OPEC Raises Target Oil Price to $21 a Barrel

The OPEC cartel, which produces about one-third of the world’s oil supply, Friday unanimously demanded a higher price for its oil and vowed to back its move with firm controls on its own production.

Meeting in Geneva, the oil ministers of the powerful 13-nation Organization of Petroleum Exporting Countries agreed to raise the target price of an average barrel of OPEC oil to $21, up from the former $18 level, in a market that has been soft for six months.

At the same time, the overall cartel production ceiling was raised to 22.5 million barrels per day, a 400,000-barrel increase, and most of the added production was steered to the maverick United Arab Emirates. Current production has been estimated as high as 23.5 million barrels per day, which is 1 million above the new official ceiling and an estimated 2 million or more above market demand for OPEC oil.

Iranian Oil Minister Gholamreza Aghazadeh, asked whether price-sustaining production ceilings could be maintained at the new levels, declared: “At this time, I’m sure 100%.” He and other ministers disclosed the agreement, and a formal communique was expected later.

The oil ministers gathered at midweek under a threat of violence among member nations on the Persian Gulf. Angered by drifting prices, down more than $5 a barrel since the start of the year, Iraq’s President Saddam Hussein, the outspoken strongman of the gulf, had denounced Kuwait and the Emirates for glutting the markets. He told them to stem their output and warned that, if words were not enough, Iraq would have to “take effective action.”

As the preliminaries of the semiannual meeting began, Iraqi troops had been deployed near the Kuwaiti border, the United States had responded by ordering snap naval maneuvers in the gulf and only a day of shuttle diplomacy by Egyptian President Hosni Mubarak stalled the momentum of a mushrooming crisis.

The higher price was considered a victory for Iraq, which is desperately short of cash to rebuild its war-ravaged economy and was, in effect, losing more with each $1 fall in the price of its oil--at least $14 billion since the slide began, according to Hussein. The Iraqi oil minister, Issam Abdul-Rahim Chalabi, went to Geneva asking for $25 per barrel, a price many ministers reportedly thought would be dangerously high in the present market.

Other ministers suggested to reporters during breaks in the deliberations that the $25-per-barrel request was a negotiating tactic to assure a price of more than $20.

With Iraq calling for an extreme position and both Kuwait and the Emirates still wary of the chill that a higher price might put on the markets, Saudi Arabia--the heavyweight producer and traditional architect of OPEC compromises--stepped in to work out the final price and production levels, according the news reports from the Geneva hotel where OPEC met.

More than 60% of the world’s proven reserves lie in the Persian Gulf, all relatively easily tapped in comparison to non-OPEC producers. So, a price-and-production agreement by the cartel, if it sticks, sets the standard for the rest of the world’s exporters.

President Bush said “there’s not a thing in the world” the United States can do about the OPEC price increase.

“The market forces will--as always--will determine what the ultimate prices are . . ., “ he said to reporters while en route to his Kennebunkport, Me., home for the weekend. “You know, they make these agreements, and then the markets have a funny way of dominating.”

In Washington, government and industry analysts said the higher level--if it holds--could result in price increases of 7 or 8 cents per gallon at the service-station pump.

Crude-oil cost increases “are generally passed through directly to the consumer,” said C. William Skinner, an official at the federal Energy Information Administration.

Michael Canes, chief economist at the American Petroleum Institute, said the higher prices for consumers would probably begin showing up in six to eight weeks.

Many analysts were skeptical, however, that OPEC would be able to hold oil production to the prescribed levels to prevent the price from falling.

“It is essential that OPEC show more discipline than they have historically,” said Constantine Fliakos, senior oil analyst at Merrill Lynch Capital Markets in New York. He said he thinks the cartel is cohesive enough to deplete its inventories and raise the price by early next year.

Canes noted that in the past, the oil cartel has gone through nine-month to one-year cycles of compliance and cheating.

“What is different this time is the overt threat of force,” he said, but he added that he is not convinced that overproducing will not resume at some point.

Aghazadeh, the Iranian oil minister, told reporters the compromise package had been blessed by “the highest levels” of OPEC governments, suggesting a political deal was struck to underlie the market scheme. Small countries such Kuwait and the Emirates would face risks by producing over their assigned ceilings in the face of a firm political agreement among their bigger neighbors.

The new OPEC levels--including the first change in the target price since December, 1986--would stand at least until the end of this year, the Iranian minister said.

The oil ministers, winding up two days of direct talks, also reportedly agreed to follow the pattern set at this meeting in future negotiations, setting the price and production levels in tandem. Recently, OPEC has left the target price fixed while manipulating production levels.

The cartel also agreed to establish two groups to monitor production, reports from Geneva said. Precise monitoring of production-ceiling cheating is difficult, but Kuwait and the Emirates clearly have been breaking the limits, according to industry analysts--Kuwait by several hundred thousand barrels a day and the Emirates, principally the sheikdom of Abu Dhabi, by as much as 500,000 barrels a day.

Both countries have denied the accusations. The Emirates’ denial is semantic, however, stating only that it has not violated the ceilings it has set for itself.

The OPEC members are Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

The Agreement at Geneva is expected to ease some of the hostility between Iraq and Kuwait, but production disputes were just part of the rift. President Hussein, who inflamed the dispute by calling the Kuwaiti foreign minister a “tool of America” and charging that the sheikdom had entered a conspiracy with Washington to bleed the Iraqi economy, has also accused Kuwait of stealing $2.4 billion worth of oil from a field that noses into Kuwaiti territory.

Baghdad wants that money back and also insists that Kuwait and other Arab supporters of Iraq’s 1980-88 conflict with Iran erase Iraqi war debts. The cash-strapped regime finds itself allied in financial distress with its old enemy, Iran, and both led the forces at Geneva in favor of higher prices for their oil.

Under the formula worked out by Egypt’s Mubarak, Iraqi and Kuwaiti officials will meet this weekend or early next week in Jidda, Saudi Arabia, to discuss their differences. On Friday, the Iraqi news agency said that the Saudi meeting was a matter of protocol and that subsequent talks would be held in Baghdad. There was no response from Prime Minister Saad al Abdullah al Sabah or other Kuwaiti officials.

Quoting an unidentified government spokesman, the news report added: “It is necessary that the prime minister of Kuwait know that whoever comes to the meeting with us should be prepared to remove the harm and aggression suffered by Iraq and respond to Iraq’s legitimate needs.”

One potential beneficiary of a successful OPEC stand would be American oil producers, who could reap the higher prices without having to decrease their production. Should the higher price be long-term, it could stimulate domestic exploration and development.

“Oil companies are generally the beneficiaries of rises in oil prices,” said New York analyst Fliakos, who noted that market watchers anticipate rising share values for oil company stocks.

Although the United States currently imports about half of the oil it consumes, government analysts said no threat to national security is likely. “A two- or three-dollar increase would make us slightly less dependent” on foreign oil, Skinner said, but the benefit would be minimal in security terms.

NEXT STEP

The impact of OPEC’s new, higher target price for crude oil will begin to be felt at the gasoline pump in the United States in six to eight weeks, according to experts. But the long-term level of future gasoline prices will depend on the cartel’s success in enforcing new production ceilings that underpin the higher target price. OPEC hasn’t succeeded in staying within fixed ceilings in the recent past. This time, oil ministers have vowed in the strongest terms to do so. But, as OPEC President Sadek Boussena acknowledged Friday, the cartel has no penalties to enforce discipline.

Times staff writers Maura Reynolds, in Washington, and James Gerstenzang, in Kennebunkport, Me., contributed to this article.