Of Mini-Glut and Gluttony

By Christopher Byron

The petroleum cartel's leader pushes for automatic price rises

Normally, meetings of the 13-nation OPEC cartel are accompanied by pomp, pageantry and no small amount of worldwide hand wringing as the cartel's jetabout ministers swoop into distant capitals to push up the price of oil. Yet when word leaked of a secret gathering in Geneva two weeks ago of six of OPEC's top ministers, who had assembled at the invitation of Saudi Arabia to discuss pricing and production strategy, the oil-consuming nations seemed distinctly more relaxed than in the past.

That was because, for the first time in years, the topsy-turvy international oil game is tilting slightly in favor of the consumers. Not only has the industrial world's economic downturn pushed oil consumption to its lowest levels in five years, but OPEC's share of the world market is itself shrinking.

Though it remains by far the most potent force in the oil trade, OPEC is seeing its role being gradually eroded, both by disputes among its members and by happenstance. Production is tailing off in Venezuela, Nigeria, Libya and other African countries, while for much of this winter the war between Iran and Iraq choked off almost entirely exports from those two producers. Result: in 1980 OPEC production slid by 13%, its biggest drop ever.

Meanwhile, the soaring cost of OPEC oil, which has climbed by 160% in the past two years, to an average $35 per bbl., has spurred conservation. In the U.S., petroleum consumption is down more than 8% from 1979 levels, and imports have dropped by 20%, to 6.3 million bbl. daily.

At the same time, according to the authoritative Petroleum Intelligence Weekly newsletter, stepped-up oil exploration efforts are boosting output in many non-OPEC areas. During 1980, production jumped by 32% in Mexico, by 10% in the North Sea and by 1.3% in the U.S., which is experiencing its biggest drilling boom since the mid-1950s.

As a result of these developments, a worldwide mini-glut of oil is appearing, and some petroleum prices have at long last begun to ease. On the bellwether international "spot" market, where small amounts of crude are traded at free market rates, prices have slipped from a high of more than $41 per bbl. late last year to a current level of $37 per bbl.

Still, the spot market's softness probably does not foreshadow lower fuel costs for consumers. The mini-glut is nearly microscopic: there is an estimated surplus of no more than 800,000 bbl., out of a total non-Communist worldwide production of about 53 million bbl. per day. "It is absurd to talk of a glut," says one West German oilman. "So long as any one of a number of oil-producing nations can create shortages, the world's energy supply hangs by an exceedingly thin thread."

Indeed, a plan to tighten the market back up, was precisely what the six OPEC ministers had gathered in Geneva to discuss. At the meeting was not just Saudi Arabia's Sheik Ahmed Zaki Yamani, whose nation accounts for almost half of the cartel's oil output, but representatives of Kuwait, Nigeria, Algeria, Indonesia and Venezuela as well.

Yamani sought to win support for two objectives that the desert kingdom is hoping to achieve at the cartel's May 25 pricing conference in Geneva. First, the Saudis are anxious to scrap OPEC's chaotic, everyone-for-himself pricing and return to a unified rate structure that would reestablish their country, which has consistently held out for the lowest prices of any cartel member, as the group's key price setter.

Second, Yamani has been pushing an "indexing" plan that would link rises in the cost of OPEC oil to Western inflation--an idea that the U.S. opposes as amounting to little more than a strategy to keep prices climbing steadily no matter what the worldwide demand for oil. Warns international Oil Analyst Walter Levy of the scheme: "It will whipsaw consuming nations by keeping the price high when demand is soft and then allowing the market to set sky-high prices when supplies are tight. Once the market is back in balance, the new higher prices would tend to be the basis on which the whole formula is then refigured."

The Saudis have repeatedly tried to get OPEC to go along with their price program, but the greedier cartel members have remained more interested in simply pushing their own prices to the limit. As a result, OPEC has been unable even to return to a unified price, let alone adopt indexing.

Yet the current softness in the oil market has given the Saudis a new opportunity. Since last autumn, Saudi Arabia has been pumping nearly 2 million bbl. per day above its self-imposed limit of 8.5 million bbl., in order to prevent world prices from surging anew in the face of pinched exports from Iran and Iraq. But in recent weeks the two warring nations have resumed limited shipments, blunting the need for increased Saudi output. Accordingly, oil analysts have long been expecting a Saudi production cut. But the Saudis have chosen to use their production leverage quickly to advance their pricing program.

Following the Geneva gathering, OPEC's secretary-general, Rene Ortiz, said only that the talks had dealt with "longterm strategy, including pricing," But TIME has learned that Saudi Arabia told the others at the meeting that it intends to cut production by 500,000 bbl. daily, perhaps as soon as the end of March. A public announcement might be delayed somewhat, in order not to embarrass U.S. Secretary of State Alexander Haig, who is expected to visit Riyadh, the Saudi capital, some time in the coming weeks with the news that the Reagan Administration has decided to fill a large Saudi armaments request that had been blocked by the Carter Administration.

The Saudis also agreed at Geneva to "consider" a $2 increase for Saudi Arabian crude, which now sells for $32, the lowest price in the cartel. At the same time, Saudi Arabia's cartel ally, Kuwait, agreed to impose a 300,000-bbl.-a-day cutback. In return for these gestures, the entire group agreed in principle to support, at the cartel's May meeting, the Saudi program for indexing and unified pricing.

Yet even this support may not be enough for adoption of indexing by the cartel, which requires approval by all members for major policy actions. Says Edward Morse, director of the U.S. State Department's international energy division: "The U.S. is against indexing, and we think the cartel would be foolish to try it because the effort will fall flat."

Ultimately, the best guarantee that OPEC will not adopt indexing is the avarice of some of the cartel's members. Time and again, states such as Libya and Iraq and even presumably "moderate" producers like Indonesia have shown their willingness at the first signs of a tightening market to break ranks in a free-for-all rush for higher prices. But for now, at least, world demand appears to be peaking, and if OPEC's producers have hopes of maintaining the prices that they are already receiving, they will have to come to terms with Yamani, who alone can close--or open--enough valves to keep cartel petroleum supplies in balance with world needs.

--By Christopher Byron. Reported by Bruce van Voorst/Brussels

With reporting by BRUCE VAN VOORST

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