The principal argument of this article is that the tandem forces of weak oil demand and the financial needs of the poorer members could upset the OPEC status quo (i.e. price and production levels).

The article begins by highlighting a sample of the projected borrowing for the following year by the increasingly debt-ridden OPEC members (e.g. Algeria: $700 million, Nigeria: up to $2 billion from the IMF and up to $5 billion in refinanced commercial debt, Venezuela: must refinance $34 billion in foreign debt, etc.). The question is raised whether the poorer of the OPEC members (i.e. the ‘have-nots’) would be able to repay their debts or would they imitate the spiral of borrowing and refinancing practiced by Mexico and Brazil. It is likely that any cut in price or reduction in sales would exacerbate the borrowing dependency.

Given the unfavorable predictions of demand for oil, OPEC projects output for the first quarter of the following year to be half that of what it was five years before. Although the banking community is quick to dismiss any suggestion that OPEC members are a credit risk, this exposure (i.e. $16 billion lent to members in the previous two years) if concentrated in a few financially unstable states could prove troublesome.

The world’s banks should expect a significant outflow of funds as OPEC countries continue to draw down deposits. As the OPEC’s current account deficits continue to grow (i.e. to a high of $35 billion in 1984, up from $7 billion in 1982), restrictions on their own are unlikely to do much. If the OPEC countries continue to draw down deposits at anything like the rate experienced between 1982 and 1983 (i.e. $45 billion to finance deficits and the Iran-Iraq War); the Eurodollar bond market will be significantly impacted. If the European banks are drained of substantial amounts of liquidity, their ability to participate in the market could be hindered.

Summary by David A. Ritchie