Oil Prices Fall as OPEC Signs New Agreement
Their ranks split and the immediate outlook dim, OPEC ministers completed their year-end meeting late Monday by signing a status quo agreement that drove oil prices down sharply before the ink had time to dry.
Responding to an accord that was boycotted by Iraq and almost defied by Iran, oil markets in London and New York sent prices for some grades of crude oil tumbling by more than 80 cents a barrel. Economists said that might be only the beginning.
Unless the divided cartel is able to rein in its oil production, economists say, prices could plummet from the current official average of $18 per barrel toward the $10 range reached briefly in the summer of 1986.
$3 Drop Called Conservative
“A $3 decline is extremely conservative,” said an oil economist based in a Middle East oil-producing nation. “We are very, very close to a repeat of ’86.”
On European markets, the price of Britain’s Brent crude for January delivery tumbled 83 cents a barrel to $17.15, and on the New York Mercantile Exchange, January contracts for the most widely traded U.S. crude, West Texas Intermediate, dropped 87 cents a barrel to $17.44.
If the lower crude price were passed completely through to consumers, prices at the pump would drop by nearly 3 cents a gallon for each $1 decline in the price of a 42-gallon barrel. However, refiners and others will keep some as profit. A $3 per barrel drop might eventually lower gasoline prices by a nickel per gallon, analysts said.
More broadly, by placing downward pressure on overall energy prices, a sustained decline in the price of crude would tend to lower inflation and increase the Gross National Product.
But the lesser price also stands to cool off the modest 1987 revival in oil exploration and production in the United States, hastening the decline of domestic oil production and the rise in the nation’s reliance on imported oil. Over time, demand for OPEC oil would grow.
Analysts predicted, however, that a precipitous fall in spot oil prices will galvanize the members of the Organization of Petroleum Exporting Countries into tightening production and holding firm to the official price. Observers of the cartel said the ministers might convene an emergency meeting as early as January if fixed prices fall lower across the market.
The agreement raises the possibility of emergency meetings. Hernandez Grisanti, the oil minister from Venezuela, said the ministers are “willing to take any additional measures which may be necessary to stabilize the market.”
Meanwhile, the news that Iran finally agreed to sign the accord after threatening otherwise might cheer oil traders after Monday’s sell-off, said Joseph Rault Jr., a New Orleans oilman attending the session here.
Extends Existing System
The agreement signed just before midnight on the sixth day of OPEC’s regular year-end meeting extends through June 1988 the existing system of fixed prices and production quotas first put into place a year ago. As expected, the average price remains $18 per barrel and the production ceiling is defined as 15.06 million barrels, effectively unchanged from last June’s adjustment.
But cheating on the quotas by several members since summer has sent too much oil into the markets and undermined the official price. To keep customers, producers have been offering steep discounts off the official price.
Monday’s agreement seeks to prevent such problems by naming an outside auditing firm to visit production sites and monitor output. That has been tried before without success.
Iran Demanded Price Hike
Iran had demanded a $2 per barrel price increase and threatened to stay out of the status-quo accord. Its oil minister flew to Tehran early Monday to consult with political leaders before phoning in his acquiescence Monday night. As it has since December, 1986, Iraq refused to abide by the agreement because it didn’t win a quota equal to war foe Iran.
The moderate faction led by Saudi Arabia contended that the oversupply of oil and uncertain global economic conditions made a price increase unfeasible. But Iran charged that such economic analysis masked a Saudi-Kuwait strategy to starve Iran of oil revenue to fund its war. The Saudis are aiding Iraq financially in the war.
Another level of intrigue centered on the successful campaign by Venezuela, Indonesia and Nigeria to block a Saudi-Kuwaiti effort to give Iraq the higher quota it wanted. That preserved for those members the same percentage of the total OPEC oil output--important for domestic political consumption--but tended to weaken prices because Iraq remains free to expand its production, already second only to Saudi Arabia.
The 15.1 million quota excludes Iraq. Based on November statistics, Iraq would bring the cartel’s production to 17.9 million. Continued cheating by others, especially the United Arab Emirates, would bring the total to about 19 million--or 1.5 million barrels per day above the predicted first-quarter demand for OPEC oil.
