OPEC's Geneva Debacle

By Christopher Byron

Petroleum producers fail in a desperate attempt to find unity

For a brief moment last week, it looked as if the two years of chaos in the world's oil markets were ending. Saudi Arabia appeared about to force its moderate pricing policy on the 13-nation Organization of Petroleum Exporting Countries. But then, after a week of frantic negotiations behind closed doors in Geneva's luxurious Intercontinental Hotel, the oil ministers broke up in deadlock. Instead of agreeing to a compromise formula that would have reunified OPEC's crazy quilt of prices, which range from a low of $32 per bbl. to a high of $40 per bbl., they left the world's oil game still bedeviled and in disarray.

OPEC'S failure to arrive at a common price for its product was the fourth such unsuccessful effort in the past two years, and the outcome guaranteed more upset and uncertainty in oil markets. Concludes Energy Economist James McKie of the University of Texas: "I had expected OPEC to converge on a unified price sooner than this. But prices have become political symbols in these countries, and Geneva was a political meeting."

The deadlock comes at a bad time for OPEC but a good time for just about everyone else. With petroleum prices weakening for months on world markets, OPEC needed to show political solidarity in or der to prevent competitive price cutting. Their customers, though, can look forward to at least a temporary respite from oil-fired inflation.

The oil ministers' multiplying troubles came as the direct consequence of the organization's past excesses. By not curbing the price-gouging tactics of hard-liners such as Nigeria, Libya and Algeria, OPEC has pushed up the cost of crude by almost 90% in the past two years, to an average price in excess of $34 per bbl. That rise has fanned inflation and cut economic growth around the world. More important, it has led businesses and individuals to reduce consumption and start looking to such alternative energy sources as coal, natural gas and solar power.

Per capita use of energy in the U.S. has dropped by more than 12% since 1978, and in West Germany it has decreased 9%. Says Andre Michel, an oil trader for the Swiss-based Albaco Oil Co.: "It has taken consumers a long time to respond to high prices. But things have finally begun to change. If it had happened sooner, the price of a barrel of crude today would be $15 and not more than $32."

While global demand has been slipping, OPEC'S share of the market has also been diminishing. Mexico, Britain and other non-OPEC producers have increased their output and become more significant in the world oil trade. From a production level of 31 million bbl. per day in 1979, OPEC's output has dwindled by nearly one-third, to little more than 21 million bbl. daily, its lowest rate since the 1960s. One sign of OPEC's declining clout came last week, when the U.S. Government signed a five-year contract to buy some 110 million bbl. of crude worth $3.5 billion. The oil will be funneled into the U.S. Strategic Petroleum Reserve.

The biggest losers from these changes in the world energy market are three of OPEC'S leading price hawks: Libya, Nigeria and Algeria. These countries have steadfastly forced customers to pay as much as $40 per bbl. Since April, output in Libya has dropped by nearly 60% to 750,000 bbl. daily. The decline has been steep as well in Nigeria and Algeria. Both nations have limited petroleum reserves but large populations and ambitious economic development programs that they hope to pay for with the income from oil exports.

Saudi Arabia, OPEC's biggest single producer, sees the new market situation as an opportunity to replace OPEC'S current pricing free-for-all with a system of regular and more moderate price rises. The desert kingdom has adopted this strategy because its own oil interests are very different from those of the price hawks. Saudi Arabia has a small population and almost inexhaustible petroleum reserves. It wants to keep price increases moderate so that the industrialized countries will remain important clients for Saudi oil well into the 21st century and will not rush to adopt significant conservation measures or produce energy substitutes.

To force down the prices charged by OPEC's hardliners, Saudi Arabia since last October has been pumping upwards of 10.3 million bbl. per day of crude, or 20% more than normal, and selling it for a base price of $32 per bbl., the lowest available from any OPEC member. The result: a temporary worldwide miniglut that has swelled inventories in the consuming nations and put pressure on oil exporters to cut prices.

By the start of last week's Geneva meeting, oil experts believed Saudi Arabia's tactics had paid off and that a behind-the-scenes compromise deal had been cooked up. The purported agreement: the Saudis would raise their price to $34 per bbl., while the rest of OPEC would drop down to match it. In return, Saudi Arabia would cut production to about 8.5 million bbl. daily, thereby tightening the market and helping to support the new price.

Saudi Oil Minister Sheik Ahmed Zaki Yamani further encouraged hopes that a compromise would be reached, telling journalists coyly on the first day of the conference: "We are happy with the price of oil at $32 per bbl., but we do not oppose a little increase." As the conference unfolded it became clear that there was no firm deal at all, and one reason was that both Indonesia and Venezuela were having little difficulty selling oil for more than the $34-per-bbl. maximum price that Yamani would accept.

Said Venezuelan Energy Minister Humberto Calderon Berti bluntly: "There is simply no reason for us to come down in price." The makings of a deadlock were suddenly present.

Further complications arose when Nigeria announced that, unless a reunified pricing agreement was reached, it would undercut even Saudi Arabia's existing price of $32 per bbl. for comparable grades of crude in order to boost sales. The country is currently losing an estimated $1.5 billion monthly from its dwindling oil business, and its $8 billion in foreign exchange reserves could run out by year's end. "They [the Nigerians] are on the verge of panic," said one conference delegate. "We are all nervous about this."

By the fourth day of negotiations, all the early smiles were gone. Said Indonesia's oil minister Subroto: "Perhaps some of our early optimism was a bit premature. The mountains are higher, and the valleys are deeper than we had thought."

With negotiations totally stalled, the delegates took an unprecedented step. They asked their heads of government to appeal to Saudi Arabia's King Khalid to accept a compromise at $35 per bbl. But the effort came to nothing. As a belated gesture of good will, Yamani announced as soon as the conference ended that, although his country was sticking by its $32-per-bbl. price, it would nonetheless help tighten the market for other OPEC producers by cutting Saudi production by 1 million bbl. daily in September.

Last week's debacle in Geneva will keep downward pressure on world oil markets in spite of the Saudi cut, at least for a while. But the price relief could be surprisingly short-lived. Reduced OPEC production has already begun to work off the global crude surplus. Constantine Fliakos, an oil analyst with the Merrill Lynch investment firm, calculates that world oil production is now falling short of demand by at least 1 million bbl. per day. Autumn, when northern countries prepare for winter, is normally a period of increased energy demand. And, although oil tanks are full, they could quickly begin to empty. Then oil prices might start climbing once again.

--By Christopher Byron. Reported by William Blaylock/Geneva

With reporting by William Blaylock

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