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Charting the changes in a world awash in oil

By Harry B. EllisSenior economics correspondent of The Christian Science Monitor / February 23, 1982


This morning on my way to work gasoline at the corner station was 5 cents a gallon cheaper than it had been a few days ago, a pleasant surprise being shared by millions of American motorists.

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Lower prices at the pump reflect a phenomenon that would have been considered chimerical not long ago -- a worldwide softening of oil prices, with no end clearly in sight.

Press reports trumpet that an alarmed and shaken OPEC cartel is almost in chaos, with 12 members putting enormous pressure on the 13th -- Saudi Arabia -- to lower its huge oil output and eliminate the global glut.

Only if the Saudis drop production from their present 8 million barrels a day (m.b.d.) to 6 million, the argument runs, will the world's oil surplus disappear , allowing the Organization of Petroleum Exporting Countries (OPEC) to keep its fraying price structure relatively intact.

OPEC production last year fell to its lowest point since 1969, according to a report in the Petroleum Intelligence Weekly (PIW). And cartel members are planning a emergency session for Feb. 27 to try to coordinate cuts in production.

''All by themselves,'' says the well-known oil analyst John Lichtblau, ''the Saudis can make or break the market.''

So far the desert princes, sheikhs, and technocrats appear to be holding firm against OPEC's pressure. The Saudi government declares that current output remains at 8.5 m.b.d., a bit above the estimate of most experts.

Yet the Saudis, says Mr. Lichtblau, ''have every conceivable reason to preserve OPEC prices and prevent the cartel from breaking up.''

It may be, in other words, too early for people in rich and poor oil-importing lands around the world -- their economies ravaged by soaring oil prices over the past nine years -- to gloat about what is going on.

''Among experts,'' says Marshall Thomas, markets and prices editor of the PIW , ''there are very strong differences of opinion about future oil prices.''

Many traders involved in the daily marketing of oil - where the price drops are most spectacular -- say they believe that prices will crack under the current pressure. ''But,'' says Mr. Thomas, ''a majority of analysts who take a longer view believe OPEC will cut production enough to preserve the pricing structure.''

A distinction is drawn in the present situation between contract prices, which remain relatively firm, and spot prices, where the downward spiral is most evident.

More than 90 percent of OPEC oil is sold by member nations under long-term contracts, with prices pegged to the official cartel level -- currently $34 a barrel for light Arabian crude.

''Arabian light'' is a type of Persian Gulf petroleum used as a benchmark, or standard, for price-setting throughout the industry. Other crudes are priced higher or lower, depending on the amount of sulfur in the oil, distance from markets, and other factors.

So far among OPEC members only Iran -- once a price hawk but now strapped for cash -- has broken the official contract price, by offering its oil at $32 a barrel, $2 below the Gulf standard.

2 Even so, Iran fails to sell more crude, partly because tankers sailing up the Gulf to load Iranian oil risk attack by Iraqi gunners, but mostly because the world market is saturated with all the oil that customers will take.

''It is not really a matter of price, but a matter of demand,'' said a marketing expert.

Indirectly, according to Lichtblau, Libya, Algeria, and Nigeria break the official OPEC price by having some of their crude oil processed in Europe and then selling the refined gasoline, heating oil, and fuel oil at prices so low that they undercut the cartel standard.

By and large, however, real price-cutting is not at the contract level, but in the spot market, where 5 to 10 percent of the world's oil is sold to the highest bidder.