Iran's counterinvasion of Iraq may dry up international oil glut

Iran's counterinvasion of Iraq and the renewal of fighting in the Gulf war could cancel potential benefits to Western consumers of a current OPEC squabble over production quotas.

This may in turn dry up the international oil glut, eliminating recent downward pressure on oil prices, according to oil industry analysts.

The July 14 invasion in the southwestern region near key Iraqi oil facilities at Basra, signals the flip side of a war that began Sept. 22, 1980 when Iraqi troops crossed the Shatt al Arab waterway and blasted Iranian cities and oil facilities.

If Iran and Iraq follow the course of previous battles and hit each other's oil production facilities, such destruction could take sizable quantities of Iranian and Iraqi crude off the international market.

Iran's current production is estimated at about 2.2 million barrels per day (bpd), while Iraq is producing some 1 million bpd.

Ironically, the reduction of Iraqi and Iranian crude exports would help solve a current squabble within the OPEC - of which they are both members - regarding the dividing up of OPEC's self-imposed 17.5 million bpd production quota. Some OPEC members including Iran were reported to be cheating by cutting their official prices and producing more than their quotas. Actual OPEC production has been estimated recently at 18.2 million barrels.

Any Iranian and Iraqi production cuts would help provide a needed cushion within OPEC to allow some of OPEC's financially hurting members - such as Nigeria and Libya - to produce and sell enough oil to pay accumulating bills for development projects.

The OPEC quota was imposed in March in order to eventually dry up the international oil glut. The glut has made it considerably cheaper to buy crude on the spot market than through OPEC producers. OPEC's cheapest crude, Arabian Light, is selling through OPEC officially for $34 per barrel, yet it could be purchased on the spot market recently for $32 per barrel.

Iran and Iraq are also among the members of OPEC most in need of oil revenues. The two Gulf producers need the funds in part to rebuild production facilities lost in the previous two years of the war. Some Western observers speculate that Iran's military thrust is partly intended to help press Iraq for a demanded $150 billion in reparations to rebuild damaged oil facilities. The move is also seen as an Iranian attempt to make good on its pledge to cause the downfall of Iraqi President Saddam Hussein.

Renewed fighting in the Gulf will reduce pressure on Saudi Arabia to cut crude exports to accommodate Iranian demands for production increases. But this will also increase pressure on spot oil prices by shrinking the glut. Though the conflict may offer a respite, of sorts, for OPEC it will only be brief.

With Iran and Iraq on the verge of recovery and in need of large oil revenues to rebuild damaged facilities and pay war-related bills, it looked at the Vienna meeting last week as if OPEC members had irreconcilable differences. Indeed, they may.

Faced with a declining share of the world oil market - due in part to the British and Norwegian development of North Sea oil fields and Mexican discoveries and production - OPEC has increasingly sought to limit its own production to avoid having to cut back on the prices it charges.

What OPEC could not foresee was lingering recession in Western economies and oil firms drawing down inventories. Both have helped maintain the oil glut because of reduced consumption. That, combined with the reemergence of Iran and Iraq from the Gulf conflict, has kept the glut from drying up sooner than it might have.

Some analysts were saying even before the latest fighting that the glut will soon be gone. The bickering at the Vienna meeting of OPEC and the expressed need and desire to sell more crude, might have been an indication that the glut could be here for a while. But a renewal of heavy fighting between Iran and Iraq could counterbalance this.