OPEC Tries to Ease Pressure on Oil Prices : New Fixing System May Actually Be a Cut in Disguise
Far weaker than it was in its heyday and facing greater pressure than even a month ago to cut the price of oil, the Organization of Petroleum Exporting Countries tries again Monday to salvage its hold on world petroleum markets during a special session in Geneva.
Although some OPEC oil ministers profess to feel an easing of the pressure because of this year’s unusually bitter winter in Western Europe, many outside analysts believe that the price will nevertheless have to come down. The cut, though, may be disguised if OPEC, as some predict, comes up with a new system of fixing prices.
After shocking the industrialized world with enormous price increases in the 1970s, OPEC was forced to face the reality of the market in March, 1983, and reduce the official price of its oil to $29 a barrel. But it has since resisted all pressure to further reduce the price despite steady erosion on world markets.
At times, its shoring up of prices has seemed makeshift. OPEC met twice in the closing months of 1984 to try to keep the price up by cutting production levels. But production agreements have run into difficulty with some governments, which feel a desperate need for cash and have been trying to sell as much as they could.
Norway Freed Price
Nor has OPEC been helped by outside producers who, in the past, were content to follow the cartel’s lead. To make sure that its North Sea oil would be competitive, Norway decided a few days ago to sell at whatever price its oil would bring on the free market.
The price in the spot market--the price paid for oil that is not sold at fixed OPEC or other government prices but is sold freely on the market--was about $1 a barrel less last week than the official OPEC price of $29 a barrel. Oil industry analysts in London are predicting a cut to $27 a barrel.
According to the Petroleum Intelligence Weekly, OPEC was producing between 15.5 million and 15.9 million barrels a day in January, within the ceiling of 16 million set by OPEC last October in hopes of keeping the price up. The OPEC level of production was then 16.7 million barrels a day.
Despite finally achieving a drop in production, OPEC still faces the problem of price competition, both from within and without. Nigeria has been openly defying its fellow OPEC members by selling oil on the open market and by ignoring the limitations on production. Nigerian leaders insist that theireconomic problems are too awesome to allow them to sacrifice any oil revenue.
On the outside, Britain has been trying to make up its mind whether to follow Norway’s lead and sell North Sea oil in the free market. Britain’s energy minister has said, however, that no decision will be made until after the OPEC meeting in Geneva. Mexico, another large, non-OPEC producer, has also been considering a price reduction.
The outsiders, however, are not expected to try to cut prices far below OPEC in any price war. In a report to British investors, Tim Morgan, an oil industry analyst for stockbrokers, said last week that the “danger of a price war being triggered by non-OPEC producers, principally Britain, seems to be receding.”
“Saudi Arabia and the other low-cost producers,” he said, “are thought to have made clear, in the strongest possible terms, that should high-cost producers start a price war, then the low-cost producers would finish it.” The price that is usually discussed, under the present OPEC system, is that of a barrel of Saudi Arabian light crude. This price dictates what OPEC charges for various other kinds of oil, depending on such factors as whether the oil is light or heavy and whether it has much or little sulfur. The price for Saudi Arabian light oil is called the benchmark price by OPEC.
But there may be a new system. After a meeting Jan. 21 in Riyadh, Saudi Arabia, officials from Saudi Arabia, Kuwait, Nigeria, Libya, the United Arab Emirates, Algeria and Qatar said they had reached agreement on a proposed pricing system to put before the oil ministers in Geneva. They would not disclose any details.
Confusion has arisen because one kind of OPEC oil is actually selling on the free market for more than the OPEC price. Arabian heavy crude, which OPEC sells at $26.50 a barrel, sold at 25 cents a barrel more on the spot market last week.
Thus OPEC, according to the free market, is selling light oil at a higher price than it should and heavier oil at a lower price. It is difficult to reconcile this when every member wants to keep its own price as low as possible to meet the competition. Therefore, producers of heavy oil want the price of light oil cut. Producers of light oil want the price of heavy oil raised. On top of this, there have been proposals to come up with a new benchmark price that is really an average of the prices for several different kinds of oils.
After the meeting in Riyadh, Nigerian Oil Minister Tam David-West said OPEC had to lower the benchmark price, raise the heavy crude price, or do both.
“I don’t think the hard line on benchmark was so rigid as it was some months ago,” he said in an interview with a Saudi Arabian newspaper. “There is a psychological need to have a standard that is fixed, but reality is something different. If you are planning a national economy, you don’t go for sentiment, you go to reality.”
Many analysts in the industry believe that any new system would be announced in a way that would try to disguise a price cut. But the cut would still be there.
While the OPEC ministers prepared to meet in Geneva, oil prices were falling in the United States, another form of pressure on the ministers to cut their prices. In the past week, most major companies cut $1 off the price they paid for a barrel of oil in the United States. In some cases, the prices had fallen $4 in three months. Most major producers were now paying no more than $28 a barrel for their oil. As a result, Americans were paying less for a gallon of gasoline at the service station pump.
Consumers in Western Europe, however, were not paying less for their fuel even though the price for oil has been declining. The problem, little understood outside Europe, is that oil must be paid for in dollars, and the value of the dollar has increased greatly since the beginning of the Reagan Administration. The increase in the cost of the dollar, in fact, is known in Europe as “the third oil shock,” relating it to the huge OPEC price increases of 1973 and 1977.
As a result, Europe has not benefited from the cut in the OPEC oil price of March, 1983. In English pounds or French francs or German marks, the cost of oil is now just about the same as it was then.
