COMMODITIES: Cutback in Oil Production to Bury OPEC Quota System

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Mar 24 1998 (IPS) - The decision by leading OPEC and independent oil exporters to cut production will mean the burial – without funeral rites – of the quota system in force in the organisation since 1983.

At a special conference next Monday, the 11 members of OPEC (Organisation of Petroleum Exporting Countries) will confirm their voluntary cutbacks, to go into effect in April. Their contributions to the reduction in exports will not be based on the official quotas assigned to each country.

A former member of the board of Venezuela’s state-run oil company and expert on OPEC Alberto Quiros told IPS that no announcement would be made on the quota system at the Vienna meeting, due to the impact such an announcement would have on the market, and because now was not the time to tackle the issue within the organisation.

But Quiros, a special guest at last weekend’s two-day meeting in Riyadh which gave life to the new agreement on reducing production for the remainder of the year, said the fact that a solution was found outside of the quota system signified its demise.

OPEC members – with the exception of Iraq – and three independent exporters have all agreed to participate in the cutbacks decided on Sunday by Saudi Arabia, Mexico and Venezuela. Three others are also expected to join in the effort.

The leading promoters of the unprecedented agreement were Algeria – for OPEC – and Mexico – on behalf of the independent exporters – according to contrasting versions obtained by IPS.

Algeria’s oil minister secretly visited the capitals of the three countries that publicly promoted the accord, and ensured Saudi Arabia of the willingness of Latin America’s two big exporters, as well as that of other leaders in the market, to launch a collective strategy.

The announcement of the decision pushed up the low oil prices by nearly three dollars in a single day, even before it was reported that the agreement would guarantee the withdrawal of at least 1.38 million barrels per day (bpd) from the market as of Apr. 1.

“The quota system is already history,” reiterated Venezuelan Energy Minister Erwin Arrieta in his first comments since returning from the secret Riyadh meeting, which took international traders by surprise.

Luis Giusti, the president of the state-run Petroleos de Venezuela (PDVSA) – the world’s second largest oil company – said “the threshold of a new era in the management of oil relations and the market was crossed” in Riyadh.

Arrieta pointed out that the agreement was voluntary, and based on an analysis of the number of barrels that were flooding the market and sinking prices. Each country offered the cutback it could handle with respect to its real market supply this quarter, not based on the official quota, he added.

Giusti said the aim was to reduce supply for the rest of the year by 1.6 to two million bpd, to eliminate the current over- production and force the use of large stocks accumulated by consumer nations.

Giusti, who also travelled to Riyadh, explained that among OPEC members, the United Arab Emirates, Kuwait and Nigeria agreed on cutbacks of 125,000 bpd, Iran 100,000, Libya 80,000, Indonesia 70,000, Algeria 50,000 and Qatar, the most reluctant, 30,000.

Among independent producers, Oman will contribute with a 50,000 bpd cut in production and Egypt 25,000.

Those contributions were added to the cutbacks announced by Mexico, a non-OPEC member, Saudi Arabia, the world’s leading exporter, and Venezuela, of 100,000, 300,000, and 200,000 bpd respectively.

Giusti said talks were already underway with Malaysia, Norway and Russia, the first two of which are expected to join the initiative within the next few days.

According to the president of PDVSA, the stocks accumulated by consumer countries, equivalent to 1.1 million bpd in 1997, had climbed to 2.5 million bpd this year.

The idea is for demand to tauten to a level that forces consumption of excess stocks, which Quiros said were estimated by international analysts at lower levels than those calculated by Venezuela’s state-run oil industry.

Giusti said a two million bpd increase in global oil consumption had been predicted this year, but factors like the Asian financial crisis and the mild northern hemisphere winter contracted demand more than expected.

Demand is now expected to grow from 1.3 to 1.6 million bpd above the 74 bpd absorbed by the market in 1997. “A very conservative calculation was adopted” in the decision on how much to adjust global production, he added.

The president of PDVSA said the decision took into account the fact that Iraq would be able to increase production by 150 percent in April, as decided by the United Nations in February.

Quiros said the pact reached by the leading exporters imposed order once again on a situation that “had turned into a farce…All OPEC members, with the exception of Saudi Arabia, were producing at full capacity.”

The quota system that was established in 1983, when the prices of crude oil dropped for the first time in 10 years after hitting an upper limit of 40 dollars, was gradually transformed “from an instrument into a religion,” which failed to take into account reserves, production potential and other variables.

When OPEC raised its quota by 10 percent, to 27.5 million bpd, at its November meeting in Jakarta, several countries were assigned quotas which outstripped their production capacity.

Quiros said it was natural for each exporter to produce according to its own capacity, and that when due to momentary factors, speculative or otherwise, crises such as this year’s arose, accords like Sunday’s were reached, “without affecting the long-term strategies” of each country.

Arrieta stressed that in Venezuela’s view, the attempt to control the market through quotas was “dead.” But, he added, OPEC has a key role to play for its 11 members, through the establishment of “a new agenda,” which should return the organisation to its roots and address today’s new energy realities.

He said it was absurd, for example, for exporters to fight over the existing market, while half of the world population lacks access to hydrocarbon fuels, the enormous niche which OPEC can help countries fill through a well-defined strategy.