OPEC Ready to Try Again to Pump Up Prices

The Organization of Petroleum Exporting Countries takes another run at boosting oil prices this week, but many critics consider OPEC’s latest plan unworkable. The real show might instead be the shifting sands in the cartel’s power structure.

The OPEC meeting due to begin Thursday in Geneva will be the first in 24 years without any role for Sheik Ahmed Zaki Yamani, the oil minister of Saudi Arabia until he was fired in late October and replaced with longtime Planning Minister Hisham Nazer.

OPEC analysts say Yamani’s negotiating skills will be missed, but his absence will be a minor factor in the meetings compared to the shadows cast over the oil outlook by the Iran-Iraq War and the persistence of the oil glut that sent prices plummeting in the last year.

These pressures have had the effect of weakening Saudi Arabia’s position in the cartel, despite the Saudis’ unrivaled oil reserves, and putting Iran center stage, according to economic and political observers--a shift clearly in evidence at OPEC’s October meeting.

At that 17-day session, Saudi King Fahd took steps to breach his country’s oil-policy gap with Iran and subsequently fired Yamani, no hero in that nation. It was a major shift in posture for the country that has been Iraq’s chief financial supporter in its six-year war with Iran.

With logic similar to that offered by the Reagan Administration to explain its controversial arms deal with Iran (which itself was apparently facilitated by Saudi go-betweens), the Saudis’ recent OPEC maneuverings were seen as partly an attempt to hedge their bets on the outcome of the war and to at least be on speaking terms with Iran, the most populous country in the Middle East.

“OPEC is one of the battlefields of the Middle East,” said G. Henry M. Schuler, a longtime Middle East oilman who is now at Georgetown University’s Center for Strategic and International Studies. “In October, I think Iran won. It wasn’t a total victory, but clearly Saudi Arabia backed away.”

However strong the motivation, analysts say the hard facts of the world oil market mean that the coming ministerial conference will be a stiff test of the Saudis’ effort to come to terms with Iran and other OPEC members who want to cut production and raise prices quickly.

‘Face-Saving Expedition’

Hisham Naggar, head of Middle East and Africa research at the forecasting arm of Chase Manhattan Bank, says the Saudis themselves are still in disagreement on which policies to pursue. The December meeting will largely be a “face-saving expedition” for the Saudis as they attempt to re-establish their influence in OPEC, according to Naggar.

Currently, the OPEC members are producing under a temporary quota of about 17 million barrels per day, due to expire Dec. 31. That level, a modest cutback from the heavy volumes that sent world prices into a tailspin a year ago, has sent prices back up to about $15 from a low of just under $10 in mid-summer.

Some observers predict that OPEC will only manage at this week’s meeting to extend that quota into next year. And with seasonal demand for oil about to peak, that would set the stage for prices to begin declining again in February or March--hardly what the cartel has in mind.

“I don’t think anything’s changed at all since October,” said Joseph Stanislaw, who heads the Paris office of Cambridge Energy Research Associates, Cambridge, Mass., which has done consulting work for OPEC nations. “It would be a major accomplishment just to extend the current 17-million-barrel production quota through the first quarter of next year. That’s a likely outcome. I think it will be a difficult meeting.”

This week’s agenda calls for OPEC ministers to consider a complex plan devised in November by a special pricing committee to declare an immediate fixed, “take it or leave it” average price of $18 per barrel of OPEC crude oil. That would be an increase of $4 to $5 a barrel.

(An $18 average price for a “basket” of six OPEC grades of crude and one Mexican grade, as now proposed, would probably result in a price of about $20 for a barrel of the most commonly cited U.S. grade of crude called West Texas Intermediate. It now sells for about $15.)

But the plan to go before OPEC is not expected to include any specific proposals for a major cut in oil production. And the Saudis have so far insisted that they will not return to their abandoned role as OPEC’s “swing producer”--cutting production, as needed, so that world supplies would fall in line with demand at a price desired by OPEC.

World Awash in Oil

That has left the Saudis, OPEC’s biggest producer, advocating both higher prices and higher production at a time when the world remains awash in oil. And other OPEC members, with much less oil and far larger populations to support than Saudi Arabia, aren’t in any position to perform the swing-producer role.

Yet without big production cuts, the International Energy Agency has estimated, it will take until 1990 for oil demand to grow enough to work off the surplus and support the higher prices OPEC wants.

“King Fahd sort of acts like he hasn’t had a course in Econ 101,” said a top executive at one U.S. oil firm with a big role in Middle East fields. “There has got to be some recognition of the laws of supply and demand.”

It was the Saudis who created the glut in the first place in a since-discredited strategy, implemented in 1985, to flood the markets with cheap OPEC oil and steal business from higher-cost oil produced by such non-OPEC nations as Britain, Norway and Mexico. The policy pumped far more oil than the world needed.

The resulting collapse in prices has created economic havoc in regions and nations dependent on oil income. In the already unstable Persian Gulf area, the sharply lower prices came after four years of declining oil production as the world lessened its dependence on OPEC oil.

William B. Quandt, a fellow at the Brookings Institution who ran the Middle East desk for President Carter’s National Security Council, calculates that Saudi Arabia will realize perhaps $18 billion in oil revenue this year--less than one-fifth the sum it took in just five years ago.

Iran, needing cash to finance its war against the better-funded Iraqis who have succeeded in disrupting Iran’s oil exports, now must cope with a 50% drop in the per-barrel price it gets for the shrunken number of barrels of oil it manages to export.

Indeed, some say the moves by Saudi Arabia to accommodate Iran within OPEC have more to do with Iran’s sheer size and the broad cartel support of Iran’s appeal for quick price increases than with any conviction that Iran is on the verge of a military victory.

“The Iranians are facing the most difficult times they have ever felt, and the oil issue has become critically important to them,” said Fereidun Fesharaki, the energy adviser to Iran’s prime minister before the Iranian revolution began in 1978. “I don’t think the Iranians are negotiating from a position of strength.”

Iran, which lately hasn’t been able to export as much oil as it is allowed under the current OPEC quotas anyway, advocates production cuts to raise crude prices to $28 per barrel by the end of 1987. Its principal supporters are Libya and Algeria. So far, the Saudis have only endorsed the more immediate goal of getting to $18.

Like many critics, Fesharaki says the apparent mechanisms by which OPEC hopes to reach $18 are unworkable. Among other things, he says, it sets up eight complex criteria for differentiating among the needs of the 13 disparate OPEC members.

“When the ministers make things too complicated, it can’t work,” says Fesharaki, who is now with the East-West Center Resource Systems Institute in Hawaii. “We tried to do the same thing with four criteria in the mid-1970s and we couldn’t even make that work.”

Petroleum Intelligence Weekly, a respected publication on international oil markets, said OPEC might adopt the proposal because of back-home political pressure to do something. But it said that cheating will be rampant and that oil buyers will distrust the supposedly fixed prices and reject long-term contracts, opting instead to buy crude on the spot market and “undermining the new pricing structure from the start.”

“Some of OPEC’s most senior ministers believe such a system will probably collapse within months . . . leading to prices lower than those now prevailing,” the publication said.

Georgetown’s Schuler says that scenario doesn’t do credit to the Saudis’ intelligence and argues that the OPEC ministers are likely to forget fixed prices for now and cut production another 10%. If that creates a perception in oil markets that OPEC is unified, he says, prices could rise quickly.

“It all depends on whether you bring a political or economic approach to the question,” he says. “I say it’s political. The prospect for discipline within OPEC is much greater under Iran than it was under Saudi Arabia. So Iran wants $28, the Saudis want $18, I say split the difference and we could have $23 oil within six months.”