British Resist Saudi Push to Ease Oil Glut

As oil prices fall and economic uncertainty mounts, a test of wills is developing between two of the world’s leading oil producers, Saudi Arabia and Britain.

Sheik Ahmed Zaki Yamani, the Saudi oil minister, hopes to force Britain to limit its production and set an important example for all the producers outside of OPEC, the Organization of Petroleum Exporting Countries.

Prime Minister Margaret Thatcher of Britain, however, boasts that her government maintains “the freest oil province in the world,” and says there will be no change in this policy.

In recent years, Britain and the growing family of non-OPEC oil producers have dramatically increased their output, undercutting efforts within the cartel to keep price levels up by limiting production.

As a result, prices have weakened and OPEC’s share of the world oil market has been reduced--from more than 60% in 1979 to a little more than 33% today.

Saudis Lost Patience

Last August, the Saudis lost patience and doubled their production. Crude oil prices tumbled.

Overtly, Yamani’s wrath has been directed against non-OPEC producers, but at the same time the Saudi actions have damaged other OPEC countries. And oil experts here speculate that Yamani hopes to counter the flagrant cheating by OPEC members who exceeded production quotas and discounted prices while Saudi Arabia steadily cut back its output.

Flexing his country’s unparalleled reserves and production capacity, Yamani has demanded discipline and warned of dire consequences for the world economy if prices continue to decline.

At the same time, the Saudis have increased production as Yamani has attempted to show non-OPEC countries what will happen if they don’t hold production down.

With crude oil prices down nearly 40% in the past three months, Yamani has predicted a further substantial decline unless the non-OPEC countries agree to some form of production limits.

So far, Thatcher has shown no sign of buckling, despite projected losses of nearly $7.5 billion in revenues and prospects for more of the same.

Her unequivocal “no” to production limits and to talks with OPEC about such limits--established last Tuesday in a statement to Parliament--sent crude oil prices tumbling further as nervous oil traders saw no end to either the Saudi-British confrontation or to the volume of Saudi oil flooding onto Western markets.

Yamani has many reasons for concentrating on Britain. In the decade since Britain’s North Sea oil fields became active in 1975, Britain has steadily increased its output, doubling production over the past six years to 2.5 million barrels a day, while OPEC sought to limit its output.

Output Topped Saudis

At one point last summer, Britain’s output briefly surpassed that of Saudi Arabia, a factor that some people think was the last straw for Yamani.

Also, Britain is a convenient target. It is not a Muslim country, not an Arab country and not an indebted Third World country, any of which might be politically difficult to attack.

Above all, Britain is important. Although it produces barely 5% of the 45 million barrels of oil that is consumed daily around the world, Britain is an influential player in a world where symbols and psychology are powerful market forces.

Britain dominates the North Sea, which constitutes one of the largest non-OPEC sources of exported crude oil anywhere. Crude from Britain’s Brent field has come to be among the most widely traded, taking on the role of price-setter in a development that has raised Britain’s profile.

In addition, Norway, the other big North Sea producer, has traditionally taken its pricing lead from Britain. Norwegian government officials have confirmed that Norway is ready to discuss production cutbacks, but only as a follower, not a leader.

“If other non-OPEC countries, especially Britain, will regulate production, then we will also consider it,” Egil Helle, chief spokesman at the Norwegian Ministry of Petroleum and Energy, told The Times.

In the words of Stephen Turner, an oil economist for the respected Edinburgh-based brokers Wood Mackenzie & Co., “The U.K. (United Kingdom) is the pivot.”

A Difficult Task

But if part of Yamani’s strategy involves facing down Thatcher, the expert opinion here is that his task will not be easy. For a variety of reasons, industry observers and analysts believe that Britain’s strong public stance is more than posturing.

In most of the OPEC countries oil revenues account for 90% or more of total income and nearly 100% of exports, but North Sea oil accounts for 6% of Britain’s national income and slightly less than 10% of its exports.

Certainly the loss of oil income due to falling prices will have an impact. The revenue drop could force Thatcher’s government to put off a $5.3-billion income tax cut planned for announcement in March. And for a prime minister whose stock was shaken by a recent scandal that led to the resignation of two Cabinet ministers, such a sacrifice could be significant.

The drop in oil prices also has weakened the British pound, supplying the government with the uncomfortable choice of accepting an unwanted devaluation or increasing interest rates to boost the pound’s attraction on foreign exchange markets.

Another major decline in oil prices could conceivably cause a collapse of the pound, something Thatcher would go a long way to avoid.

But as the world’s sixth-largest industrial nation, Britain also stands to reap benefits from reduced prices. In fact, falling crude prices have touched off a brisk academic debate here as to whether cheaper oil might not prove a net benefit for Britain.

Would Reduce Inflation

Advocates of lower oil prices argue that they would reduce inflation, stimulate industrial output in the 94% of the economy not related to oil and reduce unemployment. A devalued pound, coupled with growth in world trade, would tend to increase British exports in general and compensate for lower oil sales.

Britain would not benefit to the extent that would non-oil industrial countries such as West Germany, Japan and France, but it would still benefit, they argue.

“The present drop would mean a definite plus to GNP (gross national product),” said William Robinson, editor of the London Business School’s Economic Outlook and author of a recent paper on the subject.

Other factors also serve to encourage Thatcher not to give way. The extremely high investment costs required to produce oil in the North Sea mean that only large, established companies operate there. Unlike the many small operators in the United States, which face an immediate financial crunch, these companies are in no immediate danger.

Further, Britain has encouraged risky North Sea investment with a pledge to producers that they can operate with only minimal government controls. Imposing production limits now might endanger future large-scale investment programs.

Consequently, Thatcher’s unequivocal “no” to production limits has been interpreted by oil economists here as more than public posturing.

Indeed, as Thatcher spoke in the House of Commons, her energy secretary, Peter Walker, was giving the same message more discreetly to Mana Said Oteiba, minister of the United Arab Emirates, during a meeting in London.

May Trigger Meeting

Otaiba is expected to deliver the message to his OPEC colleagues Monday at a committee meeting in Vienna. This could prompt OPEC countries that are hurting more than Britain to call for a full OPEC ministerial meeting later in February to review the strategy.

“If it doesn’t generate a ministerial meeting, then prices will peter out further,” said Michael Answorth, an oil analyst at Scott Goff Layton & Co., a London brokerage. “You will have 3 million to 4 million barrels a day not having a home, and that’s a recipe for falling prices.”

So far, among non-OPEC countries, only Egypt, a marginal producer, has agreed to cut production. Norway has leaned slightly in that direction but has made any move toward cutting prices contingent on British involvement.

Some oil analysts here believe that if prices fall enough, Britain can be forced to exert informal pressure on North Sea producers to reduce output--by extending the periods during which drilling platforms are shut down for maintenance.

Industry observers and analysts believed that lower North Sea production last summer was brought about by such action. A formal British declaration of quotas, however, is considered highly unlikely.

Such an understanding, coupled with public commitments from at least some other non-OPEC producers, among them Mexico and Norway, might give the Saudis enough to claim victory.

But oil analysts and economists here believe that in the weeks ahead Yamani is likely to come under more intensive pressure from within OPEC, whose members are suffering far more than Britain, Norway and Egypt from the effects of lower prices.

Strategy Criticized

Iran, Libya and Algeria have all publicly criticized Yamani’s strategy in the past week, and although these countries traditionally carry little influence with Saudi Arabia, analysts here believe their comments reflect a broader-based disenchantment.

For Nigeria, which is almost completely dependent on oil for its export earnings, and which has $18 billion in foreign debts, the falling prices spell greater economic turmoil.

“OPEC can’t win a price war,” Answorth said. “For them, cutting prices is a bit like cutting your head off and throwing it at your opponent, hoping it will bruise him.”

While most of OPEC feels the pressure, the Saudis do not. Their doubling of production easily compensates for the 40% decline in prices, and the depth of Saudi reserves means that they can sustain the high production.

But it is doubtful that even the Saudis want to see prices fall much more, and few political analysts believe that they would enjoy the political isolation within the Arab world that such a policy could generate.

Greater discipline within OPEC and limited non-OPEC cooperation may be the most the Saudis can hope for, analysts here believe.