What OPEC Did Next ...: In the Face of Rising Concern over Conflict in Iraq and the Troubles in Venezuela, What Will the 10 Member Cartel Pull out of the Hat to Calm the Troubled Oil Market This Time? (Oil)
Ford, Neil, The Middle East
With the oil price remaining stubbornly above the $30 a barrel mark, oil cartel OPEC decided in January to increase its total production quota by 1.5m barrels a day (b/d). The OPEC ceiling was therefore increased from 23m b/d to 24.5m b/d with effect from 1 February 2003, with further increases not ruled out. Although the 10 member cartel does not consider the high oil price to be justified, it was forced to act because the price remains some way above the organisation's own $22-28 target range.
As always, the quota increases are proportional so Saudi Arabia is the biggest winner, with its quota up 488,000 b/d to 7,963,000 b/d, although it was already pumping above the new level at the start of the year. As a result, the quota increases are largely a confirmation of the existing production situation, rather than a concerted effort to boost total OPEC output by 1.5m barrels.
OPEC statements describe the increase as a direct result of the continued shut-in in Venezuela. The long running general strike in South America's leading oil producer has caused production to fall from 2.9m b/d in early December 2002 to under 600,000 b/d by the start of 2003.
Qatari oil minister and OPEC president, Abdullah bin Hamad Al Attiyah, said: "OPEC is trying to send a very strong message that it will do its utmost to stabilise demand and supply." Commenting on the new quotas, he said: "This is a very clear message that we are not taking away Venezuela's market share, we are protecting it." However, he acknowledged that OPEC would have to reassess the situation once Venezuelan resumes full production.
A continuation of low production in Venezuela could force OPEC to increase quotas still further. Not only is low Venezuelan output cutting global production but it is also leading to falling oil stocks. Even now that the general strike has been brought to a conclusion, it will take the best part of this year to return stocks to their original levels. Venezuela's energy minister Rafael Ramirez said in January that he expected his country's output to return to normal levels by mid-February but this seemed unlikely.
A statement from the OPEC January meeting read: "The Conference remains determined to take whatever measures, as and when deemed necessary, to maintain oil price and market stability, and states that the market will be continuously and carefully monitored." It added: "The Conference repeated its standing call on other oil producers and exporters to continue to cooperate with OPEC for the enduring wellbeing of the market and the benefit of both producers and consumers."
However, this appeal to non-OPEC producers to control production growth is likely to fall on deaf ears. Despite an agreement to rein in production last year, the Russian government seems unable to force its own producers to abide by the agreement. Even in member states, the organisation struggled to enforce the quota system throughout the course of 2002. At a meeting in December 2002, the cartel agreed to both increase quotas and cut production, in an effort to improve quota compliance.
At the January meeting of OPEC, the organisation issued a statement saying it hoped Venezuela would soon be able to resume full output and take up its new quota. However, if production remains low in Venezuela the other OPEC members may feel less inclined to keep within their new quotas and another quota increase is not beyond the bounds of possibility, even at the next scheduled meeting on 11 March. The Venezuelan situation is of particular interest to the US, as the country provides 13% of US oil imports. The Venezuelan quota was increased in line with those in other countries, not because it is expected to fulfil its quota but in order to demonstrate the commitment of the other members to the South American country's membership. They did not want to be seen to be cashing in on Venezuela's misfortune. Apart from political instability in Venezuela, the main driver behind the current high oil price is the fear of a war in Iraq and the impact that this could have upon Iraqi and other producing fields in the region. …