Under the Radar: OPEC's False Hope
While oil prices rallied on the news that OPEC will slash crude production by 1.5 million barrels per day (bpd) in January, the future and clout of the cartel has never been more in doubt.
The production cut, formalized at Friday's gathering of OPEC ministers in Cairo, took nearly two months to sell to its own members. That OPEC made the cut contingent on support from nonmembers, such as Norway, Russia and Mexico, further shows the growing helplessness of the cartel in controlling world energy prices.
"OPEC is desperate to secure output cuts from major non-OPEC producers because it does not want to lose market share if it cuts its own output in January," notes Leo Drollas of London's Centre for Global Energy Studies.
Friday's production cuts seem as slippery as oil.
Counting BarrelsOPEC members themselves are poor barrel counters when it comes to quotas. While OPEC claims to have cut 3.5 million bpd so far in 2001, that's on paper. Drollas estimates the actual reduction of the 10 OPEC members bound by the cartel has been closer to only 2.8 million bpd, putting compliance at 80% or less. "Overproduction has risen as quotas have fallen," Drollas notes. "Unlike the past, when overproduction was limited to just a few of the Organization's members, it has become widespread during 2001. Even the big producers in the Middle East are well above quote, with Saudi Arabia overproducing by 170,000 bpd." And that isn't likely to improve as the cartel implements new cuts next week. Tyler Dann, director of energy research at Banc of America Securities and a member of the TSC Energy Roundtable, says OPEC members will pay little attention to the new cuts. "We'd expect compliance with the new quotas to be weak," he says. "We expect real production cuts vs. November levels to be only 700,000-800,000 bpd from OPEC."
Russian BearsIf OPEC can't count on its own members, promises from non-OPEC members such as Russia, Norway and Mexico are likely to be just as leaky. That's especially true given OPEC couldn't get the original pledge of a 500,000 bpd cut it sought. While Russia agreed to cut 150,000 bpd for three months to appease OPEC, it isn't clear how such rhetoric will translate into action. History suggests it won't. In April 1999, Russia agreed with OPEC to reduce global oil production by about 7%. However, according to data from the International Energy Agency, Russia actually increased exports by 400,000 bpd. And that was before Russia's new push to re-emerge as a global leader in energy markets. While OPEC has cut production this year, Russia has actually increased output by more than a half-million barrels per day. Plus, new exploration and production, as well as assistance from major integrated oil companies like BP Amoco (BP - Get Report) and Royal Dutch/Shell (RD), could well increase Russia's production capacity by 20% in the next three to five years. Why would a country trying to reassert itself as a major global economic power agree to undercut that mission to assist a cartel that offers nothing in return? That's a good question, and one that suggests Russia will not be cajoled by short-term price supports that undercut its goal of becoming a major player in international energy markets. "For Russia to demonstrate its commitment to the West, they can
Backfire?While additional production cuts are likely to have little short-term impact on energy markets, some pundits think OPEC's new cuts come too late in the game and actually may serve to destabilize energy markets later in 2002. "OPEC does not need to cut to stabilize the market," notes Drollas. "With no further output cuts,
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