OPEC TRI-MINISTERIAL CONFERENCE: FOCUS ON STRATEGY

Created: 9/11/1980

OCR scan of the original document, errors are possible

OPECTri-Mioisterial Conference: Focus on Slralco

oil. foreign, and finance miaistcTs from ihe OPEC rutrou arc scheduled io meei in Vienna onndeptember to review thed political recommendaoora of ibe OPEC Loot-Term Strategy Commiitee>road arccmcai already baa been reached

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iprice and production

policies Some OPECeipcci ihii the mi mg will turnonfrontation between Saudi Arabiae more milium OPEC nations, particularly Iran. Iran, Libya. Algeria, and Nigeria haveeeting jus! price lo the Tri-Mmistcnal Conference to coordinate theirand price po*lions. Confrontations over current policies could spill over into thef the LTSC report, pouibiy even preventing agreement on aspects of ibe ionr-term pricing adjustmem for nola.

The Saudis recognize tbat maintaining productionontributes to market pressures on other OPEC suppliers. On the other hand, the curreni markel couldaudi produciion cut without generating significant price pressured. Riyadh will have to raise prices by X4 per band if it is to realign it* oil prices with those of other OPEC mem ben. While lbs timing of Saudi actions remains uncertain, we believe Riyadhloroduction cut as an inducemenl to gain agreementeunified crude pricesometime during the coarse of the series of OPEC meetings beginning in raid-September-"A

unresolved issues amone the LTSC recommeD-daiioni win be dealt with by the committee over the neat sevcra! rnoaibs, Qucsioraof irrrpletneQia-tion are unlikely lo be sailed c.ioa: review of the report is plannedecond Tri-Ministerial Conference scheduled for early November. The en-lire report will then be subnJtted io the summit meeting of sovereigns and beads of stale of OPEC

IM niber countries in Baghdadnd 5MM

Current Price and Production I

Contraryress reports, Saudi Arabia has not yet decided io cut production from the current level.

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on LTSC

The OPEC Leng-Tcrm Strategy Committee was established during ibe8 OPECmeeting in Taif, Saudi Arabia. Itministerial-level committee composed of the oil ministers fiom ihe frvc founding members ofArabia, Iran, Iraq. Kuwait, andAlgeria, representing ihe African OPEC members. The commiitee was established at ihe urging of Yamam. who maioiained that OPEC ministerial conferences spend an inordinate amount of time discussing current price issues and not enough time considering long-run issues.

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rkjfi( for two years or. itsictotl the LTSC presented iu recommendations at an extraordinary cninUicrial confeicoce inTaifui early

Price. The com mince'i main rccommcndaiioa was for theaaoouoeofaa loiomaiic cuancrly price adiusiment mechanism. The system wouldloor prtce for crude oil that, in ibe long (crm. would approach ihe approximate level of ihe ecu ofalternative fuels To guarantee movcmcni inward Ihis coal, the price floor would be adjusted upward in linehrcc-poini formula incorporating:

An index reflecting, the impact of inflation on international trade. Tbe indet would be bawl eo an OECD export price indexeflect com-moditj inflaiion and an OECD domestic con-lumcr price index (CPI) lo reflcci inflation in the price of services. The upon price index would have iv. ice the weight of the CPI.

An eicrunge rale adjustment mcchanmn. The currency basket being considered is the originalurrency Geneva II basket1 modi Tied tothe L'S dollar and weighted accordingPEC import* from (he countries whose canto-ciei arc included.

A provision for iter rasing the floor price in real terms proportionatelyhe growth in real GNP of (he OLCD countries, ijfjp

I he cor.cept of automatic prke increasesby all of ihe OPEC members ai ihe Taif conference. Iran. Libya, and Algeria, however, voiced reservations over ihe formula and insisted lhal price increases be based instead on:

An index representing OPEC inflation rather than OECD inflation.

GNP growth in the OPEC countries rather lhan ihe OECD countries.

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The majority of OPEC members rejected this, ap-preoefc. reportedly oo the grounds that OPEC irbigher than ihe OECDoften includes factors for which the consumingcannot be beld responsible and thai use of OPEC GNP growth could leadpiral of oil price rises generating GNP growth which in turn would push op oil prices, faff)

Although several comrwomises oo price formulas were suggested at Ihe Taif meeting, no agreement was reached aad modifications were left to beby tbe LTSC. Over the last month or so. several reyons have indicated lhal most of theamong OPEC members were resolved. We have not been able to verify if or how the original formula may bave been modified. sB)

The LTSC report stresses that the rxiciag formula onlyvmimutm floor price, and thai as the market swings from surplus to shortage OPECs pricing stratro rmnl be flexible enough to allow prices to rise above the minimum. The LTSC pmemed alternative courses of action lo be considered when prices rise above this level:Prices may be frorea in real terms until the Roor

catches up with the higher market determined

price level.

ew price floor could be estabushed ai the higher level

Prevailing market conditions and tbe politicalwoaldrge pari in determinieg which alternative is chosen. If OPEC were to be unable to reach agreement on which pathollow, the effectiveness of the pnee mechanisni would be im-pairrd.af4f>

Although many details remain to be worked out, il seems dear ihat the Tri-Ministerialll recommend lo the OPEC Baghdad summit thai an automatic quarterly price adjustment mechanism be adopted. Strong Saudi support for regular price increases ts evidencedublic statement made earlier this year by Yamani.

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a result of ihe freeze imposed by Saudi Ant bid. oil pricei hme mare ikar. doubled si net ike endf ike Western counin^ hod been realistic and kad accepted reenter annualin ike price of oil. iherx ave beenharp and tuJJen twnrw price*.ihe ensuing impact on thruish we kad noi frozen ihe price of in ike pair.

Riyadhbo rwenira ihai ae asto-nutic price adjustment mechanism would rice litem from some al ihe political pressure* thai ihey face ob ibe price issue, fffa

If the proposed price adjustment nwcharusnt bad been in effecthe OPEC sufT calculates tbat prices woulda aieraeecl mnre thanercent per >ear. Bylo the Iranianwould nave risen toer barrel, compared with the actual average official sales price of. Tbe formula wouldalled0 price level ofer barrel, but prices would have risen above this level because of the oil market disrupt ions associated with the ltanian

Although we believe thateoposalsunder discussionetter chance a! being rcaliicd than similar ones in theLTSC under the direction of Yamani already has been charged withlan ofOPEC agreement in principle may not translate into Speedy rmplemcritation. Many Operationalneed tc be resolved before any of therecommeuda lions can be put inio operation. For esample, while tbe OPEC price structurethe last several yean has been based on the priceenchmark crude. Saudi Arab. the LTSC report recommends that Arab Light be dropped as tbe benchmark on tbe questionable grounds that il is no longer ibe "swing crude" in the world market place, that is, that there is no longer sufficient excess capacity to produce Arab Light io co*er sbort-ierm swings in demand. The LTSC also cited changing supply/demanddemand tending toward lighter prod-

- while supply is becoming iocreaiingly ,justification for abandoning Arab Light as the marker crude. Riyadh undoubtedly would abo prujer io distance it* price decisions from those of OPEC by geiting agreement on an aiiemaie henchmaik crude I

OPEC is considering several other optionsorker crude or crudes:

Use of more than onefor the Persian Golf and one for ihe African region.

A theoretical benchmark more representative of demand patterns.

A theoretical benchmark refkesirg the -righted

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The problem of determining pricenoAg the various OPEC crudes win continue P* exist. OPEC has never been able to adeqiu" .Ir deal with this problem and the LTSC reportihe issue by stating that,ontinuously moving price base, tbe problems should be less than experienced in the post. Other operational problems being worked on by OPEC include the periodicity and time lag in each of the components of the floor price and the associated question of changing price ob the basis of orojecisotn or ex post foe to adjustments, efffj

Production. The LTSC report rccommenus lhai during periods of surplus supply "appro;:rulemust be taken by all member countries to restricthe report, however, does notormal production programing scheme. Iraq has long been the leading advocate of produc-iioo programing. More recently. Iran has become vocal in its demands for the institution of someide mechanism Io proiate production cuts.

Saudi Arabia is adamantly opposed to any forma! scheme for production programing, maintaining lhai each country should control its own production

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uter of national sovereignly. Tbe Saudu. however, have made clearheir fellow OPEC member* that after the correal price siruciure is reunified, thev will be more than willing to absorb theirshare of any necessary-decline in output. Given the strength of Saudi oppcsiiioo to programing, we believe it highly unlikelyormal pro-rationing agreement would be included in thepassed on to the Baghdad summit meeting, ansa*

The LTSC report recommends Ihat underutilized productive capacily be brought on line to hold prices down during periods of slionage. It also suggestsfinancing be made available to rev-en -rt OPEC membcrsduring periods of falling. (Tim

Relations Wiih Dceloping Countries

The LTSC recommendations on future relations between OPEC and other developing countries were approved by all members attending the0 Taif meeting. The OPEC finance ministers can be expected to pay panicular attention to thefor implementing these proposals. According to the report. OPEC assistance to develop ng countries should include:

Assurances about security of oil supplies, with the developing nations having priority overto industrialized countries.

A seriesoans and grants to help developing countries meet the cosl of their oil imports. Loans to the poorest LDCs would be on concessional terms graduated according lo degree of need, whereas loans lo developing nations with stronger economies would be on commercial Icrms.

Development aid. including aid for development of ihcir indigenous energy resources.

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The report also recommends that OPEC "aid lo developinge given unilaterallya commensurate commitment fromt points to the Iraqi proposalotni fund for energy and development as an ideal vehicle for achieving these objectives. Aid from developed nations would be expected toin real terms lo offset import inflation. tffaV

Relations With lodustriaEzed Countries

The LTSC report recommeeds ihat since recent developments in pricing and long-term supply seem lo make some form of dialogue between OPEC and the industrialized countries inevitable. OPEC countries should be prepared to participaieloc. Most OPEC members see thisay to prevent the developed countries from isolating the members from one another, flfc

In negotiations with the developed countries, the report suggests OPEC seek:

Free access to ihe markets of developed countries for refined products aod petrochemicals.

Access to advanced technology oeeded by OPEC countries for development.

Increased involvement of industrial!red countries in exploration activities in OPEC countries.

Participation in joint research aciiviiks.

Location of energy-intensive industries in natural gas producing areas within OPEC countries.

Removal of economic sanctions against OPEC countries and the lifting of trade barriers on non-oil-producing couniries.

Guaranteed access to financial and investment markets in industrialized countries for OPEC funds on "ai least parity of terms and conditions"those applied among industrialized countries.

The report also recommends thai because ofexperience with previousihe Conference onEconomic Cooperation duringshould be limited lo OPECandOPEC undoubtedly hopes that byother developing countries from thesewill be able to limit criticism from theseTn-Ministerial Conference will considerproceed oo these issues.

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