OPEC to consider higher output quota as means of restoring unity

Ministers from the Organization of Petroleum Exporting Countries meet in Madrid today to consider a new plan to reestablish unity within the troubled oil cartel. But Gulf-based analysts are already writing off the plan as a temporary measure unlikely to dry up the world oil glut.

In Madrid, OPEC's price and long-term strategy committees will discuss proposals to increase OPEC's overall production ceiling by up to 4 million barrels per day. The increase is seen as a way to begin reestablishing production discipline among the 13 OPEC members.

The thinking behind the proposal is that cheating by cash-strapped cartel members on production quotas has become so widespread that they are now impossible to enforce. Instead, OPEC is seeking to set more realistic quotas which it hopes all OPEC states will honor.

By boosting OPEC's overall quota from 15 million barrels per day to 17.4 million b.p.d. (as suggested by Gulf oil ministers last weekend), it is hoped that Iraq will agree to cut its production by some 300,000 b.p.d. and abide by an OPEC-assigned quota equal to that of Iran.

Iraq has long refused to stick to its OPEC-assigned quota of 1.54 million b.p.d., insisting that it must be given a quota at least equal to arch-rival Iran's 2.369 million b.p.d.

Iraq is expected to agree to abide by the new quota. But Iran has voiced its opposition to a larger quota for Iraq, saying that such a move does not comply with OPEC's criteria for assigning quotas.

It remains unclear whether Iran's announcement represents an iron-clad position or whether it is simply a negotiating maneuver, analysts say.

In addition to considering a quota increase to 17.4 million b.p.d., oil ministers in Madrid will discuss whether OPEC's overall quota should be moved higher - to up to 18 or 19 million b.p.d. The higher quota would help apportion additional production to states such as the United Arab Emirates, which has consistently pumped more than twice its quota. A higher UAE quota might encourage greater production discipline.

Gulf-based analysts note that while an 18 million b.p.d. OPEC quota would probably exceed world demand for OPEC oil - further contributing to the oil glut - it would represent a reduction in overall OPEC production from estimated levels of 20 to 22 million b.p.d.

The higher production plunged oil prices to their lowest levels in two years earlier this month with OPEC oil selling $7 to $8 below the cartel's $18 benchmark price.

Oil prices have since rebounded slightly following the weekend meeting of the Gulf oil ministers and in anticipation of the Madrid meeting.

But oil analysts doubt OPEC members will honor even the higher production quota, noting that if oil prices remain depressed, member states will be forced to boost production to raise oil revenue to meet budget obligations.

These analysts stress that both Iran and Iraq with their huge reconstruction efforts yet to begin pose a formidable threat to OPEC efforts to regain control of oil prices. Both nations will be relying heavily on oil revenues to rearm, rebuild their war-battered economic infrastructures, and to help boost support for the political leadership. Observers say the pressure to pump more oil would quickly outweigh any allegiance toward OPEC.