Opec quota increase leaves markets uneasy
OIL industry players had always suspected that the Saudi Arabian initiative which saw the Organisation of Petroleum Exporting Countries (Opec) increase its official production limit by 10% to 27.5-million barrels per day (bpd) had more to do with punishing the quota cheats than any optimism about rapid growth in demand.
At the time, experts like Robin West of US consultants Petroleum Finance said: "The Saudis (who stuck with their quota) are sick of everyone eating their lunch."
With prices of crude hitting new four-year lows as markets discounted the hype about a new "war" against Iraq, the Saudis appeared to confirm those suspicions this week. Having sat back coolly while oil fell nearly 35% since last November - wiping over $1bn a month off its own revenues - Saudi Arabia offered to reconsider.
Oil minister Ali Al-Naimi admitted Saudi "concern" about the slump. And if quota busters - led by Venezuela pumping 1-million bpd over its 2.6-million bpd limit -- showed "a sincere change of heart", he said Saudi Arabia would welcome a "concerted effort" by Opec to restore a balance.
He was speaking ahead of the arrival in Riyadh of a high-powered delegation from Iran where angry members of the Majlis (parliament) had attacked oil minister Bijar Namdar Zageneh for failing to block the Opec output increase. They even suggested that Iran, Opec's second biggest producer after Saudi Arabia, should quit the cartel.
Something needs to be done. According to the Middle East Economic Survey, Opec output in January hit more than 28-million bpd -- even though some members had not fully taken up their quota increases. The International Energy Agency (IEA), an offshoot of the Organisation for Economic Co-operation and Development (OECD), has just warned that "even without Iraqi exports" - the $2bn worth of crude it can sell every six months to buy food and humanitarian supplies - running at more than 700 000 bpd, the world market is facing a surplus in the first six months of this year.
Estimates of the potential international oversupply are changing from month to month. The recession in the stricken Asian economies is forecast to cut demand. They have already been dumping oil and refined products to bolster dollar reserves - the IEA reported that Asian refinery runs were cut by 580 000 bpd in January.
The Oxford Institute for Energy Studies puts the Asian decline at 400 000 bpd; energy consultants Purvin and Gertz of Houston have increased the estimate to between 800 000 and 1-million bpd.
This is not huge in terms of total Asian-Pacific consumption (including Australia and New Zealand) of about 19-million bpd, on British Petroleum's 1996 figure. But it will account for much of the growth in demand: while global oil needs have risen 15% in a decade, they have rocketed 70% for the Asia-Pacific region and more in the now wounded "tigers".
Non-Opec production is set for another year of rising output after a gain of more than 1-million bpd in each of 1996 and 1997. At least 400 000 bpd will come from new wells in the North Sea - with a similar addition next year, according to the US energy department.
The IEA has revised down non-Opec supply for this year by 500 000 bpd but is still looking for growth of 1.3-million bpd.
Also looming in the short run is the effect on sentiment (if not actual supply) of the UN proposal to more than double Iraq's permitted humanitarian sales to $5.3bn every six months if it behaves - a move which has US support. However, there are strings attached, such as UN supervision of the spending of these revenues, which Iraq is expected to resist.
Outside Opec over the next few years, the full potential of the former Soviet Union's oilfields - where output has slumped 40% to less than under 7.5-million bpd because of lack of investment -- awaits revival with the help of western partners which have poured in capital, about $22bn into the Caspian Sea fields alone. In addition, exploitation rates and extra reserves are rising in old fields as technology improvements cut costs and increase output.
In the longer run, non-Opec oil will have to expand rapidly. The exploration drive following from Opec's price shock in the early 1970s has seen a leap in reserves. British Petroleum's world energy review for last year showed a global rise of 71% in 20 years to more than 1 037-billion barrels - reserves have held at more than 1 000-billion since 1989.
Most of it, however, is within Opec. Its members' reserves have almost doubled to about 800-billion barrels while non-Opec (excluding the former Soviet Union) levels are up 38%. Overall, the world has sufficient reserves to last more than 42 years - but Opec has oil in ground equivalent to 79 years of output against 15 for the rest.
If the longer picture into the next century does not suggest any catastrophic problems for oil consumers , the more immediate future could be torture for producers without some action to rein back output.