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Commentary: Opec: An Uncertain Grip On The Spigot


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Commentary: OPEC: An Uncertain Grip on the Spigot

In central Caracas, the usually vibrant streets are closed off and patrolled by soldiers. Military police with muzzled dogs patrol the concrete towers. No, it's not another Venezuelan military coup. Instead, the heads of state and ministers of OPEC are in town. They've been invited by Venezuela's tough-guy leader Hugo Chavez to celebrate the organization's 40th anniversary.

It's an auspicious moment for OPEC. With oil at $31 a barrel, the 11-member organization finally has something to celebrate. After being largely written off in the '90s as the New Economy claimed center stage, OPEC is back in the spotlight. Hotel lobbies are packed with TV reporters trying to get a word with oil ministers Ali Naimi of Saudi Arabia and Venezuela's Ali Rodriguez as if they were oracles.PRODUCTION RIFT. But OPEC isn't as powerful or unified as it seems. Since the oil embargo of 1973-74, its world market share has dropped from some 55%, to only about 36%. And beneath its apparent solidarity seethe all sorts of conflicts.

The most fundamental rift running through OPEC is over oil production. Saudi Arabia, Kuwait, and the United Arab Emirates have small populations and huge quantities of oil. So they want relatively low prices to keep their resource attractive for decades. But nations such as Iran and Venezuela, with either limited reserves or many mouths to feed, want to maximize current revenues and argue against production hikes.

Resolving those differences and forging a policy to manage oil prices over the next few months represents a huge challenge. Indeed, many observers think that's impossible and that OPEC has already lost control. Prices continue to spike well out of the $22-to-$28 range OPEC says it wants to maintain despite a production boost of more than 3 million barrels a day this year. That has exposed the Saudis to criticism from their military protectors in the U.S. in the midst of an election campaign.

Yet those who blast Saudi Arabia, whose enormous capacity makes it by far the most important OPEC country, for not making enough oil available have a point. The kingdom says it can produce as much as 10.5 million barrels a day. Yet as the market tightened early last year, the Saudis were slow to ramp up. They now produce about 8.8 million a day.

The Saudis, along with other OPEC members, have bitter memories of $11-a-barrel prices for oil less than two years ago, which led to a run on their currency and sharp domestic criticism of the Saudi royal family's management of the country. They are more afraid of sending the market into a tailspin by overproducing than they are of derailing the global economy.

Moreover, Saudi Arabia's de facto ruler, Crown Prince Abdullah, is different from his now semi-incapacitated brother King Fahd. He is less inclined to do America's bidding than was Fahd. And he wants to improve relations with such testy neighbors and OPEC stalwarts as Iran. So he's more likely to compromise with countries such as Iran and Venezuela.SUPPORTING ROLE. But that could backfire. More projects are bound to get under way in non-OPEC countries, and alternative-fuel sources will become more attractive. "Thirty-dollar prices would be suicidal for OPEC in the long run," says Sharif Ghalib, an analyst at New York's Energy Intelligence Group. They could damage OPEC in the near term, too. The International Energy Agency is forecasting that high prices will crimp world demand next year. The Saudis worry that such a scenario might catch OPEC producing far too much and trigger a major price drop.

That's one reason why Crown Prince Abdullah was willing to come to Venezuela and support Chavez' efforts to cast himself as a champion of the developing world. Abdullah wants Venezuela, a big exporter and key supplier of the U.S., to share the cutbacks he thinks may be necessary down the line. Any such cuts will be even harder to agree on than production hikes.

For now, it's hard to argue with success. Saudi Arabia is expected to earn more than $70 billion from oil this year, vs. $43.6 billion last year and just $33 billion in '98. Even the countries that worry about high prices are savoring the windfall after the tough past few years. They had better enjoy it. It won't last forever.By Stanley Reed and Chris Palmeri; London Bureau Chief Reed and Los Angeles Correspondent Palmeri Are Reporting from Caracas.


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