A year ago, the Organization of Petroleum Exporting Countries was a tattered titan.
The price of oil had dropped by half in six months and was still falling. The cartel itself made sure things would get no better: Squabbling and finger-pointing, each member nation kept pumping more oil to hold on to its fleeting market share.
”In June, 1986, a lot of people thought OPEC had lost control and was no longer relevant,” says John Lichtblau, president of the New York-based Petroleum Industry Research Foundation. ”It was their worst moment.”
OPEC has learned from its crash course, however, say Lichtblau and other experts. This is why they be-
…
lieve OPEC will not radically increase production or prices at its biannual meeting beginning Thursday in Vienna.
The organization`s apparent aim is to quickly affirm the output quotas for the second half of the year tentatively set last December–the cartel`s most recent meeting–and keep the official average price of $18 a barrel.
Saudi Arabia, as usual, is in the lead. But, again as usual, there is some dissent. The Iranians are calling for keeping production at the current level so prices can be raised, in part to make up for the fall of the dollar in which OPEC oil is priced.
No other nation has publicly seconded Iran`s suggestion.
Moreover, the Saudi position is considered particularly strong this spring. The kingdom is generally credited with OPEC`s recent success by cutting output more drastically than any other member nation, a painful exercise.
”You must respect the voice of the government of Saudi Arabia,” says Michael Harvey, treasurer of the Royal Dutch/Shell Group, in London. ”They are the heavyweight of this particular group.”
If the Saudi script is followed, it would mean official production of 16.6 million barrels a day in the third quarter, up 5 percent from 15.8 million. Fourth-quarter production would rise to 18.3 million, 15 percent above today`s level.
Most experts say this output would still be less than the world demand for OPEC oil. Therefore, spot, market-driven prices would probably stay in the $20-a-barrel range without any tampering with the official price.
”They`re slowly getting the lesson that they don`t have to set both,”
says Alfred Munk, Amoco Corp.`s manager of foreign affairs, referring to production levels and prices. ”They only have to set one, and the market takes care of the other.
”The market will do the tightening without a price announcement. The market will recognize the production discipline
and will itself take the price up into the $20 range.”
Success, though, depends on all 13 OPEC members abiding by the accord, something many of the nations have been reluctant to do before. But here, too, the disastrous results of last year`s oil glut seem to have instilled self-control.
According to Morgan Guaranty Trust Co., OPEC`s oil revenue plunged $53 billion last year to $83 billion, or less than a third of the $284 billion earned in 1980. Even oil-rich Saudi Arabia reported a budget deficit in 1986. ”After a shock, people tend to be much more disciplined,” says Robert Mabro, director of the Oxford Institute for Energy Studies in England and an OPEC adviser.
Mabro compares OPEC to a smoker who has been told by his doctor to quit after a brush with cancer.
”You might quit immediately and you might carry on for a long time,” he says. ”I don`t know beyond six months–it`s very difficult to predict–but I think for a while OPEC will remain disciplined.”
There is another reason for OPEC`s resolve: It has worked.
When OPEC scaled back production and re-established official pricing Dec. 20, the oil industry scoffed, says Nauman Barakat, a Smith Barney, Harris Upham & Co. analyst in New York who foresees OPEC adopting a $19 official price as a sop to Iran.
”The overall perception in the market was that, in fact, it would be all words and no action and that after a reasonable period of time the market would collapse,” Barakat says.
”Well, the market did weaken in February,” he says, when traders refused to buy at official prices, hoping, vainly, that they could pressure the weaker OPEC countries into breaking. ”But since then, the market has been very firm.”
”Most of the countries in OPEC see the course they`re on as the only course worth following,” adds Joseph Stanislaw, Paris-based director of Europe and the Middle East for Cambridge Energy Research Associates.
He continues: ”I think they`re in reasonably good control of their production. I think they`ve been fairly reasonable about honoring the integrity of the official price. Their psychology is playing the market correctly.
”But it`s a delicately balanced situation.”
There are several developments, the experts say, that could throw that balance out of whack.
One would be a full-blown war between the United States and Iran in the Persian Gulf, an area that became especially tense after Iraq`s May 17 missile attack on the frigate USS Stark.
”But short of a conflagration, nobody is going to pay too much attention to the gulf,” says Munk. ”There are storms that frequently close the gulf for five or seven days. A military storm doesn`t change things that much.”
Harvey agrees:
”What`s absolutely amazing is all this interdiction by Exocets
(missiles) has not stopped the flow of oil. You can push Exocets into tankers full of crude and some will catch on fire and some will not, but they keep on sailing.”
Another possibility would be a slowdown in the world economy, says Charles Ebinger, energy programs director at the Center for Strategic and International Studies at Georgetown University in Washington.
As it is, demand for oil in the noncommunist world is predicted to increase only 1 percent in 1987. (Last year, it jumped 3 percent.)
In addition, Ebinger says, nuclear and coal-fired electricity plants are continuing to come on-line in the industrialized world, reducing the demand for oil somewhat.
If the economy sours, sapping demand, OPEC could wind up producing too much under its higher third- and fourth-quarter quotas. The market would then drag down prices, and OPEC would be left with the task of once again deciding how to cut back production to keep prices from sliding further.
Nothing, however, is more likely to upset OPEC`s balance–and with it the Saudis` dream of a short, sweet meeting–than Iraq`s demands for a higher quota.
Iraq, now in the seventh year in its war with Iran, is expected at the OPEC conference to renew its claim for the same official output quota as Iran, at 2.2 million barrels a day. Iraq`s quota under the December accord is 1.5 million barrels.
Iraq has never accepted the production ceiling, however. Its daily output is believed to be slightly above 2 million barrels. And it is expected to rise by another 500,000 barrels when a new pipeline through Turkey is completed.
No one is sure when the line will be opened. Iraq has said it could be as soon as July, although most experts say it probably will not be until September or October.
But whenever the increased production is added, Iraq`s excess, plus that expected to be produced by others, notably the United Arab Emirates, would put OPEC`s output above what the world market could absorb at today`s prices, the experts say.
What can OPEC do?
Some experts, such as James Akins, a former U.S. ambassador to Saudi Arabia, say that Iraq can be pressured ”back into line.” But this view is rejected by most.
”There is no way,” says Lichtblau, ”that anyone can persuade Iraq to cut back on its output.”
What Lichtblau and the experts think the cartel will do is what it did last December: issue a quota for Iraq, knowing full well that it will be ignored, but preventing the meeting from digressing into a public airing of dirty laundry.
Later, the experts add, Saudi Arabia would take care of matters. It certainly has the means.
One of Iraq`s two existing export pipelines crosses through Saudi Arabia to the Red Sea.
Experts say the Saudis could constrict the flow of Iraqi oil through the line, offsetting the effect of the new Turkish pipeline to the Mediterranean Sea.
Or the Saudis could halt oil production in the so-called Neutral Zone.
Saudi Arabia and Kuwait, which share the zone, pump about 350,000 barrels a day to help fund ally Iraq`s war effort.
The production is not counted in OPEC`s overall quota.
Or, as they`ve done before when exports appeared to be overburdening the market, the Saudis could curb their production, estimated to be at 4.1 million barrels a day, the kingdom`s quota.
The experts agree, though, that if OPEC can avoid these troubles–and most believe it will–the cartel will emerge with the market even more firmly under its control and with the stage set for lifting prices to $20 to $22 a barrel when OPEC meets next December to set its course for 1988.
”The organization is certainly in better shape than it has been in several years,” says Harvey, ”and it probably will attack its problems with some self-confidence and some prudence.”
”They will try to have this be a quick meeting,” says Ebinger.
”That would be the stongest psychological symbol they can give to the markets, showing that OPEC is a rationally functioning organization.
”But,” he adds, ”OPEC is a group of nations that meet and negotiate. And often the rules of logic don`t apply to negotiations.”
