OPEC's leaky quotas

FOR OPEC, it's once more into the breach as the 13-member cartel tries to plug its leaky quotas. In an agreement reached Monday, the Organization of Petroleum Exporting Countries set a ceiling of 18.5 million barrels a day for six months beginning in January. The goal is to stabilize crude oil prices at about $18 a barrel, versus an average of about $12 a barrel today. Currently, the cartel is pumping about 23 million b.p.d.

The pact may say more about the cartel's internal political struggles than about how realistic the goals are. As for the United States, the agreement serves as a timely reminder that the incoming Bush administration needs to give deeper thought to US energy policy and energy security than its predecessor did.

Within the cartel, the agreement defused, for the time being, a potential production rivalry between Iran and Iraq. Both countries, emerging from eight years of bitter, costly warfare, need to sell oil to rebuild their countries. Iraq has long insisted that its OPEC quota match Iran's. Iran has countered that it should have a higher quota than Iraq has, because Iran has a larger population to support. Ultimately, Iran blinked - undoubtedly encouraged by the threat from other Gulf producers that they would flood the market, driving down prices and depriving Iran (and other oil-producing countries) of badly needed income.

That concession also helps forestall a showdown between Saudi Arabia and Iraq over dominance of OPEC; Iraq's willingness to abide by quotas hinged on getting parity with Iran. Iraq has major reserves, and will bring a new pipeline on stream in September capable of moving an additional 1.5 million b.p.d. Iraq has made noises about a desire to be the dominant power in the Gulf. With the coming of Ayatollah Ruhollah Khomeini, Iraq and Saudi Arabia buried historical antagonisms to build a united front against a militant Iran. It remains to be seen if the wartime cooperation between historical rivals extends beyond the war's end.

That the new agreement's target price is unrealistic may be inferred from the Saudis' last-minute try to set up a $15-a-barrel price floor, below which OPEC would then take emergency action to bolster prices. Some analysts say that, given the current glut of oil on the market, and with no incentive to reduce production until the quota takes effect in January, the best OPEC can hope for, in light of its new quota, is about $14 to $15 a barrel. In the end, the Saudis backed down from the proposal. They made their statement, and in any case, formalizing a price floor was of marginal significance when stacked against getting Iran to agree to parity.

This begs the question of how long the agreement will hold. Social unrest and economic hardship in many OPEC countries, to say nothing of the former belligerents in the Persian Gulf, will continue to tempt cartel members to flout quotas. So will competition from non-OPEC oil producers.

OPEC's strategy, such as it is, is to hold the cartel together through a series of patches until demand for oil tightens in another seven to 10 years. For petroleum consuming countries, especially the United States, that strategy should provide an incentive to develop policies for reducing dependence on imported oil.

QR Code to OPEC's leaky quotas
Read this article in
QR Code to Subscription page
Start your subscription today