World View : Whatever Became of Big, Bad OPEC? : Don't be fooled by signs of trouble in the oil cartel. As supplies shrink and demand grows, it could be on the verge of a powerful comeback.


As the world floats on an ocean of cheap crude oil, the once-powerful Organization of Petroleum Exporting Countries seems in disarray.

OPEC ministers will try again at a July 25 meeting in Geneva to stem overproduction by renegade members that has caused world crude prices to drop precipitously since January. If they fail, the cartel's credibility will suffer a severe blow.

Despite the current crisis, however, OPEC's problems are only temporary, analysts say.

In fact, the 13-nation cartel, which observes its 30th anniversary this year, may be on the verge of its most influential decade ever, a time when it will reassert its dominance over world oil markets.

It's a matter of simple economics. The current crude oil glut will evaporate, supplies of oil will grow tighter by 1995 and demand for the precious commodity will rise, particularly in the developing and industrialized nations of Asia, analysts predict.

And as non-OPEC sources of crude oil dry up, the cartel--whose members have 76% of the world's proven oil reserves--will find itself with its hand firmly on the world's oil spigot again.

"They're back in the driver's seat," said Joseph Story, an oil industry consultant.

The revitalization of OPEC would affect everything from the price Californians pay at the gasoline pump to the ability of a non-OPEC oil producing country such as Mexico to resolve its debt crisis.

OPEC's influence on worldwide oil supplies and prices could also determine whether long-discussed alternative energy sources such as solar power or wind ever become more than cocktail-party chitchat, whether pressure ever builds to drill for oil in environmentally sensitive areas in Alaska or off the California coast--and even whether Moscow moves ahead with Western partnerships to find and develop new Soviet oil fields.

But analysts don't see any repeat of the 1973 oil embargo or the 1979 price shocks that suddenly redefined political and economic relations worldwide.

Compared to the 1970s, leading OPEC nations, most notably Saudi Arabia, now favor market stability and prices that rise slowly but steadily. OPEC has learned that it needs steady customers as much as consuming nations need oil.

In addition, the big OPEC producers have stronger economic ties with consuming nations in the form of joint ventures and bilateral investments. And very soon, some cartel members will be shopping for Western loans and other financial aid to help them boost production capacity to forestall supply shortages.

"The atmosphere of confrontation, which for so long characterized relations between OPEC producers and the consuming countries, must be put firmly behind us, since it has proved to be highly damaging to the market, fueling instability and violent price fluctuations and has been, consequently, harmful to the economies of both producers and consumers," said OPEC Secretary General Subroto of Indonesia in a speech last month at a conference sponsored by Cambridge Energy Research Associates, a Massachusetts consulting firm.

Only Iraq has even hinted at a possible embargo recently--to protest U.S. policy toward Israel.

In the short term, an embargo would have little effect. Overproduction by OPEC members such as Kuwait and the United Arab Emirates has created a worldwide surplus of oil and caused prices to fall 30% this year.

In the longer term, however, many economists predict that the current surplus of oil will vanish thanks to an expected rise in worldwide oil demand of 1% to 2% a year. At the same time, oil production from non-OPEC nations could begin a decline by 1992, according to estimates by the government-funded East-West Center in Honolulu.

That would set the stage for rising prices and a comeback by OPEC--or at least by those members who control the most oil production.

Between them, the five Persian Gulf states of Saudi Arabia, Iraq, Kuwait, the United Arab Emirates and Iran, plus Venezuela, control more than 70% of the world's 1 trillion barrels of oil reserves, estimates Cambridge Energy Research Associates. The other OPEC members--Algeria, Ecuador, Gabon, Indonesia, Libya, Nigeria and Qatar--are increasingly cut out of the debate over cartel policy because they have limited capacity and are already producing most of that.

For the future, the main challenge facing OPEC will be to increase its ability to pump its vast oil reserves out of the ground.

At peak in 1977, OPEC nations could pump 31.7 million barrels of oil a day. But when prices reached $35 a barrel late in the decade after the Iranian revolution, OPEC discovered to its dismay that the world's thirst for oil was not limitless.

Conservation and alternative energy sources cut demand, while non-OPEC nations increased production. Prices fell, then plummeted to a low of about $9 a barrel in 1986 before recovering.

As a result, OPEC closed some production capacity, leaving about 26 million to 28 million barrels of capacity a day now. With current production running about 23 million barrels a day, there is not a lot of room to maneuver if demand heats up.

Unless OPEC nations proceed immediately with planned expansions, it's expected that demand for oil will approach the cartel's ability to produce it within five years. Without a margin of safety, supplies will grow tight, rendering production quotas obsolete and leaving world markets vulnerable to wide price swings.

Subroto says it will cost OPEC $60 billion to boost production capacity back to its 1977 levels. "We are quite simply talking about a level of expenditure well in excess of the financial capabilities of the group of the 13 developing countries that are OPEC members," Subroto said last month.

The richest OPEC nations--Saudi Arabia, Kuwait and the United Arab Emirates--should be able to find financing easily. But for the rest, the need for capital could mean even closer relations between OPEC members and consumer countries in the West and Far East.

In Venezuela, that could mean the first production-sharing agreements with outside private companies since the nation's oil industry was nationalized in 1975, said John Lichtblau, president of the oil industry-funded Petroleum Industry Research Foundation in New York.

Iran needs outside help to rebuild an oil industry ravaged in its war with Iraq. So far, it has had little success. Even so, it is unlikely that Iran will seek help from the "Great Satan," the United States, for political reasons.

But Iraq, with reserves second only to Saudi Arabia's, has moved swiftly to rebuild damaged oil facilities in the two years since the war ceased. That has added to its already huge debt, analysts said, and as a result, it has opened some drilling to Western firms in exchange for payments in oil.

Increasing production capacity would ensure stable supplies and moderate prices for consuming nations. In exchange, "Saudi Arabia . . . has made a point very prominently that they would like a quid pro quo, which they call 'security of demand,' " said Edward Krapels, president of Energy Security Analysis Inc. in Washington.

In other words, the big OPEC producers want assurances that the governments of consuming nations will think twice about imposing restrictions on oil use.

"Of course, we are decidedly in favor of protecting the environment from destruction, but we observe that environmental concern is being used as a dubious ground for restraining the use of oil," Subroto advised a European conference on energy issues in May. "The repeated talk about raising taxes on oil products and imposing duties on oil imports in consuming countries serves only to exacerbate the exporting countries' dilemma," he added.

The increased concern about restrictions underlines OPEC's growing awareness of its dependence on consuming nations.

"The gulf nations have invested money in the West, and they want to protect their assets in the West, so in no way do they want destabilization," said Fareed Mohamedi, a senior economist with Petroleum Finance Co. in Washington. "They see their future always with the industrialized countries, whether in the West or Far East. And the Far East is becoming very important for the gulf."

Here's how the different regions look from OPEC's perspective:

* The U.S. in particular will become more dependent on OPEC oil as domestic production falls and demand grows.

Already, imports account for more than half of the U.S. crude oil supply, most of that from OPEC. The trend is unlikely to reverse itself. Low crude prices make it uneconomical to look for oil in the United States. In addition, environmental controls make it harder to drill for oil offshore or in Alaska, where the best prospects are.

For their part, OPEC nations have a vested interest in maintaining a stable supply of oil to the United States. Saudi Arabia has a costly half-interest in three Texaco refineries and 11,500 service stations in the United States, a venture under the name of Star Enterprises.

Such "downstream" ventures give OPEC nations such as Saudi Arabia a secure market for their crude and also insulate them from price swings in the crude market. When crude prices go down, refining and marketing profit margins go up.

Similarly, Venezuela's national oil company shares in Unocal Corp.'s Chicago refinery and service stations in 12 states through a $500-million, 50-50 joint venture that guarantees a market for most of its crude oil production.

In any case, American consumers have already shown they will cut back use of gasoline and other petroleum products if prices get out of hand, and OPEC is unlikely to test that again soon.

* OPEC is also unlikely to disrupt supplies to Western Europe, where its member nations, particularly Kuwait, have extensive partnerships in refining and marketing.

Gasoline demand in Europe is already relatively low because of stiff gasoline taxes, and production of North Sea oil is stable for now, said Fereidun Fesharaki, who heads the energy research program at the East-West Center. Overall, demand for oil in Europe will grow about 1% or 2%.

* In Eastern Europe, demand is a question mark. The Soviet Union, which provides most of Eastern Europe's oil on a barter basis now, will likely require future payments in hard currency. That will give East European nations an incentive either to cut demand or go to the open market for cheaper oil, which could increase the demand on OPEC.

But some economists foresee recessions in Eastern Europe as formerly Communist nations transform into free-market economies, and that could blunt demand.

* The most promising new market for OPEC is Asia, where growth in demand among the developed and newly industrialized nations will exceed that of the West, analysts say. Arthur Andersen & Co. recently predicted that Japanese demand would grow 4% to 5% a year; demand from developing nations such as South Korea, Thailand, Malaysia and Taiwan could grow even faster--6% to 10%--the accounting firm said.

Japan will depend on the Middle East for an increasing percentage of its crude supplies, up to 95% by the decade's end, compared to about 65% now, as Asian oil production declines, Fesharaki said.

Japan and other Asian nations are much more advanced in forging economic alliances with oil producers in the Middle East and North Africa, analysts say.

A Petroleum Intelligence Weekly survey predicts that ownership of foreign refining assets by OPEC countries may double, with many in Asia.

For its part, Japan has been careful to capitalize on its strong trade relationships with Middle Eastern nations, where it has markets for its cars, trucks and technology. "Asia sees the gulf market as a big market for their own exports, so there's a healthy quid pro quo there," Mohamedi said.

* The Soviet Union, now the world's largest producer of crude oil, could complicate OPEC's plans if it can reverse the steep decline in its production. The Soviet Union appears to be opening the way to exploration and production joint ventures with Western energy companies such as France's Elf Aquitaine and America's Chevron Corp. But such deals are a long way off and could still fall apart.

World Oil Appetite by the Numbers

SOURCE: Cambridge Energy Research Associates, Chevron Corp.

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