OPEC's price-fixing monopoly under fire from oil companies
The major international oil companies, encouraged by the present oil glut, have gone on the offensive in a quiet battle to limit the price-fixing monopoly of the Organization of Petroleum Exporting Countries (OPEC).Skip to next paragraph
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The oil companies' attack is two-pronged:
* They are putting pressure on perhaps the weakest link in the OPEC chain, Nigeria. A quick response by OPEC giant Saudi Arabia in Nigeria's behalf has resulted in a standoff. But whether this will last beyond the month of April or next month's scheduled OPEC meeting in Quito, Ecuador, remains to be seen.
* They are swinging away from buying crude oil on the basis of term contracts with OPEC members at official prices. Instead they are buying crude and finished products on the spot market, where - because of the present glut - oil is cheaper.
The well-informed Petroleum Intelligence Weekly reports that one large US company has abandoned all crude contracts and that a major international company is buying up to 40 percent of its European requirements spot, compared with no more than 10 percent previously.
Because the spot market is unregulated, oil prices on it reflect supply and demand. When oil was scarce, spot prices were much higher than contract prices negotiated with OPEC members. When there is a glut of oil, as today, spot prices drop below contract prices.
The present base price fixed by OPEC at its meeting in Vienna last month is $ 34 a barrel. But on the spot market at the moment, it is being sold for only $28 a barrel.
Contributing to the pressures on the fixed OPEC price is the increasing flow into the market of crude from major oil producers that are not OPEC members - particularly Britain and Mexico. They are not bound by OPEC price decisions. Britain, for example, is currently undercutting OPEC by selling its North Sea oil at $31 a barrel.
That is $4.50 a barrel less than the $35.50 that OPEC allows Nigeria to charge for its oil of similar quality. (Nigeria is allowed to go above the $34 -a-barrel, OPEC base price because of the high quality of its product, which has a low sulfur content.)
There is thus a clear incentive for the oil companies to switch away from Nigeria as a source of crude, even though some of them (Mobil, Texaco, Gulf, and Shell) are involved in the production there.
Statistics suggest they have been switching. Two years ago, Nigeria was producing 2.2 million barrels a day. By the beginning of this month, its daily production had dropped to 600,000 barrels a day (oil industry officials claim the figure is above 900,000 barrels).
But there is an incentive beyond the advantageous price differential for the oil companies to move toward boycotting Nigeria. If they can force Nigeria to break ranks with other OPEC members by unilaterally lowering its oil prices below the official OPEC level, a major step will have been made in weakening the cartel's price-fixing monopoly.
Nigeria is particularly vulnerable - ironically because of its large size. This means that Nigeria is much less cushioned than are other producers to weather a sudden loss in oil revenues.
Saudi Oil Minister Ahmad Zaki Yamani recognized at the time of the Vienna meeting in March that Nigeria was under pressure. He declared that ''Nigeria is very much in our hearts.''
Presumably encouraged by that remark, Nigeria reportedly later sent an SOS to Saudi Arabia, telling the Saudis just how much Nigerian production had fallen off. The Saudis responded by letting the major companies directly involved in production in Nigeria know that unless they increased their purchases from that country, they faced loss of supplies from the Gulf. The warning was delivered in the names of OPEC Gulf members Saudi Arabia, Kuwait, Abu Dhabi, and Qatar. Implicit in it was Saudi Arabia's willingness to go as far as to organize an OPEC-wide boycott of ''offending'' companies.
Subsequently Sheikh Yamani said in London that Saudi Arabia was ''prepared to do as much as is needed'' to control the oil surplus so that agreed OPEC prices can be maintained. Petroleum Intelligence Weekly says the Saudis are hinting that to achieve this they are ready to make a further cut in their own production, from their April 1 ceiling of 7 million barrels to 6.5 million barrels a day.
Of the companies directly addressed by Saudi Arabia, Mobil and Texaco are among the partners in Aramco, the American consortium that produces the Saudis' oil for them. Mobil is more vulnerable to Saudi pressure.
For the moment, that seems to have lessened the likelihood of an immediate confrontation between OPEC and the companies. But whether this is a mere short-term buying of time before another crisis and confrontation in the companies' struggle to limit OPEC's influence, only time can tell. And only time can tell whether OPEC will be able to survive as a unified organization if the struggle is pushed to its limits.