Under substantial pressure from the United States, the Organization of Petroleum Exporting Countries has decided to increase crude oil production. It is a smart move. Increased production should lower oil prices worldwide, which will ease inflationary pressures. The U.S. contribution to the decision-making process is another matter, however. The appearance of bowing to pressure from Washington could return to haunt the organization — as well as the U.S.
Under last week’s agreement, nine of the 11 OPEC members will increase production by 7 percent, or about 1.45 million barrels per day, to 21.07 million bpd. A 10th member, Iran, first refused to participate in the accord, but later reversed itself and said it would pump to the allocation granted in the deal. In total, OPEC output will climb 1.72 million bpd. However, some OPEC states already exceed their production quotas, so the real increase in OPEC production is only 600,000-800,000 bpd. When combined with increases from non-OPEC producers, there will be around 1 million bpd of new oil on the market.
Oil prices are not too high in historical terms. The spike of the last few months, when crude hit $34 per barrel, was an anomaly. For most of the decade, it hovered around $20. After peaking, the price had fallen to $27 as markets anticipated an agreement amid furious jawboning from Washington. The decline should continue.
Stability is welcome. Oil producers and consumers alike need predictability to plan for the future. High prices risk inflation, and the recovery in the Asian economies — which accounted for half the increase in demand during the ’90s — will tighten the markets further.
For American consumers, who consider cheap gasoline a right, the prospect of high prices during the summer was outrageous. For the administration of U.S. President Bill Clinton, facing a November election, that possibility was a nightmare. Hence the cajoling and arm-twisting by Energy Secretary Bill Richardson (a highly touted candidate for the second slot on the Democratic ticket with Vice President Al Gore) to get an OPEC agreement.
For this short-term gain, the U.S. may have suffered real losses in its prestige and influence in the Middle East. Persian Gulf governments are especially sensitive to any challenges to their sovereignty. And no matter what the truth is, the widespread perception is that the U.S. forced a decision on the organization. That feeds nationalist sentiments in those countries.
The dilemmas are particularly acute for Saudi Arabia. The Riyadh government is especially close to Washington, and that infuriates fundamentalists, who see friendly relations with the U.S. as something akin to apostasy. Moreover, that country is OPEC’s largest oil producer and is capable of forcing its will on the organization. The trick, however, is avoiding precisely that sort of heavy-handed behavior. OPEC needs cohesion among member states to function effectively. Presenting the group with a done deal — and one thought to have been done on behalf of the U.S. — does not augur well for long-term cooperation.
Iran’s initial refusal to join the accord is an especially troubling sign. That country is OPEC’s second-largest producer. It and Saudi Arabia view each other as rivals; Saudi Arabia is especially concerned that Tehran wants to export its Islamic revolution across the Persian Gulf. There were signs that relations between the two governments had improved, but last week’s decision reopened old wounds. In essence, Washington forced the government in Saudi Arabia to choose between old friends and new ones. It is a short-sighted policy.
Demand for oil will keep prices high enough to satisfy the producing countries. And the temptation to cheat, by exceeding quotas, and consumer government stockpiles will provide enough cushion in the market to prevent prices from going too high. In short, oil prices may be higher than consumers like, but OPEC will never again hold the world economy hostage as it did in the 1970s. Yet, the U.S. does not want to see oil prices plummet through the floor — at least not as long as Russia depends on crude exports to keep its economy afloat.
OPEC holds its next meeting in June. By then the effects of last week’s decision should be plain. There is also ample time for other developments. With the world economy as volatile as it is, stability in oil markets is a real luxury. That, and not short-term political interests, should be the benchmark for assessing OPEC decisions.
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