WHILE the OPEC has been finding it difficult at present to maintain crude prices above $20 a barrel mainly due to weak global demand resulting from the deteriorating world economic outlook, further exacerbated by the September 11 tragedy, it faces new problems of a daunting nature, as each day passes.
According to press reports, the OPEC could not take a decision to cut crude production, in its meeting of September 26, 2001, because of an apprehension that such an action might put the OPEC on the wrong side of the current war on terrorism. The OPEC reportedly felt a moral responsibility to support the US-led coalition against terrorism in the present circumstances, by trying to keep the crude prices at a reasonable level.
The cartel now faced another dilemma as to whether it was going to receive support from the non-OPEC oil producers as it did in the past in case it decided to slash production to lift crude prices from their lower level. According to Press reports, Russia and Mexico had earlier pledged to pump more oil, if there was a short supply. Of late, however, Russia was reported to have declared that it would cut output by a symbolic 30,000 barrels per day, while Mexico had announced that it would cut exports up to 100,000 barrels per day in 2002.
Because of the uncertainty and lack of adequate support, OPEC had decided to reduce its production by 1.5 million barrels a day, beginning January. But, that was only if the non-OPEC oil producers together slashed output by 500,000 barrels a day. The production cut could then take effect as soon as the non-OPEC oil producers pledged their cuts. The delayed and conditional OPEC decision to cut output with effect from January 1, 2002 had resulted in marked drop in crude prices. December crude oil future had shed $1.93 to $19.74 a barrel on November 14, while analysts expected the price to drop further to $16-18 a barrel, in coming days and weeks.
As a matter of fact, the terrorist attacks of September 11 and the ongoing war against terrorism had led to developments that could have far-reaching consequences for the OPEC. According to a Business Week report, there was an apprehension that leading suppliers of the OPEC namely Saudi Arabia and other Middle-East oil producing nations could be de-stabilised, as a result of the ongoing military campaign by the US-led coalition and its possible effects in the form of rising opposition against the campaign. There was a feeling right now that the risks of de-stabilisation in the Middle East would remain alarmingly high for the foreseeable future. As a result, it was feared that the vulnerability of major oil consumers depending on OPEC for their supplies could increase in the event of disruption or marked decline in crude supply by the organization.
One way to tackle the above-mentioned problem was considered to be to diversify the imports by finding oil producers outside the Middle East, in order to reduce dependence on the unstable region. As a matter of fact, certain major oil consumers such as the US had already started doing this. Presently, the US imported about 52 percent of all its oil requirements. It relied on the OPEC for about half of the above quantity or roughly 26 per cent of its total oil consumption (US dependence on OPEC was more than 33 per cent in 1977). At present, Canada, Mexico and Venezuela each supplied the US with nearly as much crude as Saudi Arabia, the world’s top producer of crude oil. According to the Business Week report, there were also vast resources of untapped oil in Angola, Nigeria and Chad, but to be able to make use of these oil resources, one would need to make massive new investment.
Russia as an emerging supplier: Another potential source from which supplies could be readily available was Russia. The Russian President, who was an active partner in the US-led coalition fighting terrorism at present, was reported to have made an offer (in a speech in Germany on September 26) that his country was prepared to supply more oil if regional conflict affected crude supply adversely.
It was believed that Russia could undoubtedly pump more oil. During the current year, Russia was expected to produce 7 million barrels a day, 13 per cent more than what it did in 1999. The above-mentioned production level was second only to that of Saudi Arabia, whose daily output was 8.4 million barrels. According to an estimate, Russia could hike output by 4 per cent next year and, thereafter, it could increase production by 10 per cent to 15 per cent easily. So, the country could prove to be an additional source for crude supply for the US and Western Europe, in the coming months and years.
However, despite higher production, Russia’s exports worked out to no more than around 3 million barrels a day, as against 7 million barrels a day exported by Saudi Arabia. No doubt, there were new pipelines in the planning stages that could boost Russia’s export capacity by an additional 2.5 million barrels a day, but they were not expected to materialise before 2004 or 2005. The size of Russia was the real problem. Most of the country’s oil was produced in western Siberia, thousands of miles away from seaports having export facilities. Oil would have to flow through pipeline to Western Europe or to tankers that could carry it to the US or other markets.
According to a press report published in the Dallas Morning News, dated the October 30, 2001, Exxon Mobil had lately declared that it was ready to spend $4 billion over the next five years to develop a large offshore oil and gas field in eastern Russia. The project, which could grow to as much as $12 billion over its estimated life of 30 to 40 years, would be Russia’s largest single foreign investment so far. In recent months, the Russian government had been reportedly clearing the way for this project by bringing in regulations about fixed tax rates, which the investors considered to be vital. However, the most significant development to which the project was being attributed was the warming of relations between the US and Russia after the pledge by the Russian President to support the US war against terrorism in Afghanistan.
But, in order to perceive the recent developments in their true perspective, an understanding of the economic considerations was, also, necessary. Russia’s economy had recently received a boost from higher crude prices and increase in its crude production. The country’s GDP had reportedly grown by 8.4 percent last year. During the current year, despite a slight decline in crude prices, Russia’s GDP was expected to register a growth rate of 5.5 per cent. Obviously, the government wanted that the country should continue to move forward on the road to progress, inter-alia, by pumping more oil, if it could.
Central Asian Republics (CAR’S): According to the above-mentioned Business Week report, Central Asia, also, had great potential for crude production. One of the CARs, namely Kazakhstan, was expected to emerge as one of the world’s major oil producers in the next decade. The country had reportedly received $10 billion in foreign investment since its independence in 1991. Azerbaijan, Uzbekistan and Turkmenistan were, at the same time, reported to have large reserves. With the new relationship between the US and Russia, these reserves could be developed with the help of the US and its allies and the Central Asia could become a much more important region than it is at present, so far as crude production and exports are concerned.
Conclusion: How would the above-mentioned scenario affect OPEC’s position? No doubt, the emergence of new oil suppliers outside OPEC could lend stability to the oil market. Possibility of oil shocks might be reduced to a certain extent and vulnerability of major oil consumers, depending on OPEC, could be reduced.
However, it was doubtful if the additional supply of oil would be available at a lower price. According to a Press report, every $5 drop in the price of crude cost Russia about 1 percent of GDP. No doubt, the non-OPEC oil producers were, at present, hesitant to cut crude production but if crude prices witnessed a nosedive, there was a strong possibility that they would join the OPEC by slashing their output in order to lift the crude prices. The economic factor was, as a matter of fact, too real to be brushed aside. In the past, also, the non-OPEC oil producers had been cooperating with the OPEC by cutting their production in the event of a drop in the crude prices.
Lastly, in all probability, the US, Western Europe and Japan would continue to buy crude from the time-tested OPEC suppliers like Saudi Arabia, etc., other things remaining the same, since the business relations between OPEC and these countries had been based on the mutual benefit of all countries.