COMMODITIES-OIL: Riyadh Pact to Seek Solutions in ‘Group Therapy’

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Aug 25 1998 (IPS) - Overwhelmed by prices immune to cutbacks in production by oil exporters, the energy ministers of the countries that pushed the strategy plan to engage Friday in a sort of “group therapy,” to exchange views on what is happening in the market.

Oil ministers Ali Al-Naimi of Saudi Arabia, Erwin Arrieta of Venezuela and Luis Tellez of Mexico will meet in Mexico City to discuss why oil prices have stayed down, identify the countries that have failed to comply with the restrictions and decide whether the cutbacks still make sense.

“It is worth determining what good all this has done,” said Arrieta, referring to the strategy of voluntary cutbacks sponsored by the three countries since Mar. 22, when the Riyadh Pact, which took its name from the capital of Saudi Arabia, was reached there by the three ministers.

The agreement led to an initial withdrawal of 1.7 million barrels per day (bpd) from the market as of April, in an unprecedented joint sacrifice by the 11 members of the Organisation of Oil Exporting Countries (OPEC) and independent exporters headed by Mexico.

“We are not planning to add a single barrel more to the cutbacks already undertaken. What we want to assess are the cuts that have already been implemented,” said Arrieta, explaining the aims of the third formal meeting of the “Riyadh Trio” to be held since March.

“It is not a question of turning off a faucet, the situation is a bit more complicated than that,” said Tellez in Mexico, commenting on the objectives of the gathering. He said there were no plans for a further cutback designed to drive prices back up.

In the face of the indifference of a market saturated by over- production prior to the Asian financial meltdown and the slump in demand caused by the global spread of the crisis, the three ministers met Jun. 4 in Amsterdam to agree on an additional cut, which received the backing of the rest of the members of OPEC 20 days later.

Based on the agreements, OPEC agreed to withdraw 2.6 million bpd from the market and a group of independent exporters another half million bpd in a gradual process that got underway in July and was to have concluded by now.

But the market reacted with a renewed slide in August, after a slight rally in July. Benchmark prices currently stand at levels similar to those seen during the big 1986 crisis, and 50 percent below the 1997 average.

“We will study everyone’s perceptions of what is occurring and what other variables are having an impact on oil prices,” Mexican Deputy Minister of Energy Jorge Chavez, speaking from Mexico, told a Venezuelan radio station.

According to Mexico, neither a fresh cutback nor a revocation of the existing cuts should be expected to come out of Friday’s meeting.

The London-based World Energy Council projected this month that OPEC countries would take in 135 billion dollars in oil revenues this year, compared to 185.7 billion in 1997 and 191.8 billion in 1996.

Based on a consumption level of 74.7 million bpd and the final retail prices of crude oil derivatives, the global oil trade amounts to nearly one trillion dollars.

International analysts agree with what is being said quietly, or at least without pointing to anyone in particular, in Caracas: that one of the reasons for the new slump in prices was partial incompliance with the voluntary cutbacks.

A high-level source close to Minister Arrieta who preferred not to be identified admitted to IPS that in general the participants in the accords strictly lived up to the terms of the first pact, and that the three main sponsors of the agreements complied with the second cutback agreed to in Amsterdam.

But, he said, “practically no one” had implemented the cutback decided on at the Jun. 24 ministerial conference in Vienna, because by the time the taps had gradually been turned down to the agreed-upon level, the discouragement caused by the market’s failure to react had exhausted the discipline.

OPEC should now be producing just over 26 million bpd compared to the 28.7 million bpd it was pumping in February. But in practice the level currently stands at slightly more than 27 million bpd.

Consumers, meanwhile, have the highest level of stocks in history. OPEC, the International Energy Agency and other market supervisors estimate such stocks as equivalent to between 93 and 107 days. The Venezuelan source said the higher figure was closer to reality.

Alberto Quiros, a former Venezuelan oil industry executive who has participated in every Riyadh Pact meeting, suggested that Venezuela scrupulously comply with the agreed-on cutback of 525,000 bpd until October. If prices have failed to rally by then, “we should review the situation” and restore 15 percent of the cut production.

So far Venezuela has slashed production by an estimated 325,000 to 365,000 bpd, and the remaining cutback needed to completely fulfill its commitment is still on the books.

But the pressure on Arrieta and Venezuela’s state-run oil company, PDVSA, to freeze the cutbacks as they now stand as long as other partners are allegedly failing to live up to the agreements is growing.

An estimated 6,000 workers of companies contracted by PDVSA have been dismissed in the past two months, while states in western Venezuela where the biggest oil investments are concentrated are in the grips of a hard-hitting recession, along with the private companies that operate in the sector.

The heads of the oil union and the sector’s business association joined forces Monday to demand that Arrieta take the following message to Mexico: the effort has not given fruit and our commitment is over.

Arrieta and PDVSA president Luis Giusti have responded that it is important to analyse what would have happened to prices without the Riyadh Pact.

Against that backdrop, the meeting in Mexico City looks like a last ditch effort to keep the Riyadh Pact intact as a strategy to combat the price debacle.

If it fails to provide the expected therapeutic effects, the route taken in March could be abandoned and a strategy adopted that would provide fruits in the near future for the strained societies of the oil producers of the developing South.

According to some analysts, producers in the industrialised North – like US oil giants which saw their revenues plummet 1.315 billion dollars in the second quarter of the year – may cooperate in such a strategy.

The Independent Oil Association of the United States recently demanded support from the US government in the face of the “extremely critical” situation, which has forced the closure of a number of oilwells. “These prices are no longer good for anyone, neither consumers nor producers, and something has to be done,” said an Association head.