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March 31, 2010

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Is Iraq still in OPEC?

Yes, it is. No, the issue of the country's quota hasn't been resolved. Right now the country doesn't have a quota, although it attends meetings and votes on the organization's policy.

It is a serious issue.

The question for OPEC is whether Iraq can meet its goals. Otherwise the country will head right into a collision with OPEC.

It is possible that Iraq will collude with Saudi, but that raises the issue of whether Saudi will be willing to ratchet back its output to accomodate its neighbor in return for its neighbor sticking to a quota of, say, 7 mbpd ... which is already a pretty huge increase.

And Saudi's ability to offer Iraq that deal in turn depends on whether the cartel can maintain control of the market.

What's your conclusion?

Let me put my Hydrocarbon Commodity Forecaster hat on and opine.

I don't see the OPEC cartel raising its joint output to accommodate the Iraqis.

I don't see the Saudis ratcheting back their output unless it's accompanying a rise in the price per barrel, but I think that the cartel members get a lot of jawboning from consumer nations during recessionary times like these to keep oil prices down.

Iraq today has lots of leverage against the Saudis, because the Americans will do lots short of direct military action to ensure that the oil industry gets back on its feet. The US as you are aware has invested several hundred billion dollars in Iraq and the Iraqi government over the last couple years.

If I were the Iraqi government, I would do my best to carve out exceptions to the cartel rules so that I could keep my oil flowing and the coffers filled to ensure my grip on power.

By investing lots of money in Iraqi reconstruction the US has therefore in my opinion broken the cartel's ability to set oil prices by reducing demand.

What do you think, fellow hydrocarbon expert?

Question: Why did the U.S. majors abandon the effort to get in? (And why did OXY, a personal fave, not?)

I mean, I'd understand if they were otherwise flush with politically safe reserves (say, off the coast of Virginia.) But they're mostly not, and they face a rapidly increasing Hubbert-like rate of depletion if the Peak Oil guys are to be believed.

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