The Twilight of OPEC?

THE Organization of Petroleum Exporting Countries met in Geneva recently in an attempt to rescue itself from certain death, if not irrelevancy. Oil markets have discounted OPEC's ability to discipline its members and thus curtail runaway production and a fall in oil prices.

Sitting in the lobby of the Intercontinental Hotel, watching the press chase any oil minister who walks by, one could be led to think that the world faces another oil crisis.

Yet it is OPEC that faces a challenge, the toughest since its creation 30 years ago. OPEC's ability to manipulate oil prices and output at will is gone. The dynamics of the cartel are such that the 1990s are giving rise to a smaller but kinder and gentler cartel: the Gulf Organization of Petroleum Exporting Countries (GOPEC).

The march toward this smaller group has already started. Ecuador pulled out from OPEC a year ago because it was unable to afford the annual dues - but perhaps also because it was unable to have much say or impact on the group given its limited reserves and production base.

Even more telling, four countries (Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar) produce more than 51 percent of total OPEC output. Add Iran and Iraq, with only half a million barrels a day, and the total jumps to 68 percent.

Finally, Kuwait's oil minister confirmed this shift by noting at the OPEC meeting held just prior to the invasion of Kuwait in August 1991 that ``eight or nine members have effectively taken themselves out of the decisionmaking process of OPEC.''

So what is left? A smaller, more effective cartel, which includes six Gulf states: Saudi Arabia, Kuwait, the UAE, Qatar, Oman, and Bahrain. All of these countries benefited either directly or indirectly from the allied efforts to dislodge Iraq from Kuwait. They have every reason to be kind to the economies of their liberators.

Moreover, Iran and Iraq cannot be part of GOPEC because of their different economic and political objectives. They have less in common with the monarchies of the Gulf. Furthermore, there is still a fear of Iran as well as of Iraq's long-term intentions. Despite the close cooperation between Saudi Arabia and Iran during the OPEC meeting in Geneva, the Saudis are still afraid of a militarily stronger Iran and Iraq.

Another reason for a gentler and kinder GOPEC has to do with the bottom line, at least in the short run.

Analysts once looked at OPEC as having two distinct groups, one poor and the other rich. The poor group is composed of countries such as Nigeria, Algeria, Indonesia, Gabon, and even Iran and Iraq. These nations shared similar characteristics, such as a large population, a large external debt, and small oil reserves. This led them to demand higher oil prices at OPEC meetings. This group is said to have a high discount rate, meaning that they value a dollar of oil revenue today much more than a dollar tomorrow.

The rich group essentially includes states such as Saudi Arabia, Kuwait and the UAE. These oil producers all have small populations, a small or insignificant external debt, and very large oil reserves. This group is said to have a low discount rate; they do not have the same urgent needs for cash today and are willing to wait for it.

HOWEVER, Desert Storm changed this. Kuwait's liberation was expensive to the Gulf oil producers. Saudi Arabia's costs alone are reported to be close to $60 billion. Kuwait's rebuilding may come close to or even surpass this figure, depending on whose estimates one uses. When or if Iraq rejoins OPEC, it too faces substantially high rebuilding and reparation bills. Finally, Iran still continues to call for for more revenue to rebuild its war-torn economy and oil industry.

In essence, Desert Storm has made everyone in OPEC poor, at least for a while. The whole group has greater appetite for immediate cash; thus, its members offer a high discount rate.

This translates into calls for higher oil production, leading to higher-than-usual output, which was the focus of OPEC's recent meeting. High output leads to lower oil prices. OPEC's quandary: Oil prices have fallen to levels not seen since the early 1980s.

In the short run, the world will see a stable oil market. Short of a political upheaval in the region that could redraw the geopolitical map of the area, GOPEC will dominate the world oil markets in years to come. Over the long term, GOPEC undoubtedly will be tested as reliance on its oil grows, and its physical capacity to meet such increases may prove limited.

An immediate test for the states that form the nucleus of the nascent GOPEC lies in Iraq's reentry into OPEC. What kind of quota will the group assign to Iraq? Iraq will be just as adamant as Kuwait is now in demanding a higher quota. If this is the case - and if world oil demand remains soft - OPEC will again face the thorny problem of dividing up the pie. Regardless of the outcome, the bottom line is lower prices. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHELCSPS.COM.