OPEC strategies and prices, New Resources, The Politics of Oil, Fall, 2002

November 7, 2002
(next update: December 6, 2002

OPEC
Organization of Petroleum Exporting Countries (OPEC) members include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

OPEC OPEC PRODUCTION
Less than a month ago, the market was debating whether OPEC basket prices would remain above $28 per barrel for a long enough time to trigger an OPEC production increase. What the market has seen instead is a steady decline in prices since October 18, the last time that the OPEC basket price reached $28 per barrel.

Although some of the price decline could be attributed to an easing of tensions over Iraq, the primary reason for the decline is that OPEC members simply didn't wait for the price band to trigger a production increase. As the price for a basket of OPEC oils approached $28 per barrel in September for the first time since December 2000, the OPEC 10 increased oil supplies rapidly. OPEC production above quota levels rose from 2 million barrels per day in August to 2.7 million barrels per day in October (preliminary estimate), as OPEC 10 production reached its highest level since September 2001.

With the current mismatch between OPEC production (above quota levels) and prices, it may well be that the current quota levels no longer serve as a reliable guide to what OPEC production should be. However, raising the quota levels will not likely prove to make them a more reliable guide, either. Instead, the market will likely take its cues from OECD commercial inventory data. The rising level of OPEC production should be reflected within the next few months in the form of higher inventory levels. EIA's current Short-Term Energy Outlook (Outlook) projects that OECD commercial oil inventories(relative to historical ranges) have likely bottomed out, and that current rising OPEC production levels will soon be reflected in higher inventory levels.

OPEC's Price Target
"This is where we've pitched our tent," OPEC President Rilwanu Lukman said, referring to OPEC's price target range. "It's a useful tool and it's working." As November arrived, Saudi Arabia's Oil Minister Ali Naimi noted that the despite the recent price declines, the current price for a basket of OPEC oils was still acceptable and within the group's $22-$28 a barrel target price band. The $25 per barrel price at the beginning of the month was at the center of this range, and was about $1 per barrel higher than the average year-to-date price for the OPEC basket.

OPEC's tactic of increasing production as needed while remaining firm on quotas during the past year worked over the past 6 months. Although the lack of quota adherence has hurt OPEC credibility in the past during times of price weakness, the recent level of OPEC basket prices has enabled OPEC to postpone addressing the issue (at least until OPEC's next meeting in December). Although EIA's previous Outlooks had expected a large production increase during the fourth quarter above summer production levels, EIA estimates that this increase has already taken place, with the biggest jump occurring in September-October.

WORLD OIL MARKETS IN 2003
As the OPEC 10 meets in December, it will address not only the recent rise in OPEC 10 production and calls by Algeria and Nigeria to increase their quota levels, but also the state of the world oil market in 2003. Limiting factors for OPEC 10 production in 2003 will continue to be the situation in Iraq, and whether world oil demand will recover as expected.

The U.S. economy is projected to grow by over 3 percent annually in 2003, and lead to the recovery in U.S. oil demand. About half of the 1.3 million barrels per day growth in world oil demand in 2003 is projected to come from the U.S.. China and other non-OECD countries are projected to provide another 0.5 million barrels per day of demand growth.

Rising non-OPEC production will meet much of this new demand. About half of the anticipated 1 million barrels per day increase in non-OPEC supply in 2003 is expected to come from additional oil exports from Russia and the Caspian Sea region. Increases are also expected from offshore Africa, Mexico, and increased Canadian synthetic oil production.

IRAQ
Weekly Iraqi UN-sanctioned oil-for-food export numbers fluctuated wildly in October. The reported weekly numbers ranged between 0.6-3.0 million barrels per day, with a high total for one week followed by a corresponding dip the next. Much of the variation can be ascribed to the vagaries of reporting. Tankers that began loading at the end of one week sometimes did not finish loading until the beginning of the next (when they were counted), leading to corresponding dips and rises in the weekly export numbers

On a monthly basis, however, the export picture becomes much clearer. Average monthly Iraqi UN-sanctioned exports rose from 1.1 million barrels per day in September to 1.7 million barrels per day during October, their highest level since March. For the year, Iraqi oil-for-food exports have averaged 1.2 million barrels per day, or about 0.5 million barrels per day below the 2001 average of 1.68 million barrels per day. Illegal Iraqi exports have averaged another 200,000-300,000 barrels per day.

The recent increase in Iraq oil-for-food exports has been attributed to the removal of illegal Iraqi surcharges following pressure on Iraq by the United States and the United Kingdom. Rather than selling its oil to middlemen with these added surcharges, Iraq has begun signing contracts directly with its customers.

Should Iraqi exports be interrupted because of a military confrontation with Iraq, Saudi Arabia and other OPEC countries have indicated that they have more than enough spare capacity to make up for any shortfalls. EIA's Outlook does not assume any disruptions to Iraqi exports from military actions, and exports are assumed to continue at September levels until increasing in mid-2003 (except during the rollover of the UN's oil-for-food program in December, a time when exports have often declined in the past).

WORLD OIL PRICING
Major world crude oils important for oil pricing, called "benchmark" or "marker" crudes, are traded on international exchanges. West Texas Intermediate (WTI), the main marker crude for the United States, is traded on the New York Mercantile Exchange (NYMEX). Dubai's Fateh (or Dubai) is used as a marker for oil in Asian markets. North Sea Brent crude, used as a marker for much of the rest of the world's traded oil, is traded on the International Petroleum Exchange in London (now merged with the InterContinental Exchange). Brent is an important world oil marker despite declining production in the U.K. North Sea Brent system, which averages only 350,000-400,000 barrels per day.

In order to address the issue of declining Brent production, the industry price assessor Platts included 2 similar North Sea crude oils - North Sea Forties (U.K.) and Oseberg (Norway) in its assessment of Dated Brent (used for trading wet barrels in physical as opposed to futures markets). The change, which took effect on July 10, has gotten off to an uneven start, with Royal-Dutch Shell (co-operator of the Brent system) opposed to the change, and BP (operator of the 750,000 barrels per day Forties system) in favor of the change. The International Petroleum Exchange began using the Platt's Brent formulation with its October contract on September 13, 2002.

The average price for imported oil paid by U.S. refiners is referred to as the Imported Refiners' Acquisition Cost (IRAC). This average cost for imported oil is used as a proxy for the average world oil price, and is the world oil price used in EIA's Short-Term Energy Outlook. The IRAC price and OPEC basket price have tracked closely during the past few years.

OPEC Crude Oil Production ¹(Thousand barrels per day)

3Q 2002 Production

4Q 2002 Production

1/01/02 Quota²

2002 Production Capacity³

4Q Surplus Capacity³

Algeria

876

900

693

1,100

200

Indonesia

1,112

1,100

1,125

1,200

100

Iran

3,402

3,500

3,186

3,850

350

Kuwait⁴

1,923

1,950

1,741

2,400

450

Libya

1,333

1,340

1,162

1,400

60

Nigeria

1,949

2,000

1,787

2,300

300

Qatar

650

670

562

850

180

Saudi Arabia⁴

7,743

7,933

7,053

10,000-10,500⁵

2,067-2,567⁵

UAE⁶

1,987

2,000

1,894

2,600

600

Venezuela⁷

2,733

2,900

2,497

2,950

50

OPEC 10 Crude Oil Total

23,707

24,293

21,700

28,650-29,150⁵

4,357-4,857⁵

Iraq⁸

1,719

2,232

N/A

2,900

668

OPEC Crude Oil Total

25,426

26,524

N/A

31,550-32,050⁵

5,026-5,526⁵

Other Liquids⁹

2,761

2,761

N/A

Total OPEC Production

28,187

29,285

N/A

NA: Not Applicable
¹Crude oil does not include lease condensate or natural gas liquids.
²Quotas are based on crude oil production only.
³Maximum sustainable production capacity, defined as the maximum amount of production that: 1) could be brought online within a period of 30 days; and 2) sustained for at least 90 days.
⁴Kuwaiti and Saudi Arabian figures each include half of the production from the Neutral Zone between the two countries. Saudi Arabian production also includes oil produced from its offshore Abu Safa field on behalf of Bahrain.
⁵ Saudi Arabia is the only country with the capability to further increase its capacity significantly within 90 days. Saudi Arabia can increase its sustainable production capacity to 10 million barrels per day within 30 days and to 10.5 million barrels per day within 90 days. As a result, the estimates for Saudi Arabia are as shown as a range, with the lower figure using the 30 days' definition and the upper end reflecting Saudi Arabia's 90 days' capability. OPEC's surplus capacity estimates are also shown as a range for this reason.
⁶The UAE is a federation of seven emirates. The quota applies only to the emirate of Abu Dhabi, which controls the vast majority of the UAE's economic and resource wealth.
⁷Venezuelan capacity and production numbers exclude extra heavy crude oil used to make Orimulsion.
⁸Iraqi oil exports are approved by the United Nations under the oil-for-food program for Iraq established by Security Council Resolution 986 (April 1995) and subsequent resolutions. As a result, Iraqi production and exports have not been a part of any recent OPEC agreements. Resolution 986 limited the sale of Iraqi crude oil over six-month periods to specified dollar amounts. However, the Security Council voted to remove any limits on the amount of oil Iraq could export in December 1999.
9Other liquids include lease condensate, natural gas liquids, and other liquids including volume gains from refinery processing.

OPEC Price Band
OPEC collects pricing data on a "basket" of seven crude oils, including: Algeria's Saharan Blend, Indonesia's Minas, Nigeria's Bonny Light, Saudi Arabia's Arab Light, Dubai's Fateh, Venezuela's Tia Juana Light, and Mexico's Isthmus (a non-OPEC crude oil). It uses the price of this basket to monitor world oil market conditions. Because WTI is a very light, sweet (low sulfur content) crude, it is generally more expensive than the OPEC basket, which is an average of light sweet crude oils such as Algeria's Saharan Blend and heavier sour crudes (with high sulfur content) such as Dubai's Fateh. Brent is also lighter, sweeter, and more expensive than the OPEC basket, although less so than WTI.

At its March 2000 meeting, OPEC set up a price band mechanism, triggered by the OPEC basket price, to respond to changes in world oil market conditions. According to the price band mechanism, OPEC basket prices above $28 per barrel for 20 consecutive trading days or below $22 per barrel for 10 consecutive trading days would result in production adjustments. This adjustment was originally automatic, but OPEC members changed this so that they could fine-tune production adjustments at their discretion.

Since its inception, the informal price band mechanism has been activated only once. On October 31, 2000, OPEC activated the mechanism to increase aggregate OPEC production quotas by 500,000 barrels per day.

MEETINGS, ANNOUNCEMENTS, AND RELATED EVENTS
The OPEC 10 countries hold meetings at OPEC headquarters in Vienna, Austria, where they decide issues and make announcements that influence world oil markets and prices. Major developments in the past twelve months include:

November 14, 2001: OPEC held its 118^th meeting, deciding to cut production quotas by 1.5 million barrels per day, effective January 1, 2002, contingent upon non-OPEC agreement to cut production by 500,000 barrels per day.

November 29, 2001: The eleventh phase of Iraq's oil for food program was approved for six months (180 days) beginning December 1, according to UN Security Council Resolution 1382 .

December 28, 2001: A Consultative Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC) convened in Cairo, Egypt on December 28 to review oil markets and confirm a 1.5 million barrels per day production quota cut, effective January 1, 2002. The decision followed a non-OPEC production/export reduction commitment of 462,500 barrels per day, also effective January 1, 2002.

March 15, 2002: OPEC held its 119^th meeting to review oil markets, leaving output quotas unchanged.

April 8, 2002: Iraq halted all oil-for-food exports, using "oil as a weapon" against Israel and its supporters.

April 12, 2002: Venezuelan President Hugo Chavez resigned, only to resume the presidency on April 14.

May 9, 2002: Iraqi resumes oil-for-food exports after ending its self-imposed 30-day oil export embargo.

May 29, 2002: The eleventh phase of Iraq's oil for food program ended.

June 21-22, 2002: OPEC met with non-OPEC producers to discuss the global oil market.

June 26, 2002: OPEC held its 120^th meeting to review oil markets, leaving output quotas unchanged.

September 19, 2002: OPEC held its 121^st meeting to review oil markets in Osaka, Japan, leaving output quotas unchanged.

September 21-23, 2002: International Energy Forum held in Osaka, Japan between producer and consumer nations.

November 25, 2002: The twelfth phase of Iraq's oil for food program ends.

December 12, 2002: OPEC holds its 122nd meeting to review oil markets in Vienna, Austria.

March 11, 2003: OPEC holds its 123rd meeting to review oil markets in Vienna, Austria.

BACKGROUND
The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, in September 1960, to unify and coordinate members' petroleum policies. OPEC members' national oil ministers meet regularly to discuss prices and, since 1982, to set crude oil production quotas. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were members of OPEC, but Ecuador withdrew in December 1992, and Gabon followed suit in January 1995. EIA estimates the current eleven OPEC members account for roughly 40% of world oil production and about 77% of the world's proven oil reserves.

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