Wishing OPEC success in holding the line on petroleum prices
Boston — In the industrial countries, it may not be the popular thing to wish success to the Organization of Petroleum Exporting Countries. But when the ministers of the cartel meet in Vienna next week, many in those rich oil-importing countries, including the United States, will be hoping they hold the price line. Well-wishers include:
The non-OPEC oil industry.
Producers of coal and natural gas, whose prices are heavily influenced by trends in petroleum prices.
Commercial bankers with loans outstanding to either a domestic oil industry or to such nations as Mexico and Venezuela that are highly dependent on oil exports for the revenue to service their external debts.
The oil industry ``would be panicky at the idea that the cartel couldn't hold together,'' notes Morris Adelman, a Massachusetts Institute of Technology oil economist.
The Iraqi bombing of Iran's Kharg Island terminal last week is not entirely unwelcome in oil circles. Reducing the 1 million to 1.5 million barrels per day leaving that terminal could ease the problem of setting production quotas for OPEC. Ministers could allot the lost Iranian output to Saudi Arabia, which has been complaining about not being able to produce at its quota, or divide it among several members.
Professor Adelman comments: ``If they have any sense, they will let the Saudis pick it up.''
Spot oil prices jumped higher immediately after news that the Iraqi jets had severely damaged Iran's main oil-loading jetty. Petroleum buyers must also consider the prospect that Iran might carry out its threat to attack oil installations in other Middle Eastern countries if its own production capability is impaired.
``The [Iraq-Iran] war has been great fortune for OPEC and non-OPEC producers alike,'' Adelman says.
To John H. Lichtblau, president of the Petroleum Industry Research Foundation, the best resolution of the OPEC meeting would be modest erosion of oil prices -- perhaps $1 to $3 a barrel -- from the present $26 to $27 over the next year or two and then a slow uptrend.
Mr. Lichtblau would not like to see a collapse in the price of crude to, say, $15 a barrel because of the potential for economic turmoil. ``Everybody will agree with that except some foolish columnists . . . who think everything would be great if it collapsed,'' he says.
Lichtblau believes OPEC will be able to prevent oil prices from collapsing, despite the recent move by Saudi Arabia to sell some of its crude at discount prices.
Dr. Rene Ortiz, secretary-general of OPEC from 1978 to 1981 and now an oil consultant, maintains that it is in the interests of both OPEC and non-OPEC countries that OPEC stabilize oil prices. If oil prices fall too much, the resulting decline in oil exploration and development would result in the US and other major consumer countries facing increasing dependence on OPEC producers by the end of this decade, he said in an interview here.
OPEC's problem has been a decline in oil consumption in the major industrial countries of the West and in Japan.
According to the International Energy Agency, second-quarter oil consumption by the 24 nations of the Organization of Economic Cooperation and Development totaled 32.3 million barrels a day, compared with 33.5 million barrels a day in the same quarter of 1984.
Other sources of energy, mainly nuclear power and natural gas, have eaten into oil markets.
OPEC nations, and particularly Saudi Arabia, are the so-called ``marginal'' producers in the world, because they are attempting to maintain prices. Non-OPEC exporting nations, such as Britain, Norway, or Mexico, simply cut their prices to sell as much oil as they wish. OPEC producers -- unless they cheat on their price-maintenance cartel, as some members do -- meet the leftover demand at slightly higher prices.
If a price war broke out in the petroleum market, however, oil would drop until it was unprofitable for some wells to be pumped. Views differ as to how far down that price would be. Earlier this month, the Saudi Arabian oil minister, Sheikh Ahmad Zaki Yamani, said crude prices could fall to between $15 and $18 a barrel next spring if producers failed to cooperate to stabilize the price.
Adelman guesses prices would drop ``a lot more.'' He says there is ``no natural stopping place'' above $5 a barrel -- about the cost for bringing in new oil production in most OPEC countries.
During the oil crisis of the 1970s, he recalls, Saudi Arabia talked of boosting capacity from around 10 million barrels a day to 20 million barrels. Recent Saudi production has run around 2.2 million barrels a day, compared with its OPEC quota of 3.5 million barrels.
Iraq is in the process of stepping up production by 500,000 barrels daily through a pipeline running through Saudi Arabia. Its Persian Gulf outlet has been interrupted by the war with Iran, but some Iraqi oil has flowed through a pipeline across Turkey.
Lichtblau notes that even $15-a-barrel crude would stop much new oil exploration and development in the world. Mr. Ortiz, an Ecuadorean, says that some of the more difficult new North Sea oil finds could cost as much as $26 a barrel to develop.
Neither Ortiz nor Lichtblau expects Britain or Norway to cooperate with OPEC by reducing output because of the domestic political flak this would produce. Mexico, a non-OPEC oil exporter, temporarily trimmed production, but is not doing so now.
Should a price war break out, Lichtblau and Adelman expect the United States to protect the domestic oil industry by imposing a major tax on imports. This would maintain the domestic price of crude and, as a side benefit, provide huge revenues for reducing the budget deficit. Each dollar per barrel would produce about $2 billion in revenues.
``That would be bad for them, but good for us,'' Adelman says.
He figures the US would have to help Mexico and Venezuela by rescheduling and paying back some of their debts. And there could be major political consequences in the Middle East and possibly other OPEC countries as incomes fall. Adelman also suspects some commercial banks will ``go bust.'' But these, he says, can be taken over by other, more prudent or fortunate banks that have taken fewer oil loan risks.
Another consequence of a collapse in oil prices would be a halt in the switching from oil-fired steam and power production to coal-fueled power, or, especially abroad, nuclear power. Developing countries that import oil would benefit. Most of the industrial countries should grow a little faster economically.
These three oil experts, however, expect OPEC somehow to reach an agreement to stabilize prices, if not at the present level, then at a modestly reduced level.
``Looking over the edge of the cliff will concentrate their minds,'' says Adelman. ``They will get together and stop cheating.'' At least for a while, he adds. CHART: Noncommunist world oil production (millions of barrels per day) OPEC Non-OPEC 1973 '75 '80 '85 '90 '95 (est.) 10 15 20 25 30 35 Source: Merrill Lynch Economics