OPEC Raises the Ceiling

An oil miniglut cools off demands from the cartel

Whenever the 13 members of the Organization of Petroleum Exporting Countries get together, two things seem certain: they will bicker vociferously among themselves, and then they will raise the price of their precious crude. That is precisely what happened at the OPEC oil ministers' 57th meeting last week at the El Aurassi hotel in Algiers. After lavish feasting on caviar and couscous, the oil ministers argued until 3 a.m. but then reached a compromise that allowed some of them to push the price of oil still higher. The 13 countries decided to set a price ceiling of $32 per bbl. on crude. For certain higher quality grades of oil, the price could go to $37 per bbl. OPEC prices now range from Saudi Arabia's $28 per bbl. to Algeria's $38.

The Algiers decision reflects some change in OPEC's pricing philosophy. Usually the cartel has fixed a floor price and agreed not to sell oil for anything less. Since the Iranian revolution set off the latest world oil shortage, the difference between the floor price and the top rate charged by some OPEC members has grown considerably. Now the new ceiling price policy should limit the oil escalation by hawks like Algeria, Libya and Nigeria.

The agreement to set a maximum price was forced on the cartel by the current miniglut of oil. Greater conservation and the sharp recession in the U.S. have decreased the world's thirst for petroleum. OPEC's economics experts told the ministers at the beginning of the meeting that world oil production is now about 1 million to 2 million bbl. per day greater than demand. The excess output is acting as a restraint on countries wishing to push the price of oil ever higher. Said Sheik Ahmed Zaki Yamani, the Saudi oil minister, after the meeting: "The agreement does not impose restrictions on others not to raise their prices. But I don't think they are going to raise prices because of the downward trend of the markets."

Nevertheless, last week's decision immediately set off some price shifts. While high-price countries like Libya and Algeria did not push theirs higher, Kuwait, Iraq, Qatar and Venezuela announced that they would begin demanding as much as $2 per bbl. more for oil on July 1. Those four countries have been recently charging a basic price of about $30 per bbl. for crude. Saudi Arabia refused to increase its rates for now, but Yamani hinted that he might raise them by $1 per bbl. to $4 per bbl. in order to unify OPEC prices. Some oil experts expect the Saudis to hike prices by about $2 per bbl. within a few weeks.

Western energy experts estimated that the latest increases would boost the average cost of OPEC oil nearly a dollar, to just under $32 per bbl. That is nearly double the $18.72-per-bbl. price of last June. Officials of oil importing nations immediately denounced the price rise as extortionate, but one U.S. official conceded that it would add only a penny to the price of a gallon of heating oil or gasoline. Still, the increase could raise the world's oil bill by $40 billion this year.

Last week's meeting underscored again the weakened role of Saudi Arabia inside OPEC. While that country still pumps one-third of all OPEC production, it can no longer solely determine world oil policy. Prior to the Iranian revolution, Saudi Arabia virtually dictated crude prices because it had surplus production and could threaten to drive the cost of crude down if the other countries did not follow its lead. Now the Saudis are pumping oil at the rate of 9.5 million bbl. per day, which is 1 million more than before the fall of the Shah of Iran and near to their current capacity. They have thus lost their leverage over other cartel members. The Saudis could not convince the other OPEC members that they should agree on a lower ceiling price. In fact it took four hours of extra bargaining for Yamani to persuade Iran Oil Minister Ali Akbar Moinfar, whose country produces about one-tenth as much petroleum as Saudi Arabia, to change a single key word in the conference's final communique.

The oil-consuming nations can hardly derive much solace from the relatively modest price increases. The current oil surplus is expected to have evaporated by fall. Even if it has not, the Saudis and others could decide to reduce production to keep pressure on prices. Other oil countries believe that Saudi Arabia will soon cut output. Said Kuwait Oil Minister Ali Khalifa al-Sabah: "There is no specific promise, but that is certainly my understanding--if only through the way Yamani held his brow."

As OPEC ministers departed from last week's meeting, they left no doubt that they will start raising prices again just as soon as world petroleum demand permits. The group will meet in September and could then return to its old ways. Said Libyan Oil Minister Abdul Salam Zagaar: "The ceiling is going to be $37 until September, and then we will see what the market will do."

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