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.