ASSESSMENT OF OPEC

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R002000020006-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 55
• Document Creation Date: December 16, 2016
• Document Release Date: October 5, 2004
• Sequence Number: 6
• Publication Date: December 17, 1974
• Content Type: MFR

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MEMORANDUM FOR THE RECORD
SUBJECT: Assessment of OPEC
17 December 1974
Camp David Energy Meeting at the request of the Energy
Resources Councili. The paper was delivered to Mr. James
Reddington on 13 December 1974.
Distribution: (S-6682)
30 - James Reddington (OY.B)
1 - William Bredo (Treasury)
1 - Peter Tocina (Treasury)
1 - Stephen Bosworth (State)
1 - Clement Malin (YEA
1 - NIO/Econ - 25X1
1 - NIO/Econ - (Annex only)
1 - O/DCI -
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reduced. In 1976-77, strains or. OPEC nations to adjust their
production to world demand should lessen, since recovery in
economic growth probably will more than offset the impact
next fear years. Production cuts totaling some 3 million.
b/d -- conceivably as much as 6 million, b/d -- will be
needed by next summer to keep world cil supply and demand.
in balance. Even a surplus of as much'as 6 million b/d
probably can be averted or worked off temporarily by
unilateral production cuts. With the onset. of winter,
pressure on OPEC producers to hold down output will be
Executive Summary
Assessment of OPEC
The price of oi.l has come to be essentially a matter
of political decision and thus is difficult to predict.
Nevertheless, OPEC members have very strong incentives to
stand together on the price issue. If OPEC were to dissolve,
there would be no natural floor for oil prices above the
cost of production, and none of the members want to see the
return of $2.00-a-barrel oil. Furthermore, Saudi Arabia --
the country with the greatest financial capability to cut
production -- has strong political rensons*to conform to
the desire of other Arab producers to maintain high prices.
We thus foresee little strain on OPEC unity during t:e
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Alaskan and North Sea oil will come on stream in
the late 1970s, and the non-OPEC nations of the Third
World are likely to becove self-sufficient a few years
later. By 1980, demand for OPEC oil will fail to a
projected 22-24 million b/d -- or 4-6 million b/d below
the current JAmml -- and additional reductions in demand
could be on the horizon. This situation almost certainly
would require coordinated produ.-tion cuts by OPEC members.
We believe that almost all of the cuts would be absorbed
by the rich Persian Gulf nations and Venezuela, with other
OPEC countries continuing to produce at or-near capacity.
Saudi Arabia could easily reduce output by C-million b/d.'
Declining reserves probably will force Venezuela to cut
output by nearly 1 million b/d by 1980, whatever the market
situation. The other million b/d probably corld be divided
among Iran, Kuwait, and the United Arab Emirates without too
much acrimony. If the Saudis refused to cut output because
of outside political pressure, we judge that the other OPEC
nations would be willing to prorate a cut if up to 5.or 6
million b/d among themselves. In this event, these producers
probably would boost prices to maintain revenues.
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OPEC1 is often described as a producers' cartel.
Although it appeared to act as one last surumer, the cutbacks
then were made by individual states acting on their own,
rot as a co-ordinated group policy. Thus it still can be
said that OPEC bays =n yet been put to the test.
The group has never been forced to act in the tradi-
tional manner of a cartel by allocating production to raise
or maintain prices. It took advantage of the politically
motivated Arab oil cutback to boost prices and then relied
on a few members -- Kuwait, Venezuela, Libya, Iran, and
Abu Dhabi.-- to cut output this past summer.. Whether OPEC
can or will act as a traditional cartel over the long term
in the face of further drops in demand is still somewhat in
'doubt. The answer to this question lies in the political and
economic situations of the principal OPEC members. In some
cases, the personalities of leaders and the traditions and
national character of the country are also important.
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1The members of the Organization of Petroleum Exporting
Countries are Algeria, Ecuador, Indonesia, Iran, Iraq, Kuwait,
'Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and
Venezuela.
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Characteristics and Policies
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The political imperatives that operate in these
countries cannot be'overlooked. No leader can afford
to appear to accept the dictates of Europe or the United
States. The appearancE of "knuckling under to the
imperialists" would create a domestic political situation
very harmful to the party or person in power and be damaging
to their international prestige. Moreover, leaders of all
of?the OPEC countries have a high regard for the organization
itself; none want to be in a position where he would be
accused-of trying to "break OPEC."
Few OPEC leaders would risk serious domestic or inter-
national political problems for the sake of long-term
economic gains'. The horizons of most OPEC leaders -- Saudi
Arabia's Ring Faysal and the Shah of Iran may be exceptions are limited to their lifetimes or tenures in office.
Immediate domestic or international popularity is more
important than potential benefits to future generations.
Only if the welfare of future generations is a'popular present-
day issue would long-tern economic considerations have
much impact on current decisions.
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At the same time, the leaders are sensitive to accusations
that they are enriching themselves at the expense of their
oil-less Third World brothers. Some foresee a situation
wherein they could be isolated from both the Third World and
their traditional Western friends.
(Fears of isolation
and recession are partly responsible for the various schemes
to channel some funds to the Third World and even to some
industrial nations.
There have been no indications of an OPEC consensus
that high oil prices will encourage the substitution of
other fuels to the eventual detriment of the producer nations.
The OPEC leaders' belief that there will always be an adequate
market for oil at a high price.-- as a petrochemical feedstock
if not as a fuel -- is apparently sincere. Furthermore, most
of them seem to believe that the price of oil-substitutes
will 'remain greater than the price of OPEC oil and that each
developed country will be reluctant to rely heavily on high-
prices substitutes. These beliefs could change as the result
of falling consumption and oil and gas development in non-OPEC
areas.-
In sum, we do not see any building OPEC consensus that
prices are too high or unsustainable. Arguments that high prices
will result in depressions in the developed world and disasters
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in the developing world have fallen :nostly on deaf ears.
The OPEC countries' collective inclination is to wait end
oee, while considering many and implementing some schemes
to recycle a portion of their burgeoning revenues.
Decision Making in OPEC
An OPEC consensus that prices are too.-high is not a
prerequisite to a price rollback.. Present OPEC prices
were only in part set by a consensus. The December price
increase was engineered by the Shah with the support or
acquiescence of most other members. The other OPEC members
later participated in the further rises in prices that
have resulted from changes.in participation and taxes.
Three countries -- Venezuela, Iran, and Saudi Arabia
aspire to leadership roles in OPEC. In both Venezuela and
Iran the leadership can see the time -- within two decades --
when their oil production will drop drastically. Given this
time frame, the prospect that technical advances and consumer's
efforts to minimize oil imports could relegate OPEC oil to a
minor role at the turn of the century is of no great importance.
For the Saudis, however, the value of oil in the marketplace
several generations hence is an important factor. They see
themselves producing enormous quantities of oil well into the
middle of the next century. Thus their Appreciation of the inpac
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of present policies on e heir oil, 25, 50,
or more years hence has considerable weight.
New Members
OPEC's membership is unlikely to expand much in the
next few years. In an effort to keep OPEC from becoming
hard to manage, the founding members may attempt, to keep
the club small by strictly interpreting the requirements
for membership, which state that a country musty be a substantial
net crude oil exporter with interests fundamentally similar
to those of other members. Each founding member -- Iran,
Iraq, Kuwait, Saudi Arabia, and Venezuela -- has veto power
over new applicants.
. Trinidad, Bolivia, and Malaysia have sought membership
recently, and Peru and Mexico are likely to do so in the
next several years as their oil production increases. One
or two of these countries may gain full membership and
the others probably will be offered associate membership,
which carries no voting rights. Prospective OPEC members are
unlikely to have much influence. They probably will follow
the lead of the majority on important issues. In the future,
the U.K., Norway, China, Mexico, and Malaysia will certainly
Nave the potential t, undertake substantial oil-exports.
Trends in Supply and Demand
-In 1975, demand for OPEC oil probably will continue to
decline. Slowing economic activity throughout the developed
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world will reinforce the impact of higher prices and
conservation measures on.consumption. Furthermore, the
normal pattern of inventory drawdowns is not expected to
materialize. Thus, by mid-summer, demand for OPEC oil
probably will fall by at least 3 million b/d from the
current level. Crash conservation programs in several
of the major consuming countries perhaps could increase
the surplus by at much as 3 million b/d.
After 1975, as economic recovery begins to offset the
continuing impact of conservation measures OPEC exports will
probably stabilize at about 26-27 million b/d. OPEC exports
will begin to fall again, however, when new oil from Alaska,
the North Sea, China, and perhaps Mexico begin to enter the
market in major quantities in 1978-80. By 1980, OPEC exports
probably will not exceed 22-24'million b/d.
Production Policies
OPEC's production policy for the foreseeable future will
be to regulate output to meet demand and thus maintain the
level of prices established by the group. Thus far, produc-
tion cuts have been made on an individual basis, and no
formal or informal production pro-rationing scheme has been
agreed upon. OPEC will probably need to cut output further
this coming summer, but it is not at all clt:ar now how the
cuts will be made, or which member will make them. What
seems likely is that one or more countries will cut output
outside the OPEC framework as thnI did. this past summer.
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Similar moves to cut or raise output should -.
be adequate to meet the small expected fluctuations in
demand until the late 1970s. Kuwait, Libya, Iraq, the
United Arab Emirates (Abu Dhabi), Ecuador, and Venezuela
have all shown a willingness to voluntarily reduce their
production substantially. host other members have also
made small voluntary production cuts.
In 1975, OPEC members will have estimated surplus
revenues equivalent to about 18 million b/d of output
(see the table). If Saudi Arabia refused to cut its
output next year in the face of an oil surplus, the other
members of OPEC, with surplus revenues equivalent to about
10 million b/d, could reduce output by 6 million
b/d and still receive' far Ore money than they could spend.
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OPEC Countries:Revenues and Ex enditures"1975
(assuming current levels-ZT-311 output and Oct 1974 o 1 prices)
Annual Export
Revenues
Preliminary Estimates
of Import Expenditures
Surplus .
Revenues*
Surplus,iA Millions
of Barrels Per Day
Billion
Billion $
Billion $
Algeria
4.1
4.8
-0.7
-0.17
Ecuador
0.8
-0.3
-0.08
Indonesia
5.6
5.1
.5
0.15
Iran
21.3
10.2
11.1
3.08
Iraq
4.4
1.8
2.6
0.86
auwait
8.2
6.2
1.81
Libya
5.3
4.1
1.2
0.29
Nigeria
9.6
.3.0
6.6
1.66
Qatar
2.0
.4
1.6
0.43
Saudi Arabia
32.4
5.0 ~
27.4
7.71
5.9
1.8
4.1
1.10
Venezuela
8.9
5.1
3.8
1.13
I0$.5 .
TUT
17.9
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The present massive excess of oil revenues above import
requirements places nearly all of the member states in the
position of being able to i:aduce production substantially to
maintain prices. For now and the next couple of years, nearly.
all producers can act as price setters, with only Algeria,
Ecuador, and Indonesia being forced by their import needs
to act as price takers. As their expenditures rise, however,
the number price setters will dwindle sharply. By the
late 1970s, only Saudi Arabia, Kuwait, the Emirates and perhaps
to a much lesser degree Libya, Iraq and Iran will still
have the freedom to act as price 'rs.
During the next few years, the cartel will be able to
cope with any likely oil surplus without Saudi participation,
but by the late 1970s Saudi co-operation will be essential.
Continuing slow energy demand growth combined with growing
production of energy in the OECD, China, and non-OPEC Third
World-countries will force some formal or informal system of
allocating cutbacks by 1978-80. If OPEC is to succeed in
holding prices high la-;:e in the decade, the OPEC core --
particularly Saudi Arabia -- will have to cut back output much
more sharply than OPEC as a whole, or must recycle revenues.
to other OPEC states to facilitate their cutbacks, Venezuela,
although not in the position of a price setter, will also be
reducing in output substantially as its oil reserves are depleted.
The need for sharp output cuts will greatly increase the
influence of Saudi Arabia and Kuwait. These nations could
afford to make the necessary cuts because they would still
have ample resources. ?
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The alarming prospect of a'quantuin drop in oil
income if the oil producers competed for market shires
? should serve to closely unite OPEC. One possible OPEC
response would be to again sharply boost oil prices about
1980 or so, to recreate a widespread flexibility to cut
output still further. Even if the Free World is highly
successful in holding down the growth in energy consumption
and in boosting domestic and other non-OPEC sources of_
energy supplies, it will still rely on the present members
of OPEC to provide more than 20 million b/d of oil in 1980
down from about 29 million currently.. Given this level of
demand, there is no reason why O'-=EC would not be able to
make the price increases stick'-- at least for a few
years. Because of the short-range considerations that
govern the policy actions of most OPEC governments, it
would be highly unlikely for them not to attempt such a?
move.
Price Polio
For the next few years, OPEC has indicated that it will
probably attempt to maintain oil prices at about their' current
level in real terms. 'OPEC can be expected to make small
periodic price increases to offset at least part of the
increased cost of OPEC imports. Although the odds favor
the adoption of some sort of price indexing syste! to tie
oil prices to the prices of industrial and agricultural
exports, it is not clear now now or wnen sucn a system
would be implemented. Indexing is supported by the
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OPEC Secretariat and many of the more important producers,
especially Iran. Saudi Arabia, however, opposes automatic
indexing. Thus, compromise seems likely with, oil prices
rising less than the cost of imports. In any event, price
negotiations among -he main producers will continue for
.
years.
In the late 1970s and beyond, particularly if foreign
exchange expenditures by the smaller producers and Venezuela
rise rapidly, pressures will mount within OPEC for another
sizeable boost in real oil prices. Indeed, the arithmatic
of the situation will sooner or later push even the price
setters into a situation from which the only escape -- albeit
effective only for a few years -- will be to boost prices
sharply. Such a move might be self defeating in the long-
run but probably would be the. only viable alternative
available to the OPEC countries at that time.
As time goes on, and certainly by the late 1970s, many.
OECD nations will have strong vested interests in the
maintenance of high energy prices. They will likely have
protected their energy industries from fluctuations in
world price levels. The U.R. in particular is an example
of the strength of the vested interests which will have
developed. Because of the large debts it is currently
running up, it would be placed in a very difficult situation
if oil prices fell sharply just as North Sea output reaches
substantial levels. Similar, although less influential,
vested interests will have been developed in most other OECD
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nations, as their domestic energy producing and consuming
industries adjust their operations in-response to high energy
prices Japan, because-of its small domestic energy potential,
iF probably an exception among the major OECD nations.
On the producer side, Saudi 1rabia may be an exception
in that its petroleum production and pricing policies are
motivated mainly by political factors. Considerations of
Arab unity, the Israeli occupation of Arab land, and anti-
communism play a large but undefinable role in Saudi petroleum
policy formulation. Outside political pressure could also
be important. Domestic political trends are not encouraging.
There is a body of opinion in Saudi Arabia that favors high
prices for economic and conservation reasons, and this group
appears to he growing in influence. Moreover, the Saudis
have clearly indicated that OPEC unity ranks high among its
political objectives.
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If Saudi Arabia could be influenced to maintain output
at current levels. despite pressures froia other producers,
it is doubtful if any other producers would agree to go along
with the Saudis. Even Abu Dhabi would probably be more
swayed by economic considerations and Iranian iressure than
by loyalty to Saudi Arabia.
Subgroup Behavior
Subgroups within OPEC are likely to put the K'hole
organiiation's interests first, since for the most part
they see their interests best served by it. Factions within
the organization probably will not push any issues so far
as to risk the breakup of OPEC. Although some subgroups,
such as the Arab members, have the power to manipulate the
market at the expense of other members, we believe they
value the continued existence of OPEC more highly than
short-term economic gains. .
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The Organization of Arab Petroleum Exporting Countries
(OAPEC) is the most important producer organization outside
OPEC. It was formed in 1968 by Saudi Arabia, i'uwait, a.td
Libya -- then headed by King Idris. OAPEC's principal goal
was the coordination of oil policies among the moderate
Arab countries. Despite-the change In Libya's government
and the addition of new members (some not large enough
exporters to merit OPEC membersh4.p) -- Algeria, Bahrain,
Egypt, Iraq, Qatar, Syria, and the United Arab Emirates --
Saudi Arabia is still the driving force behind OAPEC.
The actions taken for political reasons to reduce
production and the embargo of selected countries during and
after the October war were a sharp deviation from OAPEC's
main objective. Under Saudi leadership, OAPEC is likely
to continue to stress the long-term economic goals of the
organization such as its Arab tanker fleet and the Bahrain
dry dock project. Short of major deterioration in the Arab-
Israeli situation, the OAPEC countries are unlikely to take actio:
outside the OPEC framework to manipulate oil prices-or production
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Almost two years agog, *22 Latin American and Caribbean
countries agreed in principle to establish a regional energy
organization, Organization Latinoamerica de Energia (OLADE).2
OLADE's principal objectives are:
o Development of Latin American energy resources with
the use of the most advanced technology.
o Higher prices for oil shipped to industrialized
countries.
.o Direct government-to-government agreements between
oil-producing countries of OLADE.
o Uniform policy by OLADE countrjes toward foreign
oil companies. I
o Use of oil by OLADE's oil-producing. countries as a
lever.
OLADE has yet to be officially put into operation. The
members have been unable to agree on the basic document to set
up the organization. The diversity of views among the original
signatories probably will continue to hamper OLADE's effectivenes
We do. not foresee a breakup of OPEC for at least for the
next several years. In addition to its role in setting oil
prices, the members value the organization's continued e~'istence
as a forum for exchanging ideas and information, OPEC's
membership probably will not expand much in the next few years,
2The. members of OLADE are Argentina, Bolivia, Brazil, Chile,
Columbia, Costa Rica, Cuba, Dominican Republic, Ecuador, El
Salvador, Guatemala, Guyana, Honduras, Jamaica,, Mexico, Nicaragua
Panama, Paraguay, Peru, Trinidad, Uruguay, and Venezuela.
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and prospective members are unlikely to have much influence.
Subgroups within OPEC are likely to put the whole organiza-
tions's interests first, since, for the most part, they see
their interests best served by it.
A Natural Gas Cartel?
Some OPEC members are considering the. establishment of
a cartel for liquefied natural gas -- LNG. OPEC, because
.of'the large production of associated gas and the ownership
of major non-associated gas deposits, control about-56%
of total known Free World natural gas reserves. This is
much smaller than their 83% of control over known Free World
crude oil reserves, however, and will give them less leverage
in controlling prices. In any event, a ceiling on LNG prices
will be set by the level of crude oil prices. The LNG
-industry is still in its infancy and any OPEC move to set
prices higher than market forces would allow, will greatly slow
its development. OPEC will probably try to hold gas prices
at least as high as crude oil on a delivered BTU basis, so as
not to lrse from the substitution of gas for oil. Because
the consuming countries do not now depend on OPEC owned
natural gas, OPEC has little leverage and would gain little
h?"efit by forcing gas prices above oil prices..
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ANNEX .
POSITIONS AND ATTITUDES OF OPEC MEMBERS
From an economic point of view,. OPEC members can be
divided into three groups, with. somq overlap.
o First, Saudi Arabia, Kuwait, Libya, Qatar, and the
United Arab Emirates, ihi do not operate under any
? important economic restraints. These countries have
ample oil reserves and as much income as they can
effectively spend under any foreseeable price or
production level.
? o Second, Iraq, Iran, Nigeria, Indonesia, and Algeria,
the heavily populated countries with ambitious development
plan. These states lean toward whatever combination of
?price and production maximizes revenues. Within this
group, the financial pressure is much greater on
Indonesia and Algeria than on the other states.
o Third, Venezuela, Ecuador, and Algeria, which are
.concerned about declining o.'.l reserves and give
conservation an important place in their policies.
If substantial new reserves are not discovered in
?Indonesia and Nigeria, these countries also will become
the principal states make up 0'. EC.
increasingly concerned about conservation.
The following sections sketch the factors that differentiate.
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Al zeria
Background
Algeria in the 1970s is being transformed from an
agricultural to an oil-producing econcmy. Petroleum and
natural gas account for 18% of GDP and.three-fourths of
exports. Algeria is richly endowed with natural gas, but
its known oil reserves axe zaaltively small. The country
has a larger population (16 million) and a lower level of
oil reserves than most Persian Gulf oil states. In 1973
per capita GNP was less than $500, but is expected to double
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by the early 1980s. Development efforts have led to large
foreign debts, but the country has maintained its credit-
worthiness because of potential oil and gas income. Since
the nationalization of.most of the oil industry in,1971,
only three foreign companies have a share in oil production
(two French and one American).- Sonatrach, the state-owned
company, controls about 80% of output.
Prospects for Spending Oil Revenues
Algeria has more absorptive capacity than most of the
oil producers?of the Middle East because of its large
population, good infrastructure, and the industrialization
and modernization started under the French. Crude oil
production capacity will probably increase to about 1.4
-million b/d by 1980 from the current -level of about I million. 25
.Developmental expenditures of the central governm nt in 1974
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are expected to rise to $2.2 billion, 55% more than in
1973. In addition, administrative budget expenditures are
to be increased 9% to $1.7 billion, . Spokesmen place the
total cost of a 4-year development plan through 1977 at $28
billion. Three-fifths will be directed to industry, but
education and training will receive high priority as well.
Little in the way of military purchas:s is planned.
!(lgeria, although it aspires to OPEC leadership, is
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clearly a price taker. It needs all the funds it will
acquire through oil and gas revenues to advance its ambitious
development program, service a large foreign debt, and provide
expected government services. The government has strongly
supported price hikes for oil and would increase prices
further if possible, but would be reluctant to reduce output
further. The Algerian attitude on oil prices reflects (a)
the fact that absorptive capacity probably will exceed oil
revenue in any case; (b) the small site of oil reserves;
and (c) good prospects for developing other exports. Algeria
thus is willing to sacrifice long-run income for short-run
income from oil.
Position on OPEC Issues
Despite an emphasi3 on production, Algiers has been
willing to sacrifice: for OPEC causes that it considers worthy.
It has opposed meeting with consumers, and President Boumediene
was an outspoken critic of the Washington Energy Conference.
The government fears that meetings could result in a special
relationship between large consumers and 'large producers that
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might be inimical to Algeria's interests. President Boumediere
proposed the April UN General Assembly debate on world
economic problems. In the debate, Algiers advanced the
classic terms-of-trade argument that LDCs are forced to sell
cheap and buy dear and the corollary that petroleum cartels
and other possible cartels of raw materials producers?are
justified. Algeria also advocated nationalization of raw
material 'production in LDCs, and the removal of such middle-
men as the international oil companies.
Algeria: Economic Fact Sheet
Estimated
1965 1910 1973 1974
Million.Persons
Population 12.0 14.3 15.7 16.2
Thousand B/D
Cruse oil production 600 1,000 . 1,100 . 930
Billion US $
GNP 3.4 5.5 7.5 11.5
Government oil
revenues 0.1 0.3 1.0. 3.7
Foreigh exchange
expenditures 0.6 1.1 1.5 3.9
Foreign exchange
reserves
0.2
0.3
1.1
Approved For Release - 20006-8
2.1
25X1
 Ecuador
Background
Ecuador's economic situation has improved markedly
since the beginning of the petroleum boom in mid-1972. Last
year, real G:JP grew by about 15t to $2.3 billion, boosting
per capita income to $350. Government oil revenues, which
totaled some $200 million in 1973, are being used primarily
to -finance increased spending on social and economic infra-
structure. The 1973 budget registered a $4.6 faillion surplus,
compared with a deficit of $20 million in 1972.
The increased inflow of petroleum dollars, while stimulating
economic growth, has added substantially to inflationary
pressures. Consumer prices rose 18% last year. During the
first 7 months of this year, prices climbed an alarming 16%.
Inflation and shortages of basic foodstuffs are cre