November 20, 2001 No. 12

The Marginalization of OPEC's Pricing Power

November 20, 2001 | By Dr. Nimrod Raphaeli*
No. 12

Facing with declining demand and plummeting oil prices OPEC oil ministers met in Vienna on November 14 to consider reduction of OPEC production by 1-1.5 mb/d (million barrels per day). In the communiqué, the ministers agreed to reduce production by 1.5 mb/d effective January 1, 2002 "subject to a firm commitment from non-OPEC producers to cut their production by a volume of 500,000 b/d simultaneously." The non-OPEC members, and Russia in particular, have already declined the conditionality built into OPEC's decision. Saudi Arabia's Minister of Oil, Ali Al-Nu'aimi was quick to blame non-OPEC major producers, Norway, Mexico and Russia, but particularly Russia, for failing to go along with a considerable reduction in its production (in fact, Russia offered a symbolic reduction of 30,000 b/d). Russian oil policy is outside our frame of reference, but it suffices to point out that it was unrealistic, if not naïve, to expect Russia to follow OPEC on the day when its President Putin was given a royal welcome by the Government of the United States.

OPEC has had a perennial problem of inadequate compliance with production quotas which the Iranians refer to as "oil leakage." Only last weak did the Nigerian Minister of Oil attribute his country's considerable leakage to "a problem with logistics." Indeed, OPEC has seldom been effective as a cartel. Nevertheless, there are some trends in oil production which we would like to consider briefly.

In reviewing the table below, a number of observations suggest themselves:

First, as a percentage of total world production, OPEC's production has declined between 1975 and 2000 from 50.67% to 42.82%. This trend is likely to accelerate once the Caspian Sea oil becomes available on the market.

Second, the share of the Gulf countries in OPEC has remained relatively steady with a share of 70% and 68% in 1975 and 2000, respectively. However, as a percentage of total world production, gulf countries' share in production has declined from 35% in 1975 to 29% in 2000.

However, apart of the production issue there are certain long-range developments which may eventually exert pressure on OPEC' as a cartel:

Crude Oil Production by OPEC and Non-OPEC Members
(Million of Barrels per Day)
Year Gulf Nations Total OPEC Total Non-OPEC Total World Production % Total Gulf Production/Total OPEC % Total Gulf Production/Total World Production % Total OPEC/Total World
1975 18.93 26.77 26.06 52.83 70% 35% 51%
1980 17.96 26.61 32.99 59.6 67% 30% 45%
1985 9.63 16.18 37.8 53.98 60% 18% 30%
1990 15.28 23.2 37.37 60.57 66% 25% 38%
1995 17.21 26 36.33 62.33 66% 28% 42%
2000 19.94 29.11 38.87 67.98 68% 29% 43%

Source: Energy Information Administration

(a) Gulf Nations include Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and United Arab Emirates

(b) Ecuador withdrew from OPEC in Dec. 1992 and Gabon withdrew in Dec. 1994, they are both are included under the "Non-OPEC" group for all of the years listed above.

  • The Chinese and Russian governments signed last September 8 an agreement for constructing a pipeline to carry Russian oil to Chinese refineries. The pipeline will be 2400 km (1500 miles) long with a capacity to carry 30 million tons of oil a year. It will cost $10 billion to construct and it is due for completion in 2010. Currently, China imports two-thirds of its oil from the Middle East and, while its demand for oil will increase over time, the Russian oil will diversify China's sources of import.
  • Concerned about potential political risks in the Middle East, countries in Southeast Asia are shifting to the use of natural gas, often locally produced. An example is the Philippines gas complex opened recently at a cost of $4.5 billion. It will reduce Philippines import of oil by $700 million a year.
  • Singapore and Indonesia are constructing two pipelines, one for gas and another for oil.
  • Through another pipeline, Indonesia will supply natural gas to Thailand and Malaysia. This is part of an ASEAN (Association of Southeast Asian Nations) policy to build an independent energy network.
  • With a moderate government in Afghanistan (in the making) a new impetus will be provided to the construction of a natural gas pipeline that will link the Caspian Sea with Turkey and Europe via Pakistan and Afghanistan. What makes this project doubly attractive is that it will be outside the OPEC's framework.
  • Development of renewable energy sources. For example, responding to environmental demands, the U.K. will increase its use of renewable sources to 10% in the 2010.
  • Development of new sources of energy such as solar energy that has shown a promising beginning.

It would be folly to sing the requiem on OPEC but consumers need not shiver if OPEC threatens to cut production.
Sources: Al-Hayat, November 11, 2001; Middle East Economic Survey, October 8, 2001; Tehran Times, November 10, 2001; Al-Sharq Al-Awsat, November 15, 2001; OPEC Press Release No. 24/2001 of November 15, 2001.

Terrorist Accounts
A bulletin from the Office of Foreign Assets Control of the U.S. Treasury Department, issued on November 7, 2001, lists 62 entities and individuals as "Specially Designated Global Terrorists." The bulletin, which was circulated to other governments, has triggered a variety of responses, particularly in the Arab and Islamic banking system:

Islamic Financial Institutions Complain about Unjustified Attacks
At the meeting of Islamic banks and financial institutions held in Bahrain last week under the headline "Integration and Innovation," speakers complained about "a public relations campaign, from unknown sources," on these banks and institutions and their linkage to terrorist financing. Many speakers, including central bankers, emphasized that they were not charitable organizations but well-established financial institutions subject to strict banking controls and that their religious orientation "would not allow them to take part in sabotage or terrorist activities." In response to a question whether the criticism might affect the size of deposits in Islamic banks, the crown prince of Bahrain, the center of the largest number of Islamic financial institutions, said: "Capitals are like water. They come and they go. The important thing is to protect the institutions' strength and stability."
Source: Al-Sharq Al-Awsat, November 12, 2001.

Bahrain: Painful Blow by U.S. at Islamic Banks Expected
Participants in the International Conference for Islamic Banks, held in Manama, Bahrain, anticipate the U.S. to deal a painful blow at three Islamic banks in the US by freezing their assets and consequently "paralyze their activities completely." The bankers said they have condemned the terrorist activities in the U.S. and denied any relationship with Al-Qaida or any one of its financial subsidiaries. As a precautionary measure, however, the Islamic banks have withdrawn their money from American and European banks. These withdrawals have reached approximately $1 billion.

There are 81 Islamic banks operating in Bahrain, in addition to 20 commercial banks and 84 banking representatives with a total capital of $100 billion.

The central bank of Bahrain has confirmed that there were no bank accounts associated with terrorist activities.
Sources: Al-Qabas, November 12, 2001; Al-Hayat, November 11 and 12, 2001.

Al-Barakat Bank Closes 130 Branches Worldwide
Sheikh Abbas Jam'ali, the director of Bank Al-Barakat in Somalia, has decided to close 130 bank branches worldwide, including the main branch in the U.A.E. Bank Al-Barakat and its many subsidiaries and associated companies appear on the U.S. Bulletin of terrorist entities.

Jam'ali stated that the financial transactions channeled through the bank's 130 branches amount to $4 million a month but denied any connection with terrorist activities. As to why the bank would appear on the U.S. list, Jam'ali speculated that the listing of the bank as a terrorist-linked entity was either because the bank has an Islamic name or because the U.S. has received false information.

Bank Al-Barakat was established in 1991 in Somalia after the fall of President Muhammad Sayad Barri, and has since acted the central bank for Somalia.

Meantime, on November 8 Swiss authorities have froze the assets of "Al-Nada Investments," previously known as "Al-Taqwa" which is also on the U.S. list of terrorist-linked entities.
Source: Al-Hayat, November 9, 2001.

U.A.E.: Central Bank Freezes 62 Accounts
In response to the U.S. Bulletin the central bank of the U.A.E. has frozen the banking accounts of 62 organizations and individuals suspected of connections with Al-Qa'ida. Among these are two prominent Muslim banking and money-changing organizations, the "Al-Taqwa" and "Al-Barakat." The following is a partial listing of these entities as an indication of the width and breadth of their activities and geographical expansion:

Al- Barakat Bank Somalia, Dubai (U.A.E.)
Al-Barakat International (a.k.a. BARACO Co.) Dubai, U.A.E.
Barakat Wiring Service Minneapolis, MN
Barakat International Sweden
North America Barakat, Inc. Toronto, Canada
Barakat Telecommunications (a.k.a. Btelco) Somalia, Holland
Barakat Enterprise Columbus, OH
Barakat Wire Transfer Seattle, WA
Taqwa Trade, Property and Industry Co Vaduz, Liechtenstein
Bank Al-Taqwa Ltd. Nassau, Bahamas

The United States has accused Bank Al-Barakat and Bank Al-Taqwa and their subsidiary financial institutions of operatingunofficial money transfer known as "hawala" in the millions of dollars from their extensive network system to terroristorganizations and for keeping no records of their transactions.
Source: Al-Hayat, November 9, 2001; Al-Sharq Al-Awsat, November 9, 2001.

Italy Arrests Head of Bank Al-Taqwa
Italy has arrested the two senior executives of the Al-Taqwa Bank and frozen their accounts in Italian banks. The two, YusufNada (Egyptian national) and Ghaleb Hamat (Syrian national) have connections with the Moslem Brotherhood movement.

Al-Taqwa Bank was established 10 years ago in the Bahamas with a capital of $50 million, subsequently increased to$100 million. Substantive losses in East Asia and alleged "harassment" by various police agencies because of its Islamic naturecaused the bank to collapse. While under liquidation, the bank established "Nada Management" which is suspected of servingas an illegal channel of funds to terrorist organizations.
Source: Al-Hayat, November 8, 2001.

Beirut: Freezing Hizbullah's Accounts –Pressure on Iran
Official sources maintain that the U.S. demand to freeze the bank accounts of Hizbullah is meant to pressure Iran to providesecurity and military facilities in connection with the war on Afghanistan. The U.S. would like to expedite the prosecution of thewar before the onset of Ramadan on November 16. Subsequently, the Lebanese Prime Minister, Rafik Al-Hariri, expressed hissatisfaction with the position taken by both France and Russia in support of his position against freezing the bank accounts ofHizbullah.
Sources: Al-Hayat, November 7 and 10, 2001.

Egypt Not Bound by U.S. Lists of Global Terrorists
In an interview with Al Sharq Al-Awsat, Egypt's Foreign Minister, Ahmad Maher, declared that the lists circulated by the U.S.of global terrorists do not bind Egypt that is "bound only by the resolutions of the Security Council on terrorism."
Source: Al-Sharq Al-Awsat, November 13, 2001.

Dallat Al-Baraka: No Connection With Terrorism
The Saudi group of banking and trading houses known as "Dallat al-Baraka" has denied any connection with terrorist activities.It said it has absolutely no relationship with the Somali banking group known as Bank Al-Barakat.
Source: Al-Hayat, November 9, 2001.

Saudi Intelligence: Bin Laden's Wealth is $40-50 Million
Prince Turky Al-Faisal, the former chief of Saudi intelligence discounted the Western reports about the "fabulous wealth" of binLaden. According to Prince Turky, who had a long record of seeking to bring bin Laden to Saudi Arabia for trial, estimates hiswealth at $40-50 million. Bin Laden's biggest financial contribution in Afghanistan was building a security shelter for MullahOmar (Head of Taliban) modeled after the Saddam Husain's shelter in Baghdad.
Source: Al-Hayat, November 8, 2001.

France: No Remittances from Saudi Arabia Without Adequate Information
The French banking authorities will not accept remittances from Saudi Arabia to beneficiaries in France unless there is sufficientinformation on the beneficiary (full name and address), his bank account and the purpose of the transfer.

Similar measures have been adopted by the U.S. and U.K. after September 11.
Source: Al-Sharq Al-Awsat, November 12, 2001.


Morocco: Water Shortage
As a consequence of a climate change (rising temperatures) combined with persistent drought (rainfall down by two thirds in thelast three years) the Moroccan economy has sustained losses estimated at $10 billion primarily because of decline in agriculturalproductivity. Experts believe that water is likely to be one of the most important subjects that will occupy Moroccan policymakers in the medium and long-term as population growth will continue to exert downward pressure on the amount of wateravailable for personal consumption.

While the agricultural sector makes up 20% of GDP it consumes 70% of the estimated 14 billion cubic meters of wateravailable in Morocco, followed by industry with 20% and personal consumption with 10%. Agricultural use of water hasincreased from 3 to 6 billion cubic meters between 1960 and 2000 but there will only be 5.2 billion cubic meters for agriculturein 2025 when the population would reach 50 million. In this environment of scarcity, rationalizing agriculture would be the firststep toward introducing efficiencies in the uses and objectives of water.
Source: Al-Hayat, November 9, 2001.

Saudi Arabia: Water Investments
The Minister of Agriculture and Water, Dr. Abdallah Abdulaziz al-Mu'ammer estimates the investments for water desalinationin Saudi Arabia at $88 billion. This will meet personal consumption level of 300 liters (75 gallons) per person daily. In themeantime, the kingdom is seeking to rationalize the use of water in agriculture. For example, wheat cultivation has declined from924,000 hectares in 1994 to 430,000 this year and the cultivation of barley has been sharply reduced from 315,000 hectares in1996 to 25,500 this year. Saudi Arabia will thus ceases to be an exporter of wheat which has never made economic sense.

Saudi Arabia is invoking religion and nationalism to educate people to save on water consumption.
Source: Al-Hayat, November 4, 2001.

Enormous New Investments in Energy Projects in the Middle East
The ministers of energy of the Gulf Cooperation Council, meeting in Abu Dhabi recently, have estimated the cost of new energyand petrochemical projects in the Gulf region and the Middle East at $60 billion through 2010. The ministers seem to suggestthat the events on September 11 will have no more impact than the Gulf war in 1992. At the same time, many of the Gulfcountries are moving ahead with their privatization programs. Saudi Arabia alone has opened before foreign investors thepetrochemical and gas industries that could attract $25 billion in new investments.
Source: Al-Hayat, November 7, 2001.

FDI Flow to Middle East Remain Insignificant
According to the recently published World Development Report by the United Nations Conference on Trade andDevelopment (UNCTAD) Foreign Direct Investment (FDI) inflows into the Middle East and North Africa have doubled from$2.3 billion in 1999 to $4.6 billion in 2000, but they represent only 0.36% of global totals. Almost all of the FDI inflows went,in order of magnitude, to five countries: Egypt ($1.23 billion), Saudi Arabia ($1,00 billion), Tunisia ($781 million), Bahrain($500 million), and Jordan ($300 million).
Source: Middle East Economic Survey, October 1, 2001.

Tunisia: Government Attempt to Save Failing Companies
There are 1043 businesses in Tunisia facing financial difficulties as a result of September 11. So far, 525 businesses, whichprovide 5500 employment opportunities, have received government assistance. Another 160 businesses that provided 5500employment opportunities had declared bankruptcies.

Of the businesses with financial troubles, 64% are in the industrial sector, 33% in the trade and services sector and 3%in the agricultural sector.
Source: Al-Sharq Al-Awsat, November 12, 2001.


Iraq: Capital Increase for Military IndustryThe Iraqi cabinet, chaired by Saddam Husain, has approved capital increases in companies that are owned by the MilitaryIndustry Authority. No information was provided on the size of the capital increase or the number of and the activities of thecompanies concerned.
Source: Al-Thawra (Baghdad), November 12, 2001.

Iraqi Imports of Cars
Iraq has imported 5000 Peugeot 306 and 1000 Peugeot 406 for distribution to buyers who ordered them in advance.

In a report to the Iraqi parliament, Udai Saddam Husain, who was elected early this year as a member to that body,submitted a report, which he published in his newspaper Babil, criticizing the government's policy for using the "Oil for Food"program to import consumer goods instead of buying spare parts for factories which have been closed since the Gulf War.Udai urged the government to import new oil refineries and modernize existing refineries. He said Iraq would need newrefineries in case it is subjected to new attacks by Western powers.
Sources: Al-Iqtisadi, November 14, 2001; Babil, November 10, 2001.

Large Number of European Firms Participate in Baghdad Fair
Hundreds of European companies are competing to sell goods at the annual Baghdad Trade Fair despite the difficulties of doingbusiness under a UN sanctions regime. A total of 1,650 firms from 48 countries are taking part, and the biggest participants areGermany, France, Italy, Spain and Turkey. The show spans everything from cars to agricultural and industrial equipment andpharmaceuticals, textiles and electrical and household goods. There was no military equipment which Baghdad is banned frompurchasing.
Source: Tehran Times, November 10, 2001.


Egypt: Decline in Foreign Currency Revenues Threatens a Dollar Crisis
Bankers and economic experts have warned of a new crisis in Egypt's exchange market, particularly the trading in dollars, dueto a sharp decline in foreign currency revenues estimated at $3 billion. This is the result of a number of factors, including fewerremittances by Egypt workers abroad, the sharp decline in the tourism industry and revenues from the Suez Canal andcontracting foreign direct investments. The problem is aggravated further by the moneychangers who are withholding the dollarsfrom the market, anticipating the depreciation of the Egyptian pound.
Source: Al-Sharq Al-Awsat, November 11, 2001.

Afghanistan: Currency Appreciates
Following the fall of Mazar Al-Sharif and in anticipation of the defeat of the Taliban, currency traders in Kabul have raised thevalue of the Afghani (national currency) vis-à-vis the dollar. Two days before the fall of Kabul the Afghani was selling at 37,300for the dollar against 42,000 for the dollar two days earlier. As a matter of fact, the Afghani has registered solid appreciationsince the start of the U.S. air campaign from a low base of 80,000 Afghanis for the dollar. It goes to prove that a free market,even a restricted one, is a good predictor of political developments.
Source: Al-Hayat, November 11, 2001.


Israel: Minister of Regional Cooperation Meet with Arab Office in Doha
The Israeli Minister of Regional Development who was attending the World Trade Organization meeting in Doha, Qatar, held anumber of meetings with ministers of trade from Arab countries which he described as "splendid." Unlike other internationalmeetings where Arab delegates make angry statements about Israel, the WTO meeting dwelt upon trade and economy.

When asked about the status of the two Israeli trade offices purported to have been closed by Oman and Qatar, Miloanswered that the two offices "are alive and well."
Sources: Al-Sharq Al-Awsat, November 11, 2001; Al-Qabas, November 12, 2001.

Egypt Discounts Inviting Israel to Cairo International Fair
The Egyptian government informed members of parliaments that it has definitely decided not to extend an invitation to Israel toattend the Cairo International Fair due to open next March. The President of Fairs and International Markets, MuhammadAl-Sa'id Saleh, declared the decision was "final and irreversible" because of persistent Israeli aggression against the Palestinianpeople.
Source: Al-Sharq Al-Awsat, November 13, 2001.

PA: Rise in Unemployment
According to the Central Statistics Office the number of unemployed Palestinians has increased from 170,000 in the thirdquarter of 2000 to 291,000 in the third quarter of subsequent year, or 26.5% of the labor force. Particular hit are the workersin the services sector where unemployment has reached in excess of 50%.
Source: Al-Hayat Al-Jadeeda, November 14, 2001.

PA: Palestine Joins the Common Arab Economic Market
The Minister of Finance of the Palestinian Authority, Muhammad Al-Nashashibi, announced that the Council for ArabEconomic Union has decided to extend a membership in the Arab Common Market to Palestine. It will be the eighth member,joining Egypt, Syria, Iraq, Jordan, Yemen, Mauritania and Libya.

Mr. Nashashibi said Israel would not be able to impede the Palestinian membership because the PA and Israel havesigned economic agreements with the European Union which permit the export of Palestinian products inside the PA-controlledterritory and to Europe and the Arab countries.
Source: Al-Hayat Al-Jadeeda, November 12, 2001.

*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.

Share this Report: