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The Cartel Is Losing Its Clout

5 minute read
John Greenwald

OPEC’s failure to agree on quotas could bring it down

The showdown at last week’s meeting of the Organization of Petroleum Exporting Countries in Vienna was taut and grim. At one of the long rectangular tables sat Sheik Ahmed Zaki Yamani, the elegantly groomed Oil Minister of Saudi Arabia. At another, roughhewn and tieless, was Seyyed Mohammad Gharazi of Iran. The issue before them was the control of OPEC itself. The result: a draw that deepened the most severe crisis in OPEC’S 22-year history and raised doubts about whether the organization can ever function as an effective cartel.

The frequently bitter two-day session merely papered over conflicts that have been brewing since 1981, when the global recession helped spawn a worldwide oil glut. The 13 member nations agreed to let OPEC’s bench-mark crude-oil price stand at $34 per bbl., its level for more than a year. They also approved a 1983 production limit of 18.5 million bbl. per day. That would be about the same amount that members pumped during 1982, but it would be higher than the 17.5 million-bbl. ceiling that OPEC set for itself last March. Said a U.S. oil-company executive who observed the meeting: “Prices now will probably continue to drift down slowly, just as they had been doing.”

More important than the actual agreement was what was left out. The conference did nothing to resolve the crucial question of how much oil each member should produce. That leaves OPEC without a formal method for limiting its output to maintain its price. Such a method is the heart of a true cartel. Notes John Lichtblau, president of the Petroleum Industry Research Foundation: “To agree on an overall production level does not mean that much when you cannot decide how to set this level. The question of who will produce what is really the most important thing.”

OPEC never had to worry about setting individual quotas during the palmy 1970s. The group jacked up the price of oil from $1.35 per bbl. in 1970 to $29 per bbl. ten years later. But the rising prices led consumers to make strenuous efforts at conservation and attracted a flood of capital that went into rinding and pumping oil. As a result, for the first time, in 1982, non-OPEC countries produced more oil than the OPEC nations.

Also in 1982 the OPEC countries appear to have recorded a deficit in their international current-account balance for the first time since they emerged as a major price-setting force. Consequently, the poorer OPEC nations are under pressure to produce more oil to keep revenues flowing. The cartel first tried to restore order last March by assigning production quotas. That effort was an instant failure: some members overshot their ceilings by 100% or more.

The conflict within the organization now threatens to tear it apart. One faction, led by Saudi Arabia, includes neighboring Persian Gulf producers like the United Arab Emirates, and does not want to lower its production further to let the other side raise its output. The opposing faction, which includes Iran, Nigeria and Indonesia, desperately needs income and is eager to pump every drop of oil that it can sell, even if that sends prices plummeting. Iran, which has become the spokesman for this group, is spurred by the need to finance its two-year-old war of attrition with Iraq. It is now producing some 3.2 million bbl. daily, nearly three times the 1.2 million-bbl. quota set for it in March.

Experts are still reluctant, however, to dismiss OPEC as a price-setting force. Says Lichtblau: “This is not the end of OPEC. It has weakened since the end of 1981, but the price of oil is still substantially above what it would be in a free market right now.” Walter Levy, a top oil consultant, believes that adversity could save the organization. Says he: “If the fear of Allah enters OPEC members, maybe they will say that it is better to work out a program among themselves rather than face a free-falling oil price that leads to revenue losses by everyone.”

Most of OPEC’s muscle comes from Saudi Arabia, which accounts for roughly one-third of the group’s output. Although the Saudis are now producing only about three-fourths of their March quota of 7 million bbl., analysts expect Riyadh to maintain that level, rather than pump more, in order to maintain prices. Predicts Henry Schuler of Georgetown University’s Center for Strategic and International Studies in Washington: “The Saudis will take up the slack. I think they are compelled to hold prices and accept a reduction of market share.”

That would be welcome news in some quarters. Bankers, for example, now view the prospect of a break in prices with the same horror that they once reserved for ever rising energy costs. A steep price drop could crush an ailing oil exporter like Mexico, which has borrowed billions from international banks and is already in the midst of an economic crisis. Sharply lower prices would also bankrupt some existing high-cost exploration and production ventures.

Informed observers look for OPEC’s jury-rigged price and production arrangement to survive the winter, when oil demand will be at a peak. The crunch is likely to come in the spring, when homes and workplaces turn down their thermostats as the heating season ends.

The long-term outlook for OPEC and oil prices is squarely tied to the health of the world economy, which shows few signs of rebounding any time soon. A vigorous recovery, however, could rejuvenate the cartel by driving up demand. Says James McKie, a University of Texas energy expert and member of the TIME Board of Economists: “If world recovery does proceed and the growth of demand resumes, I would expect OPEC to regain at least the amount of clout that it had before the Iranian crisis.” OPEC may be gravely wounded, in other words, but rumors of its imminent demise are probably exaggerated. —By John Greenwald. Reported by Mary Earle/New York and Lawrence Malkin/ Vienna

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