Rift in the oil patch, so that we can have cheap oil!!
Fri, 05 Feb 1999 22:09:44 +0800
Global Intelligence Update
Red Alert
February 5, 1999
Saudi Arabia Claims "There is no Excess Oil Production"
Summary:
At the recent inauguration of Venezuela's President Hugo Chavez,
the Saudi Arabian Minister of Petroleum and Mineral Resources met
with the new Venezuelan Energy and Mines Minister in an attempt
to resolve their differences over OPEC oil production quotas. The
Saudi representative made the extraordinary claim that "There is
no excess production on the world oil market, but rather excess
oil inventory." Other members of OPEC -- including Iraq, Iran,
and Kuwait -- have all publicly criticized Saudi policy regarding
oil production quotas. Indeed, the Venezuelans, in a reversal of
their own quota-busting policy, are now contacting non-OPEC
producers in an attempt to rein in production. In spite of these
efforts, we are facing significant overproduction over the short
term as oil producing countries fight for market share in order
to cover debt service.
Analysis:
During a meeting held on February 2 between Saudi Arabia's
Minister of Petroleum and Mineral Resources, Ali Bin Ibrahim al
Naimi, and new Venezuelan Energy and Mines Minister Ali Rodriguez
Araque, al Naimi denied the existence of excess oil production on
the international petroleum market. Visiting Caracas on the
occasion of the inauguration of Venezuela's new President Hugo
Chavez, al Naimi said, "There is no excess production on the
world oil market, but rather excess oil inventory." Following
his discussion with the top Saudi oil official, Rodriguez said
that Venezuela would now initiate meetings with oil officials in
Mexico, Norway, Russia, Colombia, and Ecuador to discuss a new
strategy for shoring up sagging oil prices. The Saudi's new
rigid stance regarding oil production seems to have prompted the
Venezuelan Minister to exclude the Saudis from future
negotiations. Apparently, the Saudis see no need to reduce
production, nor will they promote any coordinated plan to enable
other oil producers' to slash output. Saudi Arabia's retreat
from the use of production cuts to resolve the critical issue of
low oil prices is both an indication of the ineffectiveness of
previous measures taken to improve oil prices, and a possible
indication of a sea change in producers' market manipulation
strategies.
There are numerous indications that an OPEC resolution passed
during its semi-annual meeting in June 1998 to cut a total of 2.6
million barrels per day (bpd) from February 1998 levels is not
being respected, despite the fact that this cut was extended
during the November 1998 follow-on meeting. And with this
failure to coordinate production, a major conflict among oil
producers has emerged, which in turn has prevented new concerted
efforts to reduce production. According to most recent oil
industry surveys, OPEC output of 27.81 million bpd in January was
up by 360,000 bpd from 27.45 million bpd in December of last
year. Non-compliance with agreed oil-production quotas inside
OPEC continues.
Some Gulf oil producers are now accusing Saudi Arabia of having
unleashed the current oil crisis by advocating an increase in
OPEC's production quotas late in 1997, despite the Asian economic
downturn, and for pumping excess oil today. For instance, Amir
Muhammad Rashid, Iraq's Minister of Oil, sent a letter to Youcef
Yousfi, who serves both as president of OPEC's ministerial
conference and as the Algerian Energy and Mines Minister,
demanding that the Saudis cut their production quota in line with
the July 1990 agreement. Such reduction would not only bring
Saudi oil output down to 6 million barrels per day, which
represents about 30 percent reduction from its current production
quota, but it would more significantly reverse the economic
consequences for Iraq of the Gulf War. The Iraqis also issued a
call demanding that all parties respect OPEC resolutions and for
the adoption of new "flexible ceiling" that would take into
consideration petroleum market fluctuations.
Iran has also lately issued strong statements regarding Saudi
Arabia's oil policy. On January 27, the English-language Iran
News Oil quoted the head of Iran's parliamentary oil commission,
Morteza Zarrin Gol, as saying that "Saudi Arabia has weakened the
oil market and inflicted more damage on Iran with its oil policy
than Iraq did during its 1980-88 war with Iran. Unfortunately,
Saudi Arabia has played a key role in the weakening of the oil
market and reducing oil prices." According to Zarrin Gol, Iran
has always believed that Saudi Arabia's OPEC production quota
(which is 8 million barrels as compared to the quota of 3.3
million barrels assigned to the second largest OPEC producer,
Iran) is excessive. Truly alarming from the perspective of the
oil producing countries, however, were Zarrin Gol's statements
regarding future developments inside OPEC. "I regret to say that
there is no spirit of cooperation among OPEC member countries.
All they want to do is eliminate their market rivals. This policy
has worked only to the benefit of oil consuming countries," he
said. Moreover, Zarrin Gol expressed skepticism that further
production cuts by OPEC would have the desired impact on oil
prices, claiming that such actions by OPEC would only lead to an
increase in oil production by non-OPEC oil producers.
Dissatisfaction and frustration with the lack of discipline
inside OPEC is also growing among smaller OPEC oil producers. In
late January, Youcef Yousfi and Kuwait's Oil Minister, Sheikh
Saoud Nasser al Sabah, called for moving up by one month the
planned OPEC meeting, which was originally scheduled for March
23. This initiative failed due to the unwillingness by OPEC
members to cooperate in implementing the organization's previous
resolutions. According to the Kuwaiti daily Al-Watan on February
1, Nasser al Sabah justified not rescheduling the meeting in the
following terms, "Some oil-exporting countries have taken a clear
position against non-compliance of production cuts by deciding
not to attend any future OPEC meeting until it is confirmed that
all members have fully complied with cuts. If there is going to
be an OPEC meeting, it will not take place unless its aim is
further reduction." Clearly the Kuwaiti Oil Minister is now
prepared to up the ante on the other members on OPEC by holding
future meetings hostage to a predetermined agenda.
While Saudi Arabia, which is experiencing increased pressure to
curb production by OPEC producers, has apparently decided to stop
cooperating with efforts to stabilize oil prices by reducing
output, the other major OPEC overproducer, Venezuela, apparently
is moving in an opposite direction. The new Venezuelan Energy
and Mines Minister, Ali Rodriguez Araque, seems to be more
willing to cooperate with OPEC than his predecessor Ervin Arrieta
was. Rodriguez announced recently that Venezuela will initiate
"a very intense interchange with the OPEC and non-OPEC countries
to secure an agreement aimed at generating a recovery in oil
prices." Venezuela also intends to negotiate with such non-OPEC
producers as Mexico, Norway, Russia, Colombia, and Ecuador.
Given the apparent unwillingness of Saudi Arabia to discuss the
issue of overproduction, the question is, whether any future
concerted action could be expected from OPEC and other major oil
producers. The prospects for reaching an agreement about future
output cuts or even extending the existing ones are slim. OPEC's
impotence has never before become so transparent.
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