Saudis, tired of being fall guys, get serious about oil price war. They want long-term agreements on production, pricing

A dramatic shift in policy on the part of Saudi Arabia -- for years, the highly responsible custodian of oil market stability -- underlies the current chaos in world oil and financial markets. Middle East oil analysts say the Saudis are serious in their new role as price warriors. The recent decision by Saudi Arabia sharply to increase oil production sent oil prices on a downward spiral. The Saudis and other Persian Gulf exporters, these analysts say, are willing to see prices crash to a level where both the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC producers will be forced to reach long-term agreements on two key issues: oil pricing and oil production levels.

No such agreement is on the horizon at present. Experts predict that the price war will intensify until the crisis forces governments of oil-producing countries to make hard decisions. But senior Arab oil officials say that the crisis will inevitably result sooner or later in cooperation between the world's oil exporters.

But for the moment, gloom prevails. ``The long-awaited price crash has arrived with a vengeance, and the chances are that things will get worse before they get better,'' said oil newsletter Middle East Economic Survey (MEES) last week.

Saudi oil minister, Sheik Ahmad Zaki Yamani, stressed last week that a collective approach between OPEC members and non-OPEC members is needed to avert ``the catastrophic price collapse which is already on the horizon.''

Yamani and others see Britain as the key to cooperation between OPEC and the non-OPEC exporters, which include Norway, Mexico, Egypt, Oman, Malaysia, and the Soviet Union. This is because the British government has followed a strict noninterventionist policy on its North Sea oil, allowing oil companies free rein to expand and maximize production.

Despite the downward pressure this has created on oil prices and despite the repercussions for sterling in financial markets, London has continued to resist restricting North Sea production levels.

The Kuwaiti oil minister, Sheikh Ali Khalifa Sabah, says the price war may last three months and ``will teach everyone inside and outside OPEC that this is not in their interest, and will open the way to a compromise solution to prevent a price collapse.'' He expects there will be an agreement between oil trading nations to stabilize the market through cooperation on pricing and production levels.

Two independent experts, Robert Mabro, director of the Oxford Institute for Energy Studies, and Nordine Ait-Laoussine, formerly Algeria's oil minister but now an oil consultant, agree that the current crisis is a necessary remedy.

If ``prices fall until the alarm bells awaken the relevant politicans and decisionmakers,'' they wrote in a joint article published last week, ``there is no doubt that sooner or later, all exporting countries will recognize that the damage caused by the current crisis is too heavy to sustain, and that an agreement on prices and production discipline is urgently required.''

Mr. Mabro and Mr. Ait-Laoussine blame both OPEC and its free-market competitors for the crisis. The former, they say, pursued a short-sighted policy of defending a fixed high price, regardless of the impact on a diminishing world market. Non-OPEC producers ate into OPEC's market share by offering lower prices in hopes that at least some OPEC countries would continue defending prices to stop them from dropping through the floor, as is now happening.

As OPEC's market share shrank, ``weaker'' OPEC states began competing with the non-OPEC producers by offering discounts on official OPEC prices, based on the $28 per barrel benchmark for Saudi light crude.

The fall guys in both cases were the Saudis, who had always acted as the crucial ``swing producers,'' keeping markets and prices stable by raising or lowering their production. Sticking to official prices, the Saudis watched their oil sales plummet to little over 2 million barrels a day last summer.

Despite the 75 percent drop in their revenues in the past four years, the Saudis are still far from dire poverty.

``Saudi Arabia and the Gulf states still have extraordinarily high per capita state expenditures, they are very generous welfare states, and it is immigrant workers rather than their own nationals who are feeling the squeeze,'' says Mehran Nakhjavani, an MEES editor.

But even in Saudi Arabia, the recession has meant huge deficits that are financed by drawing on foreign reserves. Payment delays have become the norm, numerous small and medium businesses have gone bankrupt.

Had remedial action not been taken, experts say, the Saudis would have exhausted their estimated $60 bilion reserves in four years. The situation could easily have worsened, with oil exports dropping to virtually nothing.

The writing was on the wall last summer when the Saudis gave up their traditional role as OPEC price defenders and began seeking ``netback deals,'' a way of giving discounts for crude oil exports. As a result, Saudi production has returned to roughly its OPEC quota of 4.35 million barrels a day -- helping spawn the current crisis because of the downward pressure on prices.

If the price war worsens, the Saudis, Kuwaitis, and other Gulf states say that, despite their dependence on oil revenues, they are well-placed because of their massive reserves and other assets and low production costs. The British Treasury argues that oil revenues make up such a small part of its income that a sharp drop in prices would, if anything, benefit the British economy by lowering inflation and increasing industrial output. But both agree that the biggest losers will be the poor, overpopulated oil producers that are already heavily in debt.

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