CHAVEZ CALLS OPEC SUMMIT TO "DEFEND THIRD WORLD INTERESTS"

  
The election of President Hugo Chávez to a new six-year term in Venezuela has exacerbated the uncertainty surrounding that country's future and its economic and political policies. Chávez has not helped matters by embarking on a controversial visit to 10 OPEC countries in early August. Making no secret of the fact that he favors higher oil prices through restriction of output, Chávez invited OPEC leaders to a summit in Caracas on September 27-29. The meeting will be the first by the OPEC heads of state in 25 years and will celebrate the fortieth anniversary of the organization's founding. The specific purpose of the meeting is not known. Presumably, it is intended to strengthen cooperation among members to restrict output and keep the price of oil in a range of $22 to $28 per barrel.

At the June meeting of the OPEC 10 (a grouping of member countries, excluding Iraq), the organization agreed to increase production quotas by 708,000 barrels per day. Since additions to production were slow in developing and oil prices stayed high, Saudi Arabia announced its intention to push for an additional 500,000 barrels per day. Chávez accordingly made Saudi Arabia the first stop on his OPEC tour. The increases in Saudi output were causing world prices to soften, a fact that undoubtedly did not please him. But by far the most controversial destination on the Venezuelan leader's itinerary was Iraq, where he arrived by car to avoid UN sanctions against flights to Iraq. "We don't think it's appropriate or wise to make this visit," a US State Department spokesman said. "We've made that quite clear in our views, and it's just not the right thing to show up in Baghdad, particularly as a democratic leader visiting a dictator."

Chávez also traveled to Nigeria, where he agreed to move the date of the OPEC Summit to September 26 to accommodate President Obasanjo. At his last stop, in Algeria, Chávez said he was pleased with current oil prices and argued that the OPEC countries were defending their interests and those of Third World countries in general. As he had elsewhere, he signed a bilateral agreement with Algeria to increase trade and cultural exchanges with Venezuela. Finally, without providing further information, he announced that Norway, Russia and Oman might join OPEC.

In the meantime, non-OPEC production, mainly from the former Soviet Union, Mexico and South America, is expected to increase by about one million barrels per day in 2000 and by another 0.5 million barrels per day in 2001. In the first quarter of 2000, oil production from the former Soviet countries reached its highest levels since the third quarter of 1993, and further increases are expected. More oil will be available when the Caspian Pipeline Consortium begins transporting oil from Kazakhstan to world markets in 2001.

This fairly rosy picture of increased oil production is balanced by a growing world demand estimated to reach more than 78 million barrels per day by 2001. According to the US Energy Information Administration (EIA), "in 1999, world oil demand growth was mainly concentrated in OECD countries, particularly the United States. In 2000, non-OECD Asia is expected once again to be the predominant region for oil demand growth." Long-term EIA forecasts project a 60% increase in world energy consumption by 2020. An announcement by the EIA that US oil stocks were about two million barrels less than previously estimated caused the benchmark Brent oil price to surpass $30 per barrel on August 8, reaching $32.39 a week later in London.

At least one analyst, Philip K. Verleger, Jr., predicts another oil price shock, albeit milder than previous crises. "The three conditions that made the 1973 and 1979 oil crises possible have been met today," Verleger argues. "First, world consumption is growing rapidly and is projected to continue expanding. Second, every indicator points to the fact that production from OPEC will not rise substantially. Finally, investor excitement over technology stocks and abhorrence of traditional industries have depressed oil equities. Consequently, firms in the oil industry are limiting their investments, preferring instead to buy back stocks."

However, a number of factors are different today. Industrialized nations hold more than 1.2 billion barrels of strategic stocks. Lending those stocks to the market could reduce the impact of the OPEC output restriction. In addition, the percent of GDP of developed countries that is attributed to energy is less than it was in the 1970s. And, last but not least, markets are more flexible.

Gasoline prices can be expected to drop gradually but not dramatically through late fall. EIA predicts a drop of 18 cents in the US market, which is probably a bit optimistic. By the last quarter of 2000, stocks will still be low, OPEC output will be at its maximum and world demand will still be strong, increasing pressure on prices. Due to the mitigating factors mentioned above, higher oil prices are unlikely to lead to world recession, but slower growth than projected is probable. The consequences are uncertain. For example, what effect will persistently higher gas prices have on the confidence of US consumers? Consumer confidence and spending have been one of the main engines of growth of the US economy.

As for the September OPEC Summit in Venezuela, it is not going to draw Saddam Hussein or Gaddafi, who have too many security considerations to leave their own countries. The President of Iran and King Fahd of Saudi Arabia will also send representatives, and Algeria, Iran, Indonesia and the United Arab Emirates will reportedly send high-level delegations. The cartel is unlikely to have much freedom to maneuver, as its output is projected to be stretched to the limit within a few months. Iraq is increasing output but has threatened drastic cuts for later in the year. Even without Iraq, OPEC is likely to experience problems in meeting its average price goal of $25 per barrel. The Saudis are reported to be scaling back their aggressive production increase and driving prices higher in preparation for the September 10 OPEC price and quota setting meeting in Vienna, a gathering that could prove to be more important than the Caracas summit.

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