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OPEC Faces Tough Choices And Plenty Of Drama

By Marc Davis, Managing Editor
July, 2002

"To be…or not to be?" That is the perplexing, hand-wringing question facing OPEC leaders these days. Indeed, it's a Shakespearian dilemma worthy of Hamlet, himself.

On the one hand, there is a need to keep OPEC members compliant by maintaining crude prices between $22 and $28 a barrel. On the other hand, an increase in production quotas would lower oil prices. In turn, this would kick-start a sluggish global economy that thrives on lower energy costs.

So, does OPEC stoke up the furnace of global industry for its longer-term benefit by encouraging a sustained increased demand for oil? Or does it abide by its ideological mandate to support the near-term economic needs of its member states? After all, most OPEC nations rely heavily on oil earnings for the bulk of hard currency revenues.

Let's first look at holding the line between $22 and $28 a barrel. Already, OPEC has managed to engineer an impressive 30% increase in crude prices this year by keeping a tight leash on supply. But this concession to its most cash-hungry members has also fueled greed in the form of illegal overproduction within OPEC's ranks. Thus, OPEC may struggle to reign-in these rogue states if it hopes to keep crude prices from losing ground again.

Conversely, any far-sighted gamble to increase production quotas has inherent risks. It would likely escalate the 'black market' antics of states that want to get the jump on a subsequent downtrend in oil prices for the rest of the year. Some savvy market observers see such a trend already shaping up ahead of any possible tweaking by OPEC of the supply-demand balance. They cite the easing of the threat of imminent war between the U.S. and Iraq, as well as the failed coup attempt against Venezuelan President Hugo Chavez, as reasons to be bearish on crude's outlook.

Regardless of such predictions, OPEC remains under considerable political pressure from around the world to ease prices again. After the events of September 11, a trepidatious global economic recovery, particularly in the U.S., has been hindered by the higher fuel prices caused by OPEC production cuts. As mentioned earlier, this is how OPEC appeased its more-cash strapped member states, leading to a 30% hike in prices. Officially, OPEC prefers not to admit to such 'back room' dealings as the only effective means of maintaining a unified front. Instead, its cagey policy for the time being is to wait for the world's economic powerhouses to clearly demonstrate proof of an upswing in consumption. Only then does OPEC see the sense in greasing the wheels of industry by making oil more cheaply available.

"Taking into account the fact that there has been no big recovery in demand, the position of OPEC is to wait and see," OPEC Secretary General Ali Rodriguez was quoted as saying last month.

Meanwhile, Rodriguez and Co. are no doubt hoping that their rhetoric doesn't ring hollow. Any pronounced near-term increase in 'quota busting' (overproduction) would surely undermine OPEC's price controls. And the ensuing downward pressure on oil prices would only snowball with the advent of even more illegal selling if OPEC tries to stem the tide by further cutting production quotas.

Hence, this sordid saga is set to play itself out on the world stage. Paradoxically, it is an ironic Shakespearean-like twist that will likely solve OPEC's quandary. Specifically, an imminent resurgence in the global economy (fueling demand for crude oil) will likely be precipitated by the 'quota busting' that is the very source of OPEC's troubles. And once more the marketplace will revert back to a state of equilibrium, allowing OPEC to save face yet again.