OPEC Maintains Firm Resolve

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The Organisation of Petroleum Exporting Countries (OPEC) is trying to `fine tune' the world oil markets by preserving a good balance between supply and demand. Moin A Siddiqi reports.

The 10 OPEC members (excluding sanctions-bound Iraq) have reduced their collective oil production by 2.5 million barrels a day (b/d), or 9.3 per cent, in the first quarter, in order to underpin prices amid seasonal weakening in energy demand and a global economic slowdown. The cartel controls about 40 per cent of the world's oil production (exceeding 77 million b/d) and supplies two-thirds of the globe's crude exports. More importantly, about 80 per cent of proven oil reserves world wide (1,033.8 billion barrels) are deposited in OPEC countries, the bulk of which are in the Middle East.

During April-June, oil consumption in the northern hemisphere usually drops by between 2-2.5 million b/d. The new ceiling for OPEC members, effective from 1 April for OPEC-10 is 24.2 million b/d, a decline of 4.3 per cent over the February-March production level. Bijan Namdar Zangeneh, the Iranian oil minister, defended OPEC's supply restraints by saying: "We believe it is necessary to do something because there is a huge amount of over-production in the market." OPEC hawks, including Venezuela, Kuwait, Libya, and Algeria, had anticipated a supply-surplus of 2.6 million b/d without the cuts implemented in February and April.

OPEC's total production (including Iraq) in March was estimated at between 27.6 and 28.1 million b/d by Geneva-based crude tanker trackers Petrologistics. Iraq's output totalled between 2.3 and 2.8 million b/d. The cartel's potential sustainable capacity is assessed by oil experts at 32.15 million b/d. Therefore, at current reduced production rates, OPEC's excess capacity has risen to four million b/d, compared to a record low of two million b/d in late 2000, the lowest since the early 1970s.

Saudi Arabia -- the world largest producer -- has an estimated surplus of 2.63 million b/d, Kuwait 659,000 b/d, the United Arab Emirates 387,000 b/d, Venezuela 264,000 b/d, Nigeria 207,000 b/d, Libya 204,000 b/d and Iran 198,000 b/d. Iraq is facing some difficulties in boosting its capacity to 3.5 million b/d because of low investments in infrastructure.

The second-quarter demand on OPEC crudes is expected to reach an estimated 25.6 million b/d.

OPEC actions show its resolve to maintain a solid foundation on pricing. Ali Naimi, the Saudi Arabian oil minister, confidently said: "The new OPEC is an organisation that is pro-active, disciplined and knows what it wants." It appears that core members (Saudi Arabia, Iran and Venezuela) are determined to defend OPEC's preferred target of $25 per barrel.

The cartel is committed to last year's price stabilisation mechanism, (which has proved reasonably effective. This requires an automatic hike in output of 500,000 b/d if prices rise above $28 a barrel for 20 consecutive days, or conversely a production cut of 500,000 b/d if prices fall below $22 for 10 working days.

OPEC president Chakib Khelil said: "I don't think $25 oil has any impact on growth, or inflationary impact. The price of an OPEC basket of seven crudes averaged below $24.5 in the first quarter."

The major Organisation for Economic Co-operation and Development (OECD) importing countries are unhappy at OPEC's stringent output policy. The European Commission argued that: "Cuts would add to price volatility and prevent consumer nations from rebuilding their stocks of energy." Spencer Abraham, American energy secretary, described OPEC's decision on 17 March to lower output by a further one million b/d as "disappointing", given the evidence of worldwide economic downturn. The US Energy Department said: "Lower oil output would not be in the long-term mutual interests of the US or OPEC countries."

America, the world's largest economy, consumes 20 million b/d of crude and refined petroleum products, and soaring energy costs during the past year were largely blamed for exacerbating the current economic difficulties. …