OPEC May Feel Pressure With Return of Iraqi Oil

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.