A free-for-all is erupting on world oil markets as Saudi Arabia, in a reprise of the price collapse that began three years ago, opens the spigots from its vast oil fields to capture sales while driving prices down toward the single-digit level.
The Saudi initiative, apparently born of impatience with cheating by fellow members of the Organization of Petroleum Exporting Countries, is seen in part as a return to the market-share strategy espoused by Saudi oil minister Ahmed Zaki Yamani before his ouster in 1986.
Alarm over the Saudis’ sharp increase in oil production was fed Wednesday by fresh evidence of swollen inventories in the United States and elsewhere, prompting traders to drive prices of the benchmark U.S. crude down another 47 cents to $12.60 a barrel in New York.
One key Arab crude, Dubai Light, neared the $9 per barrel mark on spot markets.
The price for future deliveries of the benchmark U.S. crude, which peaked this year at $18.39 a barrel just before a special OPEC meeting in April, has tumbled since then by about one-third and is at a two-year low. As recently as Sept. 14, it fetched $15.06 per barrel.
Gasoline prices have largely resisted the decline in oil prices because of the high summertime demand for motor fuel, refinery outages and refiners’ insistence on high profit margins to offset the penalty of the lower price for crude.
However, the seasonal decline in gasoline demand and the arrival of several cargoes of gasoline attracted by high West Coast prices have begun to lower wholesale and retail gasoline prices, said James Huccaby, manager of pricing at Chevron USA.
The West Coast spot price for unleaded regular tumbled a nickel a gallon Wednesday, he said. Though he called that abnormal, he said retail prices will continue to soften with the seasonal change, declining crude prices and higher refinery output.
Futures prices for gasoline fell Wednesday on the New York Mercantile Exchange with the November contract for unleaded gas down 1.67 cents at 39.44 cents a gallon, an untaxed figure.
Though crude oil prices have been edging down in fits and starts for several months because of overproduction by the United Arab Emirates, Kuwait and others, an unusually blunt official statement Monday after a meeting of the Saudi Council of Ministers sent shock waves through the market.
“Saudi Arabia will not accept that any members of OPEC increase their oil production share at its own expense, nor will it allow other oil producers to pin its oil production down where it is now while they increase their own,” the kingdom said.
Over 5 Million Barrels
That declaration came as new production figures from the Persian Gulf showed that the Saudis, after generally holding to their official OPEC quota of 4.3 million barrels per day since the current accord was reached nearly two years ago, are now exceeding 5 million barrels.
Petroleum Intelligence Weekly, a trade publication, reported Monday that Saudi Arabia has also moved aggressively in the Far East market, especially Japan, with price discounts to match or exceed those being offered by Kuwait, Iran and Iraq.
The cartel is still operating under an ostensible official price of $18 per barrel, but cheating within OPEC and stronger-than-expected production by non-OPEC nations have put too much oil on the markets to support such a price. The cartel has been producing 20 million barrels per day, about 2 million barrels more OPEC crude than the world needs.
Most OPEC observers believe the Saudis are attempting to set the stage for two critical meetings of the cartel over the next several weeks, at which the organization will attempt to re-establish a workable system of price and production levels.
By continuing to flood the markets, Saudi Arabia will depress prices to the point where several habitual cheaters within OPEC “will stand up and cry uncle,” preferably at a special Oct. 20 committee meeting, said Jack W. Wilkinson, the chief economist at Sun Oil Co. and a longtime analyst of OPEC. A full ministerial meeting is set for Nov. 22.
Wilkinson said prices will reach “single digits easily for the very short term, but not for long.” The financial pain will bring other OPEC members into line, as it did in 1986, said Wilkinson.
But another oil expert, former Iranian OPEC delegate Fereidun Fesharaki of the East-West Center in Honolulu, says the Saudis are creating such a huge glut that it will be next spring before prices can be raised from a likely trough of $7-$10 per barrel.
Despite the disarray of the 13-member organization, Fesharaki and others said the price collapse is an ironic reminder of the power of OPEC’s biggest producers.
“OPEC is still in business, that’s why the price is going down,” he said. “The Saudis and Kuwait have decided they want prices to crash. The power to raise prices is limited, but the power to lower it is not.”
Saudi Arabia has chafed for several years under its traditional role as OPEC’s swing producer, whereby it would almost single-handedly hold prices up by cutting production to offset the overproduction of some of the cartel’s poorer or greedier member nations. Saudi Arabia is OPEC’s biggest and lowest-cost producer, and has the most idle capacity.
Triggered 1985 Collapse
Deciding in 1985 to protect their share of the world oil market in the face of OPEC’s steadily falling output, the Saudis ratcheted up their production from less than 3 million barrels per day to 6.2 million barrels, triggering the steepest price collapse since the 1930s.
The nose dive to $10 per barrel from $30 in six months’ time got the attention of other OPEC members, whose economies were badly hurt by the two-thirds decline in oil revenues. A subsequent price-fixing and production-cutting accord firmed prices up to the $18 range.
Today, the cartel is coming face to face with the short memories of some members and with major new uncertainties posed by the likelihood of peace between Iran and Iraq, whose bloody war has been a big contributor to OPEC’s disunity.
A well-connected information service called OPEC Listener in New York and London said Wednesday that the Saudis’ own budget problems were at least as important to their market-flooding move as OPEC politics: “Even if future revenue is lower as a result, it would still be higher than the levels Saudi Arabia could expect if the kingdom’s restraint encouraged other exporters to increase sales.”
Joseph Story, president of Gulf Consulting Services in Washington, D.C., who has long ties to Saudi Arabia, said Saudi King Fahd is sending a message not only to OPEC’s cheating members but to non-OPEC oil producers ranging from the Soviet Union to the United States.
OPEC has long viewed itself as an almost heroic group that restrains its production to keep prices up, letting the rest of the oil-producing world “get a free ride on OPEC’s back,” Story said. “There’s an emotional element to this. The Saudis are saying, ‘We’re tired of being dumped on.’ ”
OIL PRICES COLLAPSE Price of the near-month futures contrct of West Texas Intermediate crude oil at the New York Mercantile Exchangte since the end of March.Source: Knight-Ridder Tradecenter