Twinkle, Twinkle, Fading Star

Scarcely a dozen years ago, in the short span of two months, the Organization of Petroleum Exporting Countries arrogantly assaulted the industrialized world by quadrupling oil prices, to $11.65 per bbl. At a four-day meeting in Geneva last week, OPEC showed only a shadow of its former power. With the world awash in oil and consumption down, the once all-powerful OPEC cartel has an ever diminishing impact on global markets.

By most estimates, 80% of all oil produced today sells for as much as $2 per bbl. below OPEC’s prices, the highest of which is $28 per bbl. for top-quality light crude. Moreover, the cartel now produces only 43% of the West’s oil, vs. 63% in 1979. The rest is pumped by such countries as Mexico, the U.S. and Britain, none of which belongs to OPEC. Three weeks ago Mexico dropped its price to $3 per bbl. below OPEC levels.

At last week’s meeting, amid acrimonious charges that some members were cheating the cartel by selling at cut-rate prices, OPEC’s 13 members[*] tried desperately to halt the price slide. “Market stability is at the crossroads,” admitted Subroto, Indonesia’s Oil Minister and the current president of OPEC, at the start of the session. Yet the most that the ministers could agree on was minor adjustments like lowering OPEC’s price for the heaviest grade of Saudi crude by a token 50¢ per bbl., to $26.

It was a feeble attempt to boost sagging sales, and no oil expert thought it would work. Said an Indonesian oil trader: “It’s a charade. Official prices are there to laugh at.” Even the way the decision was made showed the extent of discord inside OPEC. Most cartel decisions have been by consensus, with the member nations at least presenting the appearance of a united front. No such accord could be reached last week. Instead, OPEC was forced to abide by majority rule, with Libya, Iran and Algeria going on record as opposed to the price cut. Nonetheless OPEC tried to look happy with what it had done. Was Saudi Arabian Oil Minister Ahmed Zaki Yamani pleased? “Yes, I am,” he said. But he was uncharacteristically quiet, and he canceled his customary postsession news conference.

This was the second meeting of OPEC ministers in a month, the sixth in a year. Yet the sessions have done little to halt the tumble of oil prices on world markets. Constantine Fliakos, chief international oil analyst with Merrill Lynch in New York, said OPEC’s “pretense to try to reassert control over the oil market is a joke.” The Geneva meeting, he said, “is a display of impotence.”

Further evidence of that was the skirting of important issues. There was, for example, plenty of talk about how to stop members from undercutting official prices through barter deals and other so-called processing arrangements, but no real action. Last year OPEC agreed to hire the Dutch auditing firm of Klijveld Kraayenhof to police prices and quotas. As of last week several members, Iran among them, were still refusing to give the accountants the information needed to determine who was cheating.

OPEC put off until the fall the touchy matter of how much oil each producer could pump. In October the members agreed on an overall output ceiling of 16 million bbl. per day. Any new plan would reshuffle quotas within that limit, but several countries want their quotas increased. Said Subroto: “The potato was too hot to handle.” The point is moot. As demand has dropped off, OPEC members now pump only about 14.5 million bbl. daily because that is all they can sell.

OPEC’s troubles and the world oil glut are especially hitting Saudi Arabia, the organization’s biggest and richest producer. Saudi output has dropped from a peak of 10.3 million bbl. per day in 1981 to 2 million bbl. per day in June, its lowest level in 20 years. Britain, a relative newcomer to the ranks of big-time producers with its North Sea fields, is pumping more oil than Saudi Arabia.

The Saudis would like to cut prices by as much as $2 per bbl. to increase sales to the point where they could pump at least 4 million bbl. per day. In a market with excess supply, that would mean other OPEC members would have to pump less and cut into their own oil revenues.

The Saudi economy has been severely squeezed by shrinking oil revenues. The kingdom currently earns only $37 billion annually from oil, vs. $100 billion four years ago. One result: its budget deficit for 1983 and 1984 totaled $22 billion. Its trade deficit is also large, $20 billion per year. So the Saudis have had to dip into foreign-exchange reserves, estimated at just under $100 billion, that were built up during the oil rush.

Another way the Saudis are trying to cope with their cash squeeze is by cutting government spending. This year’s budget reduces military outlays 20%, to $17.8 billion, softening the Saudi market for U.S.-made weapons and stirring worry in the Pentagon over the kingdom’s defense capability. Subsidies on food, electric power and gasoline are down 20%. The Riyadh government is also slashing money for new industrial projects. Two refineries worth $1.5 billion were canceled after 15% of the construction had been completed. Particularly hurt by the cutbacks are American and South Korean contractors who have been building the huge Saudi modernization projects.

Most Saudis are not unhappy to see the end of the boom times. They say they are relieved that the period of runaway economic expansion is over. Nonetheless, even Saudi Arabia’s new, leaner budget will be in trouble if oil sales do not go up. The Saudis could undercut OPEC’s official prices and sell oil at market rates, just as others in OPEC already do. They are not likely to do that. The Saudis are trying to keep the organization together against the day, perhaps late in the 1980s, when demand may rise and the world may need more of the cartel’s oil than it does now. –By John S. DeMott. Reported by Barry Hillenbrand/Riyadh and Robert Kroon/Geneva