FINANCIALLY TROUBLED OPEC COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000405360001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 39
• Document Creation Date: December 22, 2016
• Document Release Date: January 25, 2010
• Sequence Number: 1
• Publication Date: October 15, 1985
• Content Type: MEMO

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State Dept. review
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 DIRECTORATE OF INTELLIGENCE
1 5 OCT 1985
Central Intelligence Agency
Washington, D. C. 20505
MEMORANDUM FOR: Kenneth Glozer
Deputy Associate Director
Special. Studies
National Resources Energy and Science
Office of Management and Budget
Office of Global Issues
Acting hie Economics Division
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their
problems on an aggregate level and a case-by-case basis. If you
have any comments or questions, feel free to call
Attachment:
Financially Troubled OPEC Countries:
Managing With Narrower Options,
GI M 85-10276
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Central Intelligence Agency
Washington. D. C 20505
DIRECTORATE OF INTELLIGENCE
1 5 OCT 1985
MEMORANDUM FOR: John Brodman, Director
Office of International Energy Analysis
International Affairs and Energies Emergencies
Department of Energy
Acting Chief, Economics Division
Office of Global Issues
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their
i
problems on an aggregate level and a case-by-case basis. If you
have any comments or questions, feel free to call
Attachment:
Financially Troubled OPEC Countries:
Managing With Narrower Options. _25X1
GI M 85-10276
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Central Intelligence Agency
V1ishington. D. C 20505
DIRECTORATE OF INTELLIGENCE
1 5 CCI 1985
MEMORANDUM FOR: Robert H. Knickmeyer
Senior Economist and Financial Advisor
Near Ea'ster~n and South Asian Affairs Bureau
Department of State
Acting Chief, Economics Division
Office of Global Issues
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their
problems on an aggregate level and a case-by-case basis. If you
have any comments or questions, feel free to call
Attachment:
Financially Troubled OPEC Countries:
Managing With Narrower Options,
IL
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
1 5 OC1 1985
MEMORANDUM FOR: Charles Boykin
Deputy Assistant Secretary
Inte?lligenee
Department of Energy
E 25X1
Acting Chief, Economics Division
Office of Global Issues
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their 25X1
problems on an aggregate level and a case-by-case basis. If you 25X1
have any comments or questions, feel free to call
Attachment:
Financially Troubled OPEC Countries:
Managing With Narrower O
GI M 85-10276
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Central Intelligence Agency
Washington, D. 020505
DIRECTORATE OF INTELLIGENCE
1 5 OCI 11 285
MEMORANDUM FOR: David Vance
Energy Specialist
Office of Economic Analysis
Bureau of Intelligence and Research
Department of State
Office of Global Issues
Acting Chief, Economics Division
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their
problems on an aggregate level and a case-by-case basis. If you
have any comments or questions, feel free to call
Attachment:
Financially Troubled OPEC Countries:
Managing With Narrower Options,
GI M 85-10276
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
1 5 OC1 1985
MEMORANDUM FOR: Jack Sherrin
International Economist
Planning,and'Economic Analysis Staff
Bureau of Economic and Business Affairs
Department of State
Acting Chief, Economics Division
Office of Global Issues
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their
problems on an aggregate level and a case-by-case basis. If you
have any comments or questions, feel free to call
Attachment:
Financially Troubled OPEC Countries:
Managing With Narrower Options,
ML
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
1 5 OCT 1985
MEMORANDUM FOR: David Tarbell, Director
International Economic and Energy Affairs
Policy Analysis
Department of Defense
Acting Chief, Economics Division
Office of Global Issues
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their
problems on an aggregate level and a case-by-case basis. If you
have any comments or questions, feel free to call
Attachment: a
Financially Troubled OPEC Countries: 25X1
4a.uR ,.F, ... LII
GI M 85-10276
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15 OCT 198.5
MEMORANDUM FOR: See Distribution
Acting Chief, Economics Division
Office of Global Issues
SUBJECT: Financially Troubled OPEC Countries
Attached is a copy of a paper done by our Financial Issues
Branch on financially troubled OPEC members. It discusses their
problems on an aggregate level and a case-by-case basis. If you
have any comments or questions, feel free to call
Attachment:
Financially Troubled OPEC Countries:
Managing With Narrower Options,
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SUBJECT: Financially Troubled OPEC Countries
OGI /ECD/FI ~ (15 Oct85)
Distribution:
1 - David Tarbell - Defense
I - Steven Tvardek, Treasury
1 - Jack Sherrin, State
1. - Charles Boykin, Energy
1 - John Brodman, Energy
1 - Kennetci Glozer, OMB
1 - Robert Knickmeyer, State
1 - David Vance, State
1 - SA/DDCI
1 - ExDir
1. - DD I
1. - DDI /PES
1. - NIO ECON
1 - CPAS/ISS
1 - DD/OGI, D/OGI
1. - OGI/PG/CH
8 - OGI/EXS/PG
1 - OGI/SRD
1 - OGI/SRD
1 - C/OGI/ECD
4 - OGI/ECD/FI
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FINANCIALLY TROUBLED OPEC COUNTRIES:
MANAGING WITH NARROWER OPTIONS
This paper was prepared byl Office of Global
Issues. Comments and queries are welcome and may be directed to
the Chief, Economics Division, OGI,
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Overview
With oil prices continuing to stagnate, we believe the
financially troubled OPEC countries--Algeria, Ecuador, Indonesia,
Iran, Iraq, Libya, Nigeria, and Venezuela--will face narrower
options and more difficult decisions in the near term.
o With reserves reaching perilously low levels and no
other sources of foreign exzhange, Iran and Libya
probably will have to maximize oil revenues through more
barter, price discounts and cheating on production
quotas. The Iran-Iraq war, domestic turmoil, and
associations with terrorism could interfere with their
ability to obtain unsecured medium- and long-term loans
from international money markets should needs arise.
o Continued social unrest could force Nigeria's new
government to undertake a long resisted IMF-supported
program as unpopular austerity measures will ensue
either way.
o Without substantial Gulf aid, Iraq's cash flow problems
will persist. Iraq will have an extra 700,000 b/d of
export capacity later this year,
Even though Algeria, Ecuador, Indonesia, and Venezuela are
grappling well with their debt situations, each will be
continually pressed to maintain strict austerity measures for
years to come.
In our judgment, the fragile monetary situation of these
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OPEC members, also will cause a widening financial gap between
rich and poor members, further fragmentation of opinion or cartel
matters, and continued unilateral actions on the part of each
with regard to oil policy. For example, Iraq will try to fully
utilize its expanded production capacity. Coupled with Saudi
Arabia's recent decision to raise-output by up to 1 mb/d, an oil
price decline of several dollars per barrel probably will
result.
If oil prices fall further, all of these countries will have
to resort to increased austerity measures that will aggravate
popular dissatisifaction. In addition, the OPEC debtors--
Nigeria, Venezuela, Ecuador, Indonesia and Algeria-- will face
increased loan repayment difficulties with US and other Western
banks. More positively, Iranian fervor to export the Islamic
revolution could wane if Tehran's population has to live with
less, although Libya's Qadhafi probably will continue to support
subversive schemes despite tighter finances.
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Financially Troubled OPEC Countries: Managing With Narrower
Options
The soft oil market of the last four years has hit the
economies of the financially troubled OPEC countries--Algeria,
Ecuador, Indonesia, Iran, Iraq, Libya, Nigeria, and Venezuela--
particularly hard. In contrast to Saudi Arabia, which only
recently slid into external deficit, or other wealthy OPEC
members, many of the poorer states faced deficits even during the
oil boom of the 1970s. These deficits did not allow for a
buildup of a foreign reserve cushion for the drop in oil revenues
in the 1980s. In addition, many have large populations and
foreign debts that make management of revenue shortfalls more
difficult.
Situations and Country Responses to Date: Difficult but
Manageable
We estimate that the financially-troubled OPEC members were
forced to spend about $5 billion of their foreign reserve
holdings and accumulate at least $3 billion of foreign debt in
1984. (See Figure 1). Total debt approached $130 billion--a 34
percent increase since 1980--while official foreign assets fell
to an estimated $36 billion at yearend 1984--about 6 months of
import coverage(See Table 1 and Appendix 1). The debt buildups
and reserve drawdowns were the lowest since the oil market turned
a
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` Financially-Troubled OPEC Countries: Foreign Debt and Foreign Assets
Billion US $
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20 -}-
1980
O Total Fornton'D.bt
O ottrotal Fontan A.esU
r
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Table 1
Financially Troubled (PEC Countries: Changes in Major Financial
Aggregates, 1981-84
Billion US $ (Unless otherwise
indicated)
Oil Exports
(000 b/d)
Oil
Revenue
Naninal
Inports
Foreign
Assets
Foreign
Debt
Algeria
101
-2.4
-.8
-2.7
-1.3
Ecuador
41
0.0
-1.0
-.1
2.2
Indonesia
-236
-5.1
-1.3
-.5
11.1
Iran
943
5.8
4.2
-4.2
-2.3
Iraq
160
-1.0
-10.1
-18.8
3.5
Libya
-19
-4.1
-8.4
-5.5
-.4
Nigeria
-53
-5.5
-10.0
-3.0
13.7
Venezuela
-368
-5.9
-4.9
-.3
2.8
N
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soft in 1981 reflecting an improved current account balance last
year; the lower debt buildup also reflects reluctance on the part
of creditors to extend new lending.
As a result of the reserve drawdowns, many of the eight OPEC
members have pared foreign exchange reserves to dangerously low
levels and will be hard-pressed to*make further reductions.
o Iran--traditionally a small borrower--recorded the
largest reserve drawdown, spending about $3.5 billion,
and bringing liquid assets down to an estimated $4
billion. On several occasions severe foreign exchange
shortages forced Tehran to drastically restrict letters
of credit for nonmilitary imports, according to press
reports.
o Libya divested $1.5 billion in 1984 and foreign assets
now stand at an estimated $5 billion--about a third of
the peak 1980 level. Libya's severe foreign exchange
shortage resulted in spending restrictions on state
companies and citizens travelling abroad.
o Iraqi assets plummeted to a dangerously low $2 billion
in 1984, but $3.5 billion in cash aid from the Persian
Gulf States, oil sales on Iraq's behalf, and credits
from its trading partners supported its cash flow.
o Nigeria's reserves rose slightly in 1984 but remained in
the $1 to $2 billion range--less than two months of
import coverage. The cash squeeze prompted the
government to cut 14 percent off the 1983 budget and
include a larger allocation for debt service. Exchange
W
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controls lopped 50 percent off capital imports.
o Algeria and Ecuador recorded small reductions in foreign
assets during 1984. At the same time, however, Algeria
managed a modest repayment of short-,and medium-term
debt and obtained a $1 billion syndication from
commercial banks earlier this year.
o Venezuela--the only one of the group to run a
significant current account surplus in 1984--added
$1.3 billion to official reserves and repaid another
$1.5 billion of its $20 billion medium- and long-term
debt. Indonesia continued to accumulate both debt and
reserves, adding $1 billion to each last year.
Self-imposed domestic austerity along with the foreign
exchange shortages have forced reduced import levels and have led
many of these financially-troubled countries to rely on
countertrade to secure imports(See Text Box). Since 1981, real
imports from OECD countries have been slashed by 33 percent,
according to International Monetary Fund (IMF) data; in contrast,
imports of the 5 other OPEC members fell by only 2 percent in
1984 over 1981 with higher levels recorded during 1982-83. Even
steeper cuts were forestalled by the rise in the value of the
dollar--oil revenues are largely dollar-denominated--and the fact
that over 80 percent of imports are from Western Europe and
Japan.
Only Iran--which had austere import levels during 1979-81--
and Algeria managed to increase import volumes during the last 25X1
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two years. In contrast, Iraqi import volume dropped over
50 percent in the same period with capital and consumer goods
dropping even more as military purchases displaced them.
Ecuador, Libya, Nigeria, and Venezuela decreased import
expenditures by at least 40 percent. Indonesia managed to avoid
sharp reductions--nominal imports in 1984 were only an estimated
8 percent below the 1981 level--but only by rapidly increasing in
foreign debt.
A
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Countertrade and Probably Counterproductive
As foreign exchange levels have slumped and oil at official
prices has become more difficult to sell, countertrade is
increasingly replacing conventional trade transactions in
securing imports and expanding oil sales. Many OPEC members have
engaged in barter, but Nigeria and Iran have become the heaviest
users of countertrade arrangements.
o According to Embassy reporting, Nigeria will provide
95,000 b/d of oil to Brazil for $950 million of goods.
Lagos has also completed deals with several West
European countries involving about 110,000 b/d of
o We estimate that as much as half of all Iranian oil
exports are arranged through countertrade deals.
Tehran prefers barter and 25X1
will offer cash only for essential war materials--
usually on delayed payment terms.
o Since mid-1982, Libya has supplied the Soviets with at
least 100,000 b/d of crude in payment for arms and has a
similar arrangement with South Korea, Italy, Greece, and
Turkey.
o Iraq traded 20,000 to 40,000 b/d of oil to Brazil for
goods during 1984. In addition, press reports indicate
that Yugoslavia recently agreed to accept Iraqi oil as
payment on $425 million of debt.
. As financially-troubled OPEC countries enter into more oil
barter deals to circumvent foreign exchange shortfalls there
could be detrimental long-run economic consequences. Although
countertrade allows producers to hide price discounts and sell
more oil, it also serves to overvalue the c.omnodities traded for
oil and raises the terms-of-trade to the oil exporter. By tying
a large portion of exports to countertrade deals, oil producers
forgo dollars that could be used to buy goods more cheaply. In
addition, large administrative costs are incurred--commissions to
middle men and lost time seeking and completing deals.
Trade distortions also occur as importers are locked into
making purchases from a few countries. Barter arrangements
usually are signed for one-year periods during which monopoly
positions can be created for sellers. According to Embassy
reporting, a Nigerian government official said economic austerity
was undermined as countertrade provided goods that Nigerians
could do without. In general, domestic importers grumble about
high prices, government interference difficulties in dealing 25X1
with only one seller.
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OPEC:
OFFICIAL P(REIIN ASSEFSa
BILLION US $
1982
'1983
1984
Poor OPEC
52.4
41.2
36.4
Algeria
5.0
4.0
3.2
Ecuador
.5
.8
.7
Indonesia
4.6
4.9
5.7
Iran
14.0
9.2
5.7
Iraq
8,.0
3.6
2.2
Libya
8.7
6.6
4.9
Nigeria
1.6
1.0
1.5
Venezuela
10.0
11.1
12.5
Rich OPEC
266.8
250.0
242.2
a Yearend Totals
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UM SERVICE AND INIEFU39IS PAM M P1DTDC1'ICNS
DEBT SERVIC
E
1MILLICN US $
INTEREST
1.985
1986
1985
1986
71cuador
1650
1540
565
455
/enezuela
3515
3437
1121
866
Indonesia
3727
3795
1614
1636
11geria
4534
3440
994
780
digeria
4434
4194
1226
1032
Iraq
44.8
N/A
7
N/A
'ran
1240
N/A
189
N/A
.ibva
N/A
N/A
N/A
N/A
Based on publicly guaranteed debt only.
World Bank Projections.
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Factors Bearing on the Outlook
Lower world interest and inflation rates and higher OECD
economic growth resulting from lower oil prices would do little
to offset the revenue impact for oil producers. We estimate that
debtor OPEC members together would save only $500 million for
each 1.-point fall in world interest rates. Nigeria and Venezuela
would receive 70 percent of the gain because of their large
proportion of floating-rate debt. We also estimate that a
1. percentage point increase in OECD economic growth will increase
noncommunist oil demand by only 300,000 b/d. Because these OPEC
members rely on oil earnings for over 85 percent of their
combined foreign exchange earnings, they would not substantially
benefit from growth in other export sectors.
A drop in the value of the dollar also could financially
harm these countries. Should the dollar fall, they could have
difficulty maintaining already austere import levels. A
precipitous fall in the dollar probably would shift some of their
spending toward US goods, but all OPEC members would shoulder an
additional financial burden in allocating more of their foreign
exchange for imports.
Fewer Management Options
The options of the eight financially-troubled OPEC states to
cope with lower oil revenues varies widely, but in all cases are
being steadily narrowed. In our judgement, while Venezuela is in
the best position, all would be hard hit if oil prices should
decline further. Nigeria and Iran are the most vulnerable.
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Iran and Iraq
With no available external aid or credit, Iran is more
dependent on oil exports than any other producer. We estimate
that Tehran needs a minimum of $'14 billion a year to sustain the
war effort and the domestic economy at current levels. Revenues
in 1.985 will fall below that because of Kharg Island being out of
comission. A severe foreign exchange shortage has already forced
reductions in imports of spare parts, causing many firms to
operate well below capacity. According to the Embassy, the
unemployment rate has risen to 35 percent in some areas and
shortages of goods have pushed the inflation rate to about 40
percent annually. Even though projected government spending for
1985 is 13 percent below the austere 1984 level, we expect the
budget to show a $7 billion deficit. The government still is
firmly in control but popular discontent--caused partly by the
deteriorating economy--is spreading as evidenced by strikes,
demonstrations and bombings.
In the past year, Iran has responded to its economic plight
by attempting to put on a less radical face in order to obtain
international support.
is beginning to accelerate the settlement of foreign claims in
the World Court in order to encourage international acceptance of
Iran as a viable trading partner. Furthermore, Iranian public
denial of any association with recent hijackings probably is an
attempt to appear less radical to Westerners and its Gulf
neighbors. We believe Iran will have difficulty obtaining
unsecured medium- and long-term loans from international money
OL
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markets, however, because of the war and turmoil inside the
country. Furthermore, its only allies--Libya and Syria--have
their own cash flow problems. With no other income sources,
maximization of oil revenue and procurement of bartered goods
will remain the primary focus of the regime's foreign economic
policy.
In contrast to Iran, Iraq has been better able to insulate
the domestic economy from the effects of the war and foreign
exchange shortages, according to Embassy reporting. Though
government regulations and price controls still result in
shortages, supplies of consumer goods and living standards have
been raised because of crackdowns on black marketing, increased
repatriation of foreign exchange, and countertrade deals. In
addition, the construction sector has not suffered a serious
decline.
Foreign exchange could be limited in the future, however,
because of the continuing war and debt repayments. The US
Embassy reports that Iraqi officials admit that cash flow
problems will continue even if Baghdad secures a substantial new
loan later this year and despite the fact that Japan again has
agreed to defer about $700 million of 1983 debt for another two
years. Baghdad has conserved foreign exchange by paying only
what it considered to be its important lenders;
Lenders
probably will be more cautious with regard to Iraq in the medium-
term, but the scheduled opening of the new Iraq-Saudi pipeline
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later this year and continued Gulf support are likely to make
Baghdad a fair credit risk.
Nigeria
Nigeria's new military regime will face the same dismal
situation and alternatives as its predecessor. Declining oil
revenues have already forced significant reductions in imports
and government spending and a pileup of arrearages on short-term
debt. Under President Buhari, the government shunnned $3 billion
of IMF and World Bank support--and a subsequent debt
rescheduling--because of the requirements for a large
devaluation, trade liberalization, and sharp reductions in
petroleum subsidies--measures Buhari probably felt would be
politically destabilizing.
Libya
Because petroleum accounts
percent of government revenues,
earnings, Libya also
use its fairly ample
$10 billion drawdown
for 45 percent of Libya's GDP, 80
and all of its foreign exchange
has been hard hit. It initially was able
assets to offset revenue losses but after
since 1981, these are largely gone.
Now,
depressed foreign exchange reserves coupled with gross economic
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mismanagement have resulted in food and spare parts shortages,
according to Embassy reporting. Development spending has dropped
25 percent since 1981, and foreign construction projects are
continually being cancelled as Libya faces increasing difficulty
remitting payments to contractors.
The Qadhafi regime would face even more severe economic
problems next year if oil prices again fall sharply. We
presently expect a $1 billion current account deficit at current
oil prices; however, a $3 billion shortfall would almost exhaust
foreign exchange reserves. Borrowing has not proven to be a
preferred option for Qadhafi probably because it could leave the
government susceptible to Western economic pressures if repayment
problems occur. If forced to borrow, however, it is unlikely
that Libya will be able to secure financing from US banks and
other Western and Arab banks will remain cautious since officials
of both probably are wary of Qadhafi's association with
terrorism. Even so, revolutionary pursuits probably will not be
curtailed. Military and economic aid to Morocco, Syria, and
Nicaragua totalled $500 million last year, and aid levels could
approach the same levels in 1985. So far, Morocco has received
$100 million and Sudan's new government was offered $110 million
in cash and goods, The financial
squeeze probably will force Libya to further reduce imports and
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contract the domestic economy even as popular disgruntlement
increases.
Algeria
Although hydrocarbon exports account for 98 percent of
Algeria's foreign exchange and half of government revenues, crude
sales are less important for its economic health than for some
other producers. Large sales of condensates, petroleum products,
natural gas, and natural gas liquids continue to shore up
Algerian export revenues even though they are still affected by
declining oil prices. Algeria even has managed to repay small
portions of its debt over the last several years, while budget
cuts and domestic price increases have constrained borrowing
needs. Prices for bread and other subsidized goods were raised
1.2 to 17 percent earlier this year, which according to the
Embassy will trim $50 million off budget spending and stimulate
domestic agricultural production. With good growth potential in
natural gas and oil products, we believe Algeria is viewed as a
moderately good credit risk by lenders. Nonetheless, should oil
prices fall, Algiers probably would implement tighter austerity
measures and import reductions. If that were to happen, we
believe there could be some social unrest, especially in urban
areas.
Ecuador
The Ecuadoran economy is in better shape than most observers
expected; real GNP grew by 3 percent in 1984 and 2.5 percent
growth is expected for 1985, according to Central Bank figures.
In addition, the Febres-Cordero administration has implemented
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many reforms designed to move the economy toward free market
principles--such as measures to promote foreign investment and
reducing many consumer subsidies--in accordance with IMF
guidelines. A steep drop in oil prices, however, would wipe out
much of the improvement in the current account since 1982 and
debt service payments--the country's largest financial outflow--
would become even more onerous. Furthermore, a resumption of
large-scale capital flight and ensuing currency pressures would
lower the amount of foreign exchange available for servicing
debt. In our judgment, further economic structural reforms such
as removal of price controls, reduced protectionism and
privatization of industry probably will be popularly resisted,
thus limiting the government's ability to cope with lower oil
prices.
Venezuela and Indonesia
Short of an oil price decline, we believe Venezuela is in
relatively good shape. We believe the cautious Lusinchi
administration would react to further oil price declines by
further restricting imports and constraining economic activity.
To do so would likely produce popular backlash, however. The
government already is under pressure from labor to raise wages
and stimulate the economy, according to Embassy reporting.
Moreover, a decline in oil prices would undermine business
confidence and could spur flight from the bolivar--prompting less
business investment and further depressing economic growth.
Caracas probably will not be able to borrow from commercial banks
until private sector debt is rescheduled, possibly within a
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year. Venezuela does have a strong reserve cushion--about a
year's import coverage.
influential segments of the population place a high
value on the country's reserve position and the loss of more than
$3 billion in assets could cause a political crisis.
So far, Jakarta has made some progress in reducing
dependence on petroleum exports and insulating the economy from
market swings. Hydrocarbon revenues are projected to account for
60 percent of budget revenues this year, down from 66 percent two
years ago. In addition, oil accounts for less than 60 percent of
foreign exchange earnings. A fall in oil prices, however, could
turn the improvement around. The government probably would be
pressed to increase already heavy protectionist measures for many
inefficient industries. Furthermore, Jakarta also would likely
implement extensive import controls which would reduce industrial
production and delay completion of government projects because
imports consist primarily of capital and intermediate goods. A
significant oil price drop could spur capital flight, making debt
service more costly and retarding economic growth.
Cartel Divisiveness
In our judgment, the fragile monetary situations of the
financially-troubled OPEC members will continue to cause further
fragmentation of opinion on cartel matters. We expect a widening
financial gap between rich and poor OPEC countries for years to
come to lead to continued unilateral actions with regard to oil
policy (see figure 2).
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Wealthy vs. Financially-Troubled OPEC: Cumulative Current Account
81111on US $
149
.............................................................. -40 .......
169
166
169
-64
........................................................................................................ -80 ...........
-101
1980 1981 1982 1983 1984 1985
13 Wealthy OPEC
C3 n....r.uy-Tr.N, OPEC
m ^ -~wtawwtawM04
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Specifically:
o Venezuela cut prices of heavy crudes by about $2 per
barrel in early August in response to sagging oil sales
and to stay competitive with Mexico.
o Ecuador continues to produce 100,000 b/d above its OPEC
quota. Government officials defend Quito's policy by
citing its marginal contribution to global production
and arguing that larger producers should maintain
production dicipline and price stability, according to
Embassy reporting. Nigeria has produced 200,000 b/d
above its 1.45 mb/d quota through the first half of
1.985,
o The Embassy reports that Indonesia sells at least a
third of its oil on the spot market. In addition, press
reports indicate that Jakarta is under pressure from
Japan--its largest buyer--to discount prices.
o We believe Iraq will raise production by 700,000 b/d
when the Iraq-Saudi pipeline comes on stream later this
year and the Iraq-Turkey pipeline capacity is
expanded.
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Actions by other producers and consumers are likely to
exacerbate pressures on these members to cheat on OPEC guidelines
and could prompt lower oil prices. Saudi Arabia is becomming
increasingly irate with other members breaking cartel rules.
Should Riyadh carry out its threats to produce its assigned
quota, an extra 2 mb/d of oil could flood the market. To
compound matters, non-OPEC producers like Mexico and Egypt are in
worsening financial straits and probably will continue to ignore
pleas to support the cartel especially if member support is not
forthcorning.
Implications for the United States
The worsening positions of the financially-troubled OPEC
countries have a number of implications for US interests--some
positive, some negative.
o Some debtors in the group--especially Nigeria,
Venezuela, Ecuador, Indonesia, and Algeria--will face
increased loan repayment difficulties.
OL
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Severe payments
crises would pose problems for some large, US banks and
for the new democratic governments of Ecuador and
Venezuela.
o We believe foreign exchange shortages may be beginning
to reduce Iran's adventurism but we doubt that they will
have much effect on Libya's. Iranian fervor to export
the Islamic revolution appears to be decreasing as
Tehran's population has to live with less. Furthermore,
relations with Western countries may improve if
moderates in the regime who favor stronger ties succeed
in using economic issues to discredit radicals. In
contrast, as long as Qadhafi remains in power, we would
expect him to sacrifice his own people's economic
interests in order to pursue his anti-Western
activities.
Should oil prices fall, the problems will intensify.
Difficulties will mount for debtors in servicing debt and for
Western banks collecting payments. Pressures would mount on
governments implementing further austerity measures and meeting
popular resistance. For example, Nigeria's new government could
be threatened by increased social unrest. Finally, Iraq's
ability to sustain the war effort against Iran would be deeply
affected by lower oil prices. Baghdad probably will use its
excess capacity and aggressive pricing tactics to sell as much
oil as necessary to secure vital imports. In addition, Iraq
probably would step-up bombings on ships, civilian targets, and
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production facilities in hopes of either forcing Iran to a
settlement or hampering Tehran's abiltiy to finance the war.
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Appendix 1
Selected Tables
OPEC: Cr
ude Oil Production
(million b/d)
1982
1983 198
4 1985
Quarterly
Quota
First 'Second
Quarter Quarter
Julya
Totalb
1.8.89
17.69 17.9
5
1.6.0
17.0 1
4.7
14.6
Algeria
.70
.70 .7
0
.663
.70
.70
.70
Ecuador
.21
.24 .2
5
.183
.26
.28
.29
Gabon
.15
.15 .1
9
.137
.18
.18
.18
Indonesia
1.31
1.32 .1
42
1.189
1.29 1
.07
1.00
Iran
2.28
2.45 2.3
8
2.30
2.17 2
.32
2.20
IraqC
.97
.92 1.1
8
1.2
1.24 1
.31
1.38
Kuwaitd
.82
1.06 1.1
8
.9
1.15
.94
.92
Libya
1.18
1.17 1.1
0
.99
1.04 1
.09
1.10
Nigeria
1.30
1.24 1.4
0
1.30
1.57 1
.23
1.02
Qatar
.33
.30 .3
9
.28
.28
.29
.28
Saudi Arabiae
6.49
5.19 4.8
4
4.35
3.82 2
.67
2.90
UAE
1.25
1.10 1.2
1
.95
1.16 1
.12
1.12
Venezuela
1.89
1.79 1.7
1
1.555
1.58 1
.50
1.50
a Preliminary
b Numbers may not add because of rounding
c Crude sales to Iraqi custaners by Saudi Arabia and Kuwait is being charged
against Iraq's quota.
d Neutral Zone production is shared equally between Saudi Arabia and Kuwait.
e Saudi Arabia has no formal quota. It acts as swing producer to meet market
requirements.
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CPB
C: Current Accounta
19
81
1982
1983
(billion US$)
1984b 19
85c
Exports (f.o.b.)
291.9 265.6
208.7
172.4
171.3 147
.8
Oil
275.4 250.9
194.7
157.2
154.4 129
.4
Non-Oil
16.5 14.7
14.0
15.1
16.9 17
.0
Imports (f.o.b.)
-129.8 -160.1
-159.1
-136.8
-129.2 -121
.9
1.48.8
49.6
35,6
42.1 ? 25
.9
Net Services
-44.3 -55.1
-58.9
-54.5
-48.0 -51
.0
Freight and
Insurance
-19.2 -24.8
-23.8
-20.4
-19.0 -18
.3
Investment
Income
26.8 34.9
33.5
29.2
26.5 25
.3
Othere
-48.5 -61.6
-65.2
-61.0
-54.3 -57
.1
Grants
-10.4 -10.4
-8.9
-3.4
-2.9 -2
.8
Current Account
Balance
Of Which:
Poor OPECf
32.1 -33.4
-37.4
-20.7
-10.9 -15
.3
Rich OPEC
75.3 73.4
18.9
-1.6
2.1 -10
.5
Assumes no significant oil price decline.
b Estimated
C Projected
d Earnings on Official Assets Only.
e Includes debt service payments, worker remittances and other service payments.
f Algeria, Ecuador, Indonesia, Iran, Iraq, Libya, Nigeria, and Venezuela.
g Gabon, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates.
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OPEC: Current Account Balancesa
19
80
1981
1982
1983
(billion US $)
1984b 198
5c
Totald 10
8.6
42.0
-16.9-
22.3
-8.8 -26.
0
Algeria
1.6
-1.8
-2.8
-2.0
-2.2 -1.
8
Ecuador
-.2
-1.2
-1.6
-.7
-.2 -.
2
Gabon
.6
.2
.2
.3
.6 .
1
Indonesia
5.0
-.5
-6.6
-7.0
-2.7 -5.
6
Iran
.5
-2.4
6.2
-.9
-4.0 -2.
3
Iraq
7.6
-17.1
-19.9
-8.8
-4.8 -5.
6
Kuwait 1
5.0
11.4
5.1
5.7
5.8 4.
4
Libya
9.6
-5.1
.5
-1.0
-1.5 -1.
2
Nigeria
5.1
-5.9
-7.7
-4.7
-.5 .
1
Qatar
3.0
2.7
1.0
1.2
2.2 1.
7
Saudi Arabia 4
7.5
49.7
7.5
-15.0
-13.2 -20.
8
UAE
9.2
9.4
6.4
6.2
6.7 4.
1
Venezuela
3.8
2.6
-5.5
4.4
5.0 1.
3
Excludes holdings on private OPEC holdings abroad
Estimated
Projected
Totals may not add because of rounding.
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