In Theory: Opec faces dilemma over Iraq's return

With the end of the third Gulf War, the situation of the Organisation of Petroleum Exporting Countries (Opec) has become more complicated and confused than ever before. For the first time in four decades, Opec is faced with the serious control by a superpower of the output of one of its founder members.

In the 1990s, Opec witnessed the exit of two of its members, namely Ecuador and then Gabon, reducing its members from 13 to 11.

However, the impact of all that has been limited on all levels, including Opec's contribution to the total world oil production, because of the modest output of the two withdrawing countries.

The current situation concerning the entry of the United States on Opec's borderline through Iraq means a great deal.

Iraq after the third Gulf War is totally different from pre-war Iraq. The pre-war Iraqi oil strategy was based upon a high crude oil price by controlling size of output. That was considered one of the illogical justifications cited by Iraq for its invasion of Kuwait in 1990.

Today, under the new administration, the Iraq oil strategy is based upon raising output to 8-10 million barrels daily by the end of this decade even if this pushes prices to very low levels.

Therefore, Opec's regular meeting which is being held tomorrow in the Qatari capital, Doha, and which is the first regular meeting after the end of the war, will take a hard look at one of the main topics on the agenda.

This topic relates to the return of the Iraq oil production to the international markets within Opec's output ceiling.

Opec's dilemma stems from the nature of Iraq's return. Opec's dealing with the sole superpower in the world with respect to the Iraq production quota will be extremely different from dealing with its previous dealing with Saddam Hussain's regime.

The U.S. decision to increase the Iraq oil production to the maximum level within a few years will result in ignoring all the basic principles and rules followed by Opec during the last three decades.

The ambitious Iraq oil production increase by an American decision will have an immense impact upon the world's oil markets, as such output will equal one quarter of the entire Opec production in the next few years putting Iraq on the top of the list of Opec oil producing member states.

Certainly, this policy will have its direct effects on the price levels that can reach the lowest levels since the 1970s.

Does that mean the end of an era of controlling production to establish the required balance between supply and demand to maintain oil prices within the limits that are acceptable to Opec members?

Perhaps this is true to a great extent as the new Iraq will be out of Opec's balancing game for supply, demand and prices.

If added to that is the increased output by non-Opec members, particularly Mexican, Russian and Norwegian production, Opec's next meeting will be faced with the difficult task of developing a new formula ensuring that Iraq's presence will be within the balance of supply and demand on the world's oil markets to maintain the $22-28 per barrel target price.

In light of all this, we can conclude that Opec's dilemma will persist until the conclusion of Doha's meeting and until Iraq's new oil policy under the prevailing conditions in the country becomes clearer and more specific.

The author is Bahrain-based Gulf economic expert.