Middle East

Petroleum's Political Currents

OPEC and the Chance of War

The ministers of the member states of the Organization of the Petroleum Exporting Countries (OPEC) are convening a meeting tomorrow in Vienna under the pretense of weighty international matters and looming questions pertaining to the fate of nations most related to the global oil market, especially the United States. The most important of these questions are: Will the United States initiate a war on Iraq, and when? As for Iraq, a principal nation in OPEC, it has a current daily export capacity [quota] above 2 million barrels of oil. Yet the remaining problems with the international embargo commission, and continued tension between Iraq and the United States, have contributed to fluctuations in Iraq’s level of oil exports.

Last week, Iraq’s oil exports reached 1.4 million barrels a day. Its high point was 1.7 million barrels when the United Nations debated and voted on Resolution 1441. Considering this, an OPEC minister predicted that if war against Iraq became imminent, prices would first greatly increase, then fall to previous levels, and then decrease.

Iraq is not the only matter that OPEC members must consider, however. The fact is that Venezuela, South America’s largest oil producer, is witnessing political uncertainty, and there is an atmosphere of a civil war between Venezuelan President Hugo Chávez and the opposition, which is growing in size daily. A workers’ strike in the oil sector (the state-owned oil company Petróleos de Venezuela) has contributed to a decrease in production to half the [original] level, which was approximately 3 million barrels a day; production even came to a complete standstill yesterday.

Nigeria is the other oil country that is witnessing continued political instability and security tensions that affect oil refineries and the oil sector. Thus, a number of questions concern Nigeria’s oil production capabilities in the future.

Because of disturbances in these oil nations and the fact that global reserves are at a depressed level, oil prices will remain inside OPEC’s framework of $22-$28 per barrel—that is, unless the winter in the West becomes even more severe. Keep in mind, though, that this is the price even after OPEC nations have increased their production more than 2 million barrels per day over the official production cap decided upon at their last meeting in Osaka, Japan [in September 2002].

Because of the likelihood that the American economy might weaken further and the global impact of this, some oil-producing nations feared a large decrease in the demand for oil. They have therefore failed to abide by OPEC quotas on their production caps. They now, however, can use the pretense of political developments in Iraq, Venezuela, and elsewhere to raise the official production cap in such a manner that it will resemble actual production rates, which is recommended during tense political times.

Raising the production cap upward of 1.5 million barrels a day can in and of itself create a feeling of confidence in the markets. Yet this is not the opinion of global oil expert Robert Mabro, who heads the Oxford Institute for Energy Studies. He considers that the best option is to delay any hikes in the production cap until it becomes clearer what will happen in Iraq and Venezuela. He opines that during this period of time, the nations of OPEC should exude calm and erudition, reinstate restrictions on production allotments, and remain committed to these quota levels.

It is correct to say that the fore-ordained choices facing OPEC during this meeting are difficult. Even more difficult is the fact that a number of member states do not clarify their political stances on these matters, except to say that the level of current oil prices has great bearing on them. The instability of these prices, mixed in with so many unknown elements, makes it inevitable that they will call either for a large production increase or a decrease. This will once again prompt unforeseeable entanglements, which can only make harder the
very decisions that OPEC does not want to make.

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