Over the past few years, there has been a dramatic shift in the internal politics of OPEC, reflecting changes of political leadership at the highest levels and of broader policies of key members. The result has been greater cohesion inside the producer group and a clearer articulation and implementation of goals and aspirations.
The mid-1990s were characterized by OPEC disunity and overproduction, so much so that the cartel members themselves were questioning the future viability of the organization. Venezuela’s ambitious campaign to increase oil productive capacity from 2.8 million barrels/day in 1991 to 7 million barrels/day by 2010, combined with the gradual rise in Iraqi oil export rates through the auspices of the UN Oil for Food program, made it nearly impossible for the producer group to agree on a workable production sharing agreement.
During this period of the mid-1990s, market share considerations were paramount for most OPEC countries with spare capacity. Saudi Arabia, in particular, had to concern itself with both the short – and long-range implications of Venezuela’s market expansion plans, which were expected to have a significant bearing on the kingdom’s ability to maintain its sales to the United States. Venezuela’s government was committed to supplementing state revenue by increasing oil exports and in 1992 began a new policy to allow international oil companies (IOCs) to invest in the country’s once nationalized oilfields. This campaign contributed to a rise in Venezuelan output, from roughly 2.5 million barrels/ day through the 1980s to between 3.5 million and 3.7 million barrels/day by 1997. Venezuela refused to comply with any OPEC production sharing agreements, greatly damaging the producer group’s ability to manage oil markets and providing a strong disincentive for Saudi Arabia to contribute a large cutback in output to defend oil prices.
This political stumbling hit a dramatic snag in during 1997-1998 when an unexpected economic
meltdown hit much of Asia and precipitated an unexpected drop in Asian oil use. Asian oil demand fell to 18.18 million barrels/day in 1998, down from 18.53 million barrels/day, a drop of 1.9%. This compared with a 4.5% rise in Asian oil demand between 1996 and 1997. The slowdown in Asia contributed to a major change in the global oil supply-demand balance, limiting the growth in worldwide oil demand to 74.24 million barrels/day in 1998, up only 0.5% from 1997 compared with more typical annual growth rates of 2 to 3% during the mid-1990s (Table V).
By 1997-1998, these circumstances led oil prices to collapse below $10, requiring extraordinary efforts by both OPEC and non-OPEC countries such as Mexico and Norway. The intense financial suffering of nearly all OPEC countries and key changes in government leadership in Venezuela paved the way for a major agreement among oil producers to trim output and propel oil prices back above $22 per barrel. OPEC set a price band of $22 to $28 per barrel as its target that remained in place as of this writing.
OPEC’s new, more unified dynamic is rooted in several factors:
• A rise in democratization, freedom of the press and political debate, and a growing tide of anti- Americanism are bringing a greater concern for popular opinion inside OPEC countries, especially in the Middle East Gulf region, than was the case in the past. This new concern for popular sentiment is restricting the options of regional leaders to accommodate Western interests. Populations, as well as some leaders, remain bitter about the suffering that took place when oil prices collapsed during the late 1990s.
• Rising populations and economic stagnation in many OPEC countries indicate that revenue pressures have been taking precedence over other considerations.
• Lack of investment in infrastructure and oilfields over the years due to tight state treasuries and rising social pressures has greatly curtained OPEC’s spare productive capacity, rendering it much easier for cartel members to agree to restrain output, at least in the short term.
Given this new dynamic and colored in part by the rise of Chavez as president of Venezuela, OPEC rhetoric during recent years has taken a more strident turn, with oil ministers defending their choices to attain a ‘‘fair’’ price for OPEC oil despite ramifications for global economic growth rates. The debate
Oil Demand per Region, 1996-1998 (Million Barrels/Day)
has become one of economic struggle for ‘‘rents’’ between oil producers who demand high revenues and major consumers whose economies can grow faster with low oil prices.
OPEC’s rhetoric has generally been directed at OECD consumer governments that capture rents from oil sales through high national energy taxes. OPEC’s anti-tax, anti-Western rhetoric comes against the backdrop of popular domestic sentiment inside OPEC countries that their governments are not doing enough to deliver economic benefits to a substantial portion of their populations. Leaders in OPEC countries cannot be seen as delivering benefits to Western consumers at the expense of their own citizens because such perceptions would leave regimes more vulnerable to public attack and more susceptible to the efforts of opposition parties and groups.
Although political factors have contributed to OPEC’s unity over the past 2 years, the more limited amount of spare capacity that has to be held back by most member states is also a supportive factor. Indeed, oil prices tend to track changes in OPEC spare capacity quite closely (Fig. 6).
In 1985, when oil prices collapsed, OPEC was estimated to have some 15 million barrels/day of shut-in production capacity, equal to perhaps 50% of its theoretical capacity (Iran and Iraq were at war with one another at the time) and 25% of global demand. By 1990, when Iraq invaded Kuwait, spare capacity globally was still 5 million to 5.5 million barrels/day, the amount of oil taken off the market by the UN embargo. That was approximately 20% of OPEC’s capacity, and 8% of global demand, at the time. During the winter of 2003, before OPEC’s seasonal cuts, spare capacity was a negligible 2% of global demand, a level that left oil markets highly susceptible to disruption and supported a run-up in prices to more than $30 per barrel.
Line graph depicting the relationship between oil prices and the OPEC spare capacity. From Hetco Trading.
OPEC has been helped during recent years by irregularity in Iraqi production rates given the regime in Baghdad’s aggressive posture to use the withdrawal of its UN-monitored oil exports as a political tool. In 2003, the U. S. military campaign in Iraq greatly curtailed the country’s oil exports when facilities were looted and sabotaged in the immediate aftermath of the war. Iraq’s export rates fell from just over 2 million barrels/day prior to the U. S. campaign to approximately 500,000 barrels/day in late 2003. In addition, other OPEC members have also benefited from a drop in capacity in Venezuela and Kuwait, both of which have been struggling against technical problems and natural declines in key fields. Venezuelan oil production capacity has fallen from 3.7 million barrels/day in 1998 to approximately 2.2 million barrels/day currently. Kuwait has lost capacity in certain western and northern fields such as Raudhatain, limiting its output capacity by several hundreds of thousands of barrels per day. Sustainable Kuwait capacity has recently been pegged at 2 million barrels/day.
However, the challenge to OPEC will increase during the coming years as OPEC member countries begin to anticipate an expected restoration of Iraqi capacity over time. Several individual OPEC countries have a backlog of new fields that can be brought on line soon. Several countries, such as Nigeria, Algeria, and Iran, have been quietly expanding capacity and anticipate possible production rises over the next few years. Countries such as Algeria
and Nigeria, whose new fields involve foreign oil company investment, will increasingly be under additional pressure from these IOC investors to obviate OPEC agreements and allow new fields to move forward at optimum production rates. Meeting these pressures will be difficult for OPEC if market demand for its oil does not increase significantly as expected due to a slowdown in economic growth or other inhibiting factors.
Iran is forging ahead with capacity expansions and could reach more than 5 million barrels/day by 2008 based on investments through buy-back agreements with IOCs and National Iranian Oil Company investment. However, this ambitious plan will be dependent on the success of major IOC field developments, including Azadegan, South Pars, Sirri, Gagh Saran, and the Ahwaz area. Nigeria has plans to expand production in its offshore area, and this could (if successful) raise production to more than
3.5 million barrels/day by 2006.
Prior to the U. S. campaign in early 2003, Iraq had commercial export capacity of approximately 2.2 million barrels/day via Turkey and the Gulf, with additional smuggling capacity through Syria, Iran, and Jordan. U. S. officials were hopeful that Iraq would be able to resume exports at prewar levels by late 2003. Iraq has expressed a desire to expand its productive capacity to 6 million barrels/day, and analysts believe that Iraq could quickly raise its oilfield productive capacity back to 3.6 million barrels/day if security can be restored across the
country and Iraq’s upstream oilfield sector were opened to foreign oil company investment. However, for Iraq to be able to export these higher volumes, extensive repairs will be needed to both its oilfields and its export infrastructure.
There will be pressure inside OPEC to bring Iraq back into the production quota system as its production capacity is restored. Key members may insist that Iraq be initially limited to its historical allocation of a quota at parity with that of Iran and then hold its export increases to levels in line with market demand. However, Iraq will have pressing economic reconstruction needs to take into consideration as well, raising questions, depending on the future politics inside the country, as to whether it will be in a position to opt for policies that emphasize solidarity with OPEC.
OPEC’s current capacity is estimated at 29.5 million barrels/day but could rise to as much as 36.4 million barrels/day by 2005 if new fields under development come on-line as expected. If OPEC were to expand access to foreign IOC participation, particularly in key countries now off limits to Western investment, capacity could expand to as much as 44 million barrels/day by 2010, leaving very little room for growth from non-OPEC supplies to take place without pressuring oil prices over the next 8 years or so.