Oil Prices Rise as OPEC Turns to New Allies
A surprise initiative by second-tier oil-producing nations to join forces with OPEC, disclosed over the weekend, was described by energy experts Monday as a potentially far-reaching move that could lend credibility and support to the weakened cartel.
Oil traders reacted quickly by bidding up crude oil prices $1.01 a barrel on the New York Mercantile Exchange to $17.89, the highest level of the year. In early January, oil closed at $17.85.
They were responding to the announcement that a panel of the Organization of Petroleum Exporting Countries will hold an unprecedented meeting April 23 with at least seven non-OPEC oil-producing nations to discuss ways of firming up oil prices. A meeting of all 13 member nations of OPEC would follow on April 25.
Although a consensus among at least 20 nations would be difficult to reach, the fact that the meeting was proposed by the non-OPEC nations was seen as significant because it indicates that the nations with less oil production have come around to OPEC’s view after two years of jawboning by the cartel.
The impetus for the joint meeting is the surprisingly high oil output by the world’s non-OPEC oil producers, which has diminished OPEC’s ability to control prices. Even as OPEC nations sought to cap their production, nations outside the cartel have added 800,000 barrels a day to world markets in the last year, prolonging the glut that has undermined prices.
At a meeting of OPEC’s price-monitoring committee Saturday in Vienna, the group disclosed the overture by non-OPEC oil nations, which produce about 8 million barrels a day versus OPEC’s current 17.5 million. The comparison is misleading, however, because OPEC nations are capable of producing an estimated 31 million barrels daily, while the eight non-OPEC nations are said to be producing flat-out.
Mexico, Egypt, China, Oman, Angola, Colombia, Brunei and Malaysia had met in London in March to discuss what to do about weak prices, then broke up without any apparent plans in mind. It is unclear whether all eight will be meeting with OPEC.
‘We Know Otherwise’
“We figured nothing happened, but now we know otherwise,” said Paul D. Mlotok, who follows OPEC and the large multinational oil companies for the Salomon Brothers investment firm in New York. “This is the real thing. It sounds like one of the cosmic events of the century.”
Mlotok and others discounted the idea that the 21 nations would join to form a “super OPEC.” The existing 13-nation cartel has had difficulty enough agreeing on, and carrying out, price and production quotas as its influence has waned in recent years.
More likely, said Rajai M. abu Khadra, former adviser to Kuwait’s oil minister and now at the Center for Strategic and International Studies in Washington, OPEC would determine production levels, while the non-OPEC group would agree among itself to cut output by a uniform percentage.
On a Collective Basis
“I don’t think they want to join OPEC, and I don’t think OPEC is working toward that end,” Abu Khadra said. “But this is the first time they have done something on a collective basis. I think it is significant for both the OPEC and non-OPEC countries.”
The scheduling of a “consultative” meeting of all 13 cartel members April 25--just six weeks before the regular mid-year meeting--is seen as evidence that a framework already exists for agreement with the non-OPEC nations.
However, a top official at the Kuwaiti Oil Ministry, complaining of the non-OPEC producers shortly before the April 23 meeting was announced, said: “They have made promises before. All we hear are promises.”
Abu Khadra noted that in previous years, emissaries from Egypt, Mexico, Malaysia and other producers have been invited to attend OPEC meetings as observers. As prices began to soften in 1981 and then collapsed in 1986, leading oil ministers have made numerous visits to the Soviet Union, Norway, Britain and other major producing nations to urge mutual restraint in production so that world prices could be strengthened.
Sympathy With OPEC
Norway and the Soviets have voiced sympathy with OPEC but have done little to trim output. Britain, like the United States, remains philosophically opposed to artificial quotas. The economies of industrial nations generally benefit from lower oil prices anyway.
Meanwhile, new oil fields have been discovered in recent years in Egypt, Colombia, Brazil, China, Oman, Britain and, most recently, Yemen, all of which competed with OPEC producers at a time when conservation measures were cutting worldwide demand for oil.
The weaker prices have encouraged higher production to maintain revenues, and the cartel has increasingly fought a losing battle. Since 1981, OPEC production has tumbled to today’s 17.5 million barrels a day from 30 million. Non-OPEC output has climbed to 28 million barrels a day from 22 million.
A Surprise to Experts
The strong level of non-OPEC production since 1986, when prices fell steeply, has surprised experts who expected oil output outside the low-cost Persian Gulf oil fields to be uneconomical at the lower prices. That has proven true in the United States, where production has tumbled by about 1 million barrels a day, but production has risen in many other non-OPEC nations.
“People have been starkly wrong about the effects of the price collapse on non-OPEC production,” said Charles K. Ebinger, Washington-based energy analyst at the consulting firm Putnam, Hayes & Bartlett Inc. “It was supposed to be flat, but this is not happening. We look for an extra 500,000 to 600,000 barrels a day in non-OPEC production in 1988.”
Whether or not a lasting relationship emerges from the meeting later this month, analyst Mlotok said it will bring an end to the latest price decline that has seen prices for OPEC crude oils fall as much as $5 a barrel below the cartel’s official benchmark of $18.
