Let's start with the problems within the Opec. Growing unemployment and falling standards of living are forcing Opec governments on the defensive. Saudi Arabia for example is facing problems that would have been unthinkable a decade ago. Fueled by extravagant public consumption, Saudi Arabia has run up a cumulative deficit approaching $200 billion since 1982. It's public debt is expected to rise to 110 per cent of GDP by the year 2000. While per capita income has slid down to $6,900 from $19,000 in 1980, the unemployment rate among Saudi graduates has risen to 25 per cent.

Nor is Saudi Arabia alone inher problems. Iran where 48 per cent of the population is under the age of 18, needs to create more than a million jobs every year well into the next century. Saddam Hussein's adventures in the Gulf cost the GCC $65 billion and wiped out the cushion of financial reserves they had accumulated from the good old days. Now they need to create more than 8 million jobs by the year 2010. A combination of booming populations and falling oil revenues are forcing these countries to cut generous welfare subsidies to it's citizens. As a result the state's hold on it's people weakens. In the volatile political climate in these countries, such a situation would be unacceptable.

To reverse this trend, these governments have to increase their revenues substantially in a short period. Given the state of global oil markets, the only way this can be done is by increasing their production of oil. The problem is that all these countries are in the same boat. This creates a classic prisoner's dilemma situation; as everybodyincreases their production of oil, prices fall through roof. On the other hand, everyone recognises there is an incentive to agree to voluntary production cuts and then cheat on the assigned quotas. Oil prices would still fall. Reports from international monitoring agencies suggest compliance to national quotas is only around 75 per cent.

But even more pertinent to Opec's fortunes is the changing nature of global politics. Opec no longer lives in the bi-polar world of the 1970's. There is no longer an `evil empire' to rival America while the Soviet Union was still a superpower, America restrained it's allies from importing oil from the Soviet Union. She feared an expanded Soviet supply of oil would give the Soviets political leverage over much of Europe. Besides, higher oil revenues would have weakened America's strategy of bankrupting the Soviet Union through forced higher military expenditure.

With the breakup of the Soviet Union, a huge new source of oil comes in the market. It is estimated that theCaspian Sea region alone might contain as much as 191 billion barrels of oil. Admittedly, this oil is some years away from coming to the market. New pipelines and export routes need to be established before this supply comes on tap, but huge amounts of money are being invested by foreign (including American) companies, it is estimated that within another 5 years or so, Central Asian oil will be on the market. Beset as they are with infighting about the assignment of national quotas, Opec members are not likely to take too kindly to requests to cut production to accommodate this new supply of crude, the most likely outcome would be a complete disregard for any Opec directive on quotas.

Technology is cutting the ground away from under Opec, the cost of extracting oil has fallen by about two-thirds in the last decade, while at the same time reserves are higher by around 60 per cent. One result has been that oil has increasingly become like any other commodity markets. In the 1970's, the oil business was verymuch a seller's market with buyers forced to seek a long-term contract with Opec nations to ensure no disruption of supply. But technology has helped change this in a number of ways.

Now, with previously uneconomical non-Opec oil becoming increasingly viable, buyers hold sway. The share of non-Opec nations in the market increased from a third of the market to two-thirds of the market. Fear of high-handed behaviour from the Opec nations, western industrialised nations increasingly opted to esltablish links with friendly producers like the North Sea oil producers.

In the aftermath of the oil embargoes of the seventies, the industrialised nations decided to establish a strategic petroluem reserve (SPR) for each country, under the auspices of the newly formed International Energy Agency. Taking advantage of low oil prices, the industrialised countries have increased their SPR. It now stands at a record 2 billion barrels. This has further reduced the power of Opec to induce panic in oil markets, and without acapacity to induce fear, any cartel becomes impotent.

There are other reasons to wonder about the future of Opec. It's quota system was fine as long as sellers held power over buyers in the market. But the fundamental shift in fortunes in favour of buyers changes all the equations. Oil is, unlike in the halcyon days of the Opec traded on spot and future markets. Non-Opec sellers, unconstrained by any quotas sell at the prevailing spot prices. This ensures prices can adjust to reflect market demand conditions. Opec producers on the other hand, do not have their flexibility to reduce prices with falling demand conditions. Buyers find it easier to buy from non-Opec producers rather than negotiate a costlier long-term (and riskier) contract with Opec producers. The result is that to gain much needed national revenues, Opec's members are forced to increase production on the sly and offer substantial discounts on it.

Increasingly as oil becomes less a sellers market, the idea of a producers cartel to restrictaccess to supply loses it's logic. The new concerns of oil producers are to increase access to markets and buyers. Opec is still stuck with the idea of dictating terms to buyers.