Low Oil Prices, Moderation Seen for OPEC

For now, nightly bombing raids over Baghdad and flaming oil fields in Kuwait have rendered the Organization of Petroleum Exporting Countries impotent to set the agenda for the world’s oil market.

But, assuming allied forces prevail in the Persian Gulf War, it is likely that OPEC--with three-fourths of the world’s proven oil reserves--will regain its grip on the global oil spigot after the last bomb is dropped, industry analysts and energy economists say.

Postwar OPEC, however, is likely to be dominated by moderate nations that favor stronger ties with the United States and other oil-consuming nations in the allied coalition. An allied victory would probably neutralize Iraq as the leading advocate within OPEC for using oil as a political or economic weapon, experts believe. This would leave a grateful and beholden Saudi Arabia as the de facto leader of the cartel.

Coupled with a worldwide oversupply of crude, the change in OPEC’s character would mean the prospect of relatively low oil prices for some time.

“(Allied) interests will play a greater role in the area, and definitely in the oil price and oil supply scenario or schema that we will have in the future,” conceded one source from OPEC member Venezuela.

Of course, if the war ends with Saddam Hussein still in power, relations within OPEC will remain “extremely tense and hostile, and real cooperation will be difficult,” said Vahan Zanoyan, an analyst and senior director at Petroleum Finance Co. Ltd., a Washington consulting firm.

“Most likely, though, there will be a new, improved Iraq in the picture, and under those conditions one should expect a significant display of goodwill on the part of all OPEC members to mend fences and re-establish ties with neighbors,” he said.

OPEC’s first challenge will be whether it can discipline members to scale back crude oil production enough to prevent prices from crashing. The cartel is scheduled to meet in Vienna on March 11, its first session since the war began.

How that issue is resolved will depend in large part on how quickly repairs can be made to oil fields in Iraq and Kuwait, which before the Gulf crisis accounted for 12% of world production. Some analysts are estimating that, after the fighting ceases, it will take between three months and one year to restore oil production in those two countries.

Already, Kuwaiti officials are said to be negotiating contracts with engineering and construction firms to come into the war-ravaged country once hostilities cease. Kamel Harami, manager of logistics for Kuwait Oil Co., who is now living in Bahrain, believes Kuwaiti crude output could bounce back quickly because its mainly low-pressure wells would not require major repairs. Most of the serious damage, he says, would be to loading facilities.

If Kuwait’s refineries have suffered major damage, repairs could take much longer--perhaps up to two years. That could mean leaner supplies of--and higher prices for--jet fuel, gasoline and other refined products.

As for Iraq, much of the nation’s oil production is concentrated in the north of the country, near Mosul and away from the Kuwaiti war zone, Harami said. He noted that Iraq’s pipeline to Turkey is shut down but not damaged, and could presumably go back on stream fairly quickly.

Other analysts, however, believe Iraqi oil installations and refineries have been heavily damaged and will take a year or more to rebuild.

Before the Persian Gulf War, analysts were predicting that OPEC’s influence would slowly increase in the 1990s. This was based on the notion that oil demand would grow among industrialized nations, particularly in Asia, while oil production would fall outside OPEC, notably in the United States and the Soviet Union. Such analyses saw OPEC as the only place where oil-thirsty economies would be able to turn in the coming decade.

In the current crisis, OPEC members have dramatically increased the amount of oil they are producing to make up for the shortfall of oil from Iraq and Kuwait under the United Nations-sanctioned embargo.

In January, OPEC members excluding Kuwait and Iraq produced 22.9 million barrels a day, above the quota of 22.5 million barrels a day, including Iraq and Kuwait, set by OPEC in July, the International Energy Agency reported this week.

Meanwhile, as much as 120 million barrels of oil remain in tanks on land or in tankers, put there mainly by Saudi Arabia and Iran as a reserve in case war knocked out production facilities in those countries, the IEA reported.

Once the war is over, OPEC will have to tame the worldwide glut of crude oil that threatens to drive prices down well below their current $21-a-barrel levels. If OPEC nations do not scale back their current production, prices could fall below $10 a barrel, some industry experts calculate.

The situation could be complicated by slack demand due to the economic downturn among industrialized nations and to an unseasonably warm winter. The IEA reported that demand for crude oil among nations outside Eastern Europe would drop by about 3 million barrels a day in the first half of this year.

It’s an open question whether--or by how much--OPEC members will agree to cut production. Nations such as Libya and Nigeria have been reaping windfall revenues, and others, such as Iran and Venezuela, which have used their increased earnings to expand oil production capacity, will be reluctant to curtail output.

OPEC members will look to Saudi Arabia--which has been producing more than 3 million barrels of oil a day above its quota--to cut back, but it is not likely to do so.

“The Saudis will take the position that they have incurred enormous financial costs in connection with the war and are entitled to a larger share of the market,” said Philip K. Verleger Jr., a visiting fellow and economist with the Institute for International Economics in Washington.

“The secret agenda--the one the Saudis won’t talk about--is that by refusing to cut production, they will cause prices to decline, and that will provide a stimulus to Western economies, particularly the U.S. . . . It will be the sincerest form of thanks they can offer.”

Iran is likely to hold out for higher production to make use of its newly expanded ability to produce oil and to keep the money flowing. Before the war, Iran and Iraq had identical quotas; now, it seems possible that Iran will push for a higher quota, and that could create problems.

But Iran’s agenda is unclear. On the one hand, it has sided in the past with Saudi Arabia in favoring moderate prices, stable supplies and closer ties to the West. On the other hand, “they have internal tensions between the Islamic fundamentalists and the pragmatists,” one analyst said.

In Venezuela, meanwhile, Andres Sosa Pietri, chairman of the state-owned Petroleos de Venezuela or Petroven, has been quoted as saying it is unlikely his country would cut its current production of about 2.5 million barrels a day down to the prewar quota of 1.945 million barrels a day, considering the nation’s revenue needs.

There is a possibility that OPEC--which includes the United Arab Emirates, Algeria, Ecuador, Gabon, Indonesia and Qatar--will throw out the July quotas altogether. “The agreement was rammed down the throats of OPEC under the threat of use of military force” by Iraq, said Ed Morse, publisher of Petroleum Intelligence Weekly, an industry newsletter.

Still, a market crisis--specifically the threat of plummeting oil prices--could be all that is necessary to draw OPEC together. “They are all equally afraid of the consequences of this kind of market,” Zanoyan said.

“OPEC’s proper functioning depends on two critical factors,” he said. “No. 1, the nature of market conditions, and No. 2, its own internal political dynamics. If both aren’t right, then OPEC can be almost immobilized or out of commission temporarily as it is today.”

Mohammed Gasimi, manager of economics in the Ministry of Petroleum of the United Arab Emirates, downplayed suggestions of discord. “OPEC proved in the past that it can serve all the interests of all the member countries,” he said from his office in Abu Dhabi. “At the end of the day, it made every member happy and balanced all their interests.”

“Now, everybody is in the same boat,” added Kuwait Oil’s Harami. “We’re all short of money and need dollars. The only way to get the money will be for OPEC to discipline itself.”

In any case, many observers are reserving final judgment about OPEC as the war continues. Writes industry analyst Daniel Yergin in “The Prize,” his best-selling book on oil history: “Certainly one of the lessons of the history of oil is to expect the unexpected--the ‘surprise’--that becomes perfectly obvious only after the fact.”

Times staff writer Charles P. Wallace in Bahrain contributed to this report.

GAS PRICES AND GULF EVENTS

When Iraq invaded Kuwait on Aug. 2, gasoline prices soared. In the ensuing months, the price has fluctuated in response to Gulf-related news. But since the war began, prices have actually come down quickly. Here’s a look at price trends and events, weekly price nationwide of unleaded regular. Aug. 2: Iraq invades Kuwait Aug. 6: U.N. Security Council OKs trade and financial sanctions on Iraq. Aug. 22: President Bush authorizes first call-up of reserves in two decades. Aug. 25: U.N. Security Council authorizes military action to enforce sanctions against Iraq. Oct. 19: Iraq announces gasoline rationing, which is rescinded 9 days later. Nov. 29: U.N. Security Council authorizes use of force against Iraq if it does not withdraw from Kuwait by Jan. 15. Jan. 12: Congress grants Bush authority to wage war against Iraq Jan. 15: U.N. deadline passes. Jan. 16: War begins Jan. 30: Allies declare “air supremacy” Source: American Automobile Assn.