OPEC oil ministers appear to be running out of options for defending oil prices as they prepare to meet Monday in Geneva, Switzerland.
"They're sitting seemingly over an abyss," said Richard Kjeldson, senior international economist at Security Pacific National Bank in Los Angeles.
If the ministers fail to regain control of sliding prices, oil-producing countries and their bankers--many of whom are American--will suffer. But oil-consuming nations--including the United States--will get an economic shot in the arm that would hold down both inflation and interest rates and make it cheaper to fuel airplanes, cars and power plants.
The official price of the Organization of Petroleum Exporting Countries' bellwether oil, Arabian Light crude, has been reduced nearly 18% since March, 1983, and most analysts have written off the ability of OPEC to prevent prices from falling further.
About the only issue dividing analysts is whether prices will continue to drift lower or plummet.
Slow Drop Expected
Kjeldson said the consensus forecast sets the odds at 60-40 that the price of oil "floats on down another couple bucks in the next 12 months" rather than stages a more precipitous decline.
"I don't see any chance of staying where they are or going higher," he said.
Each $1-a-barrel cut in the world price of oil, if passed on entirely to consumers, is the equivalent of a reduction of about 2 1/2 cents a gallon in the retail price of gasoline or other refined petroleum products.
OPEC is in a bind because its oil market has been shrinking and its 13 members not only are fighting competitors from outside the organization but increasingly are trying to outmaneuver one another just to hold on to their share of an increasingly smaller pie.
"Cartels are short-lived," said Kjeldson. "In a down market they undercut one another."
In its peak year, 1979, OPEC produced nearly 31.5 million barrels of oil daily, representing about five of every eight barrels consumed in the non-communist world, and oil prices appeared to be heading on a one-way course--higher. In recent months, OPEC output has been flirting with 14 million barrels a day, a level last seen 20 years ago and representing about one out of every three barrels consumed.
Market Forces Decide
Analysts estimate that the price of as much of 80% of the oil being sold around the world is currently determined by market forces rather than official decrees, compared with about 15% during OPEC's heyday.
Non-OPEC producers such as Britain, Norway and the Soviet Union all have moved toward prices determined by the marketplace. Two former OPEC allies, Mexico and Egypt have cut their prices in the past two weeks without waiting for OPEC's meeting.
OPEC's debt-ridden members, Nigeria, Venezuela, Ecuador and Indonesia, are being squeezed financially by the deterioration of oil markets. Saudi Arabia, with huge cash and oil reserves, also is feeling a pinch.
For years, Saudi Arabia has been the "swing producer," lowering its output in an attempt to keep OPEC's overall production within the organization's limits whenever demand dropped or other members exceeded quotas.
But in the past two months, Saudi Arabia's production has dropped so low that, if it continued on a sustained basis, the kingdom would have to make new spending cuts to stick to a budget that already reduces government programs.
Glut Could Worsen
And if, as it has threatened, Saudi Arabia steps up production while other producers in and out of OPEC continue to produce at current levels and fail to stop rampant discounts, the glut will worsen and prices will plummet.
If OPEC fails to restore discipline to markets, "there's no reason why prices have to stop at $20 or $10" a barrel, said Philip Verleger Jr., a Washington oil analyst for Charles River Associates, a private consulting firm.
Arabian Light, which peaked at $34 a barrel in 1981, was cut by OPEC to $29 after a stormy series of meetings in 1983 and was reduced to $28 earlier this year after more divisive sessions. On the open market, Arabian Light was hovering below $27 a barrel last week.
It was Saudi Arabia's demand that OPEC members toe the line that brought the organization's oil ministers together earlier this month in Vienna, Austria.
Those talks recessed early this month with a promise from ministers to end cheating on price and production quotas, but no means for accomplishing that goal were established.
"OPEC, after three days of informal deliberations, failed to take the only action that would have been decisive enough to stop the slide in petroleum markets, namely, more stringent production controls," analysts at the New York investment firm of Merrill Lynch, Pierce, Fenner & Smith Inc. said in a review of the Vienna session.
Can't Support Price
"The recent meeting confirms our view . . . that OPEC is so weakened that it can no longer support the price at current high levels and that the price will come down sharply before year-end."
Verleger said there is a reasonable chance the meeting in Geneva will break up without an agreement, "and if it does it will be a heck of a mess."
If the session collapses with members fighting one another, prices will start falling rapidly, but demand for oil will remain listless, he said. When prices are plunging, companies are reluctant to start a wholesale rebuilding of supplies because of fears that prices will fall even further in the weeks it takes for an oil tanker to make a delivery.
A more likely outcome, he said, is that OPEC will agree to reduce Arabian Light by about 50 cents to 75 cents a barrel and impose some new disciplinary measures to limit production by its members.
Such action would enable OPEC "to muddle through another six months before making another downward adjustment," Verleger said.
Fereidun Fesharaki, who directs the energy program at the East-West Center, a government-financed research institution in Honolulu, said he doubts that OPEC will take any action in Geneva because "things are not bad enough from the point of view of the seller to warrant a major change."
He said it will take an imminent collapse of markets before OPEC's members can put aside differences and agree to a common policy. Even the price cut of last January was supported by only nine members.
Price War Doubted
Fesharaki also is betting OPEC will not throw in the towel and launch an all-out price war.
"OPEC ministers may be greedy but they are not suicidal," he said.
Analysts say oil exporters who have no other major source of revenue will be the hardest hit, with Algeria, Ecuador, Indonesia, Iran, Iraq, Libya, Mexico, Nigeria, Norway and the United Arab Emirates among the more vulnerable to shocks. In addition, banks that have lent money to oil producers face serious problems as the value of the oil backing up the loans declines and as the ability of the debtor to repay his loans is reduced.
In the United States, falling oil prices would hit oil producers and their bankers hard as well and reduce royalty payments that are significant sources of revenue to Alaska, Louisiana, Oklahoma and Texas.
Some analysts also warn that sharp declines in oil prices would further sideline the search for alternate sources of energy, currently too expensive to compete with oil, which may be vital to the United States and other oil-consuming nations in the next several decades. Chevron predicts OPEC will once more be relied on for 50% of the world's oil by the turn of the century, up from the current 30%.
The benefits of falling oil prices would be widespread--stimulating economic growth, lowering inflation and bringing down interest rates. Consumers would pay less for gasoline, heating oil and other fuels.