OPEC: The Next Crisis

By John Haldane

OPEC's handling of the oil price cuts announced in October by Britain, Nigeria and Norway turned out to be a small, but manageable, crisis for the Organization of Petroleum Exporting Countries. Similar "mini crises" may develop again next year, particularly in the spring, when demand for oil may slacken. But oil analysts taking a longer look into the future say that a far less manageable problem will almost certainly arise when Iran and Iraq resume exports at, or near, pre-war levels. While no one expects this to happen overnight, analysts say it could occur as early as one year from now.

Following the October price cuts by the non-OPEC producers, OPEC met in Geneva and decided to cut its production ceiling from 17.5 million to 16 million barrels per day (b/d). This total daily cut of 1.5 million barrels was distributed among 11 of OPEC's 13 members, with Iraqi and Nigerian quotas left unchanged. The smallest decrease in allocation, 13,000 b/d, went to IC7abom, while Saudi Arabia accepted the largest cut of 647,000 b/d. Informal arrangements also were worked out so that wealthier nations like Saudi Arabia and Libya would absorb the cutbacks of less wealthy states.

Saudi Arabia again played a leading role in persuading OPEC colleagues to reduce output, rather than to lower the benchmark price of $29 per barrel for high quality Arabian Light oil. This price probably will hold through the winter, with usual sales on the spot market selling for a dollar or so less. But how low the benchmark price may drop when winter is over is open to debate. OPEC officials plan to meet again in Geneva later this month to examine overall pricing strategy.

Near normal oil exports by both Iran and Iraq could seriously test OPEC's ability to remain an effective cartel. Iraq, by building new pipelines, may reach pre war export levels by late 1985 or early 1986, regardless of whether its war with Iran continues. The second factor is the potential resumption of high Iranian output soon after Iran ends hostilities with Iraq. Given increasing domestic tensions over economic conditions in Iran, the Ayatollah Khomeini may be forced to end the war to safeguard his regime.

The war between Iran and Iraq, now in its fifth year, has cost the two countries billions of dollars in lost oil revenues. Economic development programs in both nations have been slowed and, in some instances, cancelled. Vitally needed agricultural and industrial imports have been cut back, and foreign businessmen complain of long delays in receiving payment. Since neither country exports anything else nearly as valuable as oil, both need to resume oil production at pre-war levels and to sell this output at going market rates, regardless of OPEC production quotas or the going benchmark price. While Iraq may be willing to listen to Saudi advice about working through OPEC, Iran may feel no such compulsion, and only seek to regain its old market share. Before the revolution, Iran produced roughly 25 percent of total Gulf production, while Saudi Arabia's share was 35 percent. Now the Saudis supply almost 50 percent, while the Iranian share has fallen to 10 percent.

Oil Exports Getting Top Priority

According to industry estimates, Iran currently is producing below its new OPEC quota of' 2.3 million b/d. In the past, Iran has pumped as much as 6.2 million b/d. While the condition of Iranian oil facilities at present probably prohibits a quick rise in production, an all out repair effort could bring production capacity back up to 4 million b/d in a year or so, with a longer range goal of 5 to 6 million b/d. Iranian economic planners are giving top priority to the maintenance and repair of oil fields, despite a shortage of hard currency.

Iraq also is producing less than its OPEC quota ; 1.2 million b/d. Exports have been badly hurt by the closure of Iraq's oil export facilities on the Gulf and by its inability to send oil via its pipeline through Syria, which was closed by the Syrian government in April, 1982. Present Iraqi production is less than 50 percent of its 3.5 million b/d pre war production, which then was ranked second highest in OPEC. However, the pipeline being constructed to link up Iraq's southern oil fields with the existing east-west Saudi line to Yanbu, on the Red Sea, should permit Iraq to increase production by about 500,000 b/d early in 1986. Combined with anticipated expansion of Iraq's existing pipeline through Turkey (the only line presently in operation), Iraq's oil exports by early 1986 could exceed its 1.983 level by 1.8 million b/d. As in the case of Iran, Iraq is giving top priority to resuming oil exports and plans to raise export levels rapidly once a ceasefire is negotiated.

Some experts predict that post war Iran/Iraq production increases could total 3 million b/d, a 19 percent rise over OPEC's current overall ceiling. This added production possibly could be absorbed by a new upswing in the world's economy, assuming, unrealistically, that such debt ridden oil producers as Mexico, Nigeria, and Venezuela would not increase their production. The more likely scenario is that the new output will create strong pressures to cut oil prices. It may be impossible for OPEC to maintain the $29 benchmark price in the face of such downward pressures.

The problem OPEC will face when Iraq and Iran boost production is how to set new OPEC quotas agreeable to all participants. If some members opt to sell all the oil they can produce at open market prices, this loss of control by OPEC over its members' production could result in world prices as low as $20 a barrel. Most oil analysts do not predict such a sharp drop, but rather forecast an OPEC benchmark price of $25 for next year.

For several years OPEC has not been the only oil game in town. Its power over the world oil market has been eroded by the steady increase in production by non OPEC nations. OPEC's estimated share of world consumption has dropped from 60 percent in 1979 to 40 percent today. During this same period, OPEC production dropped from 32 million to 17 million b/d, while non OPEC production rose from roughly 20 million to 25 million b/d. This creates a downward pressure on oil prices that will continue as long as increases in non-OPEC production exceed the growth in world consumption.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.