Washington Post Foreign Service
Sunday, April 27, 2003; Page A26
VIENNA -- The planned rebuilding of Iraq's oil industry could drive down prices and loosen the grip on world markets of the Organization of Petroleum Exporting Countries and its leader, Saudi Arabia.
With the expected removal of United Nations sanctions, which have hobbled Iraq's oil facilities for 12 years and excluded it from OPEC production agreements, the nation is poised to reclaim its position in the top rank of petroleum exporters.
While it is not clear what kind of government will emerge after the U.S.-led toppling of Saddam Hussein, any new administration in Baghdad will be eager to increase oil revenue quickly to finance reconstruction, OPEC and industry specialists said.
That prospect for Iraq creates significant new competition on world markets. It adds to strains on OPEC that already challenge the Saudi-engineered strategy of adjusting production to keep prices from $22 to $28 a barrel.
OPEC feels steadily increasing pressure from non-OPEC exporters, especially Russia. Moreover, it is riven by an internal dispute over production quotas, with Algeria, Nigeria and some other members pressing for a larger share of OPEC's total output.
A struggle for influence in oil markets could be part of a larger battle for political leadership in the Persian Gulf. A democratic Iraq would be an example of an alternative to the region's mostly authoritarian governments.
"It is certainly plausible to think that a democratic, well-run, transparent Iraqi government, the kind that the U.S. would like to see put in place, could be a very dynamic leader in the region, and it may want an equal share of the spoils with the Saudis," said Phillip Ellis, head of worldwide oil business for Boston Consulting Group in London.
Iraq, which has the world's second-largest oil reserves after Saudi Arabia, has produced at most 2.5 million barrels a day in recent years and is exporting nothing now. It is likely to raise production to 3.5 million barrels a day within two years, when, by opening fields that have gone untapped because of the sanctions, it could increase production to as much as 6 million barrels a day in five to seven years.
That would be nearly a quarter of OPEC's current targeted output of 25.4 million barrels a day. Other OPEC countries would have to give up a lot of production, and revenue, to make room for Iraq.
"The pressure will start this year, when Iraq comes back" and resumes exports, said Nordine Ait-Laoussine, a former Algerian oil minister who is president of Nalcosa, an energy consulting service in Geneva. "OPEC has to think hard about whether it can maintain the price range of $22 to $28."
He and other specialists predicted pressure in coming years to drive world prices below $20 a barrel. That would mean a drop in average oil prices of at least $5 a barrel from OPEC's current target. That translates roughly into a reduction in gasoline prices of 12 cents a gallon, and an addition of half a percentage point to the rate of global economic growth.
OPEC is counting on a strong increase in worldwide demand for oil to absorb increased Iraqi production in the long run. Some forecasts, such as by the International Energy Agency in Paris, foresee a large increase in oil demand, partly because of China's rapid industrialization.
"In five to seven years, I believe this will all be academic, because demand will be up there, and countries will be struggling to make investments" to increase oil production, Saudi Oil Minister Ali Nuaimi said after the OPEC meeting here Thursday. But he conceded that there will be problems, at least in the near term. "The main thing is to survive the next two to three years," Nuaimi said.
Saudi Arabia will be at the center of the struggle. As the largest producer among OPEC's 11 members, pumping nearly a third of the group's output, it is under the most pressure to reduce production so other countries can raise theirs. Poorer OPEC members resent Saudi Arabia's effective control of the market, a privilege it enjoys because its large excess production capacity gives it the ability to raise or lower output much more than any other country.
In recent years, the Saudis have placated the rest of OPEC by overseeing production accords that kept prices well above $20 a barrel. That level is widely seen as critical, because lower prices would mean that many OPEC countries, including Saudi Arabia, could not meet their national budget demands.
The other half of the equation is that Saudi Arabia also has moved to keep prices from going above the target range. It did so in dramatic fashion this year by increasing production sharply after prices rose to $39 a barrel owing to fears of the impending Iraq war and unexpected shortages caused by a strike in Venezuela and violence in Nigeria. As a result, prices fell back even before the war began.
"OPEC as an organization did extremely well managing supply, particularly in the last five months," Nuaimi said. "I think you will admit that OPEC delivered on its commitments."
Saudi Arabia acted to prevent oil shortages in part to please the United States, and it fears that it will lose influence in Washington and elsewhere to Iraq's new government, according to industry specialists and Middle East analysts.
The belief is widespread in the Arab world that Washington may seek to establish a pro-Western government in Baghdad that might withdraw from OPEC and pump as much oil as it could.
But the United States also has said that the Iraqi people will choose their government and decide how best to use their oil resources. That leads OPEC officials and many oil experts to predict that Iraqi nationalism and economic self-interest will lead the new government to remain in the organization, which was founded in Baghdad in 1960.
"I don't believe that the Iraqis, if they are genuinely elected, will quit OPEC. I don't think the Iraqis will push production to the maximum, regardless of price," Ait-Laoussine said.
Nuaimi also predicted that Iraq would choose to work within OPEC, and accept restraints on production to support the price and maximize revenue.
"When there is an Iraqi government that we can deal with, the first thing we will ask them is, 'Do you like a $25 price?', and if the answer is yes, then we will tell them how to tangle with us," Nuaimi said.
HAMISH ROBERTSON: Venezuela's controversial President, Hugo Chavez, who's already survived a coup and a crippling general strike, has embarked on a new course of action design to infuriate his opponents.
Having first agreed to a referendum on his future, President Chavez has suddenly backed away from the agreement.
Our Correspondent, Neil Weise, who makes frequent visits to Venezuela from his base in Miami, says that Mr Chavez is presiding over a potentially prosperous nation, which is now one of the hemisphere's worst economic performers.
NEIL WEISE: Venezuela's economy will shrink this year by between seven and 15 per cent, per capita income is forecast to drop by 50 per cent, and in the past quarter alone, one in three households has lost a working member to unemployment.
Chavez argues that his opponents are responsible for the meltdown, for bringing on a two-month civic strike early this year that cost the Government between six and seven billion dollars, mostly from lost oil revenue.
The opposition says Chavez has bankrupted the country, by taking it down the same socialist path that Cuba's Fidel Castro travelled.
Chavez himself says his so-called Bolivarian revolution will not be derailed by the self-serving oligarchy that drove Venezuela's poverty levels to 70 per cent before he was elected for the first time five years ago.
Certainly the opposition coalition comprising some business, union and military leaders failed with their strike to remove Chavez, and even some of their supporters agree they must take part of the blame for the economic upheaval the strike caused.
Their next chance to remove the President will come as early as August when, constitutionally, they can use petitions to force a plebiscite on his rule. A majority of voters could force the President's resignation.
Hugo Chavez last week said he was looking forward to the vote, to see off his opponents once and for all, but this week his Government objected to foreign observers, saying: "Venezuela is not a colony." The President also said a referendum cannot be held until electoral rolls are updated and a new Electoral Commission is appointed by Parliament.
Chavez takes counsel from a group of advisers who include the ubiquitous, Ali Rodriguez, head of oil-rich Venezuela's state-owned oil company, PDVSA. Rodriguez is a former guerrilla who graduated from blowing up foreign oil company installations to become the Secretary-General of OPEC.
The two men have long viewed PDVSA, the nation's biggest company, as the Trojan horse of opposition to their Administration, and they've sacked a massive 45 per cent of the company's 39,000 employees since the civic strike.
The strike's effects have depleted Treasury coffers, and Venezuela has put feelers out to foreign lending agencies for loans.
President Chavez said this week he would not accept, as a lending condition, the kind of austerity measures the IMF seeks from other nations, saying: "If they don't want to lend us money, then don't. This is a sovereign nation."
It's 11 years since paratrooper, Lieutenant Colonel Chavez, was jailed for leading a failed coup to oust what he called the corrupt government. It's a year since he himself survived such an attempt.
The President may yet subject himself to a referendum this year, but as a disparate and dispirited opposition has already discovered, Hugo Chavez's crisis-honed instincts have taught him how to dodge that proverbial bullet, no matter who's firing.
NEW YORK - Oil prices fell for the fourth straight day on Friday (New York time) as traders puzzled over Opec's surprise deal to raise formal output quotas while promising to cut excess supply.
In New York, US crude futures CLc1 ended at $26.26 a barrel, down 38 cents on the day and 15 per cent for the week that included a five-month low on Thursday. Benchmark Brent crude oil LCOc1 lost 24 cents to $24.09 a barrel.
Prices dropped after the Opec cartel's Thursday decision to raise production quotas and cut back less than expected on extra crude it pumped to stop prices from spiking during the US-led war in Iraq.
The Organisation of the Petroleum Exporting Countries presented the deal as a cut of two million bpd from real output levels, which had soared above official quotas in the first few months of the year.
Some analysts said Opec's estimates of current production, and its figures for the promised cut, were confusing and did nothing to allay fears of a supply glut once Iraqi crude exports resume.
"Opec's surprise quota increase unnecessarily confused the market at a time when there is sufficient uncertainty with debate over the return of Iraqi volumes, concerns over economic recovery and the impact of the SARS virus," said Matthew Warburton of UBS Warburg bank in a report.
The cartel had sanctioned extra oil sales before the war in Iraq to prevent an oil price shock. Some Opec members, particularly Saudi Arabia, had ramped up supplies earlier to cover for hitches in Venezuela and Nigeria.
"Now Venezuela is back, Nigeria is back, the war is over and the world is coming back to normal, we are trying to normalize things," said Opec President Abdullah al-Attiyah.
Dealers said that, with Iraq already off the market for a month, the other 10 Opec members seemed intent on grabbing market share before tackling the re-integration of Baghdad in the cartel's system of output limits.
While it will be some time before Baghdad even matches prewar production, down the road it has the potential to snatch second place in Opec's ranks behind Saudi Arabia.
Before the war, Iraq was pumping at a peak of 2.5 million bpd and its exports -- controlled by the United Nations under a humanitarian sales scheme -- accounted for around 4 per cent of internationally traded oil.
United Nations members are still discussing a new legal framework under which Baghdad could resume oil sales to the world market.
The United States will introduce a resolution in the council next week that lifts sanctions against Iraq and calls for a special UN coordinator in a low-level consultative role, Bush administration officials said.
The resolution -- which is bound to be contentious with permanent UN Security Council members Russia and France -- would end UN control over the lucrative oil-for-food programme.
The draft US resolution appeared to be an opening ploy and would probably be whittled down once negotiations began, diplomats said.
"The timing and magnitude of Iraqi exports is uncertain and will likely complicate Opec's deliberations for many meetings to come. Opec will reduce production to accommodate Iraqi oil, but with a lag of several months," said Mike Mayer, analyst with Prudential Financial.
Saudi Arabia's Oil Minister Ali al-Naimi said output could be trimmed again at an Opec meeting in Qatar on June 11, just days after the new deal takes effect on June 1.