Saudi Arabia Claims "There is no Excess Oil Production"
February 5, 1999
stratfor.com
SUMMARY
At the recent inauguration of Venezuela's President Hugo Chavez, the
Saudi Arabian Minister of Petroleum and Mineral Resources met with
the new Venezuelan Energy and Mines Minister in an attempt to resolve
their differences over OPEC oil production quotas. The Saudi
representative made the extraordinary claim that "There is no excess
production on the world oil market, but rather excess oil inventory."
Other members of OPEC -- including Iraq, Iran, and Kuwait -- have all
publicly criticized Saudi policy regarding oil production quotas. Indeed,
the Venezuelans, in a reversal of their own quota-busting policy, are
now contacting non-OPEC producers in an attempt to rein in
production. In spite of these efforts, we are facing significant
overproduction over the short term as oil producing countries fight for
market share in order to cover debt service.
ANALYSIS
During a meeting held on February 2 between Saudi Arabia's Minister
of Petroleum and Mineral Resources, Ali Bin Ibrahim al Naimi, and new
Venezuelan Energy and Mines Minister Ali Rodriguez Araque, al Naimi
denied the existence of excess oil production on the international
petroleum market. Visiting Caracas on the occasion of the inauguration
of Venezuela's new President Hugo Chavez, al Naimi said, "There is no
excess production on the world oil market, but rather excess oil
inventory." Following his discussion with the top Saudi oil official,
Rodriguez said that Venezuela would now initiate meetings with oil
officials in Mexico, Norway, Russia, Colombia, and Ecuador to discuss
a new strategy for shoring up sagging oil prices. The Saudi's new rigid
stance regarding oil production seems to have prompted the Venezuelan
Minister to exclude the Saudis from future negotiations. Apparently, the
Saudis see no need to reduce production, nor will they promote any
coordinated plan to enable other oil producers' to slash output. Saudi
Arabia's retreat from the use of production cuts to resolve the critical
issue of low oil prices is both an indication of the ineffectiveness of
previous measures taken to improve oil prices, and a possible indication
of a sea change in producers' market manipulation strategies.
There are numerous indications that an OPEC resolution passed during
its semi-annual meeting in June 1998 to cut a total of 2.6 million barrels
per day (bpd) from February 1998 levels is not being respected, despite
the fact that this cut was extended during the November 1998 follow-on
meeting. And with this failure to coordinate production, a major conflict
among oil producers has emerged, which in turn has prevented new
concerted efforts to reduce production. According to most recent oil
industry surveys, OPEC output of 27.81 million bpd in January was up
by 360,000 bpd from 27.45 million bpd in December of last year.
Non-compliance with agreed oil-production quotas inside OPEC
continues.
Some Gulf oil producers are now accusing Saudi Arabia of having
unleashed the current oil crisis by advocating an increase in OPEC's
production quotas late in 1997, despite the Asian economic downturn,
and for pumping excess oil today. For instance, Amir Muhammad
Rashid, Iraq's Minister of Oil, sent a letter to Youcef Yousfi, who serves
both as president of OPEC's ministerial conference and as the Algerian
Energy and Mines Minister, demanding that the Saudis cut their
production quota in line with the July 1990 agreement. Such reduction
would not only bring Saudi oil output down to 6 million barrels per day,
which represents about 30 percent reduction from its current production
quota, but it would more significantly reverse the economic
consequences for Iraq of the Gulf War. The Iraqis also issued a call
demanding that all parties respect OPEC resolutions and for the
adoption of new "flexible ceiling" that would take into consideration
petroleum market fluctuations.
Iran has also lately issued strong statements regarding Saudi Arabia's oil
policy. On January 27, the English-language Iran News Oil quoted the
head of Iran's parliamentary oil commission, Morteza Zarrin Gol, as
saying that "Saudi Arabia has weakened the oil market and inflicted
more damage on Iran with its oil policy than Iraq did during its 1980-88
war with Iran. Unfortunately, Saudi Arabia has played a key role in the
weakening of the oil market and reducing oil prices." According to
Zarrin Gol, Iran has always believed that Saudi Arabia's OPEC
production quota (which is 8 million barrels as compared to the quota of
3.3 million barrels assigned to the second largest OPEC producer, Iran)
is excessive. Truly alarming from the perspective of the oil producing
countries, however, were Zarrin Gol's statements regarding future
developments inside OPEC. "I regret to say that there is no spirit of
cooperation among OPEC member countries. All they want to do is
eliminate their market rivals. This policy has worked only to the benefit
of oil consuming countries," he said. Moreover, Zarrin Gol expressed
skepticism that further production cuts by OPEC would have the
desired impact on oil prices, claiming that such actions by OPEC would
only lead to an increase in oil production by non-OPEC oil producers.
Dissatisfaction and frustration with the lack of discipline inside OPEC is
also growing among smaller OPEC oil producers. In late January,
Youcef Yousfi and Kuwait's Oil Minister, Sheikh Saoud Nasser al
Sabah, called for moving up by one month the planned OPEC meeting,
which was originally scheduled for March 23. This initiative failed due to
the unwillingness by OPEC members to cooperate in implementing the
organization's previous resolutions. According to the Kuwaiti daily
Al-Watan on February 1, Nasser al Sabah justified not rescheduling the
meeting in the following terms, "Some oil-exporting countries have taken
a clear position against non-compliance of production cuts by deciding
not to attend any future OPEC meeting until it is confirmed that all
members have fully complied with cuts. If there is going to be an OPEC
meeting, it will not take place unless its aim is further reduction." Clearly
the Kuwaiti Oil Minister is now prepared to up the ante on the other
members on OPEC by holding future meetings hostage to a
predetermined agenda.
While Saudi Arabia, which is experiencing increased pressure to curb
production by OPEC producers, has apparently decided to stop
cooperating with efforts to stabilize oil prices by reducing output, the
other major OPEC overproducer, Venezuela, apparently is moving in an
opposite direction. The new Venezuelan Energy and Mines Minister, Ali
Rodriguez Araque, seems to be more willing to cooperate with OPEC
than his predecessor Ervin Arrieta was. Rodriguez announced recently
that Venezuela will initiate "a very intense interchange with the OPEC
and non-OPEC countries to secure an agreement aimed at generating a
recovery in oil prices." Venezuela also intends to negotiate with such
non-OPEC producers as Mexico, Norway, Russia, Colombia, and
Ecuador. Given the apparent unwillingness of Saudi Arabia to discuss
the issue of overproduction, the question is, whether any future
concerted action could be expected from OPEC and other major oil
producers. The prospects for reaching an agreement about future output
cuts or even extending the existing ones are slim. OPEC's impotence has
never before become so transparent.
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