OPEC Oil Accord Hinges on Sanction Issue

The Organization of Petroleum Exporting Countries neared agreement Thursday on a revived plan to cut oil production by about 7% and fix prices at $18 a barrel, but the deal hinged on a sensitive demand by most cartel members that Iraq be censured unless it agrees to go along.

The OPEC ministers informally agreed Thursday night to details of the plan advanced by Saudi Arabia, sources said. But the proposed action against Iraq, offered by its archenemy Iran, led the ministers to put off any final action until today. One delegate said the controversial Iraq sanction could torpedo the deal.

If approved, analysts said OPEC’s plan could raise world oil prices to the $17 to $18 per barrel range from the current $15 to $16. That might raise U.S. gasoline prices at the pump by about a dime a gallon.

Even so, the plan was seen as fraught with difficulties because of the fixed, “take it or leave it” pricing system at a time when huge oil inventories still hang over the market and cheaper oil will presumably be available from non-OPEC sources such as Britain.

Those conditions are likely to tempt OPEC members to sell more oil by undercutting the official price.

All the ministers except Iraq agreed to join in the price and production plan, but Saudi Arabia and Kuwait--supporters of Iraq in its war against Iran--were said to have blanched at the language directed at the Iraqis.

It would impose a form of action against Iraq within 30 days unless the Iraqis conform to a quota of 1.6 million barrels per day assigned to it in the proposed plan.

The type of disciplinary action to be taken against Iraq wasn’t clear, but it seemed unlikely to dissuade the Iraqis from going ahead with a major expansion of their oil production capacity early next year.

Thus, the proposed agreement appears to represent a big concession by Iran, which had threatened to undo the entire effort to raise prices by insisting repeatedly that it wouldn’t support any cutbacks unless Iraq was part of the deal.

Observers said Iran’s decision to give in reflected its desperate need for increased oil revenue to continue its war with Iraq. For the same reason, Iran agreed last August to exempt Iraq from temporary production ceilings put into effect at that time.

If approved and observed by OPEC members, the plan would slash the cartel’s production to 15.8 million barrels per day from the current 17 million from Jan. 1 until at least March 31. The cartel would seek to extend it through September, sources said.

The $18 fixed price would be an average of seven grades of OPEC crude oil, whose actual prices would span a $2.65 range, sources said.

The so-called basket price of $18 would probably mean $20 a barrel for the most commonly cited U.S. crude oil, known as West Texas Intermediate. But it remains to be seen if OPEC’s production cut will trim the world oil surplus enough to support such prices in an open market.

The OPEC ministers moved toward agreement on the eighth day of their meeting. They had been bogged down since Saturday primarily because of Iran’s insistance that Iraq be brought into the cartel’s quota system.

In addition to giving in on that point, Iran permitted an actual increase of 400,000 barrels in Iraq’s theoretical quota from the 1.2 million barrels per day assigned to it now. That is probably an academic issue, however, because two expansion projects are expected to enable Iraq to produce 2.3 million barrels per day by June.

That would widen Iraq’s oil-production advantage--and economic superiority--in the war with Iran.

In return for its concessions, Iran would get the system of fixed prices it so desperately wanted to finance its war. Iraqi military attacks have severely damaged Iranian oil facilities, reducing Iran’s oil exports to fewer than 1 million barrels a day despite a production quota of 2.3 million.

Reflects Saudi Failure

The cartel’s apparent willingness to exclude Iraq also reflects the failure of Saudi Arabia’s diplomatic efforts this week to persuade the Iraqis to go along. But some long-time OPEC observers consider it a major Saudi victory to win equal, across-the-board cuts by all the other members, enabling the Saudis for now to continue avoiding the “swing producer” role by which it slashed its own production to prop up prices for the cartel.

Analysts were skeptical that the cut, even if nobody cheats, would be enough to raise world oil prices to $18 per barrel and keep them there. But it would probably boost prices slightly above the $16.50 which was reached Thursday on the futures markets on the mere news that OPEC’s ministers had decided to hold a meeting after days of inactivity.