Non-OPEC states, especially Britain, set oil price trend
London — To find out if world oil prices are going to keep on falling despite OPEC's latest efforts to hold them up, look away from OPEC altogether, to the world's other producers.
That's the word from analysts, economists, traders, and Organization of Petroleum Exporting Countries (OPEC) ministers themselves. Many see a strong challenge to OPEC and an inevitable drop in prices over the next six months.
Some, however, see a period of stability as long as OPEC members keep below their new production ceiling of 17.5 million barrels per day (b.p.d.). The majority view holds that non-OPEC production will stay high for the rest of the year, and OPEC output will be low until the fourth quarter, in an overall framework of slack demand.
As a proportion of world consumption, OPEC production has been dropping sharply - from 62 percent in 1973 to 41 percent in 1981 to about 32 percent in February of this year.
Among non-OPEC producers, it is assumed that the Soviet Union will keep on selling as much oil as it can to raise ''hard'' (foreign) currency, and that Mexico will keep its production around 2.9 million b.p.d. to help pay its huge external debt of about $80 billion.
Mexico, not a member of OPEC, lowered its prices to the new cartel's price of crude prices by as much as $2, selling its Ural crude for between $27 and $28. In addition, China is looking for new offshore fields. The United States does not export a great deal, but its production will stay high for domestic needs.
That leaves Britain, the fifth-largest non-OPEC, noncommunist producer in the world. Its companies have every incentive both to keep producing heavily and to see North Sea prices undercut OPEC member Nigeria.
The immediate competition to keep in mind is the one between Nigeria and Britain for markets in the US, analysts agree. Both countries sell high-quality crude oil, with Nigeria's slightly ''sweeter'' (better).
The degree to which OPEC itself is watching Britain was indicated by how frequently OPEC ministers have been referring to Britain's triggering a possible price war after March 14. At that time, OPEC agreed to cut OPEC prices to $29 a barrel and set a production ceiling of 17.5 million barrels per day.
Sources within the British National Oil Corporation (BNOC), which markets a majority of North Sea oil production for the British government, confirmed to this newspaper that the US was the market Britain did not want to lose.
When Britain failed to reduce prices at the end of last year, it lost two US buyers, including Texas Eastern, the sources said. It finally cut its price last month after the US Gulf Oil Company (and others) refused to buy at the old price of $33.50 a barrel.
Pressure is still high on BNOC to cut its price again. When it went down to $ 30.50 a barrel last month, Lagos felt directly threatened and at once undercut to $30 a barrel.
A major question now is whether Britain will have to undercut Nigeria again to retain US buyers. London analysts told this newspaper Britain had no choice.
Saudi oil minister, Sheikh Ahmad Zaki Yamani, concedes that if Britain does so, a price war could break out. He and other OPEC ministers have told British Energy Secretary Nigel Lawson that it is against British interests to see oil prices tumble.
They want to see Britain go down by only 50 cents a barrel to match the Nigerian price of $30.
Britain needs high oil tax revenues, but must also keep its share of the oil market. Its biggest North Sea driller, British Petroleum (BP), has already broken protocol by saying publicly that North Sea oil should be between 75 cents and $1 cheaper than Nigerian crude.
BP is expected to reject the latest BNOC offer to reduce prices to $30.50 per barrel. BNOC sources told this newspaper they hoped North Sea companies would make up their minds what they want by the week of March 21.
Britain earns almost (STR)10 billion ($15 billion) a year from oil taxes and royalties. Peter Riddell, political editor of the Financial Times, estimates this at two-fifths of all treasury tax revenues.
At current exchange rates, every dollar-a-barrel drop in North Sea oil prices loses the treasury between (STR)350 and (STR)400 million a year.
The OPEC agreement had one immediate effect in Britain: It caused major banks to cut interest rates by one-half of 1 percent. The rates had risen twice since late last year.
In the British budget anounced Tuesday, the Chancellor of the Exchequer, Sir Geoffrey Howe, warned that if oil prices fell further and seemed likely to compromise his economic strategy later in the year, he would take ''corrective action.''
OPEC's new lower prices, he said, would lead to more output and jobs in Britain, but uncertainties continued and it was necessary to keep government borrowing down as a result.
Lower oil prices mean it is less economic for companies to spend heavily on developing new North Sea fields. So Sir Geoffrey announced a package of measures for the next four years worth (STR)800 million ($1.2 billion). Petroleum revenue tax will be reduced in searching for new fields, royalties will be abolished, and the advanced petroleum revenue tax abolished by 1986.
Oil companies gave the measures a cautious welcome.
Meanwhile, Sir Geoffrey moved to earn back some of these losses from consumers by increasing taxes on gasoline by 4 pence (6 cents) a gallon, bringing top-grade gasoline to about (STR)1.73 ($2.62) a gallon.
''If the North Sea price does go down, don't just watch Nigeria's answer, but keep an eye on Libya and Algeria as well,'' says Dr. Paul Stevens, lecturer in oil economics at the University of Surrey.
Taking a different view is David Johnson, oil analyst for the British stockbrokers Wood MacKenzie based in Edinburgh, who sees a period of price stability ahead.
In a telephone interview, Mr. Johnson agreed that Nigerian crude oil, at $30 a barrel, had the edge over North Sea oil in the US at the moment.
Nigeria was closer to the US than the North Sea and thus paid less freight costs. The quality of its oil was higher. Normally Nigerian oil should cost $2 more than Arab light crude, but today was only $1 more - a bargain.
''That means,'' he went on, ''that Nigeria should easily reach its new OPEC quota of 1.3 million barrels per day. That in turn will reassure the Nigerian government, and could lead to it agreeing to put its price up again toward the end of the year.''
Sheikh Yamani made the same point after the March 14 OPEC announcement. He hoped that Algeria and Libya would be ready at the same time to talk about lifting their own prices, now set at $30.50 a barrel.
If Nigeria obeys the 1.3 million b.p.d. quota, buyers who want more will go to the North Sea.
Dr. Stevens is not convinced. ''It's all up for grabs now,'' he said.
''If Nigeria does manage to achieve its 1.3 million b.p.d. quota, it will be at the expense of the North Sea. In fact, Nigerian, Algerian, and Libyan oil all compete with the North Sea.''
How OPEC changed its quotas (Millions of barrels per day) Old quota production New quota March'82 Nov.'82 March'83 Saudi Arabia 7.15 5.8 5.0 Iran 1.2 2.5 2.4 Venezuela 1.5 2.2 1.675 Nigeria 1.3 1.4 1.3 Indonesia 1.3 1.3 1.3 Iraq 1.2 0.9 1.2 Libya 0.75 1.7 1.1 United Arab Emirates 1.0 1.2 1.1 Kuwait 0.8 0.9 1.05 Algeria 0.65 0.7 0.725 Qutar 0.3 0.4 0.3 Ecuador 0.2 0.15 0.2 Gabon 0.15 0.2 0.15 Totals 17.5 19.4 17.5 Source: Financial Times (London); and Wood, Mckenzie oil brokers, Edinburgh; Industry sources.