Monday, Mar. 21, 1983

Emperors with No Clothes

By Charles P. Alexander

Prices dip, and the market shows who rules the oil trade

In an eighth-floor suite of London's Hotel Inter-Continental overlooking Buckingham Palace, the Organization of Petroleum Exporting Countries last week struggled for its survival as the premier power in world oil markets. Said Algeria's Energy Minister, Belkacem Nabi: "We all recognize that this is a very important meeting, unique in the history of OPEC." A global oil glut has driven the spot price for Saudi Light crude to about $28 per bbl. That is well under OPEC's official benchmark price of $34 per bbl. but not low enough to suit refiners, who in the U.S., for example, are able to sell what they can make from a barrel for only $26 to $27. As delegates from the 13 member nations harangued, haggled and tried to hammer out a scheme of prices and production quotas that would stabilize the market, Venezuela's Humberto Calderon Berti warned, "If we start fighting, all of us, the price will go down to $20 a barrel."

Even as the negotiations dragged on, the downward squeeze on oil prices grew increasingly intense. The Soviet Union lowered the price of its crude exports to Western European customers by $1.25 per bbl., to $28, the second cut in six weeks. British Petroleum, one of the companies that pump Britain's oil, added to the pressure on OPEC by arguing that North Sea crude should be priced at least 750 per bbl. lower than Nigeria's high-quality Bonny Light. North Sea oil now sells for $30.50, higher than the Nigerian price of $30 that was set last month when Nigeria became the first OPEC nation to break ranks and formally cut prices. British Petroleum's view suggests that a cut of more than $1 may be in the works for North Sea oil. Yet Nigeria has pledged to match any North Sea cut "cent for cent." Any such price war could set off a downward spiral.

The discussions in London revolved as much around questions of production as questions of price. OPEC production has dropped dramatically, probably below levels that are politically and economically feasible for most of the group's members. In 1977 OPEC nations were pumping at a rate of 31.3 million bbl. a day. Now production has dropped to only about 14 million bbl., and in spite of that the market remains squishy. Saudi Arabia has taken the brunt of the cutbacks. Its production is currently only 3.3 million bbl. a day, roughly a third of its rate of 9.6 million bbl. a day in 1981. The keepers of the kingdom's finances are unwilling to go lower, or even remain this low for much longer.

The connection between price and supply was painfully obvious to all the OPEC members. High production levels will only push prices still lower. With this in mind, Algeria and Venezuela proposed making 14 million bbl. the ceiling for OPEC producers and dropping the official price only slightly, to $32. But most members were hoping for a consensus closer to 17.5 million bbl. of production and a new benchmark price of $29. Saudi Oil Minister Sheik Ahmed Zaki Yamani, realizing that the burden of a low production quota will fall on his country, rejected the proposal by Algeria and Venezuela with the comment: "Everyone would cheat."

Recent OPEC history supports Yamani. A year ago, the group agreed to a production ceiling of 18 million bbl. a day. Before long, however, Algeria, Nigeria, Libya, Venezuela and Iran were all exceeding their quotas.

Last week the Venezuelans were offered an allotment of 1.6 million bbl. a day, but they wanted 1.8 million. Burdened by a huge foreign debt, Venezuela needs higher oil output to help the country keep up interest payments. The Iranians were totally unrealistic. They demanded that archrival Saudi Arabia lower its output by nearly 10% to 3 million bbl. a day, while Iran be allowed to raise production to match that level. Iran, which is currently exporting only 1.5 million bbl. a day, is desperate to raise money for its continuing war with Iraq, another OPEC member. The threat of Iraqi air raids against the main Iranian shipping terminal at Kharg Island has helped cut Iran's exports by 1 million in the past month.

Iran's representative to OPEC, Mohammed Gharazi, was easily the most obstreperous delegate in London last week. He proclaimed that his country would "never, never, never" agree to a reduction in the official OPEC price, a transparently hypocritical stance. For months Iran had been offering discount prices, sometimes as low as $26, in hopes of boosting production. The Iranians fear that if the benchmark price were slashed, they would have to offer even deeper discounts to maintain sales. In the face of a deadlock on the pricing issue, some ministers began talking openly of an unprecedented move: reaching a majority agreement that left out Iran. Such a step would break with OPEC's tradition of making every decision unanimous. It would also openly demonstrate a lack of the cohesion needed to manage the oil markets. At week's end Gharazi appeared to have conceded that the new official price would be $29.

As OPEC deliberated, government officials around the world cheered the prospect of a moderate drop in oil prices. But they also pondered the possible dangers of an all-out oil price war. In the U.S., Federal Reserve Board Chairman Paul Volcker was concerned that a precipitous drop in prices might increase the already alarming U.S. budget deficit by cutting receipts from the windfall profits tax on oil. If that happened, he suggested, Congress should consider imposing a new oil tax.

At its weekly meeting, the Brussels-based European Commission called for talks among the industrial nations to consider setting up a "security net" to minimize the impact of a sharp decline in oil prices. Such an arrangement could conceivably include an increase in energy taxes throughout the West to hold down consumption.

Whether or not OPEC can achieve an agreement, it appeared last week that the group has lost whatever control it had over world oil markets. As the London Times proclaimed, "OPEC has no clothes." The mighty ministers who once ruled the market now have no choice but to obey it.

--By Charles P. Alexander.

Reported by Lawrence Malkin/London and Bruce van Voorst/New York

With reporting by Lawrence Malkin/London and Bruce van Voorst/New York This file is automatically generated by a robot program, so viewer discretion is required.