Washington Report, August 6, 1984, Page 4

Trade and Finance

Oil: Prospects for OPEC & Gulf

By Joseph C. Story

Meeting in Vienna on July 10 and 11, OPEC oil ministers agreed to keep the organization's overall production and prices unchanged at levels established in March, 1983. This decision, in the face of weakening OPEC price and production discipline, points to growing instability in OPEC and in the international oil market. However, increasing exports and oil revenues for Arab Gulf producers indicate higher Arab import requirements and overseas investment toward the end of the year.

Historically, OPEC has achieved a better record of obeying official pricing policies and output limitations during periods of weak world oil demand the opposite being true when demand for OPEC oil is on the rise. Because requirements for OPEC oil will increase in 1984 for the first time since 1980, most OPEC members are anxious to recoup some of their revenue losses resulting from the lower output levels of recent years. This is particularly true for OPEC nations with large populations or large external debts, such as Iran, Indonesia, Nigeria, Iraq, Venezuela and Libya.

To support official OPEC prices, the organization's self imposed production quota remains at 17.5 million barrels of crude per day. Individual country output ceilings are unchanged, except for Nigeria. Largely because this poor and populous nation is considered a weak link in the OPEC chain, Nigeria's production ceiling is to be raised from 1.3 million barrels per day to 1.45 million barrels per day. The official press release following the OPEC meeting did not specify that any other member nation would accept a quota reduction to balance the increase for Nigeria.

In fact, the OPEC production ceiling has had little relevance for almost a year. During the second half of 1983, OPEC output ran at close to 1.5 million barrels per day above the overall quota limit. For the first six months of 1984, OPEC production of 18 million barrels per day has exceeded the agreed quota by 500,000 barrels per day. Most OPEC members have consistently overproduced their quota limits and several are demanding production quota increases. Iran wants an additional 800,000 barrels per day, Iraq 600,000, the United Arab Emirates 500,000, and Indonesia 200,000. World demand for OPEC oil is not likely to rise sufficiently to cover such large output increases for at least another year, and probably not for another two years or more. This situation explains the great reluctance of OPEC to face the very difficult task of reallocating country production quotas among member nations as oil demand rises.

Over the past year, with the exception of Iran, there has been little evidence of OPEC price discounting. However, spot market oil prices have weakened recently, and barter trade in oil is on the increase. Actually, oil barter deals are a form of price discounting and Iran, Iraq, Libya, the United Arab Emirates and Algeria have in the past traded oil for goods or services. Now, for the first time, Saudi Arabia is entering a $1 billion plus oil barter deal for Boeing aircraft and Rolls Royce aircraft engines. This break from Saudi Arabia's traditional policy of cash for oil is possibly a Saudi move to persuade OPEC colleagues that unless restraint is exercised in promoting oil barter trade, Saudi Arabia could be a powerful competitor in this type of activity.

World requirements for OPEC oil are apt to increase to an average of about 21 million barrels per day over the second half of 1984, if the demand pattern of last year repeats itself. If so, some of the pressures on OPEC for production discipline and restraint will be alleviated.            bill has slowed considerably in recent months However, if OPEC cannot match production more closely to demand than in the recent past, pressures for a reduction in official prices will mount, as was the case in March, 1983.

For the major oil producers of the Arabian Gulf, output and oil revenues will show a moderate improvement this year compared to 1983. Estimates of Gulf Cooperation Council (Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman and Bahrain) oil output, oil revenues, and merchandise imports for 1984 are shown below.

Although merchandise imports from the United States by the GCC countries fell during the first half of 1984, a reversal of this trend is expected toward the end of the year. Similarly, following a somewhat longer lag, the recent rapid decline in GCC investments in the United States should come to a halt as oil revenues pick up once again.

Joseph C. Story is a specialist in Middle East economics and international oil affairs.