OPEC's best days are yet to come

Nov 27, 2003 01:00 AM

Speculation has been rife of late that the once-mighty OPEC is on the verge of collapse, brought to its knees by a greatly diminished market share, constant infighting and the possibility that post-war Iraq won't return to the group. But the hard facts suggest a very different future, one in which the oil producer's group -- made infamous by the 1973 Oil Embargo in which it cut oil supplies to the West and sent the global economy into turmoil -- once again takes centre stage.
The Organization of Petroleum Exporting Countries holds some 70 %-80 % of the world's proven oil reserves, and that means crude from the Middle East will still be in abundance once the fields of Africa and Russia have begun to dry up. True, the next few years will be tricky for OPEC as, in the face of increasing non-OPEC oil production, it tries to balance defending its market share with defending prices. And, in the immediate future, it won't be able to do both.

But, perhaps ironically, higher oil prices have enabled non-OPEC countries, in particular Russia, to spend more on exploration and production, and non-OPEC output increased significantly in comparison to OPEC. Last year OPEC's share of world oil production hit a 20-year low, and now stands around 38 % compared to a high of almost 41 %. The group will be reluctant to lose any more market share, or its influence over the markets will be significantly reduced.
For now, with prices close to $ 30 a barrel, OPEC doesn't have to worry about reining in production. But the problem will arise when prices fall, as they are forecast to next year, and OPEC finds it has little leeway to cut back output. However, this is not the huge problem it first seems. In fact, it's little more than a temporary headache for the group. Whatever OPEC decides to sacrifice over the next few years, price or market share, it will be a relatively short-lived.

Current forecasts predict that oil output from all of the huge recent non-OPEC oil discoveries will plateau around 2008. By 2010 the potential of non-OPEC to increase production starts looking limited, and OPEC's share could rise to an all-time high around 44 %, according to some analysts.
Given this, it would seem to make little sense for countries such as Nigeria, Algeria and Libya, who are currently fighting for higher output targets within OPEC, to pull out of the group now, when the good times lie ahead. The same applies to Baghdad. People have suggested OPEC membership has little to offer a post-Saddam Iraq in which the oil industry is properly funded and production could soar.

With oil reserves second only to Saudi Arabia, Iraqi production is forecast to peak at between 6 mm and 8 mm bpd, which would be way above the production quota likely to be assigned to the country if it becomes a full OPEC member once again. But don't forget these reserve estimates are 20 years old, and new estimates could find that reserves are considerably lower than those old numbers, analysts say.
In any case, Iraq's oil industry is beset with problems, and it looks unlikely production will rise much above 2 mm bpd in the foreseeable future. By the time Iraq's output nears its peak, non-OPEC oil will be on the decline, and OPEC will be able to pump more again without risking a collapse in prices.

So the US's efforts to decrease dependency on Middle Eastern oil are only an expedient. Though world attention is currently on the deep and ultra-deep finds offshore West Africa, the proven reserves in these areas are tiny in comparison with the mammoth deposits of Saudi Arabia and Iraq.
No matter how hard the West invests in new exploration technology and new regions, it cannot rebalance the natural geographic distribution of the world's oil wealth.

Source: Dow Jones
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