OPEC Faces Crucial Bid for Survival : Saudis Threaten to Open Oil Spigot if Others Flout Rules

PARIS —  The Organization of Petroleum Exporting Countries, once powerful and arrogant, could raise oil prices a decade ago on no more than political whim or a burst of avarice. Now it spends a good deal of time in crisis, trying desperately to catch up with the declining world market and demonstrate that it still has enough influence to keep prices from crashing.

The latest attempt, which may turn out to be the most crucial and divisive, will come Friday when the oil ministers of the 13 OPEC governments convene in Vienna. Their problems will be complicated by the impatience of Saudi Arabia over the failure of most other countries to stick to OPEC’s prices and production quotas.

In fact, Sheik Ahmed Zaki Yamani, the Saudi oil minister and the dominant personality at most OPEC meetings, has warned the others publicly that Saudi Arabia, which has the world’s largest oil reserves, will increase its production if the others continue to flout the OPEC rules.

“If we increase production,” Yamani told Petroleum Intelligence Weekly, “then prices will start dropping. . . . Prices will drop sharply to something below $20.”

That would be a reduction of more than $8 a barrel, and such drastic action could destroy OPEC.

It is widely assumed that the OPEC ministers will have to cut prices. Joseph Stanislaw, a director of Cambridge Energy Research Associates, recently predicted a cut of between $1 and $1.50 a barrel. But Yamani has said that no cut will be necessary if all OPEC members keep to the production and pricing agreements.

Air of Emergency

In theory, the ministers are attending a regularly scheduled semi-annual meeting of OPEC. But there is an air of emergency. The ministers were to have met routinely in Geneva toward the end of July but, troubled by the way the market was behaving, they suddenly decided to meet in the last week of June instead. But their secretariat in Vienna could not make the necessary arrangements in time and had to settle for an early July date and move the conference from Geneva to Vienna.

At the heart of the confusion and conflict is a basic division of purpose and need among the members.

Some countries--Saudi Arabia is the best example--have great wealth and relatively few people, and can afford to limit oil production in the hope of bolstering prices now and cashing in later when prices go up again.

But others--Nigeria is the most obvious--cannot afford to wait. They are populous, poor countries with pressing development problems that cry out for solutions now. These countries feel that they must sell as much oil as they can as soon as possible, at whatever price.

In a series of meetings at the end of last year and the beginning of this year, OPEC tried to reach compromises that would satisfy the different factions. Production quotas and price levels were set, but they have not worked well.

Quotas Ignored

OPEC set a limit on the 13 countries’ combined production of 16 million barrels a day. The largest quota, as usual, was assigned to Saudi Arabia, a bit more than 4.3 million barrels a day. During the year, OPEC has managed to keep within the 16-million barrel limit--in fact, Russell Seal, general manager of British Petroleum, estimated recently that OPEC production had actually slipped below 15 million barrels a day--but only because Saudi Arabia, trying to salvage the agreement, has cut its own production substantially, to somewhere between 2.5 million and 2.8 million barrels a day. Nigeria and others are obviously ignoring their quotas and pumping more oil than is authorized.

In a price agreement on Jan. 30, OPEC cut the price of Arab light oil to $28 a barrel. The price of Arab light has always been looked on as the benchmark against which the price of all other oils is measured. But in this agreement OPEC decided not to cut the price of Arab heavy oil at the same time. Instead, it kept the price of Arab heavy oil at $26.50 a barrel.

This was aimed at satisfying producers of light oil, such as Nigeria, which had complained that it was hurt by the huge differential between the price of its oil and the price of heavy oil. Nigeria, in fact, would have preferred an increase in the price of heavy oil.

The pricing agreement was not unanimous. Iran, Algeria and Libya voted against the cut in price, and Gabon abstained. Nevertheless, all members--or almost all--were still expected to honor the agreement.

Discounted Prices

But OPEC producers, even those who voted in favor of the agreement, have failed to adhere to these prices. They have discounted prices and engaged in barter deals to meet the competition from non-OPEC members. This has contributed to a general decline in the price that most refiners are paying for oil.

Prices on the European spot market, where oil is traded freely, show what has happened. On June 26, the spot market price for Arab light oil was $26.95 a barrel, a bit more than $1 below the OPEC price. The price of Arab heavy was $25 a barrel, $1.50 below the OPEC price.

The Saudis’ impatience with this situation was made clear in early June, in a letter delivered by Sheik Yamani to the OPEC Executive Council meeting in Taif, Saudi Arabia. In the letter, King Fahd of Saudi Arabia warned OPEC members not to take his country for granted as the producer willing to cut back so that the overall production limit could be held. If the others continued to exceed their quotas, he said, Saudi Arabia would increase its production to 5 million barrels a day.

“We did not threaten anybody,” Yamani later told Petroleum Intelligence Weekly. “We just made it clear that this situation cannot continue.”

Some analysts believe that the king issued the warning because the production level had dropped so much--to its lowest point in almost 20 years--that even Saudi Arabia, despite its wealth, was hurting. There was now a shortage of funds for the country’s development program.

Will Seek Sanctions

In any case, the Executive Council, prompted by the Fahd letter, will submit a resolution to the Vienna meeting calling for sanctions against members who violate production or pricing agreements. Under the resolution, the offender could be expelled.

Several factors account for OPEC’s failure to keep prices from falling in the last few months. The first is the most obvious. OPEC no longer dominates world production the way it did.

New producers such as Mexico and Britain have emerged since the OPEC heyday in the 1970s, and these producers no longer see any need to stick to OPEC prices. The price of Britain’s North Sea oil and Mexican oil have dropped in recent weeks, putting more pressure on OPEC to cut its price in order to compete.

In setting new prices in January, OPEC hoped for a European economic recovery that would increase the demand for oil. That recovery has still not taken place. Moreover, the American economic recovery has also slowed. On top of this, the British coal strike came to an end earlier this year, and this reduced the demand for oil.

The crisis atmosphere around OPEC is a far cry from the heady days not so long ago when OPEC was increasing prices and causing economic shocks. The price reached a high point of $34 a barrel in 1981, but the realities of the market caught up with OPEC in 1983 and forced it to lower the price, for the first time, to $29 a barrel. That came down to $28 a barrel in January of this year, and could drop even more by the end of the week.