Kuwait Vows to Cut Oil Output but Not Below Quota

Kuwait made clear Thursday that it was boycotting OPEC’s new oil output quota system but pledged some cuts in production to help the cartel defend prices.

Oil prices rose Thursday after falling 79 cents Wednesday when OPEC oil ministers announced that they had clinched a deal giving each OPEC member a small increase in its production quota. The increase boosts official OPEC production for the second half of 1989 to 19.5 million barrels a day from the current 18.5 million barrels.

On the New York Mercantile Exchange in New York, the leading July contract ended the day up 33 cents at $20 a barrel. North Sea Brent oil, the most widely traded blend internationally, was little changed on the spot market with oil for delivery this month at $17.90 a barrel.

The agreement spurned demands from two OPEC members, Kuwait and the United Arab Emirates, for much bigger quota increases. Although they signed the accord, both countries said they would not feel bound to comply with their new quotas.

Kuwaiti minister Sheik Ali al Khalifa al Sabah confirmed his country’s position at a news conference Thursday but added: “We will use that freedom very, very responsibly.”

He then said he would act quickly to cut Kuwait’s output to 1.35 million barrels a day. That is above its newly assigned quota of 1.09 million but well below the 1.9 million barrels that industry sources say it pumped in May.

The UAE minister, Mana Said Oteiba, has been saying that his country is “showing restraint.” The UAE is producing about half a million barrels more than new OPEC rules would permit.

Attitude Called Crucial

The short-term hope of the Organization of Petroleum Exporting Countries is that inevitable “leakage” on its new overall output ceiling would be kept within limits.

Ministers portrayed the deal as a stop-gap measure pending further efforts to reallocate quotas in the fall.

Cartel leaders said privately that the attitude of Saudi Arabia was crucial but its minister, Hisham Nazer, indicated that the world’s biggest exporter would keep to its quota if Kuwaiti and UAE overproduction did not get out of hand.

Sheik Ali said he is as concerned as anyone over whether prices would stay at current levels. An OPEC free-for-all last fall took them down to almost $10 a barrel. Better supply discipline this year, though far from perfect, has lifted them to OPEC’s desired $18 to $20 range.

“We do not want oil prices to drop,” Sheik Ali said. “I do not envision falling to $10 again. Even if it happened, it would be extremely temporary.”

The International Energy Agency, the West’s Paris-based energy watchdog, sees demand for oil from OPEC rising to almost 21 million barrels daily in the second half of the year. Sheik Ali saw even higher future demand, at between 23 million and 24 million barrels per day.

And oil traders monitoring the OPEC meeting in Vienna said the cartel, by setting its ceiling for the second half of the year as low as 19.5 million barrels, had clearly allowed for Kuwaiti and UAE excess.

OPEC, therefore, may avoid a price crash.

But Wednesday’s Vienna accord showed the underlying flaw in the cartel’s quota system, which is that it has yet to find an objective way to allocate individual nations’ output limits.

‘Sacrificed Long Enough’

“If Kuwait feels free to cheat, the UAE will cheat. It won’t be long before everybody gets fed up and joins in,” said an official at a major oil company’s Tokyo branch.

OPEC members are: Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

Sheik Ali said at the news conference that he simply could not meet supply commitments and please long-term customers if he had to produce less oil, adding that his case was fair and that “we have sacrificed enough.”

In the OPEC talks, however, Saudi Arabia and others refused to concede their percentage share of OPEC’s market to accommodate Kuwait and the UAE.

“We want to approach matching supply to demand in a scientific way,” Sheik Ali said, explaining that OPEC would make another attempt to establish a fairer distribution of quotas in talks in Paris on Sept. 22.

OPEC, however, tried and failed at a 1986 meeting that lasted three weeks to set new quotas on the basis of such objective criteria as population, oil reserves and historic output levels. Ministers gave up when it became apparent that, at the end, someone would have to concede market share.

Sheik Ali said he thought that gradually rising demand for oil would make it easier to accommodate OPEC sellers’ needs and that “pressures on OPEC unity will start to disappear.”

Market analysts say it is an open question, however, whether demand will grow fast enough to prevent further difficulties as Iraq and Iran, hungry for revenue, rebuild production capacity after their eight-year Gulf war.