Problems for Oil Producers

By Christopher Byron

A glut of crude causes tighter development budgets

Mexico, Britain, Ecuador, Malaysia. The list of oil-exporting nations that have cut their prices keeps growing longer. After years of feasting on high prices brought on by petroleum scarcity and soaring demand, the oil-producing states are discovering that the price of crude can go down as well as up. Drooping demand and a steadily swelling surplus production of some 2 million bbl. per day have created a miniglut that grows bigger by the week.

From the oilfields of Southeast Asia to the offshore drilling rigs of North Africa and the North Sea, petroleum prices are being pruned, pared and sometimes slashed as exporting nations find themselves scrambling to hold on to customers. Not even last week's Israeli air attack on Iraq's nuclear reactor outside Baghdad did much to firm up the weakening price of crude. Though sporadic calls for an oil embargo of the U.S. echoed through the Arab world, petroleum prices stayed stagnant on the bellwether spot market, where much of the world's current excess is traded daily. At approximately $32 per bbl., spot market crude is now selling for nearly 20% less than last autumn.

Prices are sliding in large part because Saudi Arabia, which produces 10.3 million bbl. of crude oil daily, or 40% of all the output of the 13-nation Organization of Petroleum Exporting Countries, is intentionally forcing them lower. As longtime champions of steady, but moderate, rises in the price of oil, the Saudis have refused to mimic price hawks like Libya, Iran and Iraq. Instead, the Saudis for the past nine months have been pumping nearly 2 million bbl. per day above their self-imposed limit of 8.5 million bbl. daily in order to create an oil surplus and drive prices down.

For the United States, the slumping cost of crude will mean less inflation and at least moderately more growth than most experts had been forecasting for 1981 and 1982. Consumer prices will probably rise by about 10% for this year, as a whole, vs. projections of as much as 12% to 13% late in 1980. Lower oil prices may help the U.S. to avoid the recession in 1981 that many economists had also predicted.

Welcome as it is to some oil-importing nations, the weakening price of crude means an abundance of troubles for many oil exporters. Nations like Nigeria, Iran and Libya have year after year pushed the price of crude to ever higher peaks in order to finance ambitious development programs. Now the sagging demand for petroleum is crimping export earnings, cutting into government revenues, and in some cases even beginning to threaten the continuation of many big industrialization projects.

One of the hardest hit nations is Nigeria. As sales have fallen off, Nigeria's output has slipped in recent months. Daily production is now running at little more than 1.6 million bbl., down nearly 30% from 1980 levels.

Endowed with only 30 years of proven reserves, the most populous and powerful nation in black Africa had been counting heavily on high prices to pay the cost of a colossal industrialization and agricultural development program designed to buoy the economy after the oil runs out. Since 1975, Nigeria has spent upwards of $80 billion on economic development, and in the coming four years the government of President Alhaji Shehu Shagari wants to spend perhaps $152 billion more. In 1981 alone, overall imports are expected to reach $24 billion, mostly for heavy machinery, transportation equipment and food.

Oil revenues in 1980 amounted to some $25 billion, or nearly 50% of the nation's entire economic output, but smaller oil receipts will be causing new problems. With an estimated $5.5 billion in foreign loans already on its books, Nigeria now faces the unpleasant choice of adding perhaps $3 billion more in international debts, or else drawing down its $10 billion in foreign exchange reserves.

Politically, the least attractive choice of all would be the one that makes the most economic sense--slowing the rate of government spending.

Mexico, which is not an OPEC member, finds itself in a similar bind. Since 1976, Mexican production has more than tripled, to 2.8 million bbl. daily, and the resulting revenues from exports have become the foundation of economic development. Mexico has now cut prices by $4 per bbl. on both light and heavier grades of crude.

Yet no sooner did Jorge Diaz Serrano, the head of Mexico's state-owned oil company, Pemex, announce the cut than a political storm forced his resignation. Until last week, Serrano had been one of the leading candidates in next year's presidential election.

Mexico is expected to lose an estimated $1.2 billion or so in foreign exchange earnings as a result of Diaz Serrano's action. To pay its bills, the nation will have to negotiate as much as $1.2 billion in short-term credits from foreign lenders in the coming year. That could add five percentage points to an inflation rate that economists already foresee reaching 30% by year's end.

Higher inflation will put further downward pressure on the weak Mexican peso, which is being artificially supported on the world's money markets by the Mexican central bank. Devaluation would aid tourism, boost exports and help close a large trade deficit. But the last time a Mexican government undertook a major devaluation, in 1976, billions of dollars fled the country, inflation surged to an annual rate of more than 50% and economic growth came to a halt. No Mexican government wants a repeat of the 1976 devaluation fiasco.

Britain, which has been counting on North Sea oil revenues to help lift it from the status of newly submerging nation, is also coming under pressure from falling prices. The Conservative government of Prime Minister Margaret Thatcher has been relying on up to $9.5 billion in revenues from North Sea production to help balance its fiscal 1981 budget. But the weakening market has discouraged the state-owned British National Oil Co. from opening promising new fields to expand production.

Meanwhile, B.N.O.C. has now offered to trim the cost of its crude by $2, to $37.25 per bbl., in order to deter customers from seeking even cheaper deals elsewhere.

The cut may not be steep enough. British Petroleum is holding out for a full $5 per bbl. cut. These reductions could cost the British treasury millions of dollars in revenues, although the loss would be at least partially offset by the declining value of the pound. Oil prices are set in dollars and thus the British are now receiving more pounds for each barrel of oil.

As the world temporarily floats in a glut of oil caused by Saudi overproduction, more and more Western energy experts are asking themselves how much the desert kingdom actually has to produce to meet its own economic and political goals.

Are the Saudis doing the West a favor by producing 10 million bbl. per day or are they doing themselves a favor?

Some critics of Saudi intentions, like Washington Lawyer Douglas J. Feith, a staff member of Ronald Reagan's National Security Council, assert that the Saudi Arabians simply could not afford to cut back much on output even if they wanted to. As Feith has argued, the Riyadh government needs every dollar it can get from its oil exports simply to pay the high cost of financing the nation's rapidly expanding economy.

Detailed studies by numerous other experts conclude, however, that the Saudis could cut back oil production by at least 2 million bbl. daily without feeling any financial pinch. Between 1980 and 1985, Saudi development plans call for $142 billion in expenditure on such projects as the nation's huge petrochemical and refining complexes at Jubail and Yanbu, and the new $1.7 billion university complex in Riyadh that is being built by Alabama Contractor Winton ("Red") Blount. Former CIA Analyst Walter McDonald, now a top Washington energy consultant, estimates that at $32 per bbl. the Saudis need to produce only 5.3 million bbl. daily to cover all such domestic development expenditures. Thus, the world's current glut could vanish like a mirage in the desert if the Saudis suddenly decide to cut their production in half. --By Christopher Byron. Reported by David Beckwith/Washington and Jack E. White/Nairobi

With reporting by David Beckwith/Washington, Jack E. White/Nairobi

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