Bracing for a Showdown

By Charles P. Alexander

As OPEC struggles to avoid a price war, gold sinks and Wall Street soars

For the feuding members of the Organization of Petroleum Exporting Countries, the time had come for another showdown. Oil ministers from eight of the 13 OPEC countries gathered last week in London's elegant Grosvenor Square at a five-story, red-brick Georgian mansion where the delegate from the United Arab Emirates, Sheik Mani Said al-Oteiba, maintains his residence. The meeting had an urgent mission: agreement on a pricing pact and a set of production quotas that would keep the cost of oil from tumbling uncontrollably. Over the previous weekend Saudi Arabia and its Persian Gulf neighbors had issued an ultimatum to the rest of OPEC: unless a deal was struck within seven days, the gulf nations said, they would slash their oil prices to as low as $27 per bbl., $7 below the official OPEC price of $34. Such a move could trigger an all-out price war that would threaten OPEC's survival.

After two days of wrangling, the ministers adjourned and invited delegates from the other five OPEC countries to join the meeting this week. Saudi Oil Minister Sheik Ahmed Zaki Yamani reportedly said, "I think we will have an agreement." Others, though, were skeptical. Said William Brown, di rector of energy studies at the Hudson Institute, north of New York City: "They will meet. They will talk. They may even agree. But they will go home and violate whatever agreement they reach."

The growing probability that OPEC has lost its grip on oil prices threw the financial markets into turmoil. Gold, a favorite inflation hedge, plunged to $408.50 per oz., down nearly $100 in eleven days, before rebounding a bit to $415 at week's end. On Wall Street, the prospect of a brisk economic recovery unleashed another stampede in the stock market. The Dow Jones industrial average closed at record highs on four consecutive days, finishing the week at an alltime peak of 1140.96.

The White House turned bullish too. Martin Feldstein, chairman of the Council of Economic Advisers, said that the Administration would soon hike its forecast for this year's G.N.P. growth rate, from 3.1% to perhaps 5%. That optimism was buoyed by the news that the index of leading economic indicators jumped 3.6% in January, its biggest one-month gain in nearly 33 years. Oil prices could be magical at keeping inflation down. At $30, the price, adjusted for inflation, would be only 28% above its 1974 level.

Behind OPEC's crisis is the continuing worldwide glut of oil that is forcing down prices. Three weeks ago Britain and Norway, which are not OPEC members, lowered their charge for North Sea oil by $3 per bbl., to $30.50. Nigeria, a member, promptly retaliated by cutting the price of its premium-quality crude by $5.50, to $30 per bbl. That put enormous pressure on the other OPEC countries to make big cuts.

At the London meeting, the Saudis and their gulf allies suggested that the OPEC price be dropped $4, to $30. At the same time, they insisted that Nigeria boost its charge to $31.50. Reason: Nigeria's so-called sweet crude yields a particularly desirable mix of products after refining, so the Saudis must charge less than Nigeria to stay competitive. Nigeria, fearful of losing sales to its North Sea competitors, is so far sticking with its price.

The major stumbling block to an agreement is the belligerent attitude of Iran, which sent no delegate to last week's sessions. Publicly, the Iranians have demanded that the OPEC benchmark stay at $34. Privately, they are selling all the oil they can at cut rates to raise cash for their war with another OPEC member, Iraq. Oil industry sources in Western Europe say that Iran has been selling oil for as little as $20 per bbl. The Iranians apparently hope that the official price will stay at $34 so they can keep undercutting it.

One of the principal characters in last week's events remained offstage: British Prime Minister Margaret Thatcher. It is increasingly clear that OPEC will need some cooperation from other oil-producing countries to have any hope of controlling prices. Two of the largest of these competitors, Mexico and Norway, have been yielding to the full-court press they have been getting from OPEC oil ministers in the past week or two, but apparently Thatcher has not. Said one of her aides: "OPEC is a cartel and must run its own affairs. It must stop involving the British government."

Nonetheless, British Energy Minister Nigel Lawson met separately with the ministers from Venezuela and the United Arab Emirates. All three were mum about the talks. Some oilmen in Britain, however, believe the U.K. might reach a tacit understanding with OPEC to avoid a price war. Further price cuts could, after all, drain revenues from the sagging British economy. But any agreement to limit production would go against Thatcher's staunch free-market philosophy, and would also violate contracts that give private companies, including British Petroleum and Royal Dutch/Shell, the right to pump North Sea crude.

The Mexicans apparently will go along. In Paris last week, Mexican officials huddled with OPEC representatives from Venezuela, Algeria and Kuwait. According to OPEC sources, the Mexicans indicated that they would follow the organization's lead on pricing and hold their production to 1.5 million bbl. a day, no higher than the average level of last year.

Many U.S. energy experts fear that a drop in oil will undermine conservation efforts and ultimately boost demand for foreign oil supplies. Some, including James McKie, economics professor at the University of Texas, favor a tax on imported oil to keep the price of crude from dipping below $30 in the U.S. Says McKie: "It's a matter of national security." But the Administration is against imposing such a tax any time soon. Said Commerce Secretary Malcolm Baldrige: "Why not give the consumer a break?" The White House apparently wants the public to reap all it can from OPEC's travails.

-- By Charles P. Alexander.

Reported by James Shepherd/ London and William Stewart/ Beirut

With reporting by James Shepherd, William Stewart This file is automatically generated by a robot program, so viewer discretion is required.