OPEC Agrees to Cut Output, Spur Oil Prices

Oil ministers of the Organization of Petroleum Exporting Countries reached unanimous agreement Monday night on Iran’s proposal for a drastic cut in the production of crude oil in order to raise prices, the president of the cartel announced.

Rilwanu Lukman, who also is Nigeria’s oil minister, provided no details, but the Iranian oil minister said the cuts would amount to about 3.3 million barrels a day, bringing OPEC’s daily production down to about 16.7 million barrels from the present 20 million.

“You’ll hear all about it tomorrow (today),” Lukman told reporters as he emerged from a Geneva hotel after a late-night meeting of the 13 OPEC ministers. Another meeting is scheduled for today.

Backed by Saudi Arabia

Iran’s oil minister, Gholamreza Aghazadeh, said at a news conference that he is very optimistic about the plan to cut production. The cartel’s biggest producer, Saudi Arabia, had been among the final holdouts opposed to the plan but eventually agreed to go along with it.

The formula all of the ministers approved would require 12 of the OPEC countries to revert to the self-imposed output ceilings to which they agreed in late 1984, Aghazadeh said. For political reasons, Iraq, which has been at war with Iran for nearly six years, was excluded from the new plan and will theoretically be allowed to pump all the oil it wants.

Ecuador, a small producer that desperately needs oil revenues to pay off foreign debts, will be allowed a slight upward adjustment of its old quota. It would be allowed to pump about 50,000 barrels a day more than the 183,000 it was producing in October, 1984.

Unanimity Essential

Oil industry analysts consider a unanimous agreement by OPEC members on production cuts crucial to reversing a worldwide slump in prices, which have dropped from $32 a barrel late last year to as low as $7.35 for some grades.

By not requiring production cutbacks from Iraq, Iran appeared to remove a major stumbling block to the quota agreement that OPEC has been vainly seeking for years.

Oil prices surged at the news. On the New York Mercantile Exchange, contracts for September delivery of West Texas Intermediate, the benchmark U.S. crude, closed at $13.29 a barrel, up $1.74 over Friday’s close.

The events came as OPEC oil ministers entered the second week of talks in their fourth attempt in recent months to reach an agreement on lowering output and boosting prices.

At Least 2 Months

Aghazadeh, who was understood to have offered the proposal to the oil ministers at a session Sunday, said the plan would be effective for at least two months, when the ministers could meet again to discuss the price structure.

He said Iraq would be free to produce as much oil as it wants, but added: “We can control Iraq’s production by ourselves.” He did not explain what he meant. Iraq’s quota under the 1984 agreement was 1.2 million barrels a day, but its current production is estimated at almost 2 million barrels.

Iran’s old quota was 2.3 million barrels, and it is generally estimated to be pumping about 2.2 million barrels. Both Iran and Iraq are believed to be at production capacity, which has been severely affected by their war.

There was no immediate public reaction from Iraq to Iran’s plan.

Kuwait announced that it has agreed to the plan and is reducing its current production of 1.6 million barrels a day by 700,000 barrels, bringing the country’s daily output to the October, 1984, level of 900,000 barrels. Kuwait said it would honor Iran’s proposal as long as others did but described the proposal as a temporary solution.

May Reduce Oil Glut

If it is effective, the plan is expected to gradually absorb the present world oil glut and thus boost prices over several months, market analysts in Geneva said.

(In San Francisco, W.D. Hermann, chief economist at Chevron Corp., said that if OPEC sticks to the agreement, oil prices are likely to rise to between $15 and $20 a barrel by the end of the year. Hermann said worldwide demand for OPEC oil is now about 17.5 million barrels a day, since oil companies have started building heating oil supplies for winter.

(He said that if consumers believe that oil prices are on the way up, the belief would trigger a round of aggressive buying, which in turn would force prices even higher. “It’s hard to say what kind of psychology you’ll get out there” in the marketplace, he added.

(Bruce Pasternack, a senior vice president of the management consulting firm of Booz-Allen & Hamilton in San Francisco, called OPEC’s agreement “a step in the right direction” but, in contrast to Hermann, said he does not expect oil prices to rise much as a result.

(“At best,” he said, it would stem the decline.” He said the oil cartel would have to reduce production to at least 15 million barrels a day before there would be much impact on the price.

Enforcement Difficult

(In the past, OPEC has had difficulty in imposing quotas as producer countries in need of money simply produced more than they were authorized and pumped it onto the world market.

(Therefore, Pasternack said, the success of the cartel’s new quota system will depend on whether it agrees on a method of enforcing the quotas. For the quotas to work, he said, “there’s got to be some teeth in them, some method of control.”)

Iran, backed by Algeria, Libya and Gabon, has been demanding that OPEC set binding quotas under a fixed lower ceiling.

An Algerian proposal at this conference that would have lowered the ceiling to between 15 million and 16 million barrels a day collapsed when it was rejected by Saudi Arabia.