Saudis opt for OPEC unity and shelve pricing proposal - for now

OPEC oil ministers meeting in Vienna signed a new production agreement yesterday, after Saudi Arabia dropped a proposal to include in the accord a $15 minimum price for OPEC oil. The new agreement establishes an OPEC-wide production quota of 18.5 million barrels per day and resolves a quota dispute between former Gulf war foes Iran and Iraq.

It also marks the first time in two years that all 13 members of the oil cartel are party to an output agreement.

The signing was made possible after Saudi Oil Minister Hisham Nazer withdrew the surprise proposal. ``If people do not want to strengthen the resolution that is all right with us,'' Mr. Nazer was quoted as saying, after withdrawing the measure.

The Saudi proposal, made shortly after Iran accepted the OPEC agreement Sunday, had placed the entire agreement in jeopardy. The resulting confusion triggered a brief fall in oil prices, but they have since risen on news of the accord.

Iran and other so-called ``price hawks'' immediately objected to the new Saudi proposal. The Iranian delegate accused the Saudis of attempting to sabotage the OPEC agreement.

Iran, backed by Algeria and Libya, charged that the Saudis were trying to replace OPEC's theoretical reference price of $18 per barrel with the Saudi suggested price of $15.

The episode brought to the fore a long-standing and fundamental disagreement between Gulf Arab oil producers and other members of the Organization of Petroleum Exporting Countries. And it points up the continuing divisiveness within OPEC, which some market analysts say will eventually erupt into a new production war, undermining the OPEC agreement.

Current OPEC production is estimated at 22 to 23 million barrels per day as a result of widespread cheating on previously assigned quotas.

In order to regain a grip on world oil markets and prop up sagging crude prices, experts have said OPEC must trim its production to at least 18 or 19 million b.p.d. But it is doubtful even this will help restore world prices to the $18 per barrel OPEC target price.

OPEC oil has been selling on world markets at between $12 and $15 in recent weeks.

The Saudis' $15 pricing proposal is expected to resurface at next year's OPEC meeting.

Though details of the Saudi proposal for a $15 minimum OPEC price were sketchy, some oil analysts suggest the Saudis were interested in requiring automatic production cuts by all OPEC members in the event that oil prices dip below $15.

Such a measure would have, in effect, transferred the Saudi's old role as so-called ``swing producer'' of OPEC to each of the OPEC states.

On a broader level, the Saudi proposal is seen by Gulf-based analysts as an effort by Riyadh to lower the OPEC reference price in line with the Saudi view that oil prices must be maintained at a lower level to firmly re-establish demand for oil from the Gulf. The Kuwaitis have a similar philosophy.

Both Saudi Arabia and Kuwait have pushed in the past for more moderate OPEC pricing policies. But they have been countered by ``price hawks'' such as Iran and Algeria (states with large populations but relatively small oil reserves). The price hawks follow a shorter term strategy and argue that oil should be sold for the highest possible price.