VIENNA: The planned rebuilding of Iraq’s oil industry could drive down prices and loosen the grip on world markets of the Organization of Petroleum Exporting Countries and its leader, Saudi Arabia.
With the expected removal of United Nations sanctions, which have hobbled Iraq’s oil facilities for 12 years and excluded it from Opec production agreements, the nation is poised to reclaim its position in the top rank of petroleum exporters.
While it isn’t clear what kind of government will emerge after the US-led toppling of Saddam Hussein, any new administration in Baghdad will be eager to increase oil revenue quickly to finance reconstruction, Opec and industry specialists said.
That prospect for Iraq creates significant new competition on world markets. It adds to strains on Opec that already challenge the Saudi-engineered strategy of adjusting production to keep prices from $22 to $28 a barrel.
Opec is facing steadily increasing pressure from non-Opec exporters, especially Russia. Moreover, it is riven by an internal dispute over production quotas, with Algeria, Nigeria and some other members pressing for a larger share of Opec’s total output.
A struggle for influence in oil markets could be part of a larger battle for political leadership in the Persian Gulf. A democratic Iraqi government would be an example of an alternative to the region’s mostly authoritarian regimes.
“It is certainly plausible to think that a democratic, well- run, transparent Iraqi government, the kind that the US would like to see put in place, could be a very dynamic leader in the region, and it may want an equal share of the spoils with the Saudis,” said Phillip Ellis, head of worldwide oil business for Boston Consulting Group in London.
Iraq, which has the world’s second largest oil reserves after Saudi Arabia, has produced at most 2.5 million barrels a day in recent years and is exporting nothing at present. Now it is expected to raise its production to 3.5 million barrels a day within 18 to 24 months. Then, by opening vast new fields that have gone untapped because of the sanctions, it could raise production to as much as 6 million barrels a day in five to seven years.
That would represent nearly a quarter of Opec’s current targeted output of 25.4 million barrels a day. Other Opec countries would have to give up a lot of production, and revenue, to make room.
“The pressure will start this year, when Iraq comes back” and resumes exports, said Nordine Ait-Laoussine, a former Algerian oil minister who now is president of Nalcosa Energy Consulting Services in Geneva. “Opec has to think hard about whether it can maintain the price range of $22 to $28.”
He and other specialists predicted pressure in coming years to drive world prices below $20 a barrel. That would mean a drop in average oil prices of at least $5 a barrel from OPEC’s current target. That translates roughly into a reduction in gasoline prices of 12 cents a gallon, and an addition of half a percentage point to the rate of global economic growth.
“In five to seven years, I believe this will all be academic, because demand will be up there, and countries will be struggling to make investments” to increase oil production, Saudi Oil Minister Ali Nuaimi said after the Opec meeting here on Thursday. But he conceded there will be problems, at least in the near term. “The main thing is to survive the next two to three years,” Nuaimi said.
Saudi Arabia will be at the center of the struggle. As the largest producer among Opec’s 11 members, pumping nearly a third of the group’s output, it is under the most pressure to trim production so other countries can raise theirs.
Poorer Opec members resent Saudi Arabia’s effective control of the market, a privilege it enjoys because its large excess production capacity gives it the ability to raise or lower output much more than anybody else.
In recent years, the Saudis have placated the rest of Opec by overseeing production accords that kept prices well above $20 a barrel. That level is widely seen as critical, because lower prices mean many Opec countries, including Saudi Arabia, can’t meet their national budget demands.
The other half of the equation is that Saudi Arabia also has moved to keep prices from going above the target range. It did so in dramatic fashion earlier this year, by increasing production sharply when prices soared to $39 a barrel owing to fears of the impending Iraq war and unexpected shortages caused by a strike in Venezuela and ethnic disturbances in Nigeria. As a result, prices fell back even before the war began.—Dawn/The LAT-WP News Service (c) The Washington Post.
