OPEC Finally Gets Together

By Alexander L. Taylor III

Tough Saudi Arabian tactics hold down the price of crude

By all appearances, it was like any other meeting of the 13 nations that make up the Organization of Petroleum Exporting Countries. The usual parade of Mercedes-Benz limousines rolled up outside the swank Inter-continental Hotel in Geneva, where they were met by a cordon of gray leather-jacketed Swiss police and platoons of reporters and photographers. Inside, the oil ministers lived like the modern-day kings they have become. They dined on sumptuous meals that included filet de truite fumee, poussin de Bresse aux morilles and coeur de Charolais roti aux herbes.

But the outcome of last week's meeting was far different from any in nearly two years. Instead of long and bitter talks that ended in a deadlock over the price they should charge for oil, the OPEC ministers needed just nine hours and ten minutes to agree on a new base price of $34 per bbl., $2 more than the current rate for Saudi Arabian light crude but $2 less than the bench-mark level they have been using as a pricing guide since last December. Moreover, the oil producers said that the price would remain at that rate through the end of 1982.

Last week's agreement, though, was a decision imposed on OPEC by outside events rather than a sign of its unity. The world has become less dependent on expensive crude. Oil demand in the consuming countries fell 8% in 1980 and dropped an additional 8% in the first half of this year. This has helped create a non-Communist world surplus for the past twelve months.

In the face of declining demand, some OPEC prices have been tumbling. Members like Nigeria and Libya, which last January were demanding $40 and more for a barrel of their precious product, have been forced to cut rates in an effort to unload their crude. Nigeria slashed its prices twice, during the summer and autumn, to $34.50. Libya reduced its price by $1 per bbl., but sales still dropped by 60%. Underscoring the weakness in the world market, the big U.S. oil companies last week reported sharp profit drops for the period from July through September. Exxon's earnings fell 21%, Standard Oil of California had a 16% decline, and Mobil's profits slumped 30%.

The Geneva meeting was an emergency session aimed at containing the damage. Most of the OPEC members believed that they could eliminate the turmoil in world oil markets if Saudi Arabia would only lower its production. Saudi Arabia is the dominant member of the organization, producing almost one-half of total output. The desert kingdom has long sought unified and slightly lower prices in order to preserve its markets and prevent the consuming nations from seeking alternative energy sources. But since other producers would not agree to Saudi demands, that country has attempted to drive down the cost of crude by flooding the market with oil priced at less than the standard OPEC level. Until September of this year, Saudi Arabia had been producing as much as 10.3 million bbl. per day, or nearly 2 million more than in 1978.

OPEC members arrived in Geneva resigned to lowering their official price toward the Saudi level, if the Saudis would reduce their production to eliminate the petroleum glut. Even though the meeting started eleven hours after the Senate agreed on the sale of AWACS planes to Saudi Arabia, the action in Washington had no effect at all on oil politics at the session.

It became apparent very quickly last week that Saudi Oil Minister Sheik Ahmed Zaki Yamani had finally won his test of will with the other OPEC members. They agreed to drop the bench-mark price of crude by $2, and Saudi Arabia indicated that it will lower production immediately from 9.3 million bbl. per day to 8.5 million bbl. The only real disagreement at the session was over the various premiums that members could charge for their crude in addition to the new base price. Algeria and Libya, for example, will be permitted to demand $4 per bbl. more for their crude, while Nigeria can ask an additional $3 per bbl.

As last week's meeting wound down, Indonesian Energy Minister Subroto said: "The average price of OPEC oil will change very little." In fact, for Italy, West Germany and The Netherlands, which obtain relatively more of their crude from producers other than Saudi Arabia, the decision will mean lower petroleum prices. The U.S. gets only 17.5% of its imported oil from the desert kingdom, but prices may rise because its other suppliers like Mexico--and even those in the U.S.--are likely to move up to the new unified OPEC price. The cost of gasoline in the U.S. is expected to increase eventually by about 20 per gal.

But for the first time in almost three years, the industrialized nations will have a constant energy price to use in economic and business planning. If OPEC is as good as its word, corporations will be able to make investment decisions without worrying about runaway energy costs. Indeed, the real price of oil will probably drop over the next 14 months because of general inflation. Says New York Oil Analyst John Lichtblau: "Just to keep up with inflation this year, the marker crude would have to go to $36 per bbl." The long-range outlook for oil prices is more uncertain. If the world economy picks up in 1982, demand for oil would increase, and some individual OPEC members could decide to try pushing up the cost of crude once again.

World oil markets are no longer as simple as they were in the days when OPEC could unilaterally jack up prices to almost any level it desired. Nonetheless, oil production and prices remain precariously balanced and can easily fall into turmoil. The sharp reduction of output during 1978 and 1979 by only one producer, Iran, caused oil prices to jump from $12 to nearly $40 per bbl. World oil could again become the prisoner of some similar unexpected event.

With reporting by William Blaylock, BRUCE VAN VOORST

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