Insight On The News Posted May 15, 2003 By J. Michael Waller

Venezuelan strongman Chavez, right, and his oil minister, Rodriguez, center, and Kuwaiti oil minister Saud Nasser al-Sabah are all smiles after colluding to manipulate the oil market.

Oil-producing titans Kuwait, Qatar and Saudi Arabia may have passively helped the United States and its allies to topple Saddam Hussein, but they stabbed Uncle Sam in the back before the gunfire subsided in Baghdad. With the world economy in a slump, they easily could have repaid the United States and others for destroying the threat the Iraqi regime posed to their oil fields and their regimes. Instead, they met in Vienna on April 23 with some of the most notorious state sponsors of terrorism, Iran and Libya, as well as the fanatically anti-Western regime of Hugo Chavez in Venezuela and a vegetable soup of other countries that might or might not be "with us" in the war on terrorism. In what promised to continue a crushing burden upon the working people of their benefactor nations, they agreed sharply to cut back oil production to keep prices artificially high.

That meeting of the member states of the Organization of the Petroleum Exporting Countries (OPEC) brought together an almost-humorous collection of medieval dictatorships and kleptocracies. Weeks before, Saudi Arabia boasted that OPEC's decision to increase production during the war in Iraq helped prevent a spike in oil prices. Indeed, oil analysts say, it did. But the April 23 decision, in effect, declared economic warfare on the rest of the world, including the United States.

With the end of Saddam's regime and the shadow it cast upon much of the oil-producing Middle East, say administration insiders, the United States is reassessing its relationships in the region - particularly with regimes such as Saudi Arabia that financial records show to have been playing both sides in the terrorism war. And with the world evermore conscious about state sponsorship of terrorism, and of how fossil-fuel-dependent countries inadvertently finance such regimes, U.S. policymakers are taking a new, hard look at OPEC as an illegal syndicate in restraint of trade.

Founded in 1960, OPEC's aims, according to its founding statutes, are "the coordination and unification of petroleum policies of the member-countries and the determination of the best means for safeguarding their interests individually and collectively." It was created literally as a cartel or, to use its own words, "The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations." Its main "stabilization-of-prices" strategy has been to prevent the free market from keeping prices generally low.

The OPEC members control more than three-fourths of the world's proven oil reserves and supply more than 40 percent of the world's oil, according to the U.S. Department of Energy (DOE). The cartel cannot afford to allow prices to rise too sharply, as sustained higher prices would give others greater incentive to develop new oil fields outside OPEC's control. Industry analysts say that OPEC has tried to keep prices at about $25 per barrel since 2000, and that recently the price has been fluctuating between $22 and $28 per barrel - just low enough to discourage other countries from exploiting new fields.

Sen. Charles Grassley (R-Iowa), a longtime critic of OPEC, has sought action against what he calls the cartel's "stranglehold on the U.S. economy." He says OPEC "distorts" the gasoline and diesel market and has had a harmful effect on farmers, truckers and ordinary Americans. Grassley has proposed pressuring OPEC members (see sidebar, p. 26) that receive U.S. military backing and foreign aid. Indonesia and Nigeria are among the recipients of this U.S.-taxpayer assistance; Saudi Arabia, Kuwait and the United Arab Emirates among others are beneficiaries of the U.S. Armed Forces.

Regimes hostile to the United States have sought to use OPEC as a tool of political and economic warfare. The Arab oil embargo of the 1970s caused the first sustained price spike, and the Islamic Republic of Iran has been one of the hard-line members arguing for higher prices. More recently, another anti-American force has arrived on the scene: Venezuelan strongman Hugo Chavez. In 2000, the former paratrooper-turned-president hosted OPEC's first summit in 25 years to strengthen the cartel. He tried to cement OPEC support for his regime by tightly enforcing cartel quotas. Prior to his taking power in 1999, Venezuela was considered a renegade within OPEC, ignoring quotas in an attempt to double production by 2007. But Chavez promised to turn OPEC around and to slash Venezuelan oil production to raise the world market price. In turn, OPEC appointed his oil minister, a former communist guerrilla named Ali Rodriguez Araque, as its secretary-general.

OPEC leaders flatly refused to keep prices down, saying instead that wealthier industrialized nations should cut prices at the pumps by lowering their taxes on energy, while starting a new image-making campaign of its own, pledging to fight to protect the world's environment and safeguard the rights of developing nations. Chavez then worked to develop strategic collusion among the often-fractious OPEC members and to invite independent major oil-producing states such as Angola, Mexico, Norway, Oman and Russia to join the cartel.

"I am one of the many who think that what is happening in Iraq is very dangerous for the world," Chavez told journalists on April 11. He voiced alarm that the successful U.S.-led ouster of Saddam threatened the unity of OPEC. Even more, OPEC is worried that a pro-U.S. Iraq, along with oil producers outside the cartel, might allow world market forces to work by increasing supply and lowering prices. According to a new DOE report, Venezuela's cut in production was keeping post-Saddam prices from "falling too low." Now the OPECers have met once again, like any other band of robber barons, to restrict supply and raise prices.

And this, American strategists say, is the time for the United States to finish off OPEC once and for all. There is no shortage of ways to do it, says John McCormack, head of energy practice at Stern Stewart & Co. in New York. All that's needed, he tells Insight, is a strategy and commitment. Some of the options have the added value of denying revenue to state sponsors of terrorism [see "Economic Warfare Can Win Terror War," Nov. 12-25, 2002]. Options worth considering include the following:

• Make it a priority to construct and safeguard a pipeline to deliver Caspian crude oil from Azerbaijan and Kazakhstan on a route that avoids transit through Iran and Russia. The pipeline, called Baku-Tblisi-Ceyhan, would begin in Azerbaijan, transit Georgia and end in Turkey, strengthening three pro-U.S. countries in the region and undermining the petropower of Iran and Russia. Former national-security adviser Zbigniew Brzezinski and others have been strong proponents of development of Caspian Sea oil and gas, and construction of secure pipelines that would bypass Azerbaijan's large neighbors.

Azerbaijan and Kazakhstan do not coordinate with OPEC, and their immense reserves promise to supply international oil needs for decades to come and help keep prices low. A Muslim state that consistently is friendly toward the United States, Azerbaijan finds itself sandwiched between hostile Russia and Iran and has yet to receive the special treatment that geostrategist Brzezinski and others say it merits. The problem, say industry analysts, is getting the resources to market. Economists such as McCormack, who has worked with many energy companies around the world, offer another reason for avoiding Russia: "stupid Russian oil-company managements."

• Promote the growing democracy movement in Iran. Ripe for regime change of a peaceful kind, Iran needs more creative and strategic attention from the United States. Unrest in Iran continues to grow among a population that is considered the most pro-U.S. in the Muslim Middle East. A democratic revolution in Iran would eliminate another terrorist-sponsoring government that keeps power through Western petro dollars.

• Promote freedom and justice in the rest of the Middle East. Part of this campaign already is under way with the new Palestinian-Israeli "road map," even though it has little to do with oil per se. However, the United States must start telling the truth about the other regimes in the region, beginning with diplomatic and public-diplomacy efforts to highlight the systematic human-rights violations, institutionalized corruption, support for terrorism and decades of economic warfare against the United States by regimes such as those of Saudi Arabia and Syria. A big question with such an effort is what would come after those regimes.

• Promote regime change in Venezuela. As the fifth-largest oil producer, Venezuela is key to U.S. security and vital to OPEC's cohesion. Chavez has broken the independent unions of the state-owned PDVSA oil company and is bringing it under his political control. Purging the senior management of the once-autonomous company, Chavez tapped a longtime confidant, a former communist guerrilla once known as Comandante Fausto, to run the enterprise. Fausto, whose real name is Ali Rodriguez Araque, served as secretary-general of OPEC from 2000 until recently, and has excellent relations with some of OPEC's radical member-states. PDVSA owns the Citgo Petroleum Corp., reported to be the third-largest gasoline supplier in the United States.

• Quickly ramp up Iraqi oil production. Modernization of Iraqi oil exploration, refining and shipping facilities will allow the new post-Saddam government in Baghdad to benefit from a huge inflow of hard currency to rebuild the country and boost the economy. A quick recovery and modernization of the Iraqi energy sector, experts reason, would lessen internal political and economic pressures that otherwise would fan militant anti-Americanism in the country. It also would help strengthen the new, pro-U.S. government.

"By far the most effective way would be to encourage Iraq to reach its potential production capacity of 8 million barrels per day versus the 1 million to 1.5 million barrels per day they have done over the past few years," says McCormack. After Saudi Arabia, Iraq has the second-greatest reserves within the cartel, and its oil is among the cheapest in the world to bring to the surface. Iraq might find it in its interest to discontinue coordination with the rest of OPEC.

For more on this story, read "Taking on OPEC."

J. Michael Waller is a senior writer for Insight magazine.

Reuters, 05.08.03, 3:10 PM ET By Elizabeth Fullerton

MEXICO CITY (Reuters) - Mexico's decision to orient its oil policy towards the United States and away from the OPEC cartel is seen as more about mending bruised ties with its main trading partner than a fundamental policy shift.

Mexican Foreign Minister Luis Ernesto Derbez said on Wednesday during a visit to Washington that the linkage between Mexico's oil policy and OPEC production decisions will weaken as North America becomes more of a single energy market.

"I think part of this is fence-mending with some of our natural trading partners who chose publicly and visibly to go their own separate ways with the war (on Iraq)," said Larry Goldstein, President of the Petroleum Industry Research Foundation in New York.

Mexico annoyed the United States, which buys 90 percent of its exports, by refusing to back a U.S.-led attack on Iraq.

Non-OPEC Mexico is the eighth biggest crude producer in the world and one of the top four oil suppliers to the United States, along with Saudi Arabia, Venezuela and Canada.

Since 1998 Mexico has cooperated with the Organisation of Petroleum Exporting Countries in raising and lowering supply to stabilize global oil prices.

Mexico had curbed its exports since the start of 2002 in cooperation with OPEC to boost prices from late 2001 lows but as of February this year it raised its export platform to 1.88 million bpd to compensate for lost supply from a Venezuelan strike and curb rising oil prices as a war on Iraq loomed.

"(Derbez's comments) could be taken as a message that Mexico is in a better position to increase its share of the U.S. market because of the situation with Venezuela and other global events," said Lisa Pearl, Associate Director at Cambridge Energy Research Associates.

Mexico in March exported an average of 1.88 million barrels per day (bpd) of crude on average output of 3.317 million bpd. Mexican energy officials have said the nation is currently close to its export and production capacity limit.

PRAGMATISM RULES

Mexico has something of a tightrope to walk between cooperating with OPEC to keep oil prices -- and hence export revenues -- buoyant and not upsetting the United States or hurting its economy which is closely linked to Mexico's.

"Where they fit in this continuum between close ties with a consumer like the U.S. and close ties with other producers like OPEC depends a lot on price level," said Sarah Emerson, Managing Director at Energy Security Analysis Inc in Boston. "I think if the (oil) price fell to $10 (a barrel) again Mexico would line up with OPEC to try to reign in production worldwide. If the price is $30 Mexico is certainly not going to talk about its alliance with OPEC," she added.

Oil prices on Thursday were trading around $27 a barrel in New York. Prices have fallen since OPEC's surprise decision two weeks ago to raise its official output limits while claiming a large cut in actual supplies.

Mexico, which has over the past year mirrored OPEC's moves in its own oil policy, said it would define its oil export platform by June 1 in the wake of the OPEC move.

Analysts stressed that pragmatism prevailed above all else in Mexico's strategy towards OPEC.

"On a day-to-day basis Mexico hasn't been a supporter of OPEC policies," said Goldstein, noting the country had produced and exported what it wanted. "Only during crises has Mexico stepped up and supported on a temporary basis cuts in production."

<a href=www.canada.com>CanWest News Services Wednesday, April 30, 2003

The Organization of Petroleum Exporting Countries may vote to cut output at a June 11 meeting should oil prices keep falling, said Alvaro Silva, the group's secretary-general.

OPEC members have been exceeding their output quotas this year to make up for production disruptions from members including Venezuela, Iraq and Nigeria. At a meeting last week in Vienna, the producers said they would rein in output starting June 1.

Crude oil for June delivery fell 25 cents, or one per cent, to $25.24 a barrel on the New York Mercantile Exchange, the lowest closing price since Nov. 13. Prices have plunged 37 per cent from a 12-year high of $39.99 reached on Feb. 27.

"We agreed there was too much oil on the market and took out two million barrels a day," Silva said in an interview.

The June reduction will be from the group's current output of "around 27 million barrels a day" for the 10 members with quotas, all but Iraq, Silva said.

By Sam Vaknin <a href=www.upi.com>UPI Senior Business Correspondent From the Business & Economics Desk Published 4/29/2003 1:43 PM

SKOPJE, Macedonia, April 29 (UPI) -- Indonesia's Energy Minister Purnomo Yusgiantoro is unhappy with the modest production cut, from June 1, of 2 million barrels per day, adopted last week by the Organization of Petroleum Exporting Countries. He intends to demand further reductions at the June 11 meeting in Qatar.

The deal struck is so convoluted and has so many loopholes that actual output declines may amount to no more than 600,000 bpd, assuming, miraculously, full compliance. Quotas were first raised before the war to 27.4 million bpd -- a theoretical level, not met by actual supply. Crude prices, entering a period of seasonal weakening, dropped further on the news.

With Nigerian and Venezuelan crude recovering from months of strife, this downtrend may be temporary. Global excess capacity is a mere 1 million bpd, one-fifth its prewar level. As North American and North Sea production declines, the importance of Gulf producers soars.

OPEC's 11 countries -- Algeria, Indonesia, Iran, Iraq (suspended in 1990, following its invasion of Kuwait), Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela -- control one-third to two-fifths of global oil output and three-quarters of the far more important residual demand -- traded between net consumers and net exporters. Residual demand is set to double by 2010.

Still, OPEC, led by Saudi Arabia, now off the U.S. buddy list, faces fundamental problems that no tweaking can resolve. Iraq, in the throes of reconstruction and under America's thumb, may opt to exit the club it has founded in 1960 and, thus unfettered, flood the market with its 2.3 to 2.8 million bpd of oil. Iraqi production can reach 7-8 million bpd in 6 years, completely upsetting the carefully balanced market sharing agreements among OPEC members.

This nightmare may be years away, what with Iraq's dilapidated and much-looted infrastructure and vehement international wrangling over past and future contracts. All the same, it looms menacing over the organization's future.

Far more ominous perils lurk in Russia, the second-largest oil producer and growing. Though the cheapest and most abundant reserves are still to be found in the Persian Gulf, Central Asia and Russia are catching up fast. Ali al-Naimi, the Saudi oil minister, may be forced out of office by this apparent crumbling of the organization's stature.

This would be unwise. Al-Naimi is widely credited with engineering the tripling of oil prices to more than $30 a barrel between 1998 and 1999. As the informal boss of the state-owned Saudi oil behemoth, Aramco, he has already introduced postwar output cuts. The oil market is so volatile that even marginal production shifts affect prices disproportionately. Naimi is a master of such manipulation.

Saudi Arabia regards itself as the market regulator. It keeps expensive, fully developed wells idle as a 1.9 million bpd buffer against supply disruptions. It is this "self-sacrificial" policy that endows it with tremendous clout in the energy markets. Only the United States can afford to emulate it -- and even then, the Saudis still possess the largest known reserves and sports the lowest extraction costs worldwide.

OPEC is, therefore, not without muscle. Saudi Arabia has punished uppity producers, such as Nigeria, by flooding the markets and pulverizing prices. Yet, the organization is plagued by internecine squabbles about market shares and production ceilings. Giants and dwarves cohabit uneasily and collude to choreograph prices in what has long been a buyers' market. These inherent contradictions are detrimental. If OPEC fails to recruit another massive producer (namely: Russia) soon, it is doomed.

Paradoxically, the Iraq war is exactly what the doctor ordered. OPEC's only long-term hope lies in a geopolitical shift, the harbingers of which are already visible. Russia may join the cartel, disenchanted by an imperious and haughty U.S., or the Europeans may "adopt" OPEC as a counterweight to the sole "hyperpower's" newfound energy preeminence.

America announced its intention to pull out its troops stationed in Saudi Arabia. As this major producer is thrust into the role of the "bad guy," it acquires incentives to team up with other "pariahs" such as France and, potentially, Russia. Controlling the oil taps is a sure way to render the U.S. less unilateral and more accommodating.

U.S. interests are diametrically opposed to those of oil producers, whether in OPEC's ranks or without. The United States seeks to secure an uninterrupted supply of cheap oil. Yet, a consistently low price level would go a long way towards reducing Russia back to erstwhile penury. It would also destabilize authoritarian and venal regimes throughout the Middle East.

This unsettling realization is dawning now on minds from Paris to Riyadh and from St. Petersburg to Tehran. As the United States looms large over both producers and consumers, the ironic outcome of the Iraqi war may well be an oil crunch rather than an oil glut.

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By ROBERT J. McCARTNEY <a hre=goerie.com>goerie.com-The Washington Post

VIENNA, Austria — 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, the organization 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.

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.

AP-NY-04-27-03 1319EDT Last changed: April 27. 2003 9:42PM