OPEC Moves Toward Rejecting Iran Plan to Raise Prices
As OPEC ministers began meeting Wednesday, oil prices rose by 47 cents a barrel with markets cheered by the growing support in the cartel for Saudi Arabia’s position that the current $18 official price be maintained.
Expectations for the meeting have been low because of Iran’s unequivocal refusals to sign any agreement that doesn’t raise official oil prices, a step that other OPEC ministers strongly oppose.
A consensus on maintaining current prices would help prevent what some skeptics have warned could be a 1986-style price collapse early next year. At the New York Mercantile Exchange, contracts for January delivery of West Texas Intermediate closed at $18.55 a barrel.
There was little concrete indication of progress at the year-end meeting which began Wednesday at OPEC headquarters here. Several ministers emerging from the five hours of secret talks said they mostly listened to reports and are to begin serious debate today.
However, observers have managed to find a silver lining in the strong possibility that Iran will refuse to abide by whatever agreement emerges.
In effect, the Iranians would be borrowing a page from war foe Iraq, which refuses to follow the current price- and production-fixing agreement reached a year ago. But now, Iran and Iraq might trade places outside the agreement: Iraq would be granted a higher quota and would agree to abide by it, while Iran would defect in anger over the price freeze and the higher quota for Iraq.
From OPEC’s standpoint, it is better to have Iran outside the agreement than Iraq. The reason is that Iraq has been expanding its oil production capacity, while military damage has prevented Iran from producing as much as it is allowed under the current quota system.
Iraq has refused to abide by its nominal quota of 1.5 million barrels a day, and has been producing as much as 2.7 million barrels. Its oil minister, Issam Abdul Rahim, reiterated Wednesday that it would respect a quota identical to Iran’s 2.4-million-barrel ceiling. OPEC leaders Saudi Arabia and Kuwait, who support Iraq in the war, have indicated their willingness to boost its quota.
Thus, the inclusion of Iraq would trim the production of the cartel’s biggest cheater. Yet a defection by Iran wouldn’t add any oil to the market because of its perceived inability to boost production. The overall result should be firmer prices.
The Iranians, desperate for cash to fuel their war against Iraq but reeling from war-inflicted damage to oil facilities, are insisting on an official price increase of at least $2 per barrel. But most other OPEC members now appear to view that as unrealistic in today’s glutted market.
A pricing committee recommended Wednesday that the cartel extend its official $18-a-barrel price, backing the adamant stand by Saudi Arabia, the cartel’s largest producer. There was also understood to be support for a production quota of about 18 million barrels a day, compared to the present 16.6 million barrels.
Though the quota would be higher, most of the increase would merely legitimize 900,000 barrels per day of Iraq’s current production. Another 500,000 barrels would be parceled out to the other members. The total would fall below the cartel’s true output, which has exceeded 19 million barrels at times.
The doubts about Iran’s ability to crank up production didn’t prevent Oil Minister Gholamreza Aghazadeh from warning Wednesday that his national oil company would flood the market with 4 million barrels a day if OPEC doesn’t enact an agreement that Iran likes.
“If our positions are not appreciated, we won’t be a signatory,” he told reporters through an interpreter. “If we do not sign anything, then we do not have any commitment to production ceilings.”
Noting that such steep overproduction would send prices into a tailspin, Salomon Bros. analyst Paul Mlotok said: ‘One, they can’t do it. Two, they’re the ones crying for a higher price. He’s saying, ‘Give me what I want or I’ll cut my throat.’ ”
The isolation of Iran within OPEC would accurately reflect its standing in the Middle East since the Arab summit in Jordan last month. The Iranians were unanimously condemned for such actions as their attacks on tankers in the Persian Gulf and their role in the violence at the holy city of Mecca in July.
In fact, Aghazadeh said Wednesday that the array of OPEC ministers aligned against it on the price issue was a direct result of the Arab summit.
Though it would theoretically restrain overall production, Iran’s refusal to sign an agreement would be an imperfect answer to OPEC’s current situation. Analysts noted that it would extend doubts about the cartel’s credibility because a major member would remain in official violation of its policies.
“Psychologically, it is not good,” said Jack N. Aydin, a New York-based analyst for McDonald & Co. brokerage. “It would initially be negative for the markets. But once everyone realized that production would be lower, it would be a good solution.”
Even a unified OPEC would still have the threat of a global recession to contend with, the cartel’s president, Nigerian Oil Minister Rilwanu Lukman, told delegates from the 13 member nations.
In a speech, Lukman congratulated them for the year-old price-fixing and production-cutting agreement that raised prices to $18 a barrel after a collapse to $10 from $30 in 1986. But he criticized members for producing too much oil in the second half of 1987.
He said the need for a consensus on price and production is “especially acute in view of the uncertainties concerning the performance of the world economy. If the fear of a global recession materializes, then the room for maneuver within the international oil industry will be far more limited than at present.”
