OPEC oil ministers meet today in Vienna for what is regarded as a critical effort to head off a plunge in oil prices. World markets are awash in oil. And Gulf-based analysts warn that unless the oil cartel restores the level of discipline that followed the December 1986 agreement to shore up its $18 benchmark price, continued high production could push the price of crude below $15 per barrel as early as January.
Such a drop in prices, if sustained, would spell disaster for many of the Organization of Petroleum Exporting Countries' 13 members. The concern is that it might trigger a surge of overproduction by panicked oil producers trying to compensate for the anticipated loss of much-needed oil revenue. That, in turn, could force prices lower as competition for limited markets heated up.
For Iran and Iraq, a $15 price would cut deeply into their war chests. The other Gulf producers would also suffer. The current benchmark keeps deficits at a minimum as the governments pump funds into their depressed economies. Even a limited price drop would be a significant shock to oil-based economies that have already been hit hard by the continuing decline in the value of the dollar. The consequences would be equally grim for OPEC's one Asian, four African, and two Latin American members.
Facing this financial scenario, the Gulf states are expected to work hard to leave politics out of the discussions despite regional tensions over the Iran-Iraq war.
``I think Saudi Arabia is smart enough to avoid a direct confrontation with Iran,'' says a Gulf-based oil executive. Another oil company official adds, ``When it comes to economic reality, when it comes to how are they going to get the money to keep the war going, Iran gets its act together.''
Nonetheless, there are signs of storm clouds over Vienna. And many oil analysts are pessimistic that the cartel will be able to overcome internal differences on fundamental issues of price and production levels.
Iranian officials have said they will ask for the benchmark price to be raised to $20 per barrel, in part to compensate for the declining value of the dollar. That stance has drawn criticism from Saudi Arabia, in light of reports that Iran and others are secretly offering discounts of up to $3 per barrel.
The Gulf Arab states have said they will oppose raising the $18 reference price until world demand warrants an increase. Some analysts see the request for $20 oil as an attempt to boost the overall pricing structure so Iran can increase revenue while continuing to offer its secret discounts.
In addition to the price question, the cartel is facing serious trouble because Iraq, Kuwait, the United Arab Emirates and other members have regularly produced well over assigned quotas.
OPEC's power to control prices is proportionate to its ability to take up the slack in oil markets. OPEC oil ministers determined earlier this year that in order to maintain the $18 benchmark price, OPEC should keep total production within 16.6 million barrels per day (bpd). Anything more would build both an oil glut and pressures for a price drop.
Despite the risks, overall OPEC production in recent months has at times reached 19 million bpd - roughly 2.4 million barrels over its quota. As a result, oil storage tanks and seaborne tankers now hold the equivalent of three months worth of oil consumption.
Now OPEC ministers face the task of deciding how - in an already glutted market - to apportion new production quotas to countries that need oil revenues desperately. None of the OPEC states is in a position to accept gracefully a cut in its own oil production. And the Saudis have repeatedly stated their opposition to once again serving as OPEC swing producer, cutting back to compensate for the overproduction of other member states.
Circumstances have dashed OPEC's earlier hopes of increasing all members' quotas at today's meeting. Expectations of greater world oil consumption have been scaled back to a projected 1 percent increase - 400,000 to 500,000 bpd. Newly producing oil fields in the North Sea, China, Brazil, Colombia, Syria, North Yemen, India, Egypt, and other areas are expected to fulfill that increase in demand. Economists, with an eye on stock-market share prices, are also warning that oil demand may drop off if industrial countries' economies slow down.
Despite these circumstances, Iraq is asking OPEC once again for a quota increase to equal Iran's 2.37 million bpd. Iraq has rejected its 1.54-million-bpd quota and has increased output to 2.7 million bpd.
Analysts say that Saudi Arabia will argue in Vienna that it is better to have a higher Iraqi quota than for Iraq not to abide by any quota at all. It remains unclear whether Iran will accept this logic. But even if it does, the difficult issue remains of whose production will be cut to allow Iraq's to nearly double.