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OPEC 1990-2000

It was almost three years before prices began to recover. The lower prices did have a positive result for OPEC. It encouraged increased consumption and halted production increases in much of the rest of the world. By the end of the decade of the 1980s OPEC and prices seemed to have stabilized. We now come to the events that led to the current problems for OPEC. Remember when looking at this problem that OPEC or any other cartel faces two problems in their attempts to control prices. The first problem is to determine the level of production which meets their collective goals. Simply stated, for OPEC this means maintaining production levels which insure the highest prices possible without encouraging competition outside of OPEC or significant conservation measures on the part of consumers. In January of 1990 Saudi Arabia and Kuwait had 24 and 9 percent of OPEC's total production. Iraq and Iran had 13 percent and 12 percent respectively. Iraq was involved at this time in a territorial dispute with Kuwait. Negotiations between the two countries were not successful. A meeting on July 25, 1990 between Saddam Hussein and April Glaspie, United States Ambassador to Iraq, was a major factor in Iraq's decision to invade its neighbor. In that meeting Hussein was assured that the United States would not become involved in the dispute. A week later on August 2, 1990 Iraq invaded and occupied Kuwait. The United States did get involved and was the major player in restoring Kuwait's sovereignty and early in 1991. At this point Iraq can not longer export and Kuwait's oil fields are devastated. Iraq and Kuwait have virtually no production and the slack is taken up by other OPEC members, primarily Saudi Arabia. In February 1991 Saudi Arabia's production accounted for over 35 percent of OPEC output. The Saudis had increased production sufficiently to compensate for the loss of Kuwait's production as well as some of that of Iraq. Other countries made up most of the difference. We now come to the current situation. In December 1998 Saudi Arabia's market share was 29.7 percent, Kuwait 7.4 percent, Iran 13.0 percent, Iraq 8.4 percent and Venezuela 11.0 percent. Saudi Arabia has the greatest increase in market share compared to the pre Gulf War period. Venezuela is next. In addition the Saudis have always had the

largest volume of production. At most times the Saudis produced at least twice as much as the second largest OPEC producer. Those who have followed OPEC will recall that, especially in the 1980s, many of the negotiations over production quotas Market Share: Current OPEC included discussions of what was equitable for the member Members countries. Among the factors considered were population, per capita income and the dependence upon crude oil Jan. Dec. Member Change exports. 1990 1998 By the end of the 1980s most of the problems about who received what share of the pie had been solved. All of the explicit and implicit agreements in place at that time were disrupted by Iraq's invasion of Kuwait and the ensuing Gulf War. It is probable that OPEC will move in the direction pre Gulf War agreements in splitting up the pie and will return to the old method of doing business. Some consideration will have to be given to the economic needs of OPEC members as well as non OPEC members such as Mexico. Venezuela is a case in point. The country is on its economic knees or worse. In spite of the fact that Venezuela increased its share of OPEC production significantly over the last decade. It is unlikely in any OPEC agreement that Venezuela would be asked to give up it's gains. Algeria Indonesia Iraq Iran Kuwait Libya Nigeria Qatar Saudi Arabia U.A.E. 5.0% 5.7% 12.8% 2.9% 5.0% 8.4% -2.1% -0.7% -4.4% 1.3% -1.3% -0.4% -0.2% 0.7% 5.6% -0.8% 2.3%

11.7% 13.0% 8.7% 5.3% 7.5% 1.7% 7.4% 4.9% 7.3% 2.4%

24.0% 29.7% 8.9% 8.6% 8.1% 11.0%

Venezuela When OPEC agrees on another cutback in production to boost price is not unlikely that Venezuela will not have to share proportionately in that cut. Even if they do they will not be required to give up their gains in market share. There will be a lot of pressure on Saudi Arabia to shoulder a disproportionate share of the cuts.

The price of crude oil spiked in 1990 with the lower production, uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world and particularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwait than they did Persian Iran. The proximity to the world's largest oil producer helped to shape the reaction.

World Events and Crude Oil Prices 1981-1998

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Following what became known as the Gulf War to liberate Kuwait, crude oil prices entered a period of steady decline. In 1994, the inflation adjusted oil price reached the lowest level since 1973. The price cycle then turned up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997, world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. Declining Russian production contributed to the price recovery. Between 1990 and 1996 Russian production declined more than five million barrels per day. OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among member countries. The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or underestimated by OPEC. In December 1997, OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 million barrels per day effective January 1, 1998. The rapid growth

Russian Crude Oil Production

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World Events and Crude Oil Prices 1997-2003

in Asian economies came to a halt. In 1998, Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral. In response, OPEC cut quotas by 1.25 million barrels per day in April and another 1.335 million in July. The price continued down through December 1998. Prices began to recover in early 1999. In April, OPEC reduced production by another 1.719 million barrels. As usual not all of the quotas were observed, but between early 1998 and the middle of 1999 OPEC production dropped by about three million barrels per day. The cuts were sufficient to move prices above $25 per barrel. With minimal Y2K problems and growing U.S. and world economies, the price continued to rise throughout 2000 to a post 1981 high. In 2000 between April and October, three successive OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price increase. Prices finally started down following another quota increase of 500,000 effective November 1, 2000.

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OPEC Production