Will Opec's oil price decrees fall on deaf ears?

Times On line April 18, 2003 Foreign Editor's Briefing by Bronwen Maddox

COULD the war in Iraq prove to be the death of Opec? The conflict has already been blamed for threatening the demise of the United Nations, the European Union and the North Atlantic Treaty Organisation; to add the Organisation of Petroleum Exporting Countries to the list hardly seems ambitious.

It would be premature to write off the oil producers’ cartel, but all the same there is an urgency about its predicament. Opec is pleased with itself — and worried. Throughout the war, it kept oil supplies flowing and the price more or less stable. But with the war’s end, it has called an emergency meeting for Thursday to head off a glut and a sudden collapse in the price.

Even if it negotiates this month’s obstacles, Opec’s problems will get worse, and in part this is down to this weekend’s elections in Nigeria. But there are two other reasons why the world might look forward to lower oil prices in the coming years, and they are labelled Iraq and Russia. Opec’s ability to counter these three issues is small: talk of the end of the cartel may be melodramatic, but we are moving into an era when its power is almost certain to wane.

Before the war there were plenty of warnings that oil prices would rocket, and so they did. Then they came down again, as the predicted scenes of burning Iraqi oil wells failed to materialise.

Opec can pride itself on managing to keep production levels steady during the conflict, making up for the sudden stoppage of Iraqi oil. Saudi Arabia fulfilled its role as the “swing producer”, making up the shortfall, and the war coincided with Venezuela’s unexpectedly early return to something like stability.

But having risen to the occasion of the war, Opec must now persuade its members to cut back or risk a collapse in oil prices, as happened after the 1991 war. The cartel is producing about two million barrels a day too much, or about a tenth over, its own officials have suggested. Yet Opec has always been better at getting its members to pump more than it has at convincing them to cut back.

As the US Department of Energy put it in a monthly report last week: “Opec’s success in offsetting supply losses kept oil prices from spiking once the war in Iraq began. However, this same success has now turned to concern that oil prices, which have dropped by almost a third as market worries over the situation in Iraq eased, risked falling further.”

Not everyone agrees. The International Energy Agency argued this week that the “glut” was an illusion, that developed countries’ stocks of oil are low and that Opec had no reason to cut production. But the nervousness of the markets suggests that Opec may well be tempted to go ahead.

As the cartel well knows, even if it overcomes the hurdles of the next few months, there are good reasons why it will be difficult to keep propping up the price.

Iraq itself may prove hardest to control. It would be overdoing the conspiracy theories to suggest that the US intended to destroy Opec with this war. But to pay for Iraq’s reconstruction, the country needs to sell as much oil as possible.

Every plan for its renaissance aims to treble its production up to Saudi Arabian levels of between seven million and eight million barrels a day. Any exhortation by Opec to hold back is likely to get short shrift from the new government in Baghdad; the cartel can console itself only that this will not happen for several years.

Then there is Russia, firmly outside the cartel and, to judge by past experience, largely immune to its pleas. Opec can, of course, try to persuade Russia that a high oil price is in its own interests and that it should therefore restrain production. Moscow would acknowledge that if the price does slip too low then the exploration and development of new fields will not happen. But in practice Moscow needs the revenues: it will continue to pump as much as it wants, and if Opec’s own restraint manages to keep the price up, so much the better. The effect of the cartel’s attempts at persuasion has been close to zero.

Finally, there is Nigeria. An Opec member, it is the fifth-largest of the US’s oil suppliers, and the Bush Administration, catching its breath after the war, has suddenly taken notice of this weekend’s elections. American policy has been to support the present Government of President Obasanjo and to hope for something like stability, particularly regarding Nigeria’s efforts to hold the Muslim north and the Christian south together.

True, the past month has not been stable. Violent ethnic unrest in the oil-rich Delta region halted about one third of Nigeria’s oil exports. Optimists, including foreign oil company investors, hope that the violence was largely precipitated by the elections. But there are still open sores that need addressing, particularly the complaint of the ethnic groups of the Delta, who are mostly excluded from its wealth.

But a new government is almost certain to want to step up oil production: that, presumably, is the basis on which oil companies have been investing. It has already boosted capacity to about 2.5 million barrels a day, half a million more than the level set by Opec.

The question for Opec is whether it legitimises this, turns a blind eye, or contests it, with the risk that Nigeria will walk out the door.   Contact our advertising team for advertising and sponsorship in Times Online, The Times and The Sunday Times. Copyright 2003 Times Newspapers Ltd. This service is provided on Times Newspapers' standard Terms and Conditions. Please read our Privacy Policy. To inquire about a licence to reproduce material from The Times, visit the Syndication website.