Badly Split OPEC Cuts Price of Oil : Iran, Algeria, Libya Refuse to Agree to $1-a-Barrel Trim

A badly divided Organization of Petroleum Exporting Countries, desperately trying to regain control of the market, announced a $1 reduction Wednesday in its basic price of $29 a barrel for oil.

It was only the second time since its formation that the once-dominant cartel, which shocked the world in 1973 with the first of its series of enormous price increases, had been forced to cut its price.

However, three members of OPEC--Iran, Algeria and Libya--refused to go along with the latest price reduction and another, Gabon, abstained in the vote on the cut.

Price Stability Foreseen

Nevertheless, Sheik Ahmed Zaki Yamani, the oil minister of Saudi Arabia, OPEC’s largest producer, said that the agreement by nine of the 13 OPEC members will stabilize prices on the world market.

“I think that our decision,” Yamani told a news conference, “will give a very strong signal to the world market--to those who know it.”

Many analysts believe that setting a price was less important for OPEC now than holding down its production. Yamani agreed with this, and both he and OPEC President Subroto of Indonesia said the cartel will keep its ceiling on production at 16 million barrels a day. Officials added that an outside auditing agency has been hired to monitor production and pricing by members.

Despite confusion about the exact size of the price cut, there was little doubt that OPEC brought its prices down to just about the level of the open market for oil in Europe but no further. In a sharp contrast to the 1970s, OPEC is now following the market, not leading it.

Perhaps out of pride, OPEC took great pains to hide the size of its price decrease. In the past, the standard price of oil--what OPEC called its benchmark price--had been set for a barrel of light crude oil from Saudi Arabia. Prices of higher and lower quality oil were figured around that benchmark.

No Longer the Benchmark

This time, while announcing that the price for Saudi light oil has been cut from $29 to $28 a barrel, the cartel said it has decided to no longer use that as a benchmark.

Yamani said the real way to figure the price reduction is to take the cost of all the different kinds of oil, weight them according to production, then average that. According to his formula and figuring, the Saudi minister said, “the cut in price is 29 cents a barrel, no more.”

This came about largely because the cost of Arabian heavy crude oil, unlike the other varieties, did not drop but remained at $26.50. Keeping it at that price represented a victory for Saudi Arabia, since some producers of light oil wanted the price of heavy oil increased so they could compete with it.

“What happened today,” Yamani went on, “is not a sizable reduction in the price of oil.”

Reporters, confused by all the talk of a weighted price, asked Yamani what kind of oil should now be regarded as the benchmark.

“It’s anybody’s guess,” he replied.

It was not clear whether the new OPEC prices will reduce the cost of gasoline at service station pumps in the United States. There was once a rule of thumb that the price of a gallon of gasoline drops 2 cents whenever the price of a barrel of oil is reduced by $1. However, oil in the United States is already selling for just a bit over $25 a barrel on the open market, well below the new OPEC prices.

The refusal of some OPEC members to support the new price structure reflected a generally discordant mood within the once supremely self-confident OPEC, which still controls a third of world production. The three days of the emergency meeting in Geneva bristled with anger and bitterness. On two occasions, oil ministers stormed out, and there were reports of tirades and insults within the closed sessions.

Role of Dissenters

Asked if the dissenters were now out of OPEC, Yamani put his arm around Belkacem Nabi, energy minister of objecting Algeria, and said, “Not out--in, but different.”

For OPEC, all the bickering and price cutting was far different from its heyday, when it raised the benchmark price of its oil from less than $3 a barrel to almost $12 in 1973, to $24 a barrel in 1979 and finally to $34 in 1981.

In 1983, the realities of a world glut of oil forced OPEC to cut the price of oil for the first time, bringing it down to $29 a barrel. That price, though battered continually by the realities of the marketplace, held for almost two years until the emergency meeting this week.

It is widely assumed that Wednesday’s dissent by four OPEC countries will not in itself prevent the cartel from holding to the new prices. Despite its insistence on high prices, Iran, for example, usually sells its oil at very large discounts in order to attract customers who must pay the high insurance and freight charges of transporting oil from the Iran-Iraq war zone. Algeria wants to maintain a high price for oil only so it can charge similar high prices for its natural gas.

The most significant part of the price agreement may actually have been the decision by Nigeria to raise its price rather than drop it. Nigeria has agreed to sell its oil at $28.65 a barrel, but said it will only hold the price so long as Britain does not try to undercut it.