Domestic impact of production cuts in OPEC countries: The cases of Nigeria and Venezuela

OPEC claims that the aim of this organization is to coordinate and unify the petroleum policies among its member countries to ensure a secure and stable income provision to its member countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital invested in the oil industry (OPEC, 2010, "Long-term Strategy). One way to achieve their goals is through agreement on each country´s production allocation. In this century, the oil market has witnessed the active role of OPEC to stabilize the market when prices show downward trend. From 2011 oil prices have remained relatively stable, around $ 95/ barrel for WTI and $ 105 / barrel for the OPEC basket. However, no situations are discarded in the near future that require actions by OPEC as have been seen in the recent past. In this sense there is evidence that the production of non-OPEC countries has been increasing, while risk situations remain to global financial stability that threaten the future growth of the residual demand for OPEC crude. This paper analyzes the effects of production cuts on Nigeria and Venezuela, founding members of OPEC countries. These two countries together account for 15% of current OPEC production (6% Nigeria, Venezuela 9%) and 28% of proven oil reserves (3% and 25% respectively). The cases of Nigeria and Venezuela are of particular interest because their economies show greater diversification from the rest of OPEC. According to World Bank statistics for 2006, the combined weight of the agricultural and manufacturing sectors in these countries reached proportions that are superior to most other OPEC countries (Nigeria 35% and Venezuela 19%), with the notable exceptions of Iran (21%) and Indonesia (41%). However, Indonesia the largest diversified country in OPEC ceased to belong to this organization in September 2008. A computable general equilibrium is developed to measure the impact of production cuts in Nigeria and Venezuela. The model considers 14 production activities for each country (comparable to each other). Production cuts are simulated as export restrictions by introducing quota exports in the model as a complementary condition). Additionally alternative scenarios are considered regarding capital mobility between sectors and closures alternatives. Preliminary results from a version of the proposed model for Venezuela with 4 sectors (petroleum, manufacturing, services, and other sectors.) reveal that a 10% reduction in oil exports could generate an overall decline in economic activity (GDP) of 0.1 % , mainly affecting the oil producer sector and the "all others sectors" which mainly includes the construction sector. It is noteworthy that the production of the manufacturing sector expands slightly to 0.3%. In this case suggesting that weight status of manufacturing sector in the structure of a country like Venezuela is not a decisive factor in the recessive character may have, in the short term, the production cuts.