Dow Jones University
March 25, 1999


OPEC Finds Politics and Oil Mix

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    VIENNA, 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.

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