OPEC FINANCES: A PERIOD OF TROUBLE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85S00315R000200160002-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: February 9, 2011
• Sequence Number: 2
• Publication Date: October 1, 1984
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
-,v
w~
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
~~
 OPEC Finances:
A Period of Troubl~'
GI 84-10/72
October 1984
~ooY 4 51
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 OPEC Finances:
A Period of Trouble
ed b
Office of Global Issues.
Comments and queries are welcome and may be
directed to the Chief, Financial Issues Branch, OGI,
Secret
G/ 84-IOI72
Ocm6er 1984
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 OPEC Finances:
A Period of Trouble
Key Judgments Three years of soft world oil conditions have forced major financial and;
!n(ormation available economic adjustments on OPEC members. OPEC's oil price cut in March
as gf'30 September 1984 1983 triggered a $40 billion decline in annual oil revenues and contributed
was used in this report.
to a record $22 billion OPEC current account deficit last year, according~to
our estimates. The 1984 deficit will approximate $11 billion. This dramatic
turnabout from the 1970s and early 1980s has already necessitated a $28 25X1
billion di?awdown in foreign assets as well as sharp cuts in imports and
The OPEC revenue decline has broader political and international
ramifications:
? The economic retrenchment of these oil-dependent economies has
sparked public criticism of government mismanagement, corruption, and
unequal distribution of sacrifices. We are most concerned with the
Nigerian Government's ability to contain the political fallout from severe
debt problems and deteriorating economic conditions.
? The weak oil market, although helping oil-importing countries, has added
Nigeria, Venezuela, and Ecuador to the long list of LDCs unable to
service their debt.
? Traditional OPEC aid recipients are turning to the United States as well
as more radical Arab regimes for assistance in making up the shortfall in
OPEC aid disbursements.
? Recent oil supply contacts with OPEC members enhance Moscow's
standing and provide a forum for continuing Soviet efforts to better
relations with conservative Middle East oil producers.
If oil prices decline in the months ahead, financial and political problems
would become more acute quickly. In particular, an oil price decline would
cause serious financial problems for major OPEC debtors-Nigeria,
Venezuela, Ecuador, and Indonesia-as well as non-OPEC oil-exporting
debtors such as Mexico and Egypt. If OPEC countries somehow manage to
avoid substantial oil price declines, we would expect next year's financial
position to approximate the 1984 pattern. 25X1
iii Secret
G184-10171
Ocm6er 1984
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 OPEC Finances:
A Period of Trouble
Background
Since 1979 the world oil market has shifted to
oversupply and downward pressure on prices. Global
recession, increased energy conservation, and a switch
to alternative energy sources reduced demand for oil.
On the supply side, increased non-OPEC production
and OPEC production above their self-imposed 17.5-
million-b/d ceiling have contributed to [he glut. The
oil market remains weak despite a strong increase in
non-Communist oil consumption in the first half of
1984; and second-quarter overproduction of almost
I million b/d by OPEC members-particularly Saudi
Financial Consequences
OPEC revenues have been sharply reduced by the
glut. In response to market pressure, OPEC cut its
official price of oil from $34 to $29 per barrel at the
March 1983 meeting and reaffirmed individual
production quotas under an overall OPEC ceiling of
17.5 million b/d. Actual OPEC crude oil output in
1983 was 17.7 million b/d, its lowest since 1967. As a
result, oil revenues fell to $154 billion in 1983 from a
peak of $275 billion in 1980-a 44-percent drop. We
calculate 1984 revenues to be only slightly higher.
Because of the revenue loss, most OPEC members
have moved from current account surplus to deficit
and have slashed imports, cut grant aid, and drawn
down foreign assets accumulated in the 1970s and
A Record Current Account Deficit. The decline in
demand for OPEC oil and [he resulting price cut led
to a $40 billion decline in oil revenues that led to a
record OPEC current account deficit of $22 billion
last year, according to our estimates. Saudi Arabia
experienced the largest shift-from current account
surpluses of $50 billion in 1981 and $7.5 billion in
1982 to a $17 billion deficit in 1983 chiefly because of
Riyadh's role as swing producer. Iran and Libya also
went from positions of surplus to deficit in 1983.
Although other OPEC members maintained or im-
proved their 1983 current account performances from
the previous year, the improvement occurred primari-
ly because of sharp import cuts, forced by worsening
Barring any oi] market shocks, OPEC's current ac-
count deficit in 1984 should be about half of last
year's record level (table 2). Specifically, we project
the OPEC current account deficit at about $1 I billion
this year assuming that:
? The current OPEC benchmark price of $29 per
barrel and individual production shares hold (or the
remainder of the year, putting the weighted average
price of a barrel of OPEC oi] at about $27.50' this
year. 25X1
? Demand for OPEC exports (including natural gas
liquids) averages about 16 million barrels per day
(b/d) in 1984. We estimate OPEC crude and natu-
ral gas liquid (NGL) production during the first half
of 1984 at about 19 million b/d and exports at 15.6
million b/d.
? OPEC real imports fall nearly 5 percent this year;
preliminary trade data suggest first-quarter imports
were down about 7 percent over first quarter 1983.
These assumptions lead to a calculated improvement
in OPEC's combined trade balance of about $7
billion, the firs[ such improvement in four years. We
also believe [he net services deficit-worker remit-
tances, freight and insurance, and investment flows25X1
will fall by about $3 billion. Outflows of worker
remittances should be down as a result of a decline in
development expenditures. We also estimate that
inflows from investment income will decline liy $2 '
billion this year because of a lower level of official '
foreign assets following last year's $28 billion draw-
down. We do not expect further major declines in
grant aid from last year's $3.6 billion level, which we
believe is already at a minimum politically acceptable
level) 25X1
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
JCIt CI
Table 1
OPEC: Crude Oil Production
Saudi Arabia =
9.81
6.49
5.19
UAE
1.50
1.25
1.10
a Preliminary. a Neutral Zone production shared equally between Kuwait and
Numbers may not add because of rounding. Saudi Arabia.
= Crude sold to Iraqi customers by Saudi Arabia and Kuwait ~ Saudi Arabia has no formal quota; it acts as swing
totaling about 250,000 b/d is being charged against Iraq's producer to meet market requirements.
quota.
Table 2
OPEC: Current Account
Exports (f.o.b.)
209.3
292.8
266.7
210.7
172.5
177.1
Oil
194.9
275.4
250.9
194.7
154.3
157.3
Nonoil
14.4
17.4
15.8
16.0
18.2
19.8
Imports (f.o.b.)
107.0
129.8
159.4
158.9
135.9
133.1
Trade balance
102.3
163.0
107.3
S1.8
36.6
44.0
Net services ~
-39.5
-43.8
-54.6
-59.7
-55.1
-51.8
Freight and insurance
-14.8
-19.2
-24.8
-23.8
-20.2
-19.7
Investmen[income=
17.9
26.8
34.9
33.5
29.4
27.3
Other^
-42.6
-51.4
-64.9
-69.4
-64.3
-59.4
Grants
-6.3
-10.6
-10.5
-9.0
-3.6
-3.1
Current account balance
56.5
108.6
42.0
-16.9
-22.1
-10.9
Estimated.
~ Projected.
=Earnings on official assets only.
a Includes debt service payments, worker remittances, and other
service payments.
 Table 3
OPEC: Current Account Balances a
Excludes earnings on private OPEC holdings abroad.
~ Estimated.
Projected.
Because of rounding, components may not add to the totals
shown.
Includes Kuwaiti and Saudi exports of oil that are being
provided to Iraq.
The collective deficit masks a diversity of financial
positions and adjustments among the 13 OPEC mem-
bers (table 3):
? Saudi Arabia has by far the largest current account
deficit, a projected $13.5 billion this year, chiefly
because of Riyadh's role as swing producer. Accord-
ing to our estimates, the Saudis will maintain last
year's export level of about 4.5 million b/d, com-
pared with 6.2 million b/d in 1982 and 9.6 million
b/d in 1980.
? Ecuador, Indonesia, and Iraq probably will record
small deficits in 1984 that will be lower than last
year's levels.
? In contrast, we believe Venezuela and Libya will use
their reserves to boost ormaintain imports and
record a small deficit.
? Iran is also likely to post a larger current account
deficit in 1984 largely because of lower oil revenues
as a result of reduced export shipments and lower
prices.
? Nigeria is likely to register a small current account
surplus this year because imports have been slashed.
Debt servicing problems are jeopardizing access to
new credits and forcing deeper spending cuts.
Only the smaller Gulf countries-Kuwait, the UAE,
and Qatar-and Gabon should be able to maintain
traditional current account surpluses without major
strains or policy changes because of modest import
requirements and/or sizable investment income from
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 Table 4
OPEC: Official Foreign Assets a
Saudi Arabia
63
95
144
153
135
122
UAE
18
27
33
35
39
43
? Based on balance-of-payments data. .
e Projected.
Because of rounding, components may not add to totals.
Forced Drawing on Foreign Assets. The current ac-
count deficits recorded since 1982 have forced OPEC
to draw heavily against its foreign assets. We estimate
that $28 billion in assets were drawn down in 1983
alone, primarily by Saudi Arabia, Iran, and Iraq. We
calculate that Riyadh divested $18 billion, while Iran
and Iraq together drew down more than $9 billion
([able 4). Although Kuwait had a current account
surplus, we estimate that private capital flight-
spurred by fears of Iranian reprisals and the Kuwaiti
stock market crash-forced about a $2 billion draw-
down in its assets. One Kuwaiti bank estimates 1983
net outflows at $9-12 billion, although the Central
Bank and the Minister of Finance have denied the
According to our estimates, the drawdown was dis-
tributed fairly proportionally across OPEC holdings
of currencies, some $19 billion of the 1983 drawdown
Borrowing More. While most of OPEC's external
deficit has been financed by drawing oh foreign
assets, some OPEC members also have borrowed
heavily from commercial banks and official creditors:
? Indonesia and Algeria each obtained over $2 billion
in syndicated loans last year.
? Saudi Arabian and Nigerian enterprises lined up $I
billion each.
? Ecuador-the only OPEC country with an IMF-
supported program last year-received about $120
million in Fund disbursements and another $450
25X1
25X1
 Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
Table 5
OPEC: Change in Import Volume
We estimate that OPEC states together will borrow
another $8 billion from banks and official creditors
[his year. Even if they obtain [his amount, we believe -
they will have to draw down from assets by some $12
billion to finance current account deficits and finan-
cial commitments. Saudi Arabia will account for mast
of the asset drawdown; Indonesia, Algeria, and Saudi
Arabia, for most of the borrowing. We expect Kuwait,
Qatar, Nigeria, and the UAE to add to foreign .
holdings.) 25X1
Reduced Imports. The revenue shortfall, limited bor-
rowing capacity for countries like Nigeria, and the
concern about drawing down assets forced almost all
OPEC states to reduce imports last year (table 5). The
volume of purchases from the Big Seven industrial
countries declined 15 percent in 1983, and scattered
first-half 1984 trade data predict another 7-percent
decline. With limited foreign exchange reserves and
large deb[ burdens, Algeria, Indonesia, Iraq, and
Nigeria.are facing particularly large import reduc-
tions. Indonesia and Nigeria, for instance, will have to
take import cuts this year of about 15 percent each.
Although cuts elsewhere will not be as large, we
expect all of the OPEC countries except Qatar,
Kuwait, Ecuador, and Venezuela to record import
Cuts in Aid. Oil revenue constraints also have
prompted sharp cuts in OPEC aid (table 6). From over
$14 billion in 1981, we estimate the major OPEC
donors cut disbursements to about $12 billion in 1982
and to $6.5-7.0 billion in 1983. Kuwait, the UAE, and
Qatar account for over 60 percent of the drop.
According to our estimates, from a high of $8.6 billion
in 1981, Saudi Arabia has cut economic and military
aid by about $2 billion in 1982 and another $I billion
in 1983. With the exception of Somalia, all the major
Islamic aid recipients have experienced significant
cuts in aid receipts. Iraq has taken the largest cut.
From $8 billion in aid in 1981, we estimate that
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
Secret
Table 6
Aid Disbursements From Major
OPEC Donors
Total
14,470
11,565
6,689
6,720
Arab states
13,515
10,575
5,362
5,865
Iraq =
8,000
5,520
2,950
3,500
Jordan
1,165
1,130
795
780
Syria
1,990
2,140
1,010
1,000
Morocco
790
640
225
165
Sudan
410
255
130
170
Other
1,160
890
252
250
Non-Arab Islamic
800
800
995
555
Pakistan
360
435
150
55
Somalia
80
190
345
300
Other
360
175
5004
200
Other
155
190
332
300
a Estimated. ~ -
Projected.
= Includes oil lifted by Saudi Arabia and Kuwait on Iraq's behalf.
e Includes $400 [o Nigeria far balance-of-payments support.
OPEC aid to Iraq in 1983 was down to $3 billion;
about half was provided in direct financial aid; and oil
sales on Baghdad's behalf by Saudi Arabia and
Kuwait amounted to $1.5 billion. Morocco and Sudan
have also taken larger cuts of 80 percent and 60
Prelimitiary data and reporting suggest that total
OPEC aid disbursements in 1984 will remain at about
the 1983 level of $6.5-7.0 billion, with Iraq receiving
some increase:
? Iraq has received about half of its expected $l
billion in direct Gulf financial aid this year. Oil
sales on Iraqi account will amount to $2.5 billion if
current levels of sales continue.
? We expect aid to Syria, Jordan, and the PLO to be
near last year's $2 billion level. According to the
1984/85 budget, Kuwait plans to pay $180 million
to Syria and $160 million to Jordan and the PLO.
Riyadh has disbursed two-thirds of its Baghdad
commitment this year.
? We expect aid to other Arab and non-Arab Islamic
states to be slightly lower than last year. Although
Riyadh has given $150 million to Sudan for bal-
ance-of-payments support, Morocco and Pakistan
Broader Ramifications
In addition to these financial adjustments, [he decline
in OPEC revenues is affecting the cartel's cohesive-
ness, the magnitude of the LDC debt problem, domes-
tic political tensions, and international foreign rela-
tions. Financial problems brought on by the oil glut
may also create opportunities for the Soviet Union.
Pressures on the Cartel. The financial bind the soft oil
market has imposed on most OPEC states is increas-
ingly threatening the organization's cohesiveness.
Tighter market conditions and political events sup-
ported sizable oil price increases and fairly high
production levels for OPEC from 1973 to 1981. The
dramatic drop in oil consumption in the past few
years, however, has caused substantial price weakness
and forced OPEC to behave like a true carte] by
setting production limits to support a unified price.
The March 1983 agreement to cut production by 1
million b/d from the 1982 annual average level has
generally defended the $29 benchmark. Nonetheless,
financial pressures have periodically forced members
to exceed their production quotas by offering dis-
counts or bartering oil. Only a sharp production cut
by Saudi Arabia this past July averted another price
decline stemming from such discounting actions and
temporarily reaffirmed the cartel's commitment to
The threat to OPEC unity remains. Most industry
forecasts expect little growth in the demand for oil in
the next year or so. Given the potential fora substan-
tial slowdown in Western economic growth next year,
OPEC may have trouble next spring when seasonal oil
use declines and the cartel is forced again to curtail
output. The longer market weakness persists and the
financial bind continues, the greater [he temptation
 for hard-pressed members to break ranks. Some slip-
page in discipline already is occurring:
? According to Embassy reporting, Nigeria is contem-
plating avariety of moves, including discounting to
boost its sales and ease pressing debt and economic
problems.
The LDC Debt Problem. The prolonged weak oil
market has added three OPEC countries to the long
list of LDCs unable to service their debt. After
financially extending themselves during the oil price
runup, Nigeria, Venezuela, and Ecuador were unable
to absorb the loss in oil revenues and meet their deb[
repayments:
According to our estimates, Lagos has $8-10 billion
in officially guaranteed and unguaranteed trade
arrearages. Although many uninsured creditors
have accepted Lagos's refinancing offer of six-year
promissory notes, official creditors remain reluctant
to implement a restructuring without an IMF-
supported program.
Large-scale capital flight sparked by a concern
about lower oil revenues and the overvalued bolivar
led the Venezuelan Government to postpone princi-
pal payments on public and private debt in March
1983. Aself-imposed austerity program has been
praised by IMF representatives, and, as a result,
bankers are proceeding with debt restructuring ne-
gotiations and dropping the usual prerequisite for a
formal IMF agreement.
Ecuador negotiated an IMF-supported adjustment
program and a financial package with creditor
banks last year that included debt restructuring and
anew $43l million line of credit. The one-year
standby expired in July, and recently inaugurated
President Febres-Cordero is negotiating a new pro-
gram as well as a 1984 debt refinancing package
Algeria and Indonesia have been able tc continue to
meet tlieir,debt obligations and maintain fairly good
credit ratings. This is largely because of their more
diversified export bases and quicker implementation
of austerity measures in response [o [he oil revenue
decline. Financial strains are evident, nonetheless,25X1
and, if the oil market remains weak or there is a '
further runup in interest rates, their creditworthiness
could quickly erode. Jakarta will have difficulty
boosting nonoil exports this year and is in conflict
with Washington over US import quotas on textiles.
Algeria's natural gas sales are sluggish, and, accord-
ing to the US Embassy in Moscow, Algeria is consid-
ering bartering crude oil to the USSR later this year
for outstanding debts.) 25X1
Political Fallout. The OPEC governments are facing
unprecedented challenges in implementing economic
adjustment policies that contrast sharply to the expad-
sionary boom of the 1970s. The current retrenchment
of these oil-dependent economies has sparked public
criticism of government mismanagement, corruption,
and unequal distribution of sacrifices. The change of
governments in Nigeria and Venezuela last year was
due in part to discontent over economic conditions. In
the Persian Gulf, leadership skills are being tested
with simultaneous management of the economic
downturn, pressing security concerns, and the spread
of Islamic fundamentalism. For the Iranian and Iraqi
Governments, heavy war expenses and lower oil reve-
nues have produced consumer shortages making it
more difficult to maintain popular support for the
proton ed war.
Generally, the economic adjustment and political
fallout have been less severe for those OPEC members
with substantial foreign assets and smaller import
requirements; these governments have been able to
maintain generous subsidies and welfare programs
that help insulate the citizens from the impact of
spending cuts. Nevertheless, the sharp contraction in
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 domestic liquidity has taken a heavy toll on financial,
real estate, and construction sectors and generated
disgruntlement by businessmen and members of the
ruling families with substantial income from these
sectors:
? In Kuwait, liquidity constraints have helped delay a
comprehensive and final settlement of the 1982 Suq
al Manakh stock market crash that touched off
private capital flight and a drain on foreign assets.
? In the United Arab Emirates, the banking sector
has been hard hit with the failure of a major
institution last year and a large number of loans to
In the more populous OPEC debtor countries, auster-
ity measures have reduced living standards to create
deeper and more widespread dissatisfaction with gov-
ernment economic policy. The newly elected govern-
ments in Ecuador and Venezuela may face opposition
from influential labor and leftist groups. Venezuelan
President Lusinchi's ability to implement his austerity
program hinges on maintaining a fragile social pact
with business and labor. In Indonesia, President Soe-
harto must be wary of popular backlash against
repression, which has helped discourage vocal opposi-
tion. Failure of the nine-month-old Buhari govern-
ment [o revive Nigeria's economy as promised is
straining the already delicate fabric of the armed
forces. The government is reluctant to implement
extensive reforms and austerity measures for fear of
/mplications ojReduced Aid. Over the past decade
the wealthier OPEC members have considered aid a
major foreign policy tool to promote their influence in
the Third World and in international forums. Major
recipients now are looking For other donors and are
willing to strain relations with their more traditional
Gulf donors. For example, we think that Syria is
likely to tilt more toward Tehran for financial help to
offset the $1 billion in aid from Saudi Arabia and
Kuwait it lost last year. Reduced international aid
flows were a principal motive for Moroccan King
Hassan's recent union with Libya, whose aid package
will replace Saudi Arabia as Morocco's principal
OPEC aid cuts also have important ramifications for
the United States. In the case of Jordan, Pakistan,
and Sudan, the cutbacks could place increased pres-
sure on Washington for additional assistance. The
United States has strategic interests in many of these
recipient countries, and reduced financial inflows
could intensify already precarious economic positions
with possible ramifications for stability and adventur-
ism by hostile neighbors, such as by Libya in the case
of Sudan. In addition, under the current oil revenue
constraint, the Saudis may be less willing to use
foreign aid in ways that dovetail with US policy
Soviet Opportunities. The sharp drop in OPEC's
share of the oil market, continued price pressures, and
financial problems created by these conditions led the
cartel to seek cooperation with a number of other
producers in 1983, including the first formal contact
with Moscow. OPEC members had become concerned
that aggressive Soviet pricing and growing exports to
Western countries were undermining the cartel's abil-
ity to stabilize prices. These recent contacts enhance
Moscow's standing with members of the cartel and
provide a forum for continuing Soviet efforts to better
relations with the conservative Middle East produc-
ers
Although Moscow has been unable to translate its oil
supply relationship into increased Soviet influence,
connection with OPEC helps underpin Soviet links
with most OPEC members. In some cases the soft oil
market has strengthened these energy-related ties by
making the oil exporters more susceptible to special
arrangements Moscow has been willing to broker: 25X1
? Total Soviet imports of OPEC oil in the first quarter
of 1984 averaged about 285,000 b/d, a 40-percent
increase from 1981 levels, according to US Embassy
reporting. Libya and Iraq have barters of about
100,000 b/d and 82,000 6/d, respectively, and
Algeria is also considering barter to meet its debt
obligations to the Soviets.
? Kuwait, [he only wealthy Gulf state with Soviet
diplomatic relations, recently concluded a $320
million arms deal with the USSR, and press reports
indicate they are finalizing a bilateral trade
agreement.
 ~ - _- ..
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
? Soviet overtures to the Indonesians are escalating.
Though Jakarta's interest probably is aimed at
increasing leverage with Washington, the Indone-
sian press has given President Soeharto's call for
improved relations with the Soviet Bloc prominent
play.
? A Kuwaiti-led consortium of Gulf Arab banks has
arranged a $100 million trade financing credit for
Moscow this year, according to press reports.
? According to Embassy reporting, Moscow's com-
mercial and cultural presence in [he UAE has
increased during the past year.
A key exception to this trend has been Saudi Arabia,
which keeps its distance from Moscow despite the sale
of about 40,000 b/d of oil to the Soviets for credit
Outlook
We do no[ expect any early improvement in OPEC's
financial positions. We now project a $12 billion
current account deficit in 1985 if oil prices are
maintained at mid-1984 levels and demand for OPEC
oil exports rises slightly to 16.4 million b/d. In this
scenario we would expect imports to grow slower than
exports but calculate that the small improvement in
[he trade balance would be offset by a larger net
Even under this steady-price scenario, OPEC mem-
bers will be forced to continue politically difficult
economic adjustment policies:
? We are most concerned with the ability of the
Nigerian Government to contain the political fallout
from its financial crunch.
? A resurgence of ethnic and religious tensions is
contributing to antigovernment sentiment in
Indonesia.
? In Venezuela, economic stagnation could intensify
strains between business and workers and disrupt
A sustained soft oil market over the next few years
could even have substantial political repercussions for
the wealthier OPEC members. Press accounts indi-
cate that Riyadh, unlike many private petroleum
analysts, is assuming demand in [he world oil market
will recover substantially in 1986. This is contrary to
expectations of many private petroleum analysts. If
they are correct, wealthier OPEC members will come
under growing pressure to adopt more stringent poli-
cies to control spending and stem the drain on foreign
assets. We believe the Saudis and others are not
prepared for any sustained economic reversals.
Moreover, if oil prices decline in the months ahead,
the problems we have outlined far OPEC countries
would become more acute quickly. In particular, an
oil price decline would cause serious financial prob-
lems for major OPEC debtors-Nigeria, Venezuela,
Indonesia, and Ecuador-as well as non-OPEC debt-
ors such as Mexico and Egypt. These debtors could
suspend debt service payments to reduce foreign
exchange outflows and preserve dwindling export
earnings. In addition, an oil price decline could affect
political dynamics in the Persian Gulf and other
strategically important LDCs, such as Mexico and
Nigeria. An oil price decline would provide substan-
tial relief to debt-troubled countries such as Brazil 25X1
and the Philippines.) 25X1
The course of the oil market also will to a large extent
determine OPEC's relationship with the Soviet Union.
As long as the market remains weak, we believe
OPEC members will continue to seek contacts with
other producers, including the Soviets, to gain support
for their pricing structure. Moscow, For its part, may
cast its inability to substantially boost oil production
and exports as a sign of cooperation with the cartel
and gain favor with individual members. By barter-
ing, Moscow is unlikely to exert any substantial .
political leverage over OPEC members with whom it
has special oil supply relationships. Ultimately, we
believe that short-term needs to maximize hard cur-
rency earnings may prevent Moscow from exploiting
opportunities for expanded contact with OPEC
 Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
Methodology
Demand jor OPEC Oil. In estimating 1984-85 OPEC
oil exports, we have assumed average OECD econom-
ic growth of 4 percent this year and 3 percent next
year. We project an increase in OPEC oil exports
(including natural gas liquids) from 15.3 million b/d
in the first half of 1984 to approximately 16.2 million
b/d by yearend, with an average of about 15.6 million
b/d for [he year. Next year we foresee oil exports
Allocation ojExports. We have assumed that the 13
OPEC members will generally maintain shares of
OPEC exports they held during the first quarter of
1984. As a result, we calculate Saudi exports of 4.4
million b/d in 1984 and 4.5 million b/d in 1985, and
combined Iranian and Iraqi exports averaging 2.8
million b/d each year assuming the war continues at
current levels. If the war ends, Iraq could boost
exports would also put downward pressure on the
current price. On the other hand, prices could rise if
inventories are not readily drawn down to help offset
an oil supply disruption
Imports. Trends in individual OPEC countries, sug-
gest to us that overall OPEC import volume will
decline by 5 percent in 1984 with no change in 1985.
We have assumed a 2.9-percent rise in the dollar price
Oil Prices. Our calculations put the present weighted
average price of a barrel of OPEC oil at about $27.50,
which we have assumed will hold over the next 16
months. Surplus OPEC capacity of at least 7 million
b/d will provide a cushion against a moderate supply
disruption and an increase in non-Communist oil
consumption to keep prices from significantly exceed-
ing the current level. Any increase in Iraqi or Iranian
First-quarter trade data of OECD members with
OPEC states plus country assessments of import
commitments and needs provide [he basis for our
1984 import projections. In addition, for those couh-
tries with very limited foreign exchange reserves and
restricted access to credit because of payments prob-
lems, the growth in imparts is constrained by the size
of the current account deficit they can afford to
finance; most of these countries have austerity meas-
ures in place. For the surplus Gulf countries, we have
assumed that real imports for the yearwill decline,
slightly. 25X1 25X1
/nvestmenr /ncome. We assume that for 1984 and
1985 earnings on official foreign assets investment
will average ]0 percent of the total value of each
Estimates
Under the above assumptions, we project a current
account deficit of $1 I billion in 1984 and a 1985
deficit near $ l2 billion. The 1984 OPEC trade surplus
will improve, reflecting mainly higher export earnings
but also lower nominal imports. We are projecting a
$500 million decline in OPEC grant aid this year.
25X1
We project that the OPEC deficit on the net services
account will narrow to $52 billion largely because of
lower freight, insurance, and service expenditures. We
calculate that official investment income will decline
by $2.1 billion to reach $27.3 billion this year largely
because of reduced holdings abroad as reserves are
drawn down to finance deficits. We estimate that
Algeria, Ecuador, Indonesia, Nigeria, and Venezuela
owe $]0-11 billion in interest on their foreign debt
this year 25X1
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2 Secret
bank deposits and Western government securities.
Only three countries, Qatar, Ecuador, and the UAE,
added to their asset holdings in 1983; Saudi Arabia
drew down the most-$18 billion (see tables 7 to 11).
We estimate that, on the basis of balance-of-payments
data, total OPEC official foreign assets fell $28
billion last year to reach a total of $292 billion. We
calculate [hat Saudi Arabia, Kuwait, and the UAE
account for about 85 percent of total OPEC official
25X1
Types
During 1979-82, the OPEC asset mix shifted marked-
ly in favor of nonreserve assets because of increased
loans, especially to Iraq,' new equity investments,
particularly by Kuwait, and drawdowns in foreign
exchange reserves by Iran, Iraq, Nigeria, and Venezu-
ela. However, the trend toward the accumulation of
nonreserve assets-corporate securities, real estate,
direct placements, and loans-has slowed. From a
variety of data sources, we estimate' nonreserve
assets accounted for at least 46 percent of the total
OPEC portfolio in 1982 but declined slightly to 43
percent in 1983.
Reserve assets~onsisting of bank deposits, gold,
specialdrawing rights (SDRs), position in the IMF,
and government securities held outside of Kuwait, and
UAE investment accounts-comprised 57 percem of
Table 7
Saudi Arabia: Distribution of
Official Foreign Assets
Total a
63
95
144
153 135
Location
United Kingdom
13
16
IS
IS IS
Other Western Europe
Il
IS
22
21 17
Canada and Japan
3
7
14
17 17
IMF and IBRD
4
5
7
9 I4
United States, other
countries, and unlocated
31
50
83
90 72
Currency
Dollars
46
62
84
92 86
Pounds sterling
1
3
3
3 3
Marks
4
8
13
13 II
Yen
2
5
Il
13 14
Other currencies
4
7
7
8 7
Gold and SDRs
2
6
8
10 7
Unknown
4
6
18
14 7
Type of account
Gold and IMF
4
6
7
10 12
Bank deposits
17
20
19
19 I6
Government securities
17
31
56
59 62
Corporate securities
18
24
32
32 16
Other assets s
7
I3
IS
21 29
Unknown
NEGL
1
II
12 NEGL
=Estimates based on balance-of-payments data. Numbers may not
add, because of rounding.
Includes loans and direct placements.
the yearend 1983 OPEC foreign asset portfolio, up
from 54 percent at yearend 1982. Algeria, Ecuador,
Indonesia, Iraq, Nigeria, and Venezuela hold almost
all of [heir surplus funds in short-term reserve assets
' Under the 1980 Gulf State Aid Agreement, proceeds from
increased Gulf oil production were to be loaned to Baghdad interest
free and repayable at [he end o(the war in cash or oil. We doubt,
however, that these loans will ever be repaid.
Percentages are based only on the known quannnes o t e
portfolio mix~~
I 25X1
' 13 Secret
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 Table 8 em;on us S Table 9
Kuwait: Distribution of Otficial UAE: Distribution of Official
and Quasi-Official Foreign Assets a Foreign Assets
Other Western Europe
5
6
6
7
6
Canada and Japan
I
1
1
1
1
IMF and IBRD
I
1
2
2
1
United States, other
countries, and unloca[ed
25
31
36
34
37
Currency
Dollars
24
26
28
40
33
Pounds sterling
3
3
3
2
2
Marks
5
6
6
6
6
Yen
1
l
1
1
2
Other currencies
3
4
4
5
4
Gold and SDRs
1
2
2
1
l
Unknown
6
12
l8
14
I9
Type of account
Gold, SDRs, and
IMF position
2
2
2
2
2
Bank deposits
2
2
1
1
2
Government securities
2
3
3
3
3
Investment accounts
26
33
37
39
35
Other assets ^
7
10
15
17
10
Unknown
2
5
4
7
15
Includes foreign assets of mixed-sector investment companies.
s Estimates based on balance-of-payments data. Numbers may not
add, because of rounding.
These accounts include some deposits but are largely invested
in medium-term government securities and corporate bonds and
equities.
a Includes loans and direct placements.
United States, other 16 20 27 28 33
countries, and unlocated
Corporate securities ^ 3 3 3 3 7
Other assets ~. 3 7 8 8 6
a Estimates based on balance-of-payments data. Numbers may not
add, because of rounding.
Includes placements with international institutions and same'
government securities. '
Includes loans, direct placements, and real estate.
Currency Composition
An estimated 65 percent of the $28 billion drawdown
last year was in US dollar-denominated assets. Never-
theless, the proportion of dollar holdings by OPEC
members remained at the 1982 level of 60 percent:
? Although sterling's share of the currency composi-
tion remained steady at about 2 percent, mark and
other major.West European currency shares each
fell by 1 percent.
? We estimate that yen holdings increased by $3
billion, raising the yen's proportion from 6 to 8
percent.
? We estimate that dollar assets fell from $193 billion
to $174 billion during 1983. Dollar placements in
the United States amounted to an estimated 37
percent of OPEC's dollar holdings.
? OPEC gold holdings remained constant at about 44
million ounces, but close to $3 billion of value was
lost because of the $75 drop in gold's price during
 Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2 .iecret'
Table 10 Billion us S Table 11
Iran: Distribution of Official Iraq: Distribution of Official
Foreign Assets Foreign Assets
IMFand IBRD
1
1
1
1
1
United Stales, other
countries, and unlocated
12
I l
7
7
3
Currency
Dollars
l4
12
5
7
5
Pounds sterling
1
NEGL
B
NEGL
NECL
Marks
2
1 NEGL
1
1
Yen
NEGL NEGL
0
~ 1
1
Gold and IMF 3 4' 2 3 2
Bank deposits 9 7 1 5 3
Government securities I 1 NEGL NEGL 1
? Estimates based on balance-of-payments data. Numbers may not
add, because of rounding.
b Includes loans and direct placements.
lAleatinn
We estimate that about 70 percent of OPEC's official
assets are in the major industrial countries or interna-
tional institutions. We estimate that the share located
in the United Kingdom decreased slightly during
1983 and that the US, Japanese, and other major
West European shares modestly increased:
? In 1983 about 25 percent of OPEC's assets were
held in the United Slates, as compared with 24
percent in 1982. Riyadh maintained a constant
share in the United States
United States, other
countries, and unlocated
Gold and IMF 2 3 2 2 1!
Bank deposits 15 16 12 4 NECL
Government securities 0 ~ 1 1 NECL NECL
Corporate securities 1 I 0 0 1.
Other as5el5 NEGL NEGL NEGL NEGL NEGL
? Estimates based on balance-of-payments data. Numbers may not
add, because of rounding.
? Assets held in the United Kingdom decreased from
17 percent to 16 percent, while other European
countries accounted for another, 16 percent-the
same as in 1979 and up 2 percent from 1982.
? Japan's share has steadily increased from 5 percent
in 1979-reaching 7 percen[in 1983.
25X1
Sanitized Copy Approved for Release 2011/02/09 :CIA-RDP85S00315R000200160002-2
 ? About $15 billion of OPEC's assets are placed with
the IMF as either loans or fund positions, at yearend
1983. Saudi Arabia accounted for about 75 percent
of the total. Riyadh also has agreed to lend the fund
$3 billion over 1984-85.
? Loans to LDCs-including Iraq-account far an-
other 16 percent of the portfolio. We have been
unable to locate about l5 percent of OPEC's assets.
Outlook for 1984
We estimate that OPEC will draw down another $13
billion in foreign assets to finance current account
deficits and net capital outflows. We expect Saudi
Arabia, Iraq, Iran, Libya, and Venezuela to reduce
holdings by $20 billion, and Kuwait, the UAE, Qatar,
and Nigeria will increase assets by $6 billion. Again,
we expect most of the decrease in OPEC holdings will
We believe the composition of OPEC assets could
move slightly in favor of nonreserve assets in 1984:
? The lower current account deficit will require a
smaller drawdown in assets. Saudi Arabia, expected
to account for most of the drawdown, probably will
liquidate a larger portion of reserve assets, having
sold many of its corporate securities last year.
?. New loans to Iraq plus oil sales on Baghdad's behalf
by Saudi Arabia and Kuwait probably will add over
$3.5 billion to nonreserve.holdings.
? Kuwait is considering increased equity investments.
Embassy reporting indicates that the newly estab-
lished Kuwait Public Investment Company probably
will not limit purchases of foreign company stock to
less than 5 percent of outstanding shares. The state-
owned Kuwait Petroleum Company purchased
Gulf's Italian facilities in January to go along with
the Scandinavian and Benelux facilities acquired in