OPEC Quotas Under Fire as Crude Oil Prices Plunge

Strategic Insights -

The Organization of Petroleum Exporting Countries (OPEC) is facing mounting pressure to reconsider its production quotas as crude oil prices plummet following remarks by OPEC President Erwin Arrieta. Arrieta's suggestion that the organization might lift its quotas in 1996 sent oil markets reeling, with crude oil prices dropping 62 cents per barrel to $18.22/bbl and gasoline prices tumbling by 1.22 cents per gallon to 60.28 cents/gal. Delegates from OPEC member countries expressed frustration with non-OPEC producers, who they claim are enjoying the benefits of OPEC's restraint while eroding the organization's market share.

Key Takeaways:

  • OPEC President Erwin Arrieta's comments on lifting production quotas in 1996 sparked a freefall in petroleum prices, with crude oil dropping 62 cents per barrel to $18.22/bbl and gasoline prices declining by 1.22 cents per gallon to 60.28 cents/gal.
  • Non-OPEC producers account for 800,000 b/d of the 900,000 b/d increase in average world oil demand in 1995, according to OPEC's Economic Commission Board (ECB).
  • OPEC Secretary General Rilwanu Lukman stated that ministers dealt mainly with "housekeeping" matters, such as the election of Arrieta and Gabon's tenuous membership, but highlighted deeper concerns about non-OPEC producers' market share.
  • Ida Bagus Sudjana, outgoing OPEC president and Indonesian oil minister, emphasized that recent price increases have been caused mainly by technical and speculative factors, rather than an increase in demand.
  • Saudi Arabia's Hisham Nazer expressed frustration with non-OPEC producers enjoying the fruits of OPEC's restraint, citing studies by OPEC's ECB that show non-OPEC production will account for 800,000 b/d of the increase in average world oil demand in 1995.
  • The devaluation of the U.S. dollar against key currencies has cut some OPEC members' purchasing power, despite increases in crude prices and dollar revenues.

Statistics:

  • Crude oil prices dropped 62 cents per barrel to $18.22/bbl following Arrieta's comments.
  • Gasoline prices declined by 1.22 cents per gallon to 60.28 cents/gal.
  • Non-OPEC producers account for 800,000 b/d of the 900,000 b/d increase in average world oil demand in 1995.
  • The average price of OPEC basket crude rose to $18.15/bbl in May from $15.84 in December.
  • The real price of OPEC's average basket crude for the first five months of 1995 was $14.33/bbl, compared with a nominal price of $17.50/bbl.

Sources:

  • "OPEC Chief Suggests Quotas May Be Cut," The Oil Daily.
  • "OPEC Chief's Comments Send Oil Prices Plunging," The Wall Street Journal.
  • "OPEC Secretary General Rilwanu Lukman's Remarks," OPEC Secretariat General.
  • "Ida Bagus Sudjana's Statement," OPEC Secretary General Rilwanu Lukman.
  • "Hisham Nazer's Comments," Saudi Arabian Ministry of Petroleum and Mineral Resources.
  • "OPEC's Economic Commission Board (ECB) Report," OPEC Secretariat General.