OPEC Accord May Result in Oil Price Drop

Times Staff Writer

OPEC ministers, their unity badly weakened by the Iran-Iraq War, appeared to have resigned themselves Saturday to a risky year-end agreement that some economists said could drive crude oil prices down more than 15% by early next year.

Instead of the stronger agreement first envisioned, the Organization of Petroleum Exporting Countries is expected to sign an accord that merely maintains the status quo without repairing its serious weaknesses.

Observers said that the organization's profound political divisions, notably the isolation of Iran by Arab nations since the violence at the holy city of Mecca in July, which was blamed on Iranian fanatics, made it impossible to reach an accord based on economic logic.

Signing Set for Today

Barring last-minute concessions by Iran and Saudi Arabia, and pending approval by home governments, several ministers said the final accord setting prices and production for the first half of 1988 will be signed by 12 of the 13 member nations today.

Several ministers, including Fernando Santos Alvite of Ecuador, said OPEC will continue the official average price of $18 per barrel and the current production ceiling, defined as 15.1 million barrels a day. But Iraq is expected to refuse again to sign the agreement.

The maintenance of the $18 price is a triumph for Saudi Arabia and Kuwait and a defeat for Iran, which desperately wanted at least $20 a barrel to help fund its war. The prevailing view was that there is too much oil on the market and too much economic uncertainty to support a higher price. The Iranians said the lower price is designed to damage their economy.

Iran succeeded, however, in rebuffing Iraq's demand that it receive the same individual production quota as its war foe--a position strongly supported by the Saudis and Kuwait. Yet Iraq's exclusion means it will be free to continue to expand its oil production, undermining the agreement and weakening prices.

Though Santos and a second minister said that Iraq would remain outside the agreement, an OPEC spokesman cautioned late Saturday that "perhaps it is too early to say anybody is out."

Iran's oil minister was mentioned as one delegate to the meeting here who wasn't prepared to sign the document agreement before checking with his political superiors back home.

Criticized by Market Experts

The pending accord was roundly criticized by most oil market experts and economists observing the cartel's meeting. They said the agreement doesn't appear to address the problems that have diminished OPEC's credibility while delivering too much oil on the market.

"Nobody is getting anything. Instead, everyone is trying to make sure nobody else gets anything," said Pierre Terzian, editor of Petro Strategies, a Paris-based energy newsletter. "It was a totally negative conference. The question isn't whether prices will come down. The question is how much."

From the official $18, already heavily discounted in some trading, analysts said the price could drop to the $14-$16 per barrel range. This will begin "almost immediately," said Norman Barakat, energy analyst for the Smith Barney brokerage in New York.

This could set the stage for emergency meetings of the embattled cartel as early as February to prevent an outright price collapse reminiscent of 1986, according to several oil market experts.

These observers said the only way to forestall such problems would be for OPEC to regain control of its members' production. They have been unable to do that here, but might have more success when prices tumble.

Potential for a 'Disaster'

"It has the potential to be a disaster," said Jack N. Aydin, a New York-based oil analyst for McDonald & Co. "But as prices really get hammered, I think they'll get their act together."

Though the cartel's quota will be listed on paper as 15.1 million barrels a day, that won't count Iraq. The Iraqis will presumably continue to produce about 2.7 million barrels per day, while cheating by other members--encouraged by Iraq's outlaw approach--has brought true production to about 19 million barrels.

By most estimates, the world's daily demand for OPEC oil in the first quarter of 1988 won't exceed 17.5 million. The overhang is what would drive prices down.

Through Friday, it appeared that Iraq would be brought into the agreement at a quota which would trim its production, while Iran would walk out in anger. Because Iran isn't thought to be capable of making good on a threat to flood the markets with oil, the net result would probably have been lower OPEC production and stronger prices.

It is understood that those plans foundered on strong opposition by Venezuela, among others, to rewarding Iraq for its cheating by giving it a higher official quota.

But the heart of OPEC's problem remained Iran, its newly embittered relations with the Saudis and its war with Iraq. As long as the military foes need oil money to pay for the war, said Terzian, their motives will run afoul of the cartel.

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