Oil Economics Weekly

OPEC is still mired in the problems we discussed in this column last week. Sunday, March 8 Saudi Arabia continued to emphasize that it was the responsibility of all producers to cut back production to maintain prices. Saudi Oil Minister Ali al-Naimi summarized the situation when he said "Perhaps what delays the materialization of a clear solution is that some countries, especially those which exceed their quotas, indicate that they are not prepared to reduce their production. This means that coming up with a joint solution within OPEC to restore stability to the market would be difficult indeed." [Reuters] He made it clear that a solution was not to be forthcoming from the countries of the Persian Gulf and that "market stability is a joint responsibility."

It still boils down to one country. Until there is some prospect of a cutback on the part of Venezuela there is not going to be a full-fledged OPEC meeting. Saudi Arabia wants more than a Venezuelan cut back. They want to enlist the help of non-OPEC producers as well. February OPEC production was a million barrels per day over quota and Venezuela accounted for three fourths of the excess production. Venezuela's quota is less than ten percent of total OPEC production.

News of the past week has not been very optimistic for OPEC. Abdullah bin Hama al-Attiyah, Qatar's oil minister, has expressed concerns that the current situation might lead to a collapse of OPEC. On the other hand Qatar was exceeding its production quota of 414,000 bpd by over 50 percent in February. Rafsanjani the former president of Iran finished his trip Saudi Arabia. Iran and Saudi Arabia issued a joint statement expressing the view that price stability was the responsibly of all exporting nations. Kuwait's oil minister Issa al-Mzidi echoed their sentiment with a called for OPEC members to respect their agreements. All of this rhetoric has fallen on deaf ears in Venezuela. Venezuela's oil minister Erwin Arrieta refused to cut his country's oil production and declined an invitation to the March 16 meeting of the ministerial monitoring committee.

There is some irony in the Venezuelan position for OPEC history buffs. In 1959 United States President Dwight D. Eisenhower imposed import quotas on crude oil. Venezuela was hit particularly hard by the quotas. Venezuelan Minister of Mines and Hydrocarbons Perez Alfonzo flew to the United States to attempt to set up a Western Hemisphere oil system. Alfonzo's proposal was not declined. It wasn't even heard by the United States government!

In response, Perez Alfonzo flew to the meeting of the Arab Oil Congress in Cairo in April of 1959. Although he could not participate, a private meeting was held with Abdulllah Tariki of Saudi Arabia and representatives of Iran, Kuwait, and Iraq. Although almost everyone present denied the ability to make a decision, the matters discussed became the framework for OPEC. Venezuela in a very real sense sowed the seeds that led to the formation of OPEC . Now it may well be Venezuela which sows the seeds of the demise of OPEC. On the other hand, Venezuela may just be negotiating for a somewhat higher quota. In any case, it is a high stakes game of poker.

What are the chances of a recovery of oil prices in the short term? A look at history should tell us that they are not very good. In the post World War II era oil prices have averaged $19.27 per barrel in 1996 dollars. Throughout the same period the median price for crude oil was $15.27 in 1996 dollars. That means that only fifty percent of the time from 1947 to 1997 have oil prices exceeded $15.26 per barrel. Prices have only exceeded $20.00 per barrel by a significant amount in response to war or conflict in the Middle East.

In the longer term prices will rise even in the absence of Middle East conflict. The current low prices lead to reduced levels of exploration and development. The decline rate in production from existing wells will eventually bring supply and demand into balance at higher prices, but as the evidence of the price collapse in the period from 1996 to 1998 demonstrated a quick recovery is unlikely.

James L. Williams
WTRG Economics http://www.wtrg.com