OPEC move good for all

OPEC move good for all

Indonesia stands to benefit greatly from the OPEC agreement on
Tuesday to raise its oil production by 1.45 million barrels per
day (mbpd) beginning in April even though the country has no
spare production capacity. The country's 2000 state budget relies
on oil and natural gas for almost 29 percent of its revenue,
assuming that crude export prices will average $20 for the April-
December period.

The OPEC output increase, although much lower than the two
mbpd to 2.5 mbpd demanded by the United States and other major
consumers, is considered by most analysts as about the right
volume to ensure a gradual decline in oil prices, from a high
range of US$30 to $34 over the past few weeks, to eventually
stabilize at $20 to $25.

Indonesia and the other 10 members of the Organization of
Petroleum Exporting Countries have reaped a windfall as oil
prices have nearly tripled to as high as $34 since last March,
when OPEC members and several non-OPEC producers, notably Mexico
and Norway, agreed to cut output by about 1.7 mbpd.

Even though the agreement smacks of kowtowing to U.S. pressure
for significant additional supply to the market, the move will
benefit both producers and consumers. All sides agree that a
price-boom-and-bust cycle will not benefit any economy. Overly
high prices could set off upward inflationary pressures, forcing
an interest rate rise and consequently depressing economic growth
and demand for petroleum. A price crash could slash production,
as many fields would be rendered inefficient, which would in turn
trigger a price boom.

It should also be remembered that hydrocarbon is not only a
material for commercial energy but also feedstock for chemicals,
an important commodity. Thus, price stability at a reasonable
level is the primary goal.

The OPEC meeting was unusual in that it was perhaps the first
time the organization was preoccupied with the overriding agenda
of how to gently lower prices, instead of the usually contentious
issue of how to defend market shares and the allocation of quotas
among its members.

Yet this new development is also a boon to OPEC's market
clout, which was eroded by a market glut and rampant quota
busting among its major producers. That the oil prices could have
risen to as high as $34 a few weeks ago without a political
crisis in any of the Gulf major producers, as in the Gulf War in
1991, is strong evidence that the oil price range will not likely
fall again to below $20.

Another encouraging trend that is indicative of a sustainable
higher range of oil prices is the steady price rise since last
April, despite the reported quota busting by some OPEC members.
Assuming that analysts are accurate in their estimate that OPEC
members have actually been pumping out 1.2 million mbpd more than
their March 1999 official quota, and yet prices have never fallen
below $25 over the past few months, then the 1.45 mbpd increase
will translate into actual additional supply of only about
300,000 barrels.

Even in the event that lone dissenter Iran produces at full
capacity of 3.3 mbpd and Iraq eventually pumps out 2.7 mbpd as
permitted by the United Nations, such an incremental increase
will be unlikely to lead to a sudden price plunge. Certainly, a
massive stock buildup will take place immediately in the second
quarter, with refiners having to replenish inventories which were
eroded sharply during the past year of the supply curb. Moreover,
few OPEC members still spare production capacity that can be
tapped to respond to market developments; Saudi Arabia alone
holds more than 50 percent of the organization's spare production
capacity, Kuwait 15 percent, with the remainder owned by Iran and
Iraq.

Most importantly, however, is the brimming self-confidence the
relatively high production discipline has built up among OPEC
members and the great lesson they learned from market
developments over the past year. It follows that the higher their
compliance with the organization-mandated production discipline,
the stronger will be their influence on market prices.

Hopefully, such high discipline will prevail in defending the
oil price band that OPEC has reportedly agreed to establish in a
bid to prevent prices from falling again below $20. The system
will work by increasing or decreasing OPEC's supply automatically
when certain price levels are reached.