Posted on 09/15/2002 2:32:36 AM PDT by Cincinatus' Wife
OPEC meets in Japan on Thursday amid a looming conflict between the United States and Iraq to debate whether there is a need to increase production as prices approach $30 a barrel.
But underlying the discussions are more fundamental issues that will define OPEC's role in world oil markets and its ability to influence them.
Within the Organization of the Petroleum Exporting Countries, divisions run along economic lines, with the less wealthy nations such as Nigeria and Venezuela parting company with the more prosperous Arab nations, such as Saudi Arabia.
Outside of the cartel, OPEC faces pressures to set prices within a range that consumers and oil producers are comfortable with while protecting its market share against rivals such as Russia, Mexico and Norway.
"As non-OPEC supply has grown, the market looks very different today than it did 15 years ago," said Rob Routs, chief executive of Shell Oil Co. in Houston.
OPEC has in its 42-year history been viewed as an international cabal of sorts, a loose alliance of oil-producing countries that joined together to counter the might that the multinational oil companies wielded after World War II.
The group was formed in 1960 at the Baghdad Conference by five founding members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Its strategy for controlling oil prices by adhering to a quota system was loosely based on the "production allowable system" the Railroad Commission of Texas used to set the price of oil domestically until the 1960s.
Yet OPEC now faces a future of becoming more of a backstop for oil prices than a force that can still manipulate the market to serve the splintered interests of the member countries.
There is a growing divide perceived between the OPEC members of the Persian Gulf countries, sometimes referred to as GOPEC, and the member countries outside the Middle East, such as Indonesia, Nigeria and Venezuela, which all face daunting economic conditions and high poverty levels.
"Even the so-called rich members, the Saudis, Kuwaitis, are no longer rich," said Mohammed Akacem, professor of economics at Metropolitan State College in Denver. "I think that OPEC is probably going to splinter into two groups, GOPEC and the poor countries."
Another reason OPEC's influence on world oil markets may be waning: Russia and the Caspian Sea nations.
"Russia is being looked at as a cartel breaker, a country that could come in and put lots of oil on the market very cheaply," said Michelle Michot Foss, executive director of the Institute for Energy, Law & Enterprise at the University of Houston.
Russia reluctantly agreed to pull some oil off the markets at OPEC's behest last year, but that is not likely to happen again anytime soon. Its current oil production is about 7 million barrels per day, placing it on even footing with Saudi Arabia, and estimates are that Russia will be able to produce as much as 10 million barrels per day by 2010.
After two years of reining in production, OPEC now finds itself with about 6 million barrels of excess production capacity and a long-term question about the prospects of sticking with a goal of oil in the high $20s. Countries such as Algeria and Nigeria that have been bringing on new oil production are eager to cash in on oil prices near $30 a barrel.
The cartel's official business at its meeting this week will be to consider raising its oil output, but the world will be watching it for reassurance that it is prepared to stabilize oil markets if the Middle East erupts in war.
If the comments of OPEC President Rilwanu Lukman made earlier this month to Bloomberg News are any indication, OPEC seems willing.
"We hope it doesn't happen," Lukman of Nigeria said about the possibility of a war against Iraq. But if there is a shortage in the market, he said, OPEC is prepared to fill it with more oil.
The key nation to watch will be Saudi Arabia, home to 15 of the terrorists who flew the four planes on Sept. 11. The Saudis have spent millions on a public relations campaign to bolster their image in the United States since the attacks and have pledged that they will increase their production to replace any oil lost from Iraq if an invasion takes place.
Yet the Saudis have their own internal problems.
"They have this conflict going on between various elements in their society, and they are sitting on the fence trying to please their constituents and trying to maintain a good price on oil," said John Lee, director of research for Pension Management Co. in Houston. "They don't want to alienate the United States in the process, either."
Nevertheless, OPEC could become very important if the United States invades Iraq.
"It will be on the short-term futures price of oil where they could have a lot of impact, and then as time goes on the real market will sort out what the price is," said Dennis O'Brien, director for the Institute for Energy and Economic Policy at the University of Oklahoma and an adviser to the Carter and Reagan administrations on energy policy.
OPEC's market share has been about 40 percent for the past decade, slipping to about 38 percent in the first half of this year, but the need to pump more oil to meet increasing demand in the fourth quarter should allow it to regain lost ground and keep prices in the mid-$20s per barrel, according to a recent report by Merrill Lynch.
OPEC's target has been a price of between $22 and $28 per barrel for the OPEC basket, an average of seven oils produced by OPEC countries and Mexico. Typically, the OPEC basket trades about $2 below the benchmark futures contract on the New York Mercantile Exchange.
With prices high, cheating among OPEC members is widespread. OPEC is believed to be producing some 2 million barrels over its quota of 21.7 million barrels per day.
In fact, some ministers believe there is no need for an increase in production.
"The market is sufficiently supplied," said OPEC Secretary-General Alvaro Silva of Venezuela. "There's enough petroleum to meet demand currently and over the winter."
What increase the members approve at their meeting, if any, will only serve to legitimize a portion of production already over the quota, not put new oil on the market.
Most estimates of an increase in OPEC's quota at its upcoming meeting range from 500,000 barrels per day to 1 million barrels per day.
Such a boost would not even meet the increase in demand during the fourth quarter of 1.4 million barrels per day projected by the Energy Information Adminstration, the research arm of the U.S. Department of Energy.
Indeed, many longtime observers question the point of the ministers even meeting to rubber-stamp a decision that is typically made before the formal discussions begin. Traders factor the anticipated decision into their dealings long before any decision is announced.
"Most of the time, OPEC will have a $2 to $5 effect on the price running up to a meeting, depending on how they play the PR, but basically the market almost immediately erodes that," O'Brien said. "The people in this highly efficient global oil market that make the difference are the refiners and how they buy oil and select oil."
Saudi Arabia might not be prosperous overall, but the ibn Sauds, who control its oil fields, certainly are. They, the political and economic masters of that country, can represent themselves to the world as the part that matters -- and for all practical geopolitical purposes, it's true. It's the key to the indulgence America has shown them these past sixty years.
OPEC probably seemed like a sure thing when it first formed. Natural resources are the only things around which enduring monopolies and cartels can coalesce. Even then, it takes government power, in the form of expropriations or grants of special rights, to give them solidity. But the OPEC nations, though they've shown an impressive solidarity over the years, could not prevent the development of other oil resources, in nations that would not naturally align with the corrupt Middle Eastern satrapies. It was the artificially high oil price the cartel strove to maintain that provided the incentive to develop new fields, a classic case of market equilibration through pricing.
OPEC's residual power over the oil market could be destroyed in ten years, by unleashing the nuclear power generating industry. For most of the oil we buy is still used to provide calories and amperes; therefore, any other technique for generating power and heat would compete with oil directly. Given oil's large disadvantages in comparison to fission-generated power, I imagine we could drive its price down to $10 a barrel without working up a sweat.
This germinates an unpleasant question: To what extent do the regulations that currently throttle American nuclear power arise from Washington's desire to keep the ibn Sauds sleek and fat?
Freedom, Wealth, and Peace,
Francis W. Porretto
Visit the Palace Of Reason: http://palaceofreason.com
Some of us don't want to destroy OUR LAND, OUR NATIONAL BEAUTY for a handful of energy.
It makes more sense if you consider the Alaskan oil as a second Strategic Petroleum Reserve.
BUMP
So, you go to Alaska often? Use your brain, no one wants pollution. Oil production is very regulated and cleaner than it used to be.I don't want to feed goverments and groups that want to kill us.
Except for me. I want pollution.
If I could create a factory, it would produce noxious emmissions from large, blackened smoke stacks, pump forth foul toxins into the runoff water, and produce NO OTHER PRODUCT than flatbed rail cars filled with solid waste.
Ahhhhhhhhh..... a man can dream, can't he?
Never met the girl.
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