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Saudis take a detour.

OPEC MINISTERS meeting in Geneva in September congratulated themselves on reaching a production agreement amid an unaccustomed climate of harmony. They had some reason to do so. By raising the overall output ceiling to a level which approaches most of the producers' maximum output capacity, the debilitating effect on prices of over-production has been reduced. Reality prevailed, and that must go some way towards psychologically impressing the markets.

The mood of compromise which overcame the delegates was undoubtedly forced by events. Before the meeting, the shaky cartel once again seemed to risk disintegration as oil prices continued their downward slide. Some producers, including Libya, Algeria and Indonesia, actually agreed to cuts in their quota allocations so that increases could be made for Kuwait, Iran, Nigeria and Venezuela.

Just as significant, however, was Saudi Arabia's decision not to seek a higher quota on its own behalf. Its output will be limited to 8m b/d for the next six months. If, as seems more likely than in the past, Opec members now adhere to their adjusted quotas, Saudi Arabia will be prepared to honour its obligation.

At the Geneva meeting, all the Opec members who are in a position to increase capacity were given quota increases - except Saudi Arabia which voluntarily stepped aside. Since the mid-1980s, the kingdom has insisted that it will no longer act as Opec's swing producer, adjusting its own output to keep overall Opec supply in line with demand. With an expansion programme underway to lift sustainable capacity to 10m b/d, it has been equally insistent on its right to produce at least 8m b/d and has given every sign of determination to secure a larger market share of total Opec production.

On the face of it, there appears to have been a change of Saudi policy. First, although Saudi Arabia is better placed than any other Opec producer to increase output, it has foregone the opportunity at a meeting where the overall production ceiling was raised.

Second, and more significant, Saudi Arabia has accepted its lowest market share since the Kuwait war. Under the agreement reached in Geneva, the kingdom will have only 32.6% of the total Opec allocation. By comparison, its share of actual Opec production from 1986 to 1990 varied between 23% and 26%. With Kuwait and Iraq effectively out of the market in 1991, Saudi Arabia all too willingly stepped into the breach and boosted its share to 34.6%.

Some analysts claim that by volunteering to reduce its share at the Geneva meeting, the kingdom has for all intent and purpose returned to its role as swing producer. There is some plausibility to this argument. Simply by not taking a greater allocation alongside other producers with spare capacity, it is making a contribution to holding up prices. Adopting a more flexible position than it has at previous Opec meetings, Saudi Arabia is behaving as the cartel's residual supplier.

True enough. But this is far from being evidence of a fundamental shift in Saudi policy. There is no reason at all to believe, for example, that the kingdom would allow itself to be in the same situation in which it found itself in 1985. Then it let its production fall to 3.5m b/d as oil prices slumped. Today, 8m b/d is the non-negotiable floor level.

The Saudi decision to limit itself to an 8m b/d quota is based on three considerations. One is the need to maintain a moderate price for oil - not for the sake of other members of the organisation but in order to maintain its own much-needed revenues.

Another is to create a sense of cohesion and discipline within Opec itself. If everybody is largely satisfied (for the time being) with their allocations, Saudi Arabia will temporarily pay the price.

Finally, the kingdom recognises the need to accommodate Iranian interests. Tehran's oil fields have been badly abused since the revolution. Its claims of being able to increase capacity substantially over the next few years are greeted with deep scepticism in the oil industry. Iran's principal strategy, therefore, is to boost prices.

Saudi Arabia must take Iranian concerns into account if there is to be modicum of stability in the Gulf. There is some uncertainty about the direction and consistency of President Clinton's foreign policy. Best, therefore, to mollify Iran.

Viewed in these terms, the Saudi position at Opec's Geneva meeting is not a harbinger of a major policy shift. Rather, it is a tactical adjustment to political and economic realities.
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Title Annotation:Saudi Arabia's oil production
Publication:The Middle East
Date:Nov 1, 1993
Previous Article:Dangerously aggrieved.
Next Article:Peace talks: a kind of peace, perhaps.

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