OPEC disarray sets stage for sharp drop in oil prices. Lower oil bills would aid West but sap economies of key debtor nations
Boston — World oil prices are on the verge of a sharp drop -- a prospect that delights motorists and most business and government leaders in the West, but that deeply worries credit-strapped oil producers. ``It's a very, very different world,'' says an economist who is preparing to run new computer forecasts based on much lower oil prices.
In London last weekend, Saudi Arabian Oil Minister Ahmed Zaki Yamani reportedly told a closed-door gathering that in the event of a price war, crude oil could plunge to $15 to $18 a barrel by next spring.
That statement, together with evidence the Saudis are enacting what amounts to a $2- to $3-a-barrel cut in oil prices, has shaken world oil markets, causing the futures price of crude oil to plunge.
In its latest issue, the authoritative Middle East Economic Survey, based in Nicosia, Cyprus, said the $2 to $3 cuts -- accomplished by tying Saudi prices to the prices of refined oil products -- were ``confirmed beyond doubt'' and indicated that the Saudis ``can no longer be taken for granted as the sole buttress of world oil prices.
``In other words,'' the publication said, ``if need be, the kingdom is ready for a price war.''
Sheikh Yamani, however, was quick to point out that his weekend prediction of a big drop in prices was hypothetical. ``Remember that he said he'd fear a price war if, if, if,'' a New York oil-industry source points out. ``It is very conditional.''
Yamani may simply have been warning other members of the Organization of Petroleum Exporting Countries (OPEC) prior to a meeting of the shaky cartel Oct. 3 in Vienna. In fact, with the winter months approaching, most oil-industry specialists have predicted firmer oil prices in the short term as demand for heating oil rises.
Still, producers and traders must forecast markets farther out than just this winter, and they've been figuring that by the time of the spring thaw, prices will weaken again, even without a cut in prices or a hike in Saudi output.
But a source connected with the international oil trade says the Saudi royal family has been pressuring Yamani to raise output due to the kingdom's financial straits.
``Yamani has been holding steadfast against temptations to cut prices,'' says this source, ``but who knows how long this can continue?''
Kristin S. Lindow, economist with the Wharton Middle East Economic Service in Washington, D.C., notes that the Saudis are running a budget deficit in the neighborhood of $30 billion this year. This is ``far more than they can handle. They can't cut spending further, and they have little liquidity in their international investments'' to cover them financially, she says.
Based on Saudi statements and actions, she says, ``we now believe the Saudis are going their own way.''
In the short term, lower prices would not net the Saudis more money. But Ms. Lindow says the Saudis apparently believe they can increase their share of the oil market and then boost production -- perhaps up to 8 million barrels a day -- in order to enjoy better earnings. The Saudis are currently pumping an estimated 2.3 million barrels a day. Their OPEC quota is 4.5 million, but they have held back to keep prices steady.
Any boost in production or cut in prices is likely to be modest. But it is unclear whether, once the price-production competition ensued, it could be controlled.
Lower oil prices would be a boon to the West. Economists say each cut of $1 a barrel reduces a gallon of gasoline by 21/2 cents. Every $5 off a barrel knocks 1 percent out of inflation and boosts the US gross national product by 0.5 percent. Likewise, oil-importing nations such as Brazil would benefit financially from sharply lower prices.
To millions of Americans who recall the aggravating gas lines and rising prices at the filling station only six years ago, lower prices can only cause a tingle of pleasure. But that feeling is not universal. Oil-producing nations such as Nigeria, Mexico, and Venezuela need the income to repay their foreign debt. They might try to protect their markets with higher production, thus driving prices down further. Falling prices for these countries could worsen the precarious international debt problem and im peril some Western banks.
A desperate Libya or Iran might be tempted to take military action against the Saudis. The Iranians, however, are constrained by a war-battered military. They and the Libyans know that an attack on the Saudis might also spark a counterattack by the United States or other Saudi allies.
The Saudis are not the only reason for discomfort in the oil world. Iraq, with a new pipeline, is ready to pump another 500,000 barrels. And one day the Iran-Iraq war is bound to end, which would mean even more oil pouring out so that those nations can rebuild their economies.
In addition, Norway plans to raise production by more than 1 million barrels a day next year, despite pleas from OPEC to restrain output in order to stabilize prices.
In the 1970s, oil producers enjoyed a seller's market. The '80s have brought a buyer's market -- too many countries need to sell oil to bolster their finances. For the foreseeable future, economists say, that is likely to remain the case.