OPEC produces curb on output that appears to be cheat-proof
For the moment at least, the Organization of Petroleum Exporting Countries appears to have enacted an oil production agreement that works. World oil prices have rebounded from less than $9 a barrel in the summer to around $15 a barrel.
Senior OPEC officials in Vienna confirm that the group is actually producing even less than the sharply reduced quotas agreed to in July in Geneva. That -- along with a recent meeting between Iranian Oil Minister Gholam-Reza Aghazadeh and Saudi Minister Ahmad Zaki Yamani -- should help unite OPEC ministers as they convene in Geneva next Monday to set individual quotas for member countries.
OPEC's new, surprising solidarity means higher oil prices at the wellhead and eventually at the gas pump. The accord confounds analysts who doubted OPEC's ability to enforce compliance with the 20-plus percent cutbacks that the quota calls for.
According to OPEC's official statement, as confirmed by independent interviews here, OPEC has dropped 4 million barrels a day from total production. Production for early September was just over 17 million b.p.d., down sharply from the July-August levels of 21 million b.p.d.
The production restraint extends beyond OPEC. Only British and United States output is still unfettered. Norway, whose revenues were decimated by lower prices for its high-cost oil, will enact a cutback by next month. Mexico, Oman, Egypt, and Malaysia -- none members of OPEC -- also have cooperated in trimming output.
The crucial element in OPEC's recent success is a system for policing each member state's production. The system was cobbled together with unexpected speed and efficiency, and so far it appears to be working.
Starting in August, OPEC mobilized experts in Vienna from each member state to compile detailed data on a weekly basis. This makes it easier to monitor compliance with quotas. Earlier OPEC efforts to enforce quotas failed with prompt regularity, but this new one rests more firmly upon an information system without precedent in OPEC's history.
Each country telexes weekly data on exports of crude oil and petroleum products, plus any inventory changes and the number of refinery runs. The OPEC secretariat circulates all data, after cross-checking and verification, to each member within three days of the end of each week. That makes the tests for quota compliance both timely and reasonably precise.
These prompt, verifiable data have proved crucial. The system permits almost ``on line'' spotting of any cheating, which was the bane of previous control efforts.
Before, the only comprehensive overview of production was a system for tracking oil tankers that was carried out privately by three ministers. But this collective system is viewed as a potentially effectively deterrent to excess production.
In any case, the incentives to cooperate are real. Saudi Arabia and Kuwait, the largest ``swing'' producers in OPEC, made their own cooperation contingent upon compliance by the others and threatened to turn on the taps again if cheating was detected.
A credible threat coupled with credible controls seems to work. But economics plays a part, too: Lower output also means higher income. Production is some 20 percent lower than before the agreement, but prices have risen to more than compensate.
Although the system seems to be working, it is still quite fragile. Iran chafes at Iraq's high quota. The United Arab Emirates are dangerously disunited on the issue: Abu Dhabi has absorbed the entire cutback, while Dubai produces at full throttle.
The present interim agreement will expire next month, but the cartel will review its winter strategy at its meeting coming up in Geneva. Although it is expected to renew the production agreement through next spring -- keeping prices firm -- the OPEC ministers remain in fundamental disagreement on long-term policy.
The Arab producers in the Persian Gulf want to keep prices low and uncertain, discouraging competing energy sources. Others militate for still lower output to drive up prices.