Putting a Pinch in the Pipeline

By Stephen Koepp

Faced with falling prices, OPEC may crank back its oil output

One oil minister described last week's hastily arranged gathering as "just a meeting of old friends." But as everyone present knew, the coy assessment by Mani Said al-Oteiba of the United Arab Emirates understated the gravity of the situation. Ministers from six of the 13 members of the Organization of Petroleum Exporting Countries huddled for 1 1/2 days last week at Geneva's Inter-Continental Hotel to devise a scheme to halt the slide in oil prices. The cartel's current crisis began two weeks ago, when OPEC member Nigeria followed price cuts made by nonmembers Norway and Britain.

The meeting, one minister acknowledged, was rife with the kind of "speeches and hyperbole" that may bog down a full OPEC session this week. Nonetheless, the delegates reached at least a loose consensus that OPEC should trim back its output to match demand rather than cut its prices. "We are willing to make some sacrifices on production," said one OPEC diplomat, "but a change in price will not help anyone."

The ministers hope to avoid repeating their desperate move of March 1983, when they were forced to make the first and only price cut in OPEC'S history, a markdown of its benchmark Arab Light crude by $5 per bbl., to $29. Since then, energy conservation and sluggish world economic growth have helped push oil prices even lower, despite OPEC's self-imposed production limit of 17.5 million bbl. a day. Ministers hinted last week that they might reduce their output to about 16 million bbl. a day. By comparison, the group's daily production in 1979 was 32 million bbl.

Saudi Arabia, traditionally the leader of the group, has thrown its weight behind the strategy. A large part of the proposed cutback probably would come from that country's production. After the Geneva meeting, Saudi Oil Minister Sheik Ahmed Zaki Yamani became chief salesman of the plan. He jetted to Lagos at the head of a 19-member delegation and tried to persuade the Nigerians to restore their crude-oil prices. They respectfully declined. So did officials in Oslo, the next stop on Yamani's campaign. No one, though, was willing to rule out a show of unity this week in Geneva. Says Constantine Fliakos, an oil-industry analyst for Merrill Lynch: "When things are easy, OPEC tends to be undisciplined. But it is always at its best when the moment is critical."

For deeply indebted oil-producing countries, including Venezuela, Indonesia and Ecuador, a decline in prices would be painful. In Mexico, which depends on petroleum sales for 70% of its exports, a $2-per-bbl. price cut would produce a $ 1.1 billion drop in an annual oil income of $15 billion. Thus Mexican officials accompanied Yamani on his travels last week even though their country is not an OPEC member. Yamani announced that both Mexico and Egypt said they would cut their own output in support of OPEC's plan.

Despite that support, OPEC will be bargaining from a weakened position when it meets this week. The cartel's share of the global oil market has declined from 47% in 1979 to 31% this year. While most OPEC members believe the approach of winter and the seasonal demand for heating oil will help bail them out of this crisis, they are likely to face another problem in the spring, when demand falls off. Even if OPEC agrees to tighter output quotas, many members may continue to flout those limits. "When we make a commitment, we must keep it," says Algerian Oil Minister Belkacem Nabi. "Those in OPEC who don't respect their promises have done us much harm."

The slump in oil prices is causing a mixture of harm and good outside OPEC. Last week several U.S. oil firms reported stagnant or declining profits for the third quarter. Mobil's earnings fell 41%, to $238 million, compared with the same period last year. But low-cost fuel is producing some consumer bargains. Last week People Express Airlines, citing a decline in aviation-fuel prices, slashed fares by about one-third on five heavily traveled eastern routes.

--By Stephen Koepp.

Reported by Lawrence Malkin/Geneva

With reporting by Lawrence Malkin