf producers who do have excess capacity, and this situation will continue.

Some of the smaller, non-Arab, members may wonder what the point of membership is under such circumstances, and for their part the larger producers may also wonder about the value of these members, whose production cutbacks, when they can be secured, have little more than a psychological impact (if that) on prices. Ecuador has already signalled its intention to leave Opec and others may follow. Nevertheless, reports of Opec's demise have been greatly exaggerated.
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Title Annotation:Outlook 1993
Publication:The Middle East
Date:Jan 1, 1993
Previous Article:Iraq: "we want food not fancy talk." (includes related article) (Outlook 1993)
Next Article:Turkey: Ankara reorients.

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