Saudi Move Toward Oil Price Cut Told

Associated Press

Saudi Arabia has concluded deals with three major U.S. oil companies that could lower the price of its oil and raise production, the Middle East Economic Survey reported today.

The authoritative oil and economic publication, published in Nicosia, said the deals on the basis of “netback price” with Exxon, Texaco and Mobil have been “confirmed beyond doubt.”

Netback pricing relates crude oil prices to market prices for refined petroleum products in certain markets. The Economic Survey said that using such a scheme could lower the price for Arabian light crude by $2 to $3 below the $28-per-barrel official OPEC price.

Defensive Action

The Saudi action is, in many ways, defensive. Almost all the other OPEC members have been discounting their oil prices despite warnings by the Saudis that they were tired of being forced to try to maintain stability in the market on their own.

The publication said top Saudi sources had indicated the agreements would send a warning from Saudi Arabia to fellow members of the Organization of Petroleum Exporting Countries and producers outside the cartel that “Saudi Arabia can no longer be taken for granted as the sole buttress of world oil prices.”


“In other words, if need be, the kingdom is ready for a price war,” the publication said.

Spokesmen at Exxon Corp., Texaco Inc. and Mobil Corp. all declined comment.

Flexible Approach

The Middle East Economic Survey said netback pricing would make clear that the Saudis were changing from rigid adherence to OPEC prices to “a more flexible approach.”

It said the Saudis were signaling other oil exporters that the “linchpin” of their oil policy now will be the restoration of Saudi Arabia’s dominant market position and maintenance of its production at an acceptable level.

“If this signal is heeded by the other exporters, the Saudis would not push their production above the current OPEC quota of 4.3 million barrels per day,” the publication said.

But it added: “If the signal is ignored and others respond by cutting prices to boost their own output in excess of quota levels, the Saudis would be prepared to turn on the taps up to the full extent of their massive production capacity, which currently stands at 8 million to 10 million barrels per day.”