If there's to be a new order in the Persian Gulf, Saudi Arabia is leaving no doubt about who'll be on top. Bolstered by their key role in the war's outcome, the Saudis are freely throwing their weight around as the gulf's No. 1 oil producer. By refusing to countenance more than a token 5% cut in oil output at OPEC's Mar. 11-13 meeting in Geneva, the Saudis solidified what one senior oil minister calls "a very dominant role."
But while the cartel's ability to cut any deal at all is a boost for OPEC, many observers are already discounting the effect the new production limits will have on OPEC's future. "The real test is further down the road, when Iraq and Kuwait are back into the market in a significant way," says Cheryl J. Trench, executive vice-president of the Petroleum Industry Research Foundation Inc.
'INSTABILITY.' Some oil watchers see the potential for OPEC then to disintegrate and for prices to crash. Iran and Algeria, which sought much deeper cuts in the traditionally slow second quarter, agreed to the deal only reluctantly. Venezuela, whose prewar OPEC quota was 2 million barrels a day, plans to boost capacity to 3.5 million barrels by 1996. And the Saudis themselves plan a 10 million-barrel-a-day capability by the mid-1990s. Given such plans, Houston energy consultant William R. Edwards sees "a significant degree of instability in the new OPEC order."
For now, though, the Saudis have put down those who want sharply lower production and much higher prices. The new agreement entails only "voluntary" cuts in second-quarter output, from about 23 million to 22.3 million barrels a day--still nearly 1 million more than OPEC's estimates of demand for its oil. The deal also preserves the Saudis' 36% share of OPEC production, which grew sharply as Saudi Arabia hiked output by some 3 million barrels to replace Iraqi and Kuwaiti crude lost after Saddam Hussein's Aug. 2 invasion of Kuwait.
The Saudis believe they have found a happy medium for oil prices that will enable them to fill war-depleted coffers without hurting OPEC's share of the world market. After the deal, OPEC crude rose by about $1, to around $19 a barrel. And the Saudis say prices will rise further later this year when the supply-demand gap narrows.
NO MARKET CRASH. They may be right. Stocks are typically built in the second quarter to accommodate demand later in the year. And even if OPEC doesn't cut output, world surplus production outside centrally planned economies will total 1.9 million barrels a day--600,000 barrels less than in 1990, the International Energy Agency estimates (chart). "If they cut production now, it's just getting way ahead of the issue," notes Bernard J. Picchi of Salomon Brothers Inc. He says that with Kuwait and Iraq out of the picture, 1991 prices should average $20.
The Saudis think the oil market won't crash as long as world economies keep growing and output from the Soviet Union keeps falling. That stance can hardly please Iraq and Kuwait--though they held little sway in Geneva. The Iraqis weren't even at the table, and Kuwait's delegation was led by its No. 2 man. That's why many oil watchers are looking to the cartel's June meeting for a better fix on OPEC's long-term prospects. For now, says one Kuwaiti official, "neither the market nor the politics is right for more action."
By June, a better picture might also emerge of Iran, which is looking like OPEC's wild card. Even as the Iranians openly disagree with OPEC strategy, they envision, in Oil Minister Gholamreza Aghazadeh's words, a new world OPEC that has "more power, is even stronger, and has less tension."
In short, Iraq's defeat means that OPEC power has shifted decisively--raising the specter of disruptions as members jockey for position. But with Saddam's war machine ruined, Saudi Prince Abdul Aziz bin-Salman, for one, is convinced that OPEC has reached a turning point in which his country's moderate views will dominate. He puts it most simply: "We are victorious."