March 25, 1999
ANALYSIS
OPEC Finds Politics and Oil Mix
Related Articles
Oil Countries Approve World Cutback of 3 Percent (March 24)
Oil Executives Work the Room at OPEC Meeting (March 23)
Oil Producers Agree to Trim Output to Help Bolster Prices (March 13)
By YOUSSEF M. IBRAHIM
IENNA, Austria -- The key to raising the price of oil, OPEC has
decided, is found more in politics than economics.
After a decade of internecine fighting over which country should
produce how much oil, the Organization of Petroleum Exporting
Countries cut through a lot of haggling here Tuesday to reach a
production-cutting accord that was underpinned by the strength of
newly arrived at political alliances.
The deal struck with four major independent oil-producing
countries to withhold 2.1 million barrels a day from the market
marks a departure for OPEC, where the dominant policy makers have
over the years been oil ministers. By contrast, this agreement --
which will reduce OPEC production by nearly 8 percent, and global
output about 3 percent -- was created by diplomats, princes and
prime ministers.
It was no coincidence that the principal component of the deal
was a new political truce struck between Saudi Arabia and its
political and ideological rival in the Persian Gulf, Iran.
It was remarkable that a deal over oil production involved
visits by Iran's foreign minister and oil minister to the Saudi
capital late in February and early in March, followed by telephone
negotiations between Crown Prince Abdullah, the effective leader of
Saudi Arabia, and President Mohammed Khatami of Iran.
"Saudi Arabia could see that the huge drop in revenues due to
lower oil prices was hurting the moderate president of Iran," said
former Algerian Oil Minister Nordine Ait-Laoussine, who observed
the OPEC meeting here and knows his way around the economics and
politics that govern the Middle East. "Khatami was coming under
pressure from fundamentalist hard-liners in Iran, which is not in
the best Saudi interest. Abdullah knows he can't have bad relations
with both Iran and Iraq," Ait-Laoussine said. "After all, he
lives in that neighborhood."
For Prince Abdullah, Ait-Laoussine continued, an agreement to
raise prices by cutting production "was the only way of helping
Khatami in Iran and easing the pressure on the budget in Saudi
Arabia."
Nor was the pact disconnected from Venezuela's new government,
installed a month and a half ago. It reversed a policy of violating
OPEC production limits practiced by the previous administration,
which had little regard for Venezuela's status as a founding OPEC
member. The new government declared itself in alignment with OPEC
and blamed the previous policy for contributing to a devastating
fall in oil prices and income.
The depressed price of crude oil over the last year also helped
persuade four big independent oil producers -- Mexico, Norway, Oman
and Russia -- to amend their own free-market stance. The four have
in a way become de facto members of OPEC by agreeing to cut their
production levels.
Such ideological and political shifts were buttressed by a
change in relations with the big multinational oil companies that
OPEC once considered adversaries. After decades of battling big oil
for political and physical control of prices and production, OPEC
won -- only to find itself in the same trenches. With the steep fall
in prices, both producers and companies are bleeding, eager to
cooperate to reverse the trend.
It is no coincidence that Iran, Algeria, Iraq, Kuwait and even
Saudi Arabia are inviting the companies they kicked out 30 years
ago to come back and invest in their oil industries. "Nothing
moves markets like fear," said Peter Gignoux, manager of the
petroleum trading desk at Salomon Smith Barney in London. "Around
the oil markets today, you will not find a bear. All wish OPEC good
luck."
Of course, even the best intentions can falter. Prices that had
moved up in anticipation of OPEC's production cuts weakened today
for a second day on the possibility that some producers would try
to cheat and sell more oil. Crude oil for May delivery fell 17
cents a barrel, settling in New York trading at $15.34.
Still, cheating is widely viewed as less likely now than it was
in the past, because OPEC members seem to have learned the
consequences of subverting their own agreements.
The Middle East Economic Survey, an authoritative newsletter in
its coverage of the oil business, commented, "OPEC has at last
succeeded in coming to grips with the core of the problem of
intolerably low oil prices, that there is no alternative to cutting
oil production."
OPEC and its new fellow travelers do have some hurdles
remaining. Iraq, for example, is not part of the accord, and has
nearly doubled its production in the last year under the United
Nations oil-for-food program, to 2.7 million barrels a day. The
Iraqis have promised to push this to three million barrels a day.
There is also the problem of weak world demand. The use of oil
in Asia, which is mired in economic problems, has yet to pick up.
At least with Iraq, it appears that the eventual solution will
be, again, politics. Speaking to journalists in Vienna on Tuesday,
Iraqi Oil Minister Amir Rashid pointed at the way, saying: "Iraq
needs to be consulted, and a dialogue should be established with
us. Without this, we will not concern ourselves." Translation:
Make a political deal with Iraq similar to the deal between Saudi
Arabia and Iran.
