Oil Slide

By Stephen Koepp

OPEC goes on a selling spree

Saudi Arabia has always considered itself the model of prudence and self-control among the 13 nations that make up the Organization of Petroleum Exporting Countries. When one of the other members threatens the group's strength by producing too much crude oil or selling it at a discount, the Saudis are usually the first to scold. Thus Saudi Arabia has perplexed the global oil industry this summer by boosting its output by 1 million bbl. a day beyond the country's voluntary quota of 4.5 million bbl. The extra crude has aggravated the world's surplus of oil and triggered a dramatic slide in prices. The situation again threatens OPEC's power to control the cost of crude. In March 1983, the countries were forced to make their first price cut in history, a $5-per-bbl. markdown, to $29.

Fears of a free fall in crude prices resounded last week throughout the oil industry. Said Gulf Chairman James E. Lee: "I think we are kind of on a razor's edge." Texaco, Quaker State and Standard Oil of Indiana lowered the rates they would pay for some types of U.S. crude by as much as $2 per bbl., to $26. The trend may force two big producers, Britain and Nigeria, to mark down the official price of their crude. Said Constantino Fliakos, oil analyst at Merrill Lynch: "If that happens, OPEC ultimately would suffer and have to lower its official price again."

The price slide was triggered by an unusual Saudi deal in which the country plans to exchange some 34 million bbl. of oil for ten new Boeing 747 jetliners. Saudi Oil Minister Sheik Ahmed Zaki Yamani protested the arrangement because it would add to the glut on the world oil market. But Prince Sultan, chief of the military and the national airline, overruled him, apparently because the royal family wanted to avoid dipping into the country's foreign-exchange reserves to pay for the planes. By exceeding its OPEC production quota, Saudi Arabia provided an easy excuse for most other members to do likewise.

OPEC's abundant production is compounded by low demand for oil. Despite the economic boom in the U.S., West European countries have been slow to recover from the worldwide recession. Total oil purchases by Western industrial countries have increased by less than 4% since last year. Meanwhile, OPEC's total output has gushed up about 30%, from 14 million bbl. a day in mid-1983 to some 18.5 million currently.

Airlines, chemical manufacturers and other heavy petroleum users will benefit most from the falling prices. Consumers, too, will feel an impact. The average price of gasoline in the U.S. has dropped to $1.18 per gal. from $1.25 a year ago, and is likely to fall further. The surge in supply, though, could put a sharp kink in the profits of U.S. oil companies. Last week Frank Kneuttel, of the Gintel energy-research group, warned clients away from energy stocks. Said he: "The price is like a snowball coming downhill without a mogul to stop it." Falling prices will also hurt Mexico, Venezuela and other countries that depend on oil income to pay off their debt.

Some industry experts believe that OPEC'S crisis will prompt an emergency meeting of the group in September or October. In the meantime, the Saudis may try to bolster prices by announcing that they will cut back production as soon as they have paid for the planes. Said John Lichtblau, president of the Petroleum Industry Research Foundation: "There is still a possibility they can correct the situation by substantially reducing their output. But it is difficult to recontrol prices once they start running away." --By Stephen Koepp. Reported by Jay Branegan/Washington and Timothy Loughran/New York

With reporting by Jay Branegan, Timothy Loughran