Saudis back in OPEC driver seat. With oil prices way down, it's time to cut production, they say

Saudi Arabia's oil-production strategy appears to be succeeding. By boosting world oil supplies and forcing down prices, the Saudis have elicited cries of pain worldwide -- from oil nations, petroleum companies, bankers, and political leaders such as Texas Gov. Mark White.

Even President Reagan, a staunch free-marketer, indicated last week that there is a limit to the benefits of low oil prices. In a press conference, he warned against United States energy producers being driven out of business by cheap imported oil.

``The US found there are other considerations'' besides the beneficial effect of lower oil prices, notes Robert Mabro, director of the Oxford Institute for Energy Studies in Oxford, England. ``Producer interests and import dependence are very important.''

Most observers say oil prices have bottomed and are on a slow rise. The New York Mercantile Exchange's oil-futures price briefly slipped below $10 a barrel two weeks ago. But quickly thereafter, a series of events -- from a strike in Norway to rumblings from the White House -- shored it up. Friday it stood at $13.61 a barrel.

Thus, most of the beneficial effects of lower oil prices may have already been felt in the US economy. On Friday, the government's producer price index for March showed another dramatic drop in the inflation rate, led by a record 22 percent decline in gasoline prices.

With indications that their case is being heard, the Saudis meet again with the 12 other members of the Organization of Petroleum Exporting Countries Tuesday.

An OPEC compromise is possible this time, says Ragaei el-Mallakh of the University of Colorado. But if the Saudis offer to cut 1 million barrels a day from their production, he says they have to be assured that ``they see reciprocal arrangements.''

Meanwhile, the Saudis have gained market share, displayed their importance as an energy power, and boosted revenues. ``The Saudi main objective was never to be in the position they were in in mid-1985, when their export volume was dwindling,'' Dr. Mabro says.

Dr. el-Mallakh sees Saudi policy aimed at oil revenue, which ``declined drastically prior to the netbacks.''

Under these ``netback contracts,'' which were instituted last summer, the price of oil is determined by refining and production costs. Most energy experts say these contracts were the real cause of the falling oil prices, since they locked in higher Saudi output.

Since the netbacks were introduced, el-Mallakh says, ``on the whole, if you include everything from January, they had greater revenue.'' He points out that the oil-futures price is not the level at which oil actually has been changing hands: ``The actual price has been higher -- $16 [a barrel] or more.''

With higher output, even at cheaper prices, the Saudis made money -- but only if prices have indeed bottomed out. At $10 a barrel, the Saudis would be losing money unless output were increased drastically.

Hossein Tahmassebi, chief economist with Ashland Oil, says Saudi Arabia's aim is ``to be an important source of crude to the West. But year after year they were losing market share. And at $28 a barrel, they would have lost even more. They had to do something.''

What they've done is sell cheap oil in order to become a key supplier to the West once more. Cheap Saudi oil, Dr. Tahmassebi says, will end up increasing US energy consumption and shutting down higher-cost energy sources in the US and elsewhere in the world. Factors affecting OPEC oil prices

As OPEC reconvenes, oil analysts are watching several factors to determine the direction of prices.

The key is Saudi production, believed to be 3.9 million barrels per day. The Saudi quota is 4.3 million b.p.d. Have the Saudis cut back? Or are prices low even with them pumping less than their quota? Will other oil countries rein in production, as well?

Other factors that crimp supplies and thus cause higher prices:

A strike by caterers serving Norway's North Sea oil workers. This has shut down Norway's 900,000 b.p.d. output. The strike could end soon.

US-Libyan tension. Tanker traffic to Libya is likely to drop off due to rising insurance rates and the possibility of conflict. Libya's 1 million b.p.d. output could be in jeopardy.

Reports that US gasoline consumption has accelerated and that inventories of crude oil and distillates are abnormally low.

But putting downward pressure:

A report that the USSR is ready to resume oil exports to West Europe.

Continued US economic sluggishness, meaning energy usage by industry is not growing significantly.

Enormous unused capacity in Saudi Arabia, Kuwait, Iran, and Iraq. If the Iran-Iraq war ever ends, production from both countries could double. Several non-OPEC nations also have plentiful reserves.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.




Save for later


Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items


Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items


Failed to save

You have already saved this item.

View Saved Items