Oil Supply May Drop; but Iraq and Ex-Soviet States Are Wild Cards

THE world price of oil is rising again. It should cost United States drivers several cents per gallon of gasoline.

Both Saudi Arabia and Iran have proposed production cutbacks of more than 1 million barrels daily for members of the Organization of Petroleum Export- ing Countries. OPEC intends to negotiate details of individual national production quotas at a special meeting in Vienna Feb. 14. Oil traders figure the oil ministers have a good chance of succeeding and thus have already pushed crude prices higher.

OPEC President Alirio Parro has met recently with officials of cartel states in the Gulf and North Africa, notes John Lichtblau, president of the Petroleum Industry Research Foundation in New York. He says that "there is a lot of goodwill. The chances of a reduction in output are real."

The price of one crude oil benchmark, West Texas Intermediate (WTI), dipped below $16 a barrel in October. In January that price averaged $19, and this week around $20. Each $1 increase adds about 2.5 cents to gasoline's retail price per gallon.

A rise in the price of oil is more than an inconvenience for motorists. Economists say it drags down economic output of oil-consuming countries, including most of the major industrial nations.

OPEC's long-standing price target has been $21 a barrel (WTI). Excessive quotas and "cheating" on quotas, however, have caused overproduction in relation to demand, keeping the price under that target.

For the first quarter of this year, OPEC has a production ceiling of 24.6 million barrels per day (mb/d). Analysts suspect the Vienna meeting will chop that ceiling by about 1 mb/d. With cheating and other leakage, actual output in the second quarter may run around 24.1 mb/d, suggests Platt's Week, an authoritative trade publication. Whether that will reduce output enough to maintain the current crude price or boost it further is debated by the experts and oil traders.

THIS year, according to Platt's, total world demand for crude and natural gas liquids will amount to 68.1 mb/d and the supply about 67.8 mb/d, reducing stocks a little. OPEC nations will supply about 27.3 mb/d.

World demand has risen relatively steadily from 61.4 mb/d in 1986. But the supply situation has changed dramatically.

Because of the United Nations embargo after Iraq's invasion of Kuwait, Iraqi exports are minor. Mr. Lichtblau describes the possibility of renewed Iraq exports as "a big dark cloud" hanging over OPEC negotiations. Should Iraq settle with the UN later this year, it could quickly boost exports to 1 mb/d, canceling any planned drop in OPEC oil exports.

Another unsettling factor in world markets is the production of the former Soviet republics.

According to Deutsche Bank Research, Russian oil production will fall from its 1987 peak of 510 million metric tons (or 10.3 mb/d) to about 340 million tons (6.8 mb/d) this year. That will leave about 40 million tons available for export this year, down from 90 million tons exported in 1991. As a result, Deutsche Bank reports, hard-currency earnings could fall from $12.9 billion to $6.7 billion.

Other analysts disagree. Matthew Sagers, an economist at PlanEcon Inc. in Washington, estimates that for the first three quarters of 1992, net oil exports were down only 1.9 percent from the same months in 1991 - to 79 million metric tons (2.1 mb/d) from 80.5 million tons (2.15 mb/d). Those numbers include all exports, both legal and otherwise.

Reports from Russia indicate that huge quantities of oil are being smuggled out of the country, with the proceeds often stashed away in banks in Switzerland or elsewhere. Within Russia itself, the demand for oil has been reduced by severely depressed industrial output. Oil remains far cheaper than the world market. So it pays handsomely for oil industry officials and others to export oil and its products.

Russia and two other oil-producing former Soviet republics plan to form an international body like OPEC, said Nursultan Nazarbayeve, president of Kazakhstan at a conference in Davos, Switzerland, last weekend. He further said Kazakhstan would seek observer status in OPEC. At that conference, OPEC Secretary-General Subroto said OPEC seeks closer cooperation with the former-Soviet republics.

However, Western oil analysts see no immediate threat of an enlargement of the cartel. For the time being, Saudi Arabia with its easily expandable output of 6 mb/d remains the kingpin in setting world oil prices.

"It is a matter of the Saudis deciding what to do," says Thomas Stauffer, a Washington oil consultant.

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