December 8, 1997

On December 1, 1997, the Organization of Petroleum Exporting Countries (OPEC) announced an increase in their crude oil production ceiling from 25.033 million barrels per day to 27.5 million barrels per day, a growth of just under 10 percent. The increase was allocated on a pro rata system where most country quotas were increased by the same percentage. Algeria received a slightly larger increase because it received a smaller increase the last time quotas were set. However, OPEC crude oil production is not expected to increase by 10 percent since many countries are already producing at maximum capacity. Bottom line: We expect an increase in OPEC crude oil production of about 0.6-0.9 million barrels per day. This could lead to somewhat lower prices than previously expected.

In terms of their crude oil production and this new agreement, the individual OPEC countries can be split into three categories. The first is those countries that do not have the production capacity to meet the new quotas set for them. This category includes Indonesia, Iran, and Libya, all of which we estimate will not be able to produce as much as they are allocated in the new agreement. The second category is those countries whose crude oil production not only exceeds their current allocation, but their new one as well. This category includes Nigeria, Qatar, Venezuela, and Iraq, which due to United Nations (UN) sanctions is a special case. Under the new agreement, these countries will continue to produce more than their allocation, but whether they will increase production further is unclear at this time. The last category is those countries that will actually increase production as a result of this agreement. It is this category that is expected to feel the greatest impact of the new OPEC quotas. In this group is Saudi Arabia, Kuwait, the United Arab Emirates, and later in 1998, Algeria. These four countries alone should add nearly 0.4 million barrels per day to the market in 1998.

On December 4, the UN Security Council approved a renewal of the Iraqi "oil-for-food" program that allows Iraq to sell up to $1.07 billion worth of crude oil every 90 days, for 2 consecutive 90-day periods. The proceeds from the oil sale are then used to pay for war reparations to Kuwait, UN activities in Iraq, and for humanitarian goods to be distributed by the UN to the Iraqi people. Iraq has stated that they will not export any oil under the latest 6-month sale window until an aid distribution plan is approved. In fact, Iraq stopped pumping oil through the pipeline running through Turkey on December 5, the first day under the new 6-month window. The UN has given Iraq until January 5, 1998 to submit an aid distribution plan. Later in January 1998, UN Secretary-General Kofi Annan will release a UN report to the UN Security Council that will provide a status of the "oil-for-food" program. In our world supply/demand balance, we have assumed that the UN Security Council will approve a 50% increase in the "oil-for-food" program, thus allowing Iraq to export about 1.1 million barrels per day in 1998.

With uncertainty over whether Iraqi oil would continue to be exported under the UN oil-for-food deal lessened and an increase in OPEC crude oil production of between 0.6-0.9 million barrels per day expected from the new OPEC agreement, prices could fall somewhat in the near term. Over the next few months, prices may remain at this slightly lower level, but prices are not expected to fall precipitously as oil demand is expected to continue strong growth in 1998.

File Last Modified: December 8, 1997

Contact:

Douglas MacIntyre
dmacinty@eia.doe.gov
Phone:(202) 586-1831
FAX:(202) 586-9753

URL: http://www.eia.doe.gov/emeu/cabs/opecmtg.htm

Energy Information Administration