AFTER a desultory meeting in June, OPEC oil ministers have five months to come up with a strategy for 1996. The message taken away from their mid-year session was that OPEC wasn’t sure where it is going next. By the time they journey to Vienna again in November, ministers will hope to have a scheme ready for stopping the inexorable rise of non-OPEC output, which is now their main concern.
The grand plan for this year was to freeze quotas and try to take some of the volatility out of the oil market by making it easier to predict supply. The strategy may have succeeded in its ambition to bring some stability, but it has failed in other ways. The biggest worry is that OPEC is losing market share as world oil demand expands. Whatever proposal the ministers produce will be expected to tackle the issue head-on, if OPEC is not to become marginalised further.
World oil demand grew by 3.2 per cent last year, if the former Soviet Union (FSU) is excluded, while OPEC oil production, including natural gas liquids, increased by only 1.7 per cent. By being relatively restrained, OPEC missed out as others pumped to capacity. Non-OPEC output outside the FSU grew by 4.2 per cent, to reach record levels. The story is being repeated this year, much to OPEC’s annoyance. World oil demand is expected to rise by at least 1 million barrels a day (b/d) during the course of 1995 and non-OPEC producers will again be winning most of it.
Leading OPEC figures, such as Saudi Arabia’s Minister of Petro-leum & Mineral Res-ources, Hisham Nazer, still make plaintive appeals for closer co-operation with non-OPEC states. After several years of mainly fruitless conversations about co-ordination, such calls are no longer taken very seriously.
Instead, sentiment seems to be shifting in favour of a larger quota if OPEC is to get serious about slowing the non-OPEC advance. Analysts argue that it may be the only way for OPEC to avoid repeating the mistake of the mid-1980s when it cut back production to support prices, only to hand market share to non-OPEC suppliers. Although the current quota of 24.52 million b/d has been widely abused, there has been room in the market for the excess. Actual output has averaged about 25.1 million b/d this year.
Quotas were not discussed at Vienna this time but there should be room for OPEC to increase its output ceiling in 1996 and try to take some of the estimated 1.5 million – 2 million b/d of new demand that is expected next year. Non-OPEC output is forecast to rise by about 1 million b/d, leaving OPEC to claim the rest.
The flaw in this argument is the inability to predict non-OPEC output with any certainty. North Sea output continues to surge and there will be other additions from Angola, Australia, China, Latin America, Mexico and Vietnam this year and next. The other unknown is FSU production which has proved particularly hard to predict. With a sharp contraction of domestic demand last year, actual exports of FSU oil were as much as 200,000 b/d higher than was anticipated in 1994. Analysts are assuming that FSU supplies will now remain relatively stable.
OPEC states with spare capacity will be sure to claim the lion’s share of any quota increase. In practice this means the three main GCC producers – Kuwait, Saudi Arabia, the UAE – and Venezuela. Only Venezuela is exceeding its current quota. The three Gulf states have been supplying on quota and will be making their claims for a larger share of revised agreement on the basis of pro-rata sacrifices they have made previously.
Saudi Arabia went without an increase in September 1993 when the current agreement was devised. It has been producing at 8 million b/d this year and has about 2 million b/d of spare capacity which is by far the highest of any OPEC country. Kuwait has a quota of 2 million b/d and will be sure to revive its demand for parity with the UAE, at the very least.
Kuwait’s capacity is 2.5 million b/d at present, including its share of the neutral zone, and the western oil fields gathering centres scheme will eventually add another 400,000 b/d. The UAE, with a quota of 2.16 million b/d, has a theoretical capacity of 2.7 million b/d after the completion of a programme to raise sustainable production.
No other OPEC members have comparable unused capacity. However, a quota debate would open old wounds. OPEC has managed to ignore the persistent quota abuses of Venezuela, Nigeria and Gabon so far but discipline would have to be restored if a new quota arrangement is to carry any conviction. And, if a quota revision does get onto the OPEC agenda for November discipline could be strained well ahead of the ministerial meeting as members jockey for influence.
OPEC frustration with its current predicament has to be set against the long term trend which is flowing in its favour. The International Energy Agency expects the growth in world oil demand to average 1.8 per cent a year for the next 15 years and OPEC can expect to pick up much of this increment. The Middle East has more than 65 per cent of the world’s proven oil reserves and a reserves/production ratio of 93 years (see table). It continues to frustrate Middle East producers that they cannot make more of this extraordinary endowment now, when it is urgently needed to improve their financial flows. While non-OPEC sources continue to expand, it seems they will either have to
be patient or face down the competition by pushing up their output. They have until November to make their intentions clear.