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OPEC prevails in the short
term
By Hooman Peimani
OPEC oil
ministers, meeting
last week in Vienna, agreed to respect their export
quotas and thus not to increase their output, despite a US
request. And the group's assurance of an increase in
its oil output should the need arise has helped calm
international oil markers. But despite the Organization of
Petroleum Exporting Countries' reassurances, the calm may not
last once the US-led war against Iraq actually
begins.
OPEC made its decision to stick with its quotas despite a
surge in oil prices in the US market (to US$40
per barrel) and significant increases elsewhere (about $33
per barrel). Drawing on the international oil markets'
realities, the organization did not consider such
increases as a result of low supplies caused by its
setting quotas for its members. Among other factors, the
existence of many non-OPEC exporters with significant
oil exports, such as Russia, Norway and Mexico and a
growing number of smaller ones such as Azerbaijan,
Kazakhstan, Turkmenistan, Uzbekistan, Chad and Angola,
has guaranteed the availability of supplies to meet
global demand.
Due to the small size of their oil
deposits, many of these exporters will be unable to
rival OPEC in about two decades. That will enable OPEC,
whose members possess more than 70 percent of the
world's proven oil reserves, to determine oil prices with
practically a free hand. However, the non-OPEC exporters
currently have a significant impact on oil prices due to
their growing output, while Russia will preserve such
influence in the long term because of its substantial
oil reserves. Their flooding markets with oil has
ensured adequate supplies, while their unused export
capabilities has put them in a position to compensate
for any shortage of oil should OPEC exporters decrease
their exports for any reason.
OPEC's declared
objective is to stabilize oil prices between $22 and
$28. The intention is to help OPEC members meet their
financial needs by preventing shocks to their economies
with destabilizing impacts, like that of 2000-01 when
oil prices fell below $10. It is also intended to
prevent skyrocketing oil prices, which could push many
economies into recession and make oil unaffordable for
others. In both cases, the result will be a lower oil
demand and a reduction in the OPEC exporters'
revenues. If it became a norm, expensive oil could encourage
many economies to switch to less expensive fuel, such
as natural gas and/or renewable fuels, which would
further decrease their revenues.
Moreover, the
non-OPEC exporters' operations have functioned as a
"natural" barrier to significant increases in OPEC
prices. This is a result of their efforts to increase
their market share through offering oil cheaper than
OPEC's, although the major ones (Russia, Mexico and
Norway) have cooperated with OPEC to stabilize oil
prices and prevent their free falling.
Against
this
background, the recent significant increase in oil prices
has had its roots in factors other than a well-orchestrated
OPEC plan. Of these, one has been the looming
threat of the war on Iraq with a psychological impact
on oil prices, apart from a possible war-created interruption
in oil supplies from the Persian Gulf. Venezuela's
political crisis, which has sharply decreased its oil
exports, has been another factor. A sudden increase in
demand for oil caused by a severe cold winter in the
United States and Canada has been yet another factor.
Referring to the existence of enough supply in
the international oil markets, the OPEC members rejected
in their Vienna meeting the doomsday scenario in the
event of war against Iraq. Having unused export
capacity, they would increase their exports to
compensate for any war-provoked shortage of oil.
Added to the availability of enough oil
supplies, such assurances have calmed the international
markets and prevented skyrocketing oil prices.
Nevertheless, it is unlikely that this situation will
continue when the war begins. By opening doors for
speculation on a possible decrease or even a major
interruption of oil exports from the Gulf, its outbreak
will surely have an impact on prices regardless of the
availability of adequate oil supplies.
The
length of the war will be only one determining factor on
how much the prices will go up. Even in the case of a
short war, uncertainty about its impact on the region
and also about the final outcome of the expected radical
political changes in Iraq will most probably serve as a
psychological factor to push prices up. Undoubtedly,
uncertainty caused by a long war will certainly lead to
a substantial increase in oil prices as well.
In
both cases, the war's long-term consequences on the
stability of the oil-rich Middle East in general, and
the Persian Gulf in particular, will probably contribute
to an increase in oil prices regardless of a possible
short-term decrease in such prices achieved through
intentional policies such as flooding the markets with
oil. There are certain feasible scenarios that could
conceivably drag those regions into crises, conflicts
and instability with long-term restrictive effects on
their oil exports.
The major scenarios include
efforts to create an independent Kurdish state in the
northern part of Iraq, which could potentially
destabilize neighboring Iran, Turkey and Syria, which
have significant Kurdish minorities. Their predictable
military intervention could lead to a regional war to
settle also many other regional grievances.
Those scenarios also include a surge in
Arab nationalism in reaction to a war against the Iraqis
seen by many Arabs as victims of a US "imperialist"
policy. The latter could destabilize many Arab OPEC
countries with large dissatisfied peoples.
As
well, they include the radicalization of the
dissatisfied and marginalized Shi'ites in Saudi Arabia,
Bahrain and Jordan with a destabilizing impact on their
respective countries. That could be a result of a sudden
uplift in a post-Saddam Hussein Iraq of the political
power of the currently marginalized Iraqi Shi'ites
constituting about 60 percent of Iraq's population.
Finally, a predictable sudden increase in the popularity
of radical and terrorist groups, which might well seek
to disrupt oil exports from the region, could be another
scenario.
A massive
and predictably highly destructive US-led attack on Iraq
could possibly end the war faster than many predict, but
it will unlikely bring long-term relief to the
international oil markets. During its course and in its
aftermath, uncertainty about the availability of oil
supplies from the Persian Gulf on which many economies
rely may well push the prices high, despite the efforts
of OPEC and, for that matter, non-OPEC states to
stabilize oil prices.
Dr Hooman Peimani works as an
independent consultant with international organizations
in Geneva and does research in international
relations.
(©2003 Asia Times Online Co, Ltd.
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