Analysts See Saudis as Key to OPEC Strategy
Oil industry analysts are stumped over what the Organization of Petroleum Exporting Countries is up to, but they believe that Saudi Arabia’s actions over the next few months will reveal the answer.
OPEC threw international oil markets into a tizzy after declaring this weekend that the cartel will wage a price war to maintain its share of world oil markets. On Wednesday, oil markets recovered somewhat after two straight days of record declines.
Oil market analysts say, however, that unless oil producing nations move to curtail production, prices could drop dramatically--possibly below $20 a barrel from the recent price of $28.
The prospect of dramatically reduced prices appears to have been heightened by the decision over the last two days by Mexico and Great Britain--two leading non-OPEC producers--to rebuff OPEC’s call to reduce production and help stabilize world oil prices. Analysts doubt that any other non-OPEC nations, including Norway and the Soviet Union, will cooperate with the cartel.
OPEC’s production stands at 18 million barrels a day, a three-year high. Most of that increase has come since October, when Saudi Arabia doubled its production, saying that it would no longer play the role of “swing producer” by keeping its production low to prop up world prices. OPEC hasn’t said what it considers its “fair share” of the world oil market. At its current production, prices are certain to fall sharply within the next six months.
Henry Schuler, director of energy security studies at Georgetown Institute of Strategic and International Studies, said “there’s room” in the marketplace for OPEC production closer to its official quota of 16 million barrels a day, which currently is being ignored.
The cartel said it plans to meet two months from now to discuss production levels. Schuler said he views the decision to put off that meeting as “confirmation of the bitter dispute that exits in OPEC.”
“On one hand you have the Saudi strategy that says protect market share, and on the other is countries such as Nigeria, which say protect revenue,” he said.
For now, the Saudi strategy seems to have won out, analysts say. And, despite the oil market’s reaction to OPEC’s new strategy, there is probably enough seasonal demand for the extra oil, especially if it’s a cold winter, analysts say. In the spring, when oil demand drops, the chief question will be “who will blink first,” said William Quandt, a senior fellow at the Brookings Institute and an expert on the Middle East.
The most likely answer, said a number of experts on the Middle East and on the oil markets, is Saudi Arabia.
Milton Lipton, a consultant with Walter J. Levy & Co. in Jersey City, N.J., said that “what it comes down to is what Saudi Arabia decides to do.”
Fereidun Fesharaki, a research associate at the East West Center and an energy adviser in Iran under the Shah, viewed OPEC’s recent move as an effort by Saudi Arabia to assert itself politically within the group. “They felt their output was really low and that they were no longer regarded as the most important in OPEC, or within the eyes of the rest of the world,” he said. But he said that sometime next spring, OPEC will “promise to be good boys and cooperate with each other and slow production to 15 million or 16 million barrels a day and maybe even lower the price.”
Quandt said that Saudi Arabia increased its production not so much to exert its influence but because it was tired of restraining its production while other OPEC nations produced more than allowed under OPEC’s quota system.
“They have internal revenue needs of their own,” he said. “They were saying, ‘We’re going to regain our market share, and the rest of you better shape up or we’ll have a price collapse on our hands,”’ he said.
Recovery of Prices
World oil markets got the first taste of that this week, when prices on the non-contract, or spot, markets fell by more than $3 on Tuesday. Oil prices recovered on Wednesday in hectic trading after two straight days of record declines. The price of crude oil for January delivery closed at $26.70, up $1.47, on the New York Mercantile Exchange.
Oil industry analysts attributed the increases to profit taking by speculators who had sold crude oil short. Oil analysts pointed out that traders for oil companies were inactive on Wednesday.
In the long run, “when the price goes down, everyone loses,” said Lipton.
He said that OPEC nations with large appetites for revenue, such as Nigeria, Algeria, Venezuela and Indonesia, as well as non-OPEC producers, including Great Britain and the United States, “can’t increase production to increase revenue at lower prices since they are producing at capacity. If prices go down, they can only lose revenue.”
Quandt said that, until next spring, “what we’re going to see is something of a game of chicken,” with OPEC calling for restraint but with no one taking any steps to cut back production.
At some point, he said, Saudi Arabia will cut back to preserve its relationship with the rest of OPEC and the industrialized world.
“They are basically a conservative nation that likes stability. They’ve never been very good at playing chicken,” he said.
Theodore Moran, a professor at Georgetown University’s School of Foreign Service and an expert on the Middle East, offered another view on OPEC’s decision to seek its “fair” share of the market.
He said OPEC is “retaliating” against non-OPEC producers for not keeping production low. Forcing prices down is a way of having “the outsiders learn their lesson,” he said.
“They are disciplining the entire industry.”
Once non-OPEC producers understand that OPEC means business, Moran said, “the oil industry will seek a new price plateau, and there will be cuts in production by OPEC and by non-OPEC producers.”
