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February 6, 2009
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February 1, 1984
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Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Figure 3 Oil Price Trends, 1982-January 1984? Official price - Spot price 1982 1983 29 1 29 for OPEC oil will approximate 20-21 million b/d.' Under this demand scenario, we expect supplies to be ample to keep a soft-to-stable market and OPEC to have to continue to restrain output, with few, if any, countries able to produce at desired levels. If demand for OPEC oil is below our baseline scenario and if OPEC fails to experience an upturn in market share, the cartel could have a difficult time maintaining the price structure. Indeed, some economists are now predicting an economic downturn in 1985 that could depress demand for OPEC oil. A failure to realize any substantial growth in market share in 1985 would be 'Assumptions underlying this forecast include: OECD real GNP growth of 2.7 percent; a continued slight decline in the energy-to- GNP ratio; constant nominal oil prices; and an increase of about I million b/d in nonoil energy demand in OECD countries. F_ very demoralizing for the cartel, because several members have already suffered financial problems for the past two to three years. Iraq and Iran-Increased Production Possible Constraints imposed by the continuing war will limit the likelihood of any major increase in production from Iran and Iraq in 1984. On the basis of recent initiatives by the Iraqis to expand export outlets, however, we believe developments in Iraq and Iran will play a crucial role in determining market condi- tions in 1985: ? If the war continues and Iraq and Iran maintain exports at or near current levels, other OPEC members will be able to share any increase in oil Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Secret Key factors to observe over the coming months that might portend a decline in oil prices are: ? Levels of OPEC production well in excess of the cartel's 17.5 million b/d quota, with Saudi output in excess of 5.0 million b/d a key factor. ? Absence of a sustained rebound in oil consumption. ? Falling spot crude prices that dip $2 to $4 below official prices. ? Competition between the United Kingdom and Ni- geria for market share. ? Exodus of buyers for North Sea crudes, forcing BNOC to step up spot market sales substantially. ? Saudi Arabia's hints that it is no longer willing to defend the benchmark. ? Additional price discounting, barter deals, or con- cessional credit terms in countries such as Libya, Iran, and Nigeria. demand among themselves and avoid the conten- tious issue of higher production quotas for the belligerents. ? Iraq's current attempts to increase oil export capaci- ty and revenues could place Baghdad in a position to boost production and demand a higher quota.' A proposal to link to the Saudi oil pipeline to the Red Sea appears to afford Iraq an opportunity to in- crease exports by 500,000 b/d in 1985. Should Iran match any increase in Iraqi oil exports-as Tehran has threatened-an additional 1 million b/d of exports would offset the expected increase in de- mand and keep the oil market soft. ? An end to the hostilities could allow Iraq to increase its export capacity by 2 million b/d or more by reinstalling offshore loading facilities in the Persian Gulf and building a new pipeline link. If Iran also raises its exports by nearly 1 million b/d, substantial cuts by other producers would be needed just to maintain price stability. Table 6 OPEC Desired Crude Oil Production, 1984 a 22.8 0.8 Gabon 0.2 Indonesia 1.7 Iran 2.6 Saudi Arabia b 7.6 United Arab Emirates 1.2 Venezuela 2.1 a Crude oil production needed to maintain financial assets at yearend 1983 levels. b Neutral Zone production divided between Saudi Arabia and Kuwait. In our judgment, OPEC countries such as Nigeria, Venezuela, and Indonesia probably would be unwill- ing to lower output to offset higher production from Iraq and Iran. Indeed, these countries-especially Nigeria-are eager to increase production and reve- nues. Even if these and other OPEC members were to agree to limit output to current quotas for 1985, an additional 3 million b/d of oil from Iraq and Iran could only be accommodated by lowering Saudi pro- duction to less than 4 million b/d. Because of their own internal needs, we believe such an outcome would give the Saudis pause and increase the risk of an oil price slide. Other Market Pressures We expect several factors to grow in significance over producers to prevent an oil price decline the next few years, making it even more difficult for 25X1 25X1 -- r 7 -- - Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 the spot oil market has become increasingly active in recent years. While accurate measurement of the volume of oil traded on the spot market is difficult, the spot market now constitutes 20 to 25 percent of total non-Communist oil trade, compared with 5 to 10 percent in the 1970s. Increasing spot market sales and the introduction of crude oil futures contracts have increased market responsiveness, buyer flexibili- ty, and price transparency, while reducing the volume of oil sold on a traditional contract basis. As a result, to boost oil sales, some producers are modifying contract terms to make deals more attractive. For example, some OPEC countries are: ? Offering buyers term contracts with prices set at the prevailing spot price at time of lifting. ? Reducing the length of the contract. ? Extending buyer credit terms-effectively discount- ing prices. ? Reducing or eliminating restrictions on the destina- tion or resale of crude oil purchases. Price discounting by OPEC members on contract sales adds to price weakness in soft market periods and increases pressure on OPEC's official price struc- ture (figure 4). Indeed, even without official action by OPEC, the growing volume of oil traded as spot sales effectively reduces average world crude oil prices when the market is soft. Oil producers are expanding downstream operations. Refinery capacity within OPEC increased by more than 1 million b/d from 1979 to 1981, and, according to the International Energy Agency (IEA), OPEC will add another 2-3 million b/d to capacity over the next several years. About half of this increase is expected to occur in the Persian Gulf. Projects under construc- tion in Saudi Arabia alone are expected to add as much as 1 million b/d to capacity in the next few years. Product export capacity in OPEC could ap- proximate 3.5 million b/d in 1985 or 1986, roughly 20 percent of expected total OPEC oil exports (table 7). Purchases of existing European capacity by OPEC members, primarily Kuwait, will also increase OPEC's role in downstream operations. Kuwait re- cently purchased both refining and marketing opera- tions in Denmark, the Netherlands, and Italy and is reportedly seeking additional facilities in the United Kingdom. OPEC oil producers in recent years have purchased or are partners in about 350,000 b/d of Table 7 Thousand b/d OPEC: Product Export Capacity Refining Capacity Product Export Capacity Refining Capacity Product Export Capacity b Saudi Arabia 570 -100 1,900 1,000 Kuwait 594 333 720 950 Venezuela 1,400 490 1,600 500 Indonesia 471 85 940 350 Algeria 300 136 450 250 Libya 130 32 360 200 Others 1,205 98 1,870 150 a Projections based on IEA data. b Exportable product capacity calculated based on 90 percent utilization less domestic consumption. Excludes natural gas liquids. refining capacity in Western Europe, and, according to press reports, purchases by private Saudi compa- nies reportedly total an additional 170,000 b/d (table 8). OPEC countries' growing role in product markets, initially planned in order to capture the profits in this sector, may cause additional problems for the organi- zation as it struggles to maintain control of oil prices and production in the next few years. Oil product prices are not included in the cartel's official price structure, and OPEC currently has little recourse if producers choose to discount product prices, despite the fact that such discounts tend to erode crude oil prices. Furthermore, because product sales are more difficult to monitor than crude sales, producers want- ing to increase market share may be better able to disguise overproduction. We believe increasing OPEC penetration into product markets may also be cause for increasing tension between these countries and consuming countries in 25X1 25X1 --- - Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 - Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Secret Figure 4 Oil Production and Price Trends, 1972-83 Oil Production 40 Million b/d Oil Price Trends US S per barrel OPEC production accord a OPEC available production capacity b Benchmark official price c Spot priced a Benchmark price falls five dollars per barrel. b Reflects government production ceilings. c Actual contract sales prices for Arabian Light. d Annual average. Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Table 8 Major OPEC Downstream European Acquisitions, as of February 1984 Refining Capacity (barrels per day) Retail Outlets Kuwait-Kuwait Petroleum Corporation (KPC) Netherlands/Belgium/Luxembourg (February 1983) 75,000 750 Sweden/Denmark (March 1983) 85,000 825 Italy (January 1984) 80,000 1,500 Total to date a 240,000 3,075 Saudi Arabia-First Arabian Corp- oration and Arabian Sea First Italy/Switzerland (April 1983) 170,000 NA Venezuela-Petroven West Germany (December 1983) 105,000 NA Market Vulnerability-The Iran-Iraq Risk Although we expect the market to remain weak over the next year or so, the volatile situation in the Middle East could cause a rapid turnabout in the market. Iraq's deterioriating economic situation and its grow- ing frustration over the protracted war with Iran could prompt Baghdad to initiate attacks in the coming weeks against oil shipping in the Persian Gulf in an effort to bring an end to the conflict. Such action might induce Iran to carry out its oft-repeated threat to close the Gulf to shipping or to strike out against the oil facilities of Iraq and its Persian Gulf allies.' Under these conditions, the world oil market could tighten quickly and cause at least a temporary runup in spot prices for several reasons: ? Uncertainty regarding the extent of damage to the a KPC has expressed interest in purchasing additional downstream oil industry in the Gulf and the length of any supply facilities in the United Kingdom consisting of a 100,000 b/d disruption, including the possibility of further at- refinery and 400 retail outlets. tacks on oil facilities, probably would encourage b Purchased by private Saudi buyers. c Fifty-fifty joint venture in a 210,000 b/d refinery with the West increased spot market purchases. German company Veba. Europe. Reduced oil consumption has created a worldwide surplus of refining capacity, and many OECD refineries have been shut down, particularly in Western Europe. Much of the adjustment, however, will be offset by OPEC's increased capacity. Accord- ing to the IEA, total OECD capacity declined by more than 5 million b/d from 1979 to 1982, and additional cutbacks are required. Moves to further reduce European capacity probably will be difficult and slow, however, and West European countries may decide to impose import fees on oil products to protect the domestic industry and jobs, according to one industry source. Thus far, OPEC has no strategy for coping with these problems, but, given their access to low-cost crude feedstocks, cartel members are in a position to embark on a ruinous price war to force additional refinery closures and increase OPEC's market share. ? A minimum of available surplus capacity in non- Communist countries is outside the Gulf; only about 3 million b/d of the current surplus of 8 million b/d is located outside the region. ? Commercial stocks have been drawn down to near normal levels, and there is little surplus to offset a disruption; government-held stockpiles might not be used initially to prevent price runups. While sizable runups in oil prices are likely during a major disruption of Persian Gulf oil supplies, we cannot predict how high prices would rise or how long such increases might be sustained. We believe the key factors under any circumstances are industry and public perceptions of the disruption and the timing of Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Secret such an event. A price runup of any nature or duration could impact on economic growth, inflation, financial markets, and political stability Because of the many economic variables that come into play, the precise impacts of future supply disrup- tions are difficult to gauge. Using the CIA-linked econometric model and allowing for the 2 million b/d of excess capacity that the industry believes is needed to maintain market equilibrium, we have attempted to measure the order of magnitude of economic impacts from a supply disruption. Our analysis indicates that for each 1 million b/d net supply shortfall, real oil prices would rise by about $10 per barrel and OECD GNP growth would decline by about 0.5 percentage point. In the event of a major price increase, heavily indebted oil-importing LDCs would be hard pressed to finance higher oil import bills given the reluctance of commercial creditors to further increase their exposure. We estimate that a $10 price increase would add another $5 billion in foreign exchange requirements for the five largest LDC commercial debtors-Brazil South Korea Chile the Philippines, and Morocco Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8 Secret Secret Approved For Release 2009/02/06: CIA-RDP85T00283R000700040009-8